Cummins Announces First Quarter Results; Raises Outlook for 2017

Cummins Inc. (NYSE: CMI) today reported results for the first quarter of 2017.

First quarter revenues of $4.6 billion increased 7 percent from the same quarter in 2016. Stronger demand from construction and mining customers and higher sales from a distributor acquisition in the fourth quarter of last year, more than offset the impact of weaker truck production in North America. Currency negatively impacted revenues by approximately 1 percent compared to last year, primarily due to a stronger US dollar. International sales improved by 17 percent primarily due to growth in China and Europe while revenues in North America increased 1 percent.

Net income attributable to Cummins in the first quarter was $396 million ($2.36 per diluted share), compared to $321million ($1.87 per diluted share). The tax rate in the first quarter of 2017 was 26.1 percent.

Earnings before interest and taxes (EBIT) were $566 million, or 12.3 percent of sales, an increase from $484 million or 11.3 percent of sales a year ago.

“Cummins delivered solid financial results, successfully launched new products and returned $222 million in cash to shareholders in the form of dividends and share repurchases in the first quarter,” said Chairman and CEO Tom Linebarger. “We launched our fully updated range of engines for North American truck and bus markets offering improved performance and better fuel economy for our customers. As recently announced, we also advanced our strategy to be the leading global powertrain supplier through our agreement with Eaton to form the Eaton Cummins Automated Transmission Technologies joint venture. This new venture will design, develop and produce the next generation of Automated Transmissions which will be fully integrated with our engine development to deliver up to an additional 7 percent improvement in fuel economy. The joint venture will benefit from the continuing shift away from fully manual transmissions in commercial vehicles, launch new products that will gain market share, leverage Cummins’ strong presence in international markets for growth and generate aftermarket sales.”

Based on the current forecast, Cummins expects full year 2017 revenues to be up 4 to 7 percent, compared to prior guidance of flat to down 5 percent. EBIT is projected to be in the range of 11.75 to 12.5 percent of sales, up from 11 to 11.5 percent. This forecast excludes the impact of the new joint venture with Eaton, which will be consolidated within Cummins’ financial results and is expected to be operational in the third quarter of this year, subject to regulatory approvals.

First quarter 2017 highlights:

• The Company returned $222 million to shareholders in the form of dividends and share repurchase, consistent with its plan to return 50 percent of Operating Cash Flow in 2017
• Cummins was named to Ethisphere’s 2017 list of World’s Most Ethical Companies for a 10th consecutive year by the Ethisphere Institute
• In March, the Company announced its plans to reach a 50 percent intensity reduction in water use at its facilities by 2020

¹ Generally Accepted Accounting Principles

First quarter 2017 detail (all comparisons to same period in 2016)

Engine Segment

• Sales - $2.0 billion, up 2 percent.
• Segment EBIT - $229 million, or 11.3 percent of sales, compared to 197 million or 10 percent of sales
• Off-highway revenues increased 20 percent primarily due to higher engines sales to global construction markets, while on-highway revenues declined by 2 percent

Distribution Segment

• Sales - $1.6 billion, up 12 percent
• Segment EBIT - $100 million, or 6.1 percent of sales, compared to $87 million or 5.9 percent of sales
• Organic sales increased 6 percent, and revenue from the acquisition completed in the fourth quarter of 2016 added 6 percent

Components Segment

• Sales - $1.3 billion, up 9 percent.
• Segment EBIT - $179 million , or 13.3 percent of sales, compared to $163 million or 13.2 percent of sales
• Strong international revenue growth, primarily in China, more than offset sales declines in North America due to lower commercial truck production

Power Systems Segment

• Sales - $882 million, up 9 percent
• Segment EBIT - $57 million, or 6.5 percent of sales, compared to $46 million, or 5.7 percent of sales
• Increased demand for industrial engines sales primarily for mining and oil & gas markets was the primary driver of revenue growth

 

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 for the full year of 2017. 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: the adoption and implementation of global emission standards; the price and availability of energy; the pace of infrastructure development; increasing global competition among our customers; general economic, business and financing conditions; governmental action; changes in our customers’ business strategies; competitor pricing activity; expense volatility; labor relations; and other risks detailed from time to time in our Securities and Exchange Commission filings, including particularly in the Risk Factors section of our 2016 Annual Report on Form 10-K. 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 Securities and Exchange Commission, 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

