Cummins Reports Second Quarter 2020 Results

Second quarter revenues of $3.9 billion; GAAP¹Net Income of $276 million
Second quarter EBITDA of 14.3 percent; Diluted EPS of $1.86
The company ended the quarter with cash, cash equivalents and marketable securities of $2.1 billion and committed borrowing capacity of $3.5 billion
The company’s long-term credit ratings remain unchanged at A+ from Standard & Poor’s and A2 from Moody’s with stable outlooks

COLUMBUS, Ind.–(BUSINESS WIRE)–Cummins Inc. (NYSE: CMI) today reported results for the second quarter of 2020.

Second quarter revenues of $3.9 billion decreased 38 percent from the same quarter in 2019. COVID-19 related customer shutdowns and weak economic activity led to lower demand in most end markets and regions except China. Sales in North America declined by 48 percent while international revenues decreased 22 percent. Currency negatively impacted revenues by 2 percent primarily due to a stronger US dollar.

Earnings before interest, taxes, depreciation and amortization (EBITDA) in the second quarter were $549 million (14.3 percent of sales), compared to $1.1 billion (17.0 percent of sales) a year ago.

Net income attributable to Cummins in the first quarter was $276 million ($1.86 per diluted share) compared to $675 million ($4.27 per diluted share) in 2019. The tax rate in the second quarter was 25.7 percent and was negatively impacted by $14 million ($0.09 per diluted share) of discrete tax items.

2020 Outlook:

The company currently expects third quarter revenues to improve from second quarter levels, however, there remains significant uncertainty around how COVID-19 will impact end market demand as well as customer and supplier operations. Due to this uncertainty the company is not providing full year revenue or profitability guidance for 2020.

Chairman and CEO Tom Linebarger

“I want to thank our employees all over the globe for their dedication to our company and to our customers. They continue to work safely and effectively through an incredibly challenging period, with unprecedented disruptions to global demand and supply, to their work processes, and to their daily lives. In the face of the most severe decline in quarterly sales in our history, we delivered solid profitability while meeting commitments to our customers who provide products critical to the functioning of the global economy.”

“Our people demonstrated remarkable flexibility as did our operations and supply chain. A pronounced example of our organization’s agility in this challenging period was our ramp up in China, where many of our facilities went from complete shut down in February and March to producing record volumes in the second quarter.”

“While customer demand did improve in some regions as the quarter progressed, significant uncertainty around the pace of recovery in our markets remains, requiring a continued strong focus on managing expenses and cash flow. Our strong financial position will enable us to continue to prioritize our investments in technology and new products including advanced diesel engines, battery electric powertrains, fuel cells, and hydrogen electrolyzers that will help drive future profitable growth.”

Second Quarter 2020 Highlights:

Announced an external-facing approach to complement the company’s internal diversity and inclusion activities, including the creation of the Cummins Against Racial Injustice Management Review Group to focus on police reform, criminal justice, social justice, and economic empowerment of Black people in the United States.

Manufactured more than 14 tons of its filtration media which has been used to produce more than eight million N95 and surgical masks globally.

Cummins announced a joint venture with NPROXX, a leader in hydrogen storage and transportation, for hydrogen storage tanks. The transaction is expected to close by the end of the first quarter 2021.

Published the Cummins Work Playbook, a one-stop resource highlighting our health and wellness protocols that ensure the safety of our employees, customers, suppliers and communities during the global COVID-19 pandemic.

Paid a $1.311 dividend to shareholders. Cummins has paid a dividend for over 70 years.

