01—Abstract
Summary
Summary of the 10-Q filed July 31, 2018. Cited figures are marked; the original filing is the authoritative source.
Cummins Inc. (CMI) reported strong financial results for the quarter and six months ended June 30, 2018.
Net sales surged by 21%a in both periods, driven by robust demand across all operating segments, particularly in North America for heavy- and medium-duty trucks, and increased international demand in markets like China and Europe. This top-line growth, combined with improved pricing and lower material costs, led to a significant increase in gross margin. Despite higher R&D expenses, particularly related to the new Electrified Power segment, and a substantial charge for an Engine System Campaign, the company demonstrated a notable improvement in net income and diluted EPS.
The company's financial position remains strong, with substantial cash and marketable securities, and access to significant credit facilities. Cummins also continued to return capital to shareholders through dividends and share repurchases. Management provided a positive outlook for the remainder of 2018, expecting continued strength in several key markets, though they noted potential challenges from trade tariffs and a slowdown in the Chinese truck market.
02—Key points
Key Highlights
- Net sales increased by 21% year-over-year for both the three and six months ended June 30, 2018, reaching $6.1 billion and $11.7 billion, respectively.
- Gross margin improved significantly, with an increase of 15% for the quarter and 11% for the six months, driven by higher volumes, improved pricing, and lower material costs.
- Net income attributable to Cummins Inc. rose by 29% to $545 million ($3.32 per diluted share) for the quarter and by 6% to $870 million ($5.27 per diluted share) for the six months.
- The company incurred a significant charge of $181 million in Q2 2018 for an Engine System Campaign related to an aftertreatment component degradation, impacting gross margin.
- Operating segments showed strong growth, with Components, Engine, and Power Systems segments posting double-digit sales increases.
- The newly formed Electrified Power segment is investing heavily in R&D, reporting an EBITDA loss of $21 million for the quarter.
- Cash from operations decreased to $473 million for the first six months of 2018 from $826 million in the prior year, primarily due to higher working capital requirements.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in Q3 FY2018, Cummins Inc kept $0.09.
- Revenue$6.13B100.0%
- Cost of revenue−$4.69B76.5%
- Gross profit$1.44B23.5%
- Operating costs−$637.0M10.4%
- Operating income$803.0M13.1%
- Interest, other & tax−$258.0M4.2%
- Net income$545.0M8.9%
04—Financials
Financial Highlights
Figures from 10-QQ3 FY2018filed July 31, 2018Financial Statements
Q3 FY2018 against Q3 FY2017
| Line item | Q3 FY2018Q3 FY2017 | Change |
|---|---|---|
| Revenue | $6.13B$5.08B | +20.8% |
| Cost of Revenue | $4.39B$3.83B | +14.8% |
| Gross Profit | $1.44B$1.25B | +15.1% |
| R&D Expenses | $229.00M$175.00M | +30.9% |
| SG&A Expenses | $604.00M$606.00M | −0.3% |
| Operating Income | $803.00M$586.00M | +37.0% |
| Interest Expense | $30.00M$21.00M | +42.9% |
| Net Income | $545.00M$424.00M | +28.5% |
| EPS (Basic) | $3.33$2.53 | +31.6% |
| EPS (Diluted) | $3.32$2.53 | +31.2% |
| Shares Outstanding (Basic) | 161.30M167.30M | −3.6% |
| Shares Outstanding (Diluted) | 161.80M167.80M | −3.6% |
05—Questions
Frequently Asked Questions
What were the primary drivers of the significant sales increase in the quarter?
The 21% increase in net sales was primarily driven by strong demand in North American markets, especially for heavy- and medium-duty trucks, and robust international demand in regions like China and Europe. All operating segments reported higher sales.
What impact did the Engine System Campaign have on the company's profitability?
The Engine System Campaign, related to an aftertreatment component degradation, resulted in a significant charge of $181 million in the second quarter of 2018, which negatively impacted the gross margin. For the six-month period, the total charge related to this campaign was $368 million.
How is the company managing its liquidity and capital resources?
Cummins maintains a strong liquidity position with $1.3 billion in cash and cash equivalents and $214 million in marketable securities as of July 1, 2018. The company generated $473 million in operating cash flow in the first half of 2018 and has access to $1.95 billion in available revolving credit facilities, supporting its working capital needs, share repurchases, capital expenditures, and dividend payments.
What is the outlook for Cummins for the remainder of 2018?
Management anticipates continued strong demand in North American truck markets, global mining, construction, and power generation markets. However, challenges include potential cost increases from trade tariffs and an expected decline in market demand in China's truck sector. Overall, the outlook suggests continued demand improvement or strength in most key markets.
06—Continue