EBIT 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 EBIT 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. EDT. 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 INCOME
(Unaudited) (a)
		Three months ended
		April 2,				April 3,
In millions, except per share amounts		2017				2016
NET SALES		$	4,589			$	4,291
Cost of sales		3,461				3,235
GROSS MARGIN		1,128				1,056
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses		537				490
Research, development and engineering expenses		158				166
Equity, royalty and interest income from investees		108				72
Other operating income (expense), net		5				(2		)
OPERATING INCOME		546				470
Interest income		2				6
Interest expense		18				19
Other income (expense), net		18				8
INCOME BEFORE INCOME TAXES		548				465
Income tax expense		143				132
CONSOLIDATED NET INCOME		405				333
Less: Net income attributable to noncontrolling interests		9				12
NET INCOME ATTRIBUTABLE TO CUMMINS INC.		$	396			$	321
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic		$	2.36			$	1.87
Diluted		$	2.36			$	1.87
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic		167.5				171.8
Diluted		168.0				172.0
CASH DIVIDENDS DECLARED PER COMMON SHARE		$	1.025			$	0.975
(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)
		April 2,				December 31,
In millions, except par value		2017				2016
ASSETS
Current assets
Cash and cash equivalents		$	1,322			$	1,120
Marketable securities		145				260
Total cash, cash equivalents and marketable securities		1,467				1,380
Accounts and notes receivable, net		3,247				3,025
Inventories		2,894				2,675
Prepaid expenses and other current assets		551				627
Total current assets		8,159				7,707
Long-term assets
Property, plant and equipment		7,746				7,635
Accumulated depreciation		(3,944		)		(3,835		)
Property, plant and equipment, net		3,802				3,800
Investments and advances related to equity method investees		1,059				946
Goodwill		482				480
Other intangible assets, net		345				332
Pension assets		785				731
Other assets		1,002				1,015
Total assets		$	15,634			$	15,011
LIABILITIES
Current liabilities
Accounts payable (principally trade)		$	2,168			$	1,854
Loans payable		48				41
Commercial paper		274				212
Accrued compensation, benefits and retirement costs		334				412
Current portion of accrued product warranty		352				333
Current portion of deferred revenue		498				468
Other accrued expenses		941				970
Current maturities of long-term debt		47				35
Total current liabilities		4,662				4,325
Long-term liabilities
Long-term debt		1,576				1,568
Postretirement benefits other than pensions		317				329
Pensions		325				326
Other liabilities and deferred revenue		1,278				1,289
Total liabilities		$	8,158			$	7,837
EQUITY
Cummins Inc. shareholders’ equity
Common stock, $2.50 par value, 500 shares authorized, 222.3 and 222.4 shares issued		$	2,163			$	2,153
Retained earnings		11,265				11,040
Treasury stock, at cost, 54.4 and 54.2 shares		(4,524		)		(4,489		)
Common stock held by employee benefits trust, at cost, 0.6 and 0.7 shares		(7		)		(8		)
Accumulated other comprehensive loss		(1,732		)		(1,821		)
Total Cummins Inc. shareholders’ equity		7,165				6,875
Noncontrolling interests		311				299
Total equity		$	7,476			$	7,174
Total liabilities and equity		$	15,634			$	15,011
(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		April 2, 2017				April 3, 2016
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income		$	405			$	333
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Depreciation and amortization		139				128
Deferred income taxes		10				(2		)
Equity in income of investees, net of dividends		(83		)		(48		)
Pension contributions in excess of expense		(23		)		(50		)
Other post-retirement benefits payments in excess of expense		(10		)		(8		)
Stock-based compensation expense		7				5
Restructuring charges and other actions, net of cash payments		—				(25		)
Translation and hedging activities		11				(14		)
Changes in current assets and liabilities, net of acquisitions
Accounts and notes receivable		(205		)		(98		)
Inventories		(202		)		(54		)
Other current assets		73				188
Accounts payable		296				107
Accrued expenses		(90		)		(283		)
Changes in other liabilities and deferred revenue		48				78
Other, net		3				10
Net cash provided by operating activities		379				267
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(81		)		(71		)
Investments in internal use software		(27		)		(13		)
Investments in and advances to equity investees		(20		)		(25		)
Investments in marketable securities—acquisitions		(26		)		(291		)
Investments in marketable securities—liquidations		147				35
Cash flows from derivatives not designated as hedges		(24		)		(26		)
Other, net		4				3
Net cash used in investing activities		(27		)		(388		)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings		—				105
Net borrowings of commercial paper		62				50
Payments on borrowings and capital lease obligations		(11		)		(15		)
Distributions to noncontrolling interests		(10		)		(10		)
Dividend payments on common stock		(171		)		(170		)
Repurchases of common stock		(51		)		(575		)
Other, net		17				(21		)
Net cash used in financing activities		(164		)		(636		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		14				(39		)
Net increase (decrease) in cash and cash equivalents		202				(796		)
Cash and cash equivalents at beginning of year		1,120				1,711
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	1,322			$	915
(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)
																Power				Intersegment
		In millions		Engine				Distribution				Components				Systems				Eliminations (1)				Total
		Three months ended April 2, 2017
		External sales		$	1,457			$	1,637			$	980			$	515			$	—			$	4,589
		Intersegment sales		566				8				364				367				(1,305		)		—
		Total sales		2,023				1,645				1,344				882				(1,305		)		4,589
		Depreciation and amortization (2)		44				30				37				28				—				139
		Research, development and engineering expenses		54				4				50				50				—				158
		Equity, royalty and interest income from investees		72				11				13				12				—				108
		Interest income		1				1				—				—				—				2
		Segment EBIT		229				100				179				57				1				566
		Segment EBIT as a percentage of total sales		11.3		%		6.1		%		13.3		%		6.5		%						12.3		%
		Three months ended April 3, 2016
		External sales		$	1,489			$	1,458			$	897			$	447			$	—			$	4,291
		Intersegment sales		487				5				340				361				(1,193		)		—
		Total sales		1,976				1,463				1,237				808				(1,193		)		4,291
		Depreciation and amortization (2)		39				28				31				29				—				127
		Research, development and engineering expenses		57				4				56				49				—				166
		Equity, royalty and interest income from investees		36				18				8				10				—				72
		Interest income		2				1				1				2				—				6
		Segment EBIT		197				87				163				46				(9		)		484
		Segment EBIT as a percentage of total sales		10.0		%		5.9		%		13.2		%		5.7		%						11.3		%
(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 April 2, 2017 and April 3, 2016.
(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 Income as "Interest expense." The amortization of debt discount and deferred costs were less than $1 million and $1 million for the three months ended April 2, 2017 and April 3, 2016, respectively.

