10-QPeriod: Q2 FY2019

CUMMINS INC Quarterly Report for Q2 Ended Jun 30, 2019

Filed July 30, 2019For Securities:CMI

Summary

Cummins Inc. reported strong financial results for the period ending June 30, 2019, with notable increases in net sales and net income compared to the prior year's comparable periods. For the three months ended June 30, 2019, net sales rose by 1% to $6.22 billion, and net income attributable to Cummins Inc. surged by 24% to $675 million, translating to diluted EPS of $4.27, up from $3.32 in the prior year. The six-month period showed similar positive trends, with net sales increasing by 4% to $12.23 billion and net income attributable to Cummins Inc. growing by 54% to $1.34 billion, with diluted EPS at $8.47 compared to $5.27. The company's performance was driven by robust sales in the Distribution and Engine segments, particularly in North America, and improved gross margins. A significant factor contributing to the improved profitability was the absence of a large engine system campaign accrual recorded in the prior year. The company also highlighted its strong liquidity position, with substantial cash on hand and available credit facilities, and announced an increase in its quarterly dividend. However, the company acknowledged potential headwinds, including expected declines in North American heavy-duty truck demand in the latter half of 2019 and anticipated decreases in truck and construction markets in China. Additionally, an ongoing internal review concerning emissions certification processes for pick-up truck applications, following discussions with regulatory agencies, presents an area of uncertainty that could materially impact future results.

Financial Highlights

54 data points
Beta

Revenue

$6.22B

26.4% Gross Margin

Net Income

$675.00M

10.9% Net Margin

EPS (Diluted)

$4.27

Total Assets

$20.25B

Cash & Equivalents

$1.40B

Free Cash Flow

$675.00M

Financial Statements
Beta
Revenue$6.22B
Cost of Revenue$4.58B
Gross Profit$1.64B
R&D Expenses$251.00M
SG&A Expenses$629.00M
Operating Income$848.00M
Interest Expense$29.00M
Net Income$675.00M
EPS (Basic)$4.29
EPS (Diluted)$4.27
Shares Outstanding (Basic)157.40M
Shares Outstanding (Diluted)158.00M

Key Highlights

  • 1Net sales for the three months ended June 30, 2019, increased 1% to $6.22 billion compared to the prior year, driven by higher sales in Distribution and Engine segments, partially offset by declines in Power Systems and Components.
  • 2Net income attributable to Cummins Inc. for the three months ended June 30, 2019, increased 24% to $675 million, resulting in diluted EPS of $4.27, up from $3.32 in the prior year.
  • 3For the six months ended June 30, 2019, net sales increased 4% to $12.23 billion, and net income attributable to Cummins Inc. rose significantly by 54% to $1.34 billion, with diluted EPS at $8.47.
  • 4Gross margin for the three months improved by 2.9 percentage points to 26.4% of sales, primarily due to lower warranty costs (absence of a prior year campaign accrual), increased pricing, and favorable mix.
  • 5The company generated strong operating cash flow of $1.22 billion for the six months ended June 30, 2019, a substantial increase from $473 million in the prior year.
  • 6Cummins announced an increase in its quarterly dividend by 15% to $1.311 per share, signaling confidence in future performance.
  • 7An ongoing internal review into emissions certification processes for pick-up truck applications, in cooperation with EPA and CARB, represents a notable risk factor with potential for material adverse impact.

Frequently Asked Questions

The significant increase in net income for the six months ended June 30, 2019, was driven by higher net sales, improved gross margins due to lower warranty costs (absence of a prior year engine system campaign accrual), a lower effective tax rate due to the absence of unfavorable discrete tax items recognized in the prior year, and an increase in the cash surrender value of corporate owned life insurance.

For the second half of 2019, Cummins anticipates North American heavy-duty truck demand to decline. Challenges include expected decreases in truck and construction markets in China, potential negative impacts from the UK's withdrawal from the EU, continued cost increases due to US trade tariffs with China, and potential negative impacts from prolonged trade disputes. Marine and oil and gas markets in North America are also expected to remain weak.

Cummins maintains strong liquidity, funded primarily by operating cash flow, which was $1.22 billion for the first six months of 2019. The company has $1.7 billion in cash and marketable securities and access to $3.5 billion in committed credit facilities, including a $2.0 billion five-year facility maturing in August 2023 and a $1.5 billion 364-day facility maturing in August 2019. This provides significant financial flexibility for operations, investments, and capital allocation.

Cummins announced on April 29, 2019, that it is conducting a formal internal review of its emissions certification process and compliance with emissions standards for its pick-up truck applications, following discussions with the EPA and CARB. Regulatory agencies have raised concerns that certain aspects of the emissions systems may reduce effectiveness and not fully comply with certification requirements. The company is working cooperatively with these agencies to enhance emission systems. Due to the preliminary nature of the review and the unknown facts, the outcome and potential financial impact are unpredictable and could be materially adverse to results of operations and cash flows.