¹ Generally Accepted Accounting Principles

Second quarter 2020 detail (all comparisons to same period in 2019):

Engine Segment

Sales – $1.4 billion, down 47 percent
Segment EBITDA – $150 million, or 10.5 percent of sales, compared to $416 million or 15.4 percent of sales
On-highway revenues decreased 55 percent and off-highway revenues declined 15 percent
Sales declined in all regions except China, where sales increased by 40 percent due to higher demand in construction markets

Distribution Segment

Sales – $1.6 billion, down 21 percent
Segment EBITDA – $160 million, or 10.0 percent of sales, compared to $172 million or 8.5 percent of sales
Revenues in North America were down 25 percent and international sales declined by 12 percent
Demand declined in all lines of business and a stronger US dollar negatively impacted revenues by 1 percent

Components Segment

Sales – $1.2 billion, down 38 percent
Segment EBITDA – $141 million, or 12.3 percent of sales, compared to $297 million or 16.1 percent of sales
Revenues in North America decreased by 55 percent and international sales declined by 9 percent due to lower demand in Europe, India, and Brazil
Sales in China increased by 63 percent driven by record levels of truck production

Power Systems Segment

Sales – $777 million, down 35 percent
Segment EBITDA – $91 million, or 11.7 percent of sales, compared to $173 million, or 14.4 percent of sales
Power generation revenues decreased by 37 percent while industrial revenues decreased 33 percent due to lower demand in mining and oil and gas markets

New Power Segment

Sales – $10 million
Segment EBITDA loss – $38 million
Costs associated with the development of fuel cells and electrolyzers as well as products to support battery electric vehicles are contributing to EBITDA losses

About Cummins Inc.

Cummins Inc., a global power leader, is a corporation of complementary business segments that design, manufacture, distribute and service a broad portfolio of power solutions. The company’s products range from diesel, natural gas, electric and hybrid powertrains and powertrain-related components including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated transmissions, electric power generation systems, batteries, electrified power systems, hydrogen generation and fuel cell products. Headquartered in Columbus, Indiana (U.S.), since its founding in 1919, Cummins employs approximately 61,600 people committed to powering a more prosperous world through three global corporate responsibility priorities critical to healthy communities: education, environment and equality of opportunity. Cummins serves its customers online, through a network of company-owned and independent distributor locations, and through thousands of dealer locations worldwide and earned about $2.3 billion on sales of $23.6 billion in 2019. See how Cummins is powering a world that’s always on by accessing news releases and more information at https://www.cummins.com/always-on.

Forward-looking disclosure statement

Information provided in this release that is not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our forecasts, guidance, preliminary results, expectations, hopes, beliefs and intentions on strategies regarding the future. These forward-looking statements include, without limitation, statements relating to our plans and expectations for our revenues and EBITDA. Our actual future results could differ materially from those projected in such forward-looking statements because of a number of factors, including, but not limited to: market slowdown due to the impacts from COVID-19 pandemic, other public health crises, epidemics or pandemics; impacts to manufacturing and supply chain abilities from an extended shutdown or disruption of our operations due to the COVID-19 pandemic; supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers, including suppliers that may be impacted by the COVID-19 pandemic; aligning our capacity and production with our demand, including impacts of COVID-19; a major customer experiencing financial distress, particularly related to the COVID-19 pandemic; any adverse results of our internal review into our emissions certification process and compliance with emission standards; increased scrutiny from regulatory agencies, as well as unpredictability in the adoption, implementation and enforcement of emission standards around the world; disruptions in global credit and financial markets as the result of the COVID-19 pandemic; adverse impacts from government actions to stabilize credit markets and financial institutions and other industries; product recalls; the development of new technologies that reduce demand for our current products and services; policy changes in international trade; a slowdown in infrastructure development and/or depressed commodity prices; the U.K.’s exit from the European Union (EU); labor relations or work stoppages; reliance on our executive leadership team and other key personnel; lower than expected acceptance of new or existing products or services; changes in the engine outsourcing practices of significant customers; our plan to reposition our portfolio of product offerings through exploration of strategic acquisitions and divestitures and related uncertainties of entering such transactions; exposure to potential security breaches or other disruptions to our information technology systems and data security; challenges or unexpected costs in completing cost reduction actions and restructuring initiatives; failure to realize expected results from our investment in Eaton Cummins Automated Transmission Technologies joint venture; political, economic and other risks from operations in numerous countries; competitor activity; increasing competition, including increased global competition among our customers in emerging markets; foreign currency exchange rate changes; variability in material and commodity costs; the actions of, and income from, joint ventures and other investees that we do not directly control; changes in taxation; global legal and ethical compliance costs and risks; product liability claims; increasingly stringent environmental laws and regulations; the performance of our pension plan assets and volatility of discount rates, particularly those related to the sustained slowdown of the global economy due to the COVID-19 pandemic; future bans or limitations on the use of diesel-powered products; the price and availability of energy; our sales mix of products; protection and validity of our patent and other intellectual property rights; the outcome of pending and future litigation and governmental proceedings; continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support our future business; and other risks detailed from time to time in our SEC filings, including particularly in the Risk Factors section of our 2019 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this press release and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available at http://www.sec.gov or at http://www.cummins.com in the Investor Relations section of our website.