A reconciliation of our segment information to the corresponding amounts in the Condensed Consolidated Statements of Income is shown in the table below:

				Three months ended
In millions				April 2, 2017						April 3, 2016
Total segment EBIT				$	566					$	484
Less: Interest expense				18						19
Income before income taxes				$	548					$	465

CUMMINS INC. AND SUBSIDIARIES
SELECTED FOOTNOTE DATA
(Unaudited)

EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES

Equity, royalty and interest income from investees included in our Condensed Consolidated Statements of Income for the reporting periods was as follows:

				Three months ended
In millions				April 2, 2017						April 3, 2016
Distribution entities
Komatsu Cummins Chile, Ltda.				$	7					$	10
North American distributors				—						5
Manufacturing entities
Beijing Foton Cummins Engine Co., Ltd.				33						18
Dongfeng Cummins Engine Company, Ltd.				22						7
Chongqing Cummins Engine Company, Ltd.				9						8
All other manufacturers				24						16
Cummins share of net income				95						64
Royalty and interest income				13						8
Equity, royalty and interest income from investees				$	108					$	72

Earnings before interest, income taxes and noncontrolling interests

We define EBIT as earnings before interest expense, income tax expense and noncontrolling interests in income of consolidated subsidiaries. We use EBIT to assess and measure the performance of our operating segments and also as a component in measuring our variable compensation programs. This measure is not in accordance with, or an alternative for, accounting principles generally accepted in the United States and may not be consistent with measures used by other companies. It should be considered supplemental data. Below is a reconciliation of “Net income attributable to Cummins Inc.” to EBIT for each of the applicable periods:

				Three months ended
In millions				April 2, 2017						April 3, 2016
Net income attributable to Cummins Inc.				$	396					$	321
Net income attributable to Cummins Inc. as a percentage of net sales				8.6		%				7.5		%
Add
Net income attributable to noncontrolling interests				9						12
Consolidated net income				405						333
Add
Interest expense				18						19
Income tax expense				143						132
Earnings before interest expense and income taxes				566						484
EBIT as a percentage of net sales				12.3		%				11.3		%

CUMMINS INC. AND SUBSIDIARIES
BUSINESS UNIT SALES DATA
(Unaudited)

Engine Segment Sales by Market and Unit Shipments by Engine Classification

Sales for our Engine segment by market were as follows:

