01—Abstract
Summary
Summary of the 10-Q filed May 3, 2016. Cited figures are marked; the original filing is the authoritative source.
Cummins Inc. reported a decrease in net sales and net income for the first quarter of 2016 compared to the same period in 2015.
Net sales declined by 9% to $4.3 billiona, primarily driven by lower demand across most global markets, particularly in the on-highway, industrial, and power generation segments. This decline was partially offset by increased sales from the consolidation of previously partially-owned North American distributors. Net income attributable to Cummins Inc. fell 17% to $321 million, resulting in diluted earnings per share of $1.87, down from $2.14 in the prior year.
The decrease in profitability was attributed to lower gross margins, unfavorable foreign currency fluctuations, and a higher effective tax rate, despite efforts to reduce operating expenses. The company continues its share repurchase program and maintains a strong liquidity position with significant cash and marketable securities.
02—Key points
Key Highlights
- Net sales decreased by 9% to $4.3 billion for the three months ended April 3, 2016, compared to $4.7 billion in the prior year period, reflecting weaker global demand across most key markets.
- Consolidated net income attributable to Cummins Inc. decreased by 17% to $321 million ($1.87 per diluted share) from $387 million ($2.14 per diluted share) year-over-year.
- Gross margin as a percentage of sales declined to 24.6% from 25.4%, impacted by lower volumes, unfavorable mix, and foreign currency fluctuations.
- Operating cash flow improved to $263 million from $173 million, driven by favorable working capital changes and lower pension contributions.
- The company significantly increased share repurchases, with $475 million in total cost for repurchases during the quarter, including an accelerated share repurchase agreement.
- Despite revenue challenges, the company generated strong liquidity, with $1.3 billion in cash and marketable securities available at quarter-end.
- The company is strategically reorganizing its business segments, combining the Power Generation segment and high horsepower engine business into a new Power Systems segment, effective April 2016.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in Q2 FY2016, Cummins Inc kept $0.07.
- Revenue$4.29B100.0%
- Cost of revenue−$3.23B75.4%
- Gross profit$1.06B24.6%
- Operating costs−$586.0M13.7%
- Operating income$470.0M11.0%
- Interest, other & tax−$149.0M3.5%
- Net income$321.0M7.5%
04—Financials
Financial Highlights
Figures from 10-QQ2 FY2016filed May 3, 2016Financial Statements
Q2 FY2016 against Q2 FY2015
| Line item | Q2 FY2016Q2 FY2015 | Change |
|---|---|---|
| Revenue | $4.29B$5.01B | −14.4% |
| Cost of Revenue | $3.23B$3.68B | −12.2% |
| Gross Profit | $1.06B$1.33B | −20.7% |
| R&D Expenses | $166.00M$166.00M | 0.0% |
| SG&A Expenses | $490.00M$537.00M | −8.8% |
| Operating Income | $470.00M$723.00M | −35.0% |
| Interest Expense | $19.00M$17.00M | +11.8% |
| Net Income | $321.00M$471.00M | −31.8% |
| EPS (Basic) | $1.87$2.63 | −28.9% |
| EPS (Diluted) | $1.87$2.62 | −28.6% |
| Shares Outstanding (Basic) | 171.80M179.20M | −4.1% |
| Shares Outstanding (Diluted) | 172.00M179.60M | −4.2% |
05—Questions
Frequently Asked Questions
What were the primary drivers of the revenue decline in the first quarter of 2016?
The primary drivers of the revenue decline were lower demand in most global on-highway markets, unfavorable foreign currency fluctuations, decreased demand in most global Power Generation markets, and lower demand in most global industrial markets. These factors were partially offset by sales increases related to the consolidation of previously partially-owned North American distributors.
How did the company's profitability change compared to the prior year?
Profitability decreased, with net income attributable to Cummins Inc. falling by 17% to $321 million and diluted earnings per share decreasing to $1.87 from $2.14. This was mainly due to a lower gross margin, unfavorable foreign currency impacts, and a higher effective tax rate.
What is the company's outlook for the remainder of 2016?
The outlook anticipates strong demand in the North American medium-duty and pick-up truck markets, and improving demand in India. However, challenges include expected declines in North American heavy-duty truck production, continued weakness in power generation and oil & gas markets, ongoing foreign currency volatility, and weak demand in global mining markets.
What is the company doing with its cash reserves and share repurchase programs?
Cummins generated strong operating cash flow and maintained significant cash and marketable securities. The company continued to repurchase its common stock aggressively, spending $475 million during the quarter, including a substantial accelerated share repurchase agreement, to enhance shareholder value and offset dilution from stock-based compensation.
06—Continue