Presentation of Non-GAAP Financial Information

EBITDA is a non-GAAP measure used in this release and is defined and reconciled to what management believes to be the most comparable GAAP measure in a schedule attached to this release. Cummins presents this information as it believes it is useful to understanding the Company’s operating performance, and because EBITDA is a measure used internally to assess the performance of the operating units.

Webcast information

Cummins management will host a teleconference to discuss these results today at 10 a.m. EST. This teleconference will be webcast and available on the Investor Relations section of the Cummins website at www.cummins.com. Participants wishing to view the visuals available with the audio are encouraged to sign-in a few minutes prior to the start of the teleconference.


CUMMINS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME (Unaudited) (a)
	Three months ended
In millions, except per share amounts	June 28, 2020			March 29, 2020			June 30, 2019
NET SALES	$	3,852		$	5,011		$	6,221
Cost of sales	2,962			3,717			4,580
GROSS MARGIN	890			1,294			1,641
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses	470			546			629
Research, development and engineering expenses	189			238			251
Equity, royalty and interest income from investees	115			129			96
Other operating expense, net	(10		)	(5		)	(9		)
OPERATING INCOME	336			634			848
Interest income	4			7			12
Interest expense	23			23			29
Other income, net	45			37			40
INCOME BEFORE INCOME TAXES	362			655			871
Income tax expense	93			127			186
CONSOLIDATED NET INCOME	269			528			685
Less: Net (loss) income attributable to noncontrolling interests	(7		)	17			10
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	276		$	511		$	675

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic	$	1.87		$	3.42		$	4.29
Diluted	$	1.86		$	3.41		$	4.27

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
Basic	147.6			149.3			157.4
Diluted	148.0			149.7			158.0

^(a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.


CUMMINS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME (Unaudited) (a)
	Six months ended
In millions, except per share amounts	June 28, 2020			June 30, 2019
NET SALES	$	8,863		$	12,225
Cost of sales	6,679			9,052
GROSS MARGIN	2,184			3,173
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses	1,016			1,222
Research, development and engineering expenses	427			488
Equity, royalty and interest income from investees	244			188
Other operating expense, net	(15		)	(4		)
OPERATING INCOME	970			1,647
Interest income	11			24
Interest expense	46			61
Other income, net	82			106
INCOME BEFORE INCOME TAXES	1,017			1,716
Income tax expense	220			362
CONSOLIDATED NET INCOME	797			1,354
Less: Net income attributable to noncontrolling interests	10			16
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	787		$	1,338

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic	$	5.30		$	8.51
Diluted	$	5.29		$	8.47

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
Basic	148.4			157.3
Diluted	148.8			157.9

^(a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.


