10-QPeriod: Q1 FY2019

CUMMINS INC Quarterly Report for Q1 Ended Mar 31, 2019

Filed April 30, 2019For Securities:CMI

Summary

Cummins Inc. reported strong financial performance for the first quarter of 2019, with a significant increase in net sales and net income compared to the prior year period. Net sales rose by 8% to $6.0 billion, driven by robust demand in North American truck markets and improved performance across most operating segments, including Engine, Distribution, and Components. The company's profitability saw a substantial boost, with net income attributable to Cummins Inc. more than doubling to $663 million ($4.20 per diluted share) from $325 million ($1.96 per diluted share) in Q1 2018. This improvement was attributed to higher sales, increased gross margins (partially due to lower warranty costs from the absence of a significant accrual in the prior year), and a lower effective tax rate. The company also generated strong operating cash flow, a notable improvement from the prior year's cash usage. Despite the positive results, Cummins is facing some headwinds, including cost increases due to U.S. trade tariffs and an ongoing review of its emissions certification process for certain pick-up truck applications. The company provided an outlook anticipating continued strength in several key markets while acknowledging potential challenges in China and the broader implications of global trade disputes.

Financial Highlights

54 data points
Beta

Revenue

$6.00B

25.5% Gross Margin

Net Income

$663.00M

11.0% Net Margin

EPS (Diluted)

$4.20

Total Assets

$19.85B

Cash & Equivalents

$1.33B

Free Cash Flow

$303.00M

Financial Statements
Beta
Revenue$6.00B
Cost of Revenue$4.47B
Gross Profit$1.53B
R&D Expenses$237.00M
SG&A Expenses$593.00M
Operating Income$799.00M
Interest Expense$32.00M
Net Income$663.00M
EPS (Basic)$4.22
EPS (Diluted)$4.20
Shares Outstanding (Basic)157.20M
Shares Outstanding (Diluted)157.70M

Key Highlights

  • 1Net sales increased by 8% to $6.0 billion for the three months ended March 31, 2019, compared to the same period in 2018.
  • 2Net income attributable to Cummins Inc. more than doubled to $663 million ($4.20 per diluted share) from $325 million ($1.96 per diluted share) in the prior year's quarter.
  • 3Gross margin improved significantly, increasing by 4.0 percentage points as a percentage of sales, driven by lower warranty costs, higher volumes, and increased pricing.
  • 4Operating cash flow was $412 million for the quarter, a substantial improvement from the $117 million used in the comparable period of 2018.
  • 5The company announced a formal review of its emissions certification process for pick-up truck applications following discussions with the EPA and CARB, which could present future risks.
  • 6North American markets, particularly heavy-duty and medium-duty truck segments, showed strong demand, contributing to sales growth.
  • 7The company repurchased $100 million of common stock during the quarter under its authorized share repurchase program.

Frequently Asked Questions

The substantial increase in net income and diluted earnings per share was driven by several factors: higher net sales across most segments, improved gross margins resulting from lower warranty costs (specifically the absence of a large engine system campaign accrual recorded in Q1 2018), increased pricing, and higher volumes. Additionally, a lower effective tax rate due to the absence of unfavorable discrete tax items in the prior year and an increase in the value of corporate-owned life insurance contributed to the improved profitability.

Cummins is conducting a formal review of its emissions certification process and compliance for pick-up truck applications following discussions with the EPA and CARB regarding model year 2019 RAM 2500 and 3500 trucks. While no official notice of noncompliance has been issued, the company is working cooperatively with regulators. The outcome of this review is uncertain and could potentially have a material adverse impact on the company's results of operations, financial condition, and cash flows depending on the findings and required remediation.

All operating segments reported higher sales, with notable growth in the Engine segment (+8%) driven by North American truck markets, and the Distribution segment (+8%) also seeing broad-based demand. The Components segment increased by 6%, supported by emission solutions and automated transmissions. The Power Systems segment was relatively flat (-0%), while the Electrified Power segment, still in development, saw a modest sales increase. Segment EBITDA improved across most segments, with Engine, Distribution, and Components showing significant year-over-year increases.

Cummins anticipates continued strong demand in North American medium-duty and heavy-duty trucks, pick-up trucks, power generation, construction, and mining markets. However, challenges include expected declines in truck and construction markets in China, uncertainties related to the UK's EU withdrawal, cost increases due to U.S. trade tariffs, prolonged trade disputes, and anticipated declines in North American oil and gas markets. Marine markets are also expected to remain weak.