10-QPeriod: Q3 FY2010

CUMMINS INC Quarterly Report for Q3 Ended Sep 26, 2010

Filed October 29, 2010For Securities:CMI

Summary

Cummins Inc. (CMI) reported a significant recovery in the third quarter of 2010, driven by strong demand in emerging markets like China, India, and Brazil, and early signs of recovery in developed markets. Net sales increased by 34% year-over-year for the quarter to $3.4 billion and by 23% for the nine-month period to $9.1 billion. This surge in sales translated into a substantial improvement in profitability, with diluted earnings per share rising to $1.44 for the quarter from $0.48 in the prior year, and $3.43 for the nine-month period from $0.80. The company's operational performance was bolstered by strong gross margins, which improved significantly due to higher volumes, favorable pricing, and reduced warranty expenses. While operating expenses like SG&A and R&D saw increases, likely due to higher compensation and investment in future products, the overall profitability was heavily influenced by the absence of significant restructuring charges that impacted the prior year. Cummins also benefited from a one-time pre-tax recovery of $32 million related to Brazilian taxes, further boosting its financial results.

Financial Highlights

54 data points
Beta

Revenue

$3.40B

24.4% Gross Margin

Net Income

$283.00M

8.3% Net Margin

EPS (Diluted)

$1.44

Total Assets

$9.87B

Cash & Equivalents

$937.00M

Free Cash Flow

$113.00M

Financial Statements
Beta
Revenue$3.40B
Cost of Revenue$2.57B
Gross Profit$830.00M
R&D Expenses$103.00M
SG&A Expenses$375.00M
Operating Income$435.00M
Interest Expense$11.00M
Net Income$283.00M
EPS (Basic)$1.45
EPS (Diluted)$1.44
Shares Outstanding (Basic)195.80M
Shares Outstanding (Diluted)196.30M

Key Highlights

  • 1Strong Q3 2010 revenue growth: Net sales increased 34% year-over-year to $3.4 billion, driven by a recovery in emerging markets and improved demand in developed markets.
  • 2Significant profit improvement: Diluted EPS rose to $1.44 in Q3 2010 from $0.48 in Q3 2009, and for the nine-month period, EPS increased to $3.43 from $0.80.
  • 3Enhanced Gross Margins: Gross margin improved significantly to 24.4% of sales in Q3 2010 (from 19.9% in Q3 2009), driven by volume, pricing, and reduced warranty costs.
  • 4Resumption of Share Buybacks and Dividend Increase: The company resumed share repurchases and increased its quarterly dividend by 50%, signaling confidence in its financial health.
  • 5Improved Liquidity and Credit Rating: Cummins maintained strong liquidity with a significant revolving credit facility and saw its credit ratings upgraded by S&P and Moody's.
  • 6Positive Outlook: Management anticipates continued demand improvement throughout the remainder of 2010, with emerging markets expected to remain strong.

Frequently Asked Questions

The primary drivers for the strong performance were the recovery in emerging markets (China, India, Brazil) and early signs of recovery in developed markets, leading to increased demand across most business segments. This volume growth, combined with improved pricing, reduced warranty expenses, and the absence of restructuring charges that impacted the prior year, significantly boosted net income and earnings per share.

While sales increased, selling, general, and administrative (SG&A) expenses and research, development, and engineering (R&D) expenses also saw increases, attributed to higher compensation (including variable compensation) and investments in new product development to meet future emission standards. However, the significant improvement in gross margins, driven by higher volumes and pricing, more than offset these increased operating expenses.

Cummins recorded a pre-tax recovery of $32 million ($21 million after-tax) in cost of sales related to a Brazilian revenue-based tax overpayment from 2004-2008. This one-time item positively impacted the company's profitability for the period, though it was excluded from segment results as it was not considered in management's operational performance evaluation.

The company anticipates continued sequential improvement in demand throughout the rest of 2010, with emerging markets expected to remain strong. While North American heavy-duty truck sales saw a dip due to pre-purchase ahead of new emissions standards, they are expected to improve. Management is confident in opportunities for long-term profitable growth across its diverse markets.