CUMMINS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (a)
In millions, except par value	June 28, 2020			December 31, 2019
ASSETS
Current assets
Cash and cash equivalents	$	1,751		$	1,129
Marketable securities	353			341
Total cash, cash equivalents and marketable securities	2,104			1,470
Accounts and notes receivable, net	3,441			3,670
Inventories	3,655			3,486
Prepaid expenses and other current assets	634			761
Total current assets	9,834			9,387
Long-term assets
Property, plant and equipment, net	4,067			4,245
Investments and advances related to equity method investees	1,362			1,237
Goodwill	1,284			1,286
Other intangible assets, net	1,017			1,003
Pension assets	998			1,001
Other assets	1,752			1,578
Total assets	$	20,314		$	19,737

LIABILITIES
Current liabilities
Accounts payable (principally trade)	$	2,281		$	2,534
Loans payable	109			100
Commercial paper	2,027			660
Accrued compensation, benefits and retirement costs	309			560
Current portion of accrued product warranty	681			803
Current portion of deferred revenue	523			533
Other accrued expenses	920			1,039
Current maturities of long-term debt	66			31
Total current liabilities	6,916			6,260
Long-term liabilities
Long-term debt	1,639			1,576
Pensions and other postretirement benefits	578			591
Accrued product warranty	636			645
Deferred revenue	829			821
Other liabilities	1,586			1,379
Total liabilities	$	12,184		$	11,272

EQUITY
Cummins Inc. shareholders’ equity
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued	$	2,353		$	2,346
Retained earnings	14,811			14,416
Treasury stock, at cost, 74.8 and 71.7 shares	(7,729		)	(7,225		)
Common stock held by employee benefits trust, at cost, 0.1 and 0.2 shares	(1		)	(2		)
Accumulated other comprehensive loss	(2,242		)	(2,028		)
Total Cummins Inc. shareholders’ equity	7,192			7,507
Noncontrolling interests	938			958
Total equity	$	8,130		$	8,465
Total liabilities and equity	$	20,314		$	19,737

^(a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.


CUMMINS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (a)
	Three months ended
In millions	June 28, 2020			March 29, 2020			June 30, 2019
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income	$	269		$	528		$	685
Adjustments to reconcile consolidated net income to net cash (used in) provided by operating activities
Depreciation and amortization	165			168			158
Deferred income taxes	—			(11		)	6
Equity in income of investees, net of dividends	(46		)	(78		)	21
Pension and OPEB expense	27			27			19
Pension contributions and OPEB payments	(22		)	(60		)	(45		)
Stock-based compensation expense	8			4			19
Restructuring payments	(33		)	(48		)	—
Gain on corporate owned life insurance	(21		)	(17		)	(18		)
Foreign currency remeasurement and transaction exposure	(5		)	3			(33		)
Changes in current assets and liabilities
Accounts and notes receivable	63			107			(177		)
Inventories	(53		)	(171		)	(18		)
Other current assets	16			79			(52		)
Accounts payable	(391		)	171			(18		)
Accrued expenses	(101		)	(321		)	99
Changes in other liabilities	171			28			56
Other, net	(69		)	(30		)	106
Net cash (used in) provided by operating activities	(22		)	379			808

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(77		)	(75		)	(133		)
Investments in internal use software	(13		)	(8		)	(14		)
Investments in and advances to equity investees	(10		)	(7		)	(8		)
Investments in marketable securities—acquisitions	(169		)	(116		)	(138		)
Investments in marketable securities—liquidations	159			95			50
Cash flows from derivatives not designated as hedges	(28		)	6			(81		)
Other, net	3			6			(16		)
Net cash used in investing activities	(135		)	(99		)	(340		)

CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) of commercial paper	410			957			(275		)
Payments on borrowings and finance lease obligations	(15		)	(10		)	(7		)
Net (payments) borrowings under short-term credit agreements	(21		)	25			42
Distributions to noncontrolling interests	—			(13		)	—
Dividend payments on common stock	(193		)	(195		)	(179		)
Repurchases of common stock	—			(550		)	—
Other, net	45			20			55
Net cash provided by (used in) financing activities	226			234			(364		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	(9		)	48			(35		)
Net increase in cash and cash equivalents	60			562			69
Cash and cash equivalents at beginning of period	1,691			1,129			1,328
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,751		$	1,691		$	1,397

^(a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.


