Cummins Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited consolidated results. Cummins designs, manufactures, distributes and services powertrains, components, power systems and emerging electrification and hydrogen products worldwide.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $8.453 billion | $6.385 billion | +32% |
| Gross margin | $2.029 billion; 24.0% of sales | $1.532 billion; 24.0% | +32%; margin unchanged |
| Operating income | $1.026 billion | $604 million | +70% |
| Net income attributable to Cummins | $790 million | $418 million | +89% |
| Diluted EPS | $5.55 | $2.92 | +90% |
| Operating cash flow | $495 million | $164 million | +$331 million |
Revenue growth reflected higher demand across most segments and regions, as well as $1.3 billion of Components sales from the Meritor acquisition. Gross margin benefited from higher volume and favorable pricing, partly offset by higher compensation costs. Interest expense rose to $87 million from $17 million, principally due to higher floating rates and borrowings. The effective tax rate was 21.7%, versus 26.8%.
Liquidity, debt and cash flow
- At March 31, cash and cash equivalents were $1.980 billion; marketable securities were $459 million, for $2.439 billion combined.
- Total debt was $7.752 billion, down from $7.855 billion at year-end; debt to total capital was 42.2%, versus 44.1%. Commercial paper outstanding was $2.545 billion.
- Committed revolving facilities totaled $4.0 billion; after commercial paper borrowings, approximately $1.455 billion remained available. A further $215 million was available under other facilities.
- Working capital was $3.445 billion and the current ratio was 1.29. Receivables and inventories increased from year-end by $632 million and $275 million, respectively.
- Investing activities used $228 million, including $193 million of capital expenditures. Financing activities used $363 million, including $222 million of dividends. No common shares were repurchased in the quarter.
- Management expects 2023 capital expenditures of $1.2–$1.3 billion and plans to emphasize debt repayment. Long-term debt principal payments include $559 million in the remainder of 2023 and approximately $1.962 billion in 2025.
Material changes and segment developments
- Components sales rose 79% to $3.557 billion, primarily reflecting Meritor’s axles and brakes business. Segment EBITDA was $507 million, including $12 million of filtration-separation costs.
- Engine sales rose 8% to $2.986 billion; Distribution sales rose 14% to $2.406 billion; Power Systems sales rose 16% to $1.343 billion. Accelera sales were $85 million and segment EBITDA loss widened to $94 million from $65 million.
- Q1 2022 included $158 million of Russian suspension costs; there were no material additional Russian suspension costs in Q1 2023. Russia operations remain indefinitely suspended.
- Segment reporting was reorganized, including the Components business changes and the New Power segment’s rebranding as Accelera; prior periods were recast for comparability.
- On April 3, 2023, after quarter-end, Cummins acquired Teksid’s Mexican foundry businesses for approximately €138 million, subject to adjustments. The acquisition is expected to be reported in Engine beginning in Q2; purchase accounting was not complete at filing.
Outlook, risks and unusual items
- Management expects strong North American truck demand, continued strength in India, Power Systems and aftermarket demand, and improvement in China truck demand from 2022 levels. The filing provides no quantified consolidated revenue or earnings guidance.
- Management expects a 2023 effective tax rate of approximately 22%, excluding discrete items, and annual net periodic pension cost near zero. It anticipates an additional $20 million of defined-benefit pension contributions in 2023.
- Supply constraints, component shortages, inflation and material and labor costs continue to pressure production, costs and the ability to meet end-user demand. Higher interest rates and Meritor-related interest and intangible amortization are also cited as earnings challenges.
- Regulators have raised concerns about emissions systems and certification disclosures for certain RAM and Nissan Titan pickup applications. Cummins expects recalls for specified model years and says further resolutions may include consent decrees and civil penalties. It cannot reasonably estimate any additional loss or range; the matter is expected to adversely affect results and cash flows.
- Product warranty liabilities and related deferred revenue totaled $2.530 billion at quarter-end. Other commitments include potential supplier minimum-purchase penalties of approximately $161 million if purchases ceased; the company does not currently anticipate paying them.
- The planned filtration business separation remains subject to execution and related costs. A $1.0 billion contingent credit agreement for the filtration business would become available only if specified conditions, including a public share sale by June 30, 2023, were met; otherwise it would terminate.
Important facts for investors to verify
- Progress, cost estimates and potential penalties associated with the emissions review and recalls, including whether regulators require additional remedies.
- Whether supply constraints ease and whether pricing and volume gains can offset inflation and higher compensation and financing costs.
- Meritor integration, the filtration separation timetable and costs, and the terms and impact of the subsequent Teksid acquisition.
- Commercial paper refinancing and debt maturities, particularly the 2023 and 2025 obligations, alongside planned debt repayment and capital spending.
- Accelera’s widening segment loss and the pace at which its developing electrification and hydrogen businesses convert investment into commercial revenue.