01—Abstract
Summary
Summary of the 10-Q filed August 2, 2016. Cited figures are marked; the original filing is the authoritative source.
Cummins Inc. reported a decrease in revenue and net income for the three and six months ended July 3, 2016, compared to the same periods in the prior year.
This decline was primarily attributed to weaker demand in global on-highway markets, unfavorable foreign currency fluctuations, and reduced demand in power generation markets. Despite these headwinds, the company's financial performance was partially bolstered by increased sales from the consolidation of North American distributors and a lower effective tax rate. The company is actively managing its costs, evidenced by a decrease in Selling, General, and Administrative (SG&A) expenses and Research, Development, and Engineering (R&D) expenses, partly due to restructuring actions initiated in 2015.
Cummins generated strong operating cash flow, and its balance sheet remained solid with a manageable debt-to-capital ratio, although it saw an increase due to share repurchases and commercial paper issuance. The company also increased its quarterly dividend, signaling confidence in its financial stability and commitment to shareholder returns.
02—Key points
Key Highlights
- Revenue declined by 10% for the three months and 9% for the six months ended July 3, 2016, compared to the prior year, driven by weaker demand across key markets.
- Net income attributable to Cummins decreased by 14% ($65 million) for the quarter and 15% ($131 million) for the six months, reflecting lower revenues and a new accrual for a loss contingency.
- Gross margin decreased in both dollar amount and as a percentage of sales, primarily due to lower volumes and unfavorable product mix, partially offset by lower commodity costs and warranty expenses.
- The company initiated restructuring actions in 2015, leading to reduced Selling, General, and Administrative (SG&A) and Research, Development, and Engineering (R&D) expenses in the current periods.
- Operating cash flow improved significantly, with $734 million generated in the first six months of 2016, up from $569 million in the prior year.
- Cummins increased its quarterly dividend by 5.1% to $1.025 per share, indicating management's confidence in future performance.
- The company repurchased $695 million of its common stock in the first half of 2016, including the completion of an accelerated share repurchase (ASR) agreement.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in Q3 FY2016, Cummins Inc kept $0.09.
- Revenue$4.53B100.0%
- Cost of revenue−$3.33B73.6%
- Gross profit$1.20B26.4%
- Operating costs−$630.0M13.9%
- Operating income$567.0M12.5%
- Interest, other & tax−$161.0M3.6%
- Net income$406.0M9.0%
04—Financials
Financial Highlights
Figures from 10-QQ3 FY2016filed August 2, 2016Financial Statements
Q3 FY2016 against Q3 FY2015
| Line item | Q3 FY2016Q3 FY2015 | Change |
|---|---|---|
| Revenue | $4.53B$4.62B | −2.0% |
| Cost of Revenue | $3.33B$3.41B | −2.4% |
| Gross Profit | $1.20B$1.21B | −0.9% |
| R&D Expenses | $155.00M$197.00M | −21.3% |
| SG&A Expenses | $524.00M$530.00M | −1.1% |
| Operating Income | $567.00M$557.00M | +1.8% |
| Interest Expense | $16.00M$16.00M | 0.0% |
| Net Income | $406.00M$380.00M | +6.8% |
| EPS (Basic) | $2.41$2.15 | +12.1% |
| EPS (Diluted) | $2.40$2.14 | +12.1% |
| Shares Outstanding (Basic) | 168.80M177.00M | −4.6% |
| Shares Outstanding (Diluted) | 169.00M177.40M | −4.7% |
05—Questions
Frequently Asked Questions
What were the main drivers for the decline in sales during the reported periods?
The primary drivers for the sales decline were lower demand in most global on-highway markets, unfavorable foreign currency fluctuations, and decreased demand in most global power generation markets. This was partially offset by sales increases related to the consolidation of partially-owned North American distributors.
How did the company manage its expenses in light of the sales decrease?
Cummins managed expenses through a reduction in Selling, General, and Administrative (SG&A) expenses and Research, Development, and Engineering (R&D) expenses. These reductions were partly due to restructuring actions completed in 2015, which involved workforce reductions.
What is the company's liquidity position, and how is it managing its cash?
Cummins maintained a strong liquidity position, generating $734 million in operating cash flow for the first six months of 2016, an increase from the prior year. The company had $1.3 billion in cash and marketable securities on hand and access to a $1.75 billion revolving credit facility. It also continued its share repurchase program and increased its dividend payment.
Are there any significant charges or contingencies impacting the company's results?
Yes, the company recorded an accrual for a loss contingency of $39 million in the second quarter of 2016 related to an issue with third-party aftertreatment systems that caused some engines to fail in-use emission testing. This contingency impacted operating income and net income.
06—Continue