10-QPeriod: Q2 FY2016

CUMMINS INC Quarterly Report for Q2 Ended Apr 3, 2016

Filed May 3, 2016For Securities:CMI

Summary

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 billion, 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.

Financial Statements
Beta

Key Highlights

  • 1Net 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.
  • 2Consolidated 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.
  • 3Gross margin as a percentage of sales declined to 24.6% from 25.4%, impacted by lower volumes, unfavorable mix, and foreign currency fluctuations.
  • 4Operating cash flow improved to $263 million from $173 million, driven by favorable working capital changes and lower pension contributions.
  • 5The company significantly increased share repurchases, with $475 million in total cost for repurchases during the quarter, including an accelerated share repurchase agreement.
  • 6Despite revenue challenges, the company generated strong liquidity, with $1.3 billion in cash and marketable securities available at quarter-end.
  • 7The 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.

Frequently Asked Questions

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.

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.

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.

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.