10-QPeriod: Q3 FY2014

CUMMINS INC Quarterly Report for Q3 Ended Sep 28, 2014

Filed October 29, 2014For Securities:CMI

Summary

Cummins Inc. reported strong financial results for the third quarter and first nine months of 2014, demonstrating significant year-over-year growth in both revenue and net income. Revenue increased by 15% and 19% for the three-month and nine-month periods, respectively, driven primarily by a rebound in North American on-highway demand and the ongoing consolidation of partially-owned North American distributors. Net income attributable to Cummins Inc. rose by 19% and 15% for the respective periods, reaching $423 million and $1,207 million. Diluted EPS also saw substantial increases, reflecting improved operational performance and a reduced share count due to ongoing stock repurchases. The company's performance was boosted by strong results across its Engine and Components segments, with significant contributions from emission solutions driven by new regulations in Europe and China. The Distribution segment also experienced robust growth, largely due to strategic acquisitions. While international revenues saw a modest increase, they were somewhat tempered by global economic uncertainties and weaker on-highway demand in certain regions. Cummins remains focused on managing its costs and capital resources effectively, as evidenced by solid operating cash flow generation and a strong balance sheet with solid credit ratings.

Financial Highlights

52 data points
Beta

Revenue

$4.89B

26.3% Gross Margin

Net Income

$423.00M

8.7% Net Margin

EPS (Diluted)

$2.32

Total Assets

$15.64B

Cash & Equivalents

$2.33B

Free Cash Flow

$523.00M

Financial Statements
Beta
Revenue$4.89B
Cost of Revenue$3.61B
Gross Profit$1.28B
R&D Expenses$198.00M
SG&A Expenses$529.00M
Operating Income$659.00M
Interest Expense$15.00M
Net Income$423.00M
EPS (Basic)$2.32
EPS (Diluted)$2.32
Shares Outstanding (Basic)182.20M
Shares Outstanding (Diluted)182.70M

Key Highlights

  • 1Revenue increased by 15% for the three months ended September 28, 2014, to $4.9 billion, and by 11% for the nine months ended September 28, 2014, to $14.1 billion, driven by strong North American on-highway demand and distributor acquisitions.
  • 2Net income attributable to Cummins Inc. grew by 19% to $423 million for the third quarter and 15% to $1.21 billion for the first nine months.
  • 3Diluted earnings per share (EPS) increased to $2.32 for the third quarter (up 22% from $1.90) and $6.58 for the first nine months (up 18% from $5.60).
  • 4The Distribution segment saw significant sales growth of 37% in the third quarter and 30% year-to-date, primarily due to the acquisition of consolidated North American distributors.
  • 5Operating cash flow generation remained strong, with $1.39 billion generated in the first nine months of 2014, an increase from $1.33 billion in the prior year period.
  • 6The company repurchased $605 million of its stock in the first nine months of 2014 and announced a dividend increase of approximately 25% in July 2014.
  • 7The Engine segment's EBIT increased by 21% in the third quarter and 13% year-to-date, benefiting from higher volumes and favorable mix, particularly in the on-highway markets.

Frequently Asked Questions

The primary drivers of Cummins' revenue growth were the significant improvement in North American on-highway demand and the ongoing consolidation of partially-owned North American distributors. Additionally, increased demand in the Components segment, particularly for emission solutions due to new regulations in Europe and China, contributed to the growth. The Engine segment also benefited from higher demand in on-highway and industrial markets.

The acquisitions of North American distributors significantly boosted the Distribution segment's sales, showing a 37% increase in the third quarter and 30% year-to-date. These acquisitions contributed to overall revenue growth and also led to a gain on the fair value adjustment of pre-existing ownership interests, impacting segment EBIT. While these acquisitions are beneficial, management noted they are dilutive to the Distribution segment's EBIT as a percentage of sales.

For the remainder of 2014, Cummins expects continued strong North American on-highway demand, market share gains in medium-duty truck and bus markets, and positive impacts from new Euro VI regulations. However, challenges include expected weakness in power generation markets, continued weak demand in India and Brazil, potential weakness in certain European markets, and the ongoing impact of foreign currency volatility. The company also anticipates acquiring three additional North American distributors in Q4, which will increase revenue but be dilutive to the Distribution segment's EBIT margin.

Cummins demonstrated strong liquidity with $2.3 billion in cash and cash equivalents and significant availability under its revolving credit facility. The company actively returned capital to shareholders by repurchasing $605 million of stock in the first nine months of 2014 and increasing its quarterly dividend by approximately 25% to $0.78 per share in July 2014. The company maintains a strong balance sheet with a debt-to-capital ratio of 17.3% and holds stable credit ratings from major agencies.