2017
In millions			Q1				Q2				Q3				Q4				YTD
Heavy-duty truck			$	620			$	—			$	—			$	—			$	620
Medium-duty truck and bus			544				—				—				—				544
Light-duty automotive			423				—				—				—				423
Off-highway			436				—				—				—				436
Total sales			$	2,023			$	—			$	—			$	—			$	2,023
2016
In millions			Q1				Q2				Q3				Q4				YTD
Heavy-duty truck			$	631			$	622			$	625			$	565			$	2,443
Medium-duty truck and bus			549				600				517				606				2,272
Light-duty automotive			433				394				345				409				1,581
Off-highway			363				386				372				387				1,508
Total sales			$	1,976			$	2,002			$	1,859			$	1,967			$	7,804

Unit shipments by engine classification (including unit shipments to Power Systems and off-highway engine units included in their respective classification) were as follows:

2017
Units			Q1			Q2			Q3			Q4			YTD
Heavy-duty			19,200			—			—			—			19,200
Medium-duty			60,300			—			—			—			60,300
Light-duty			63,100			—			—			—			63,100
Total units			142,600			—			—			—			142,600
2016
Units			Q1			Q2			Q3			Q4			YTD
Heavy-duty			19,700			20,700			20,100			18,500			79,000
Medium-duty			55,400			62,300			53,400			58,000			229,100
Light-duty			61,700			57,100			49,800			60,000			228,600
Total units			136,800			140,100			123,300			136,500			536,700

Distribution Segment Sales by Product Line

2017
In millions			Q1				Q2				Q3				Q4				YTD
Parts			$	745			$	—			$	—			$	—			$	745
Service			319				—				—				—				319
Power generation			306				—				—				—				306
Engines			275				—				—				—				275
Total sales			$	1,645			$	—			$	—			$	—			$	1,645
2016
In millions			Q1				Q2				Q3				Q4				YTD
Parts			$	648			$	642			$	643			$	694			$	2,627
Service			299				297				299				320				1,215
Power generation			275				326				291				347				1,239
Engines			241				279				271				309				1,100
Total sales			$	1,463			$	1,544			$	1,504			$	1,670			$	6,181

Component Segment Sales by Business

In the first quarter of 2017, our Components segment reorganized its reporting structure to move a small piece of the emission solutions business to the fuel systems business to enhance operational, administrative and product development efficiencies. Prior year balances were reclassified to conform with this change.

2017
In millions			Q1				Q2				Q3				Q4				YTD
Emission solutions			$	616			$	—			$	—			$	—			$	616
Turbo technologies			287				—				—				—				287
Filtration			277				—				—				—				277
Fuel systems			164				—				—				—				164
Total sales			$	1,344			$	—			$	—			$	—			$	1,344
2016
In millions			Q1				Q2				Q3				Q4				YTD
Emission solutions			$	589			$	603			$	522			$	524			$	2,238
Turbo technologies			265				276				241				254				1,036
Filtration			252				262				244				252				1,010
Fuel systems			131				138				136				147				552
Total sales			$	1,237			$	1,279			$	1,143			$	1,177			$	4,836
2015
In millions			YTD
Emission solutions			$	2,449
Turbo technologies			1,141
Filtration			1,010
Fuel systems			572
Total sales			$	5,172

Power Systems Segment Sales by Product Line and Unit Shipments by Engine Classification

In the first quarter of 2017, the Power Systems segment reorganized its product lines to better reflect how the business is managed. Prior year sales have been reclassified to reflect these changes.

Sales for our Power Systems segment by product line were as follows:

2017
In millions			Q1				Q2				Q3				Q4				YTD
Power generation			$	526			$	—			$	—			$	—			$	526
Industrial			275				—				—				—				275
Generator technologies			81				—				—				—				81
Total sales			$	882			$	—			$	—			$	—			$	882
2016
In millions			Q1				Q2				Q3				Q4				YTD
Power generation			$	518			$	602			$	543			$	593			$	2,256
Industrial			215				236				235				255				941
Generator technologies			75				83				78				84				320
Total sales			$	808			$	921			$	856			$	932			$	3,517

High-horsepower unit shipments by engine classification were as follows:

2017
Units			Q1			Q2			Q3			Q4			YTD
Power generation			1,900			—			—			—			1,900
Industrial			1,300			—			—			—			1,300
Total units			3,200			—			—			—			3,200
2016
Units			Q1			Q2			Q3			Q4			YTD
Power generation			1,800			2,200			2,000			1,900			7,900
Industrial			1,000			1,100			1,000			1,300			4,400
Total units			2,800			3,300			3,000			3,200			12,300

 

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Source: Cummins Inc.