CUMMINS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (a)
	Six months ended
In millions	June 28, 2020			June 30, 2019
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income	$	797		$	1,354
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Depreciation and amortization	333			315
Deferred income taxes	(11		)	17
Equity in income of investees, net of dividends	(124		)	(43		)
Pension and OPEB expense	54			37
Pension contributions and OPEB payments	(82		)	(92		)
Stock-based compensation expense	12			28
Restructuring payments	(81		)	—
Gain on corporate owned life insurance	(38		)	(55		)
Foreign currency remeasurement and transaction exposure	(2		)	46
Changes in current assets and liabilities
Accounts and notes receivable	170			(312		)
Inventories	(224		)	(125		)
Other current assets	95			15
Accounts payable	(220		)	148
Accrued expenses	(422		)	(194		)
Changes in other liabilities	199			120
Other, net	(99		)	(39		)
Net cash provided by operating activities	357			1,220

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(152		)	(242		)
Investments in internal use software	(21		)	(34		)
Investments in and advances to equity investees	(17		)	(18		)
Investments in marketable securities—acquisitions	(285		)	(259		)
Investments in marketable securities—liquidations	254			153
Cash flows from derivatives not designated as hedges	(22		)	(26		)
Other, net	9			15
Net cash used in investing activities	(234		)	(411		)

CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) of commercial paper	1,367			(346		)
Payments on borrowings and finance lease obligations	(25		)	(17		)
Net borrowings under short-term credit agreements	4			57
Distributions to noncontrolling interests	(13		)	(13		)
Dividend payments on common stock	(388		)	(358		)
Repurchases of common stock	(550		)	(100		)
Other, net	65			66
Net cash provided by (used in) financing activities	460			(711		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	39			(4		)
Net increase in cash and cash equivalents	622			94
Cash and cash equivalents at beginning of year	1,129			1,303
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,751		$	1,397

^(a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.


CUMMINS INC. AND SUBSIDIARIES SEGMENT INFORMATION (Unaudited)

In millions	Engine			Distribution			Components			Power Systems			New Power			Total Segments			Intersegment Eliminations ⁽¹⁾			Total
Three months ended June 28, 2020
External sales	$	937		$	1,601		$	876		$	428		$	10		$	3,852		$	—		$	3,852
Intersegment sales	486			4			274			349			—			1,113			(1,113		)	—
Total sales	1,423			1,605			1,150			777			10			4,965			(1,113		)	3,852
Research, development and engineering expenses	65			4			55			41			24			189			—			189
Equity, royalty and interest income from investees	84			11			12			9			(1		)	115			—			115
Interest income	1			1			1			1			—			4			—			4
Segment EBITDA	150			160			141			91			(38		)	504			45			549
Depreciation and amortization ⁽²⁾	51			30			47			32			4			164			—			164

Segment EBITDA as a percentage of total sales	10.5		%	10.0		%	12.3		%	11.7		%	NM			10.2		%				14.3		%

Three months ended June 30, 2019
External sales	$	2,073		$	2,015		$	1,401		$	724		$	8		$	6,221		$	—		$	6,221
Intersegment sales	630			13			445			479			—			1,567			(1,567		)	—
Total sales	2,703			2,028			1,846			1,203			8			7,788			(1,567		)	6,221
Research, development and engineering expenses	88			7			75			57			24			251			—			251
Equity, royalty and interest income from investees	62			12			11			11			—			96			—			96
Interest income	4			4			2			2			—			12			—			12
Segment EBITDA	416			172			297			173			(33		)	1,025			33			1,058
Depreciation and amortization ⁽²⁾	51			28			47			30			2			158			—			158

EBITDA as a percentage of total sales	15.4		%	8.5		%	16.1		%	14.4		%	NM			13.2		%				17.0		%

“NM” – not meaningful information

⁽¹⁾Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three months ended June 28, 2020 and June 30, 2019.

⁽²⁾Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Net Income as “Interest expense.” A portion of depreciation expense is included in “Research, development and engineering expenses.”