Cummins Reports Third Quarter 2020 Results

• Third quarter revenues of $5.1 billion; GAAP¹ Net Income of $501 million
• Third quarter EBITDA of 17.1 percent; Diluted EPS of $3.36
• The company produced record quarterly operating cash flow of $1.2 billion
• Total liquidity increased to $6.5 billion, including cash and marketable securities of $3.3 billion

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

Third quarter revenues of $5.1 billion decreased 11 percent from the same quarter in 2019. Sales in North America declined by 18 percent while international revenues were flat. Currency negatively impacted revenues by 1 percent primarily due to a weaker Brazilian Real.

Earnings before interest, taxes, depreciation and amortization (EBITDA) in the third quarter were $876 million (17.1 percent of sales), compared to $958 million (16.6 percent of sales) a year ago.

“Cummins successfully translated increased sales into strong profits and produced record operating cash flow during the third quarter,” said Chairman and CEO Tom Linebarger. “I want to thank our employees all over the globe once again for their dedication to our company and to our customers. Over the last six months we have faced both the most severe decline in quarterly sales in our history as well as the largest sequential increase. We continue to work safely and effectively through an incredibly challenging period, meeting our commitments to customers who provide products critical to the functioning of the global economy.”

Net income attributable to Cummins in the third quarter was $501 million ($3.36 per diluted share) compared to $622 million ($3.97 per diluted share) in 2019. The tax rate in the third quarter was 26.5 percent and was negatively impacted by $31 million ($0.21 per diluted share) of discrete tax items.

“We continue to advance existing products and invest in new technology while returning cash to shareholders,” said Chief Financial Officer Mark Smith. “In October we announced a 3% increase to our quarterly dividend, which will make 2020 the eleventh consecutive year of increases to Cummins’ dividend.”

2020 Outlook:

The company currently expects fourth quarter revenues to be similar to third quarter levels, with higher demand in North America truck markets and continued improvement in aftermarket sales, partially offset by lower demand in China.

On October 1^st, the company ended temporary salary reductions that began in April. Compensation expense is projected to increase by approximately $90 million dollars in the fourth quarter due to the end of these salary reductions.

“We are encouraged by the recovery in demand across our markets in the third quarter,” said Chairman and CEO Tom Linebarger. “We will continue to manage cautiously through the remainder of the year as visibility on future orders remains low and the impact of the virus on economies around the world remains difficult to predict.”

Third Quarter 2020 Highlights:

• The company completed an aggregate $2 billion debt offering of 5, 10, and 30-year maturities. The company’s long-term credit ratings remain unchanged at A+ from Standard & Poor’s and A2 from Moody’s with stable outlooks

• A collaboration with the Department of Energy’s Oak Ridge National Laboratory (ORNL) has resulted in the ability to produce enough filter media to supply more than a million face masks and respirators per day to U.S. healthcare facilities

• Cummins was awarded over $12 million of funding for five separate Department of Energy projects related to PEM and Solid Oxide fuel cell and electrolyzer technologies

• The company announced an increase in its quarterly dividend from $1.311 to $1.35 a share

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

Engine Segment

• Sales - $2.1 billion, down 13 percent
• Segment EBITDA - $382 million, or 18.1 percent of sales, compared to $341 million or 14.1 percent of sales
• EBITDA was positively impacted by a $30 million value added tax (VAT) recovery
• On-highway revenues decreased 13 percent and off-highway revenues declined 9 percent
• Sales declined by 18 percent in North America but increased 8 percent in international markets primarily due to increased demand in China

Distribution Segment

• Sales - $1.7 billion, down 14 percent
• Segment EBITDA - $182 million, or 10.6 percent of sales, compared to $186 million or 9.3 percent of sales
• Revenues in North America were down 18 percent and international sales declined by 5 percent
• Demand declined in all lines of business

Components Segment

• Sales - $1.5 billion, down 7 percent
• Segment EBITDA - $261 million, or 16.9 percent of sales, compared to $286 million or 17.3 percent of sales
• Revenues in North America decreased by 24 percent and international sales increased by 26 percent due to higher demand in China and India

Power Systems Segment

• Sales - $981 million, down 13 percent
• Segment EBITDA - $101 million, or 10.3 percent of sales, compared to $158 million, or 14.0 percent of sales
• Power generation revenues decreased by 7 percent while industrial revenues decreased 21 percent due to lower demand in mining and oil and gas markets

New Power Segment

• Sales - $18 million
• Segment EBITDA loss - $40 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
RECONCILIATION OF SEGMENT INFORMATION
(Unaudited)

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

CUMMINS INC. AND SUBSIDIARIES
SELECT FOOTNOTE DATA
(Unaudited)

EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES

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

INCOME TAXES

Our effective tax rates for the three and nine months ended September 27, 2020, were 26.5 percent and 23.6 percent, respectively.

The three months ended September 27, 2020, contained unfavorable discrete items of $31 million, or $0.21 per share, consisting of $17 million of changes in tax reserves, $8 million of provision to return adjustments relating to tax returns filed for 2019 and $6 million of net other discrete items.

The nine months ended September 27, 2020, contained $27 million, or $0.18 per share, of unfavorable net discrete tax items, primarily due to $34 million of unfavorable changes in tax reserves and $8 million of provision to return adjustments, partially offset by $15 million of favorable tax changes within India's 2020-2021 Union Budget of India (India Tax Law Change) passed in March of 2020. The India Tax Law Change eliminated the dividend distribution tax and replaced it with a lower rate withholding tax as the burden shifted from the dividend payor to the dividend recipient for a net favorable income statement impact of $35 million.

The India Tax Law Change resulted in the following adjustments to the Condensed Consolidated Statements of Net Income in the first nine months of 2020:

AVAILABLE LIQUIDITY AND CREDIT RATINGS

Available Liquidity

Cash provided by operations is typically our principal source of liquidity with $1,580 million generated in the nine months ended September 27, 2020. Our sources of liquidity include:

Credit Ratings

In August of 2020, concurrent with our new $2 billion debt issuance, both Standard and Poor's Rating Services and Moody's Investors Service, Inc. reviewed and reaffirmed their respective credit rating and stable outlook. Our rating and outlook from each of the credit rating agencies as of the date of filing are shown in the table below.

CUMMINS INC. AND SUBSIDIARIES
FINANCIAL MEASURES THAT SUPPLEMENT GAAP
(Unaudited)

Reconciliation of Non GAAP measures - Earnings before interest, income taxes, depreciation and amortization and noncontrolling interests (EBITDA)

We believe EBITDA is a useful measure of our operating performance as it assists investors and debt holders in comparing our performance on a consistent basis without regard to financing methods, capital structure, income taxes or depreciation and amortization methods, which can vary significantly depending upon many factors.

EBITDA is not in accordance with, or an alternative for, accounting principles generally accepted in the United States (GAAP) and may not be consistent with measures used by other companies. It should be considered supplemental data; however, the amounts included in the EBITDA calculation are derived from amounts included in the Condensed Consolidated Statements of Net Income. Below is a reconciliation of “Net income attributable to Cummins Inc.” to EBITDA for each of the applicable periods: