cmi-20200329

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 29, 2020

Commission File Number 1-4949

CUMMINS INC.

(Exact name of registrant as specified in its charter)


Indiana						35-0257090
(State of Incorporation)						(IRS Employer Identification No.)

500 Jackson Street

Box 3005

Columbus, Indiana 47202-3005

(Address of principal executive offices)

Telephone (812) 377-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock, $2.50 par value

CMI

New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit such files). Yes x No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

As of March 29, 2020, there were 147,526,086 shares of common stock outstanding with a par value of $2.50 per share.

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CUMMINS INC. AND SUBSIDIARIES

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QUARTERLY REPORT ON FORM 10-Q


		Page
	PART I. FINANCIAL INFORMATION
ITEM 1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Statements of Net Income for the three months ended March 29, 2020 and March 31, 2019	3
	Condensed Consolidated Statements of Comprehensive Income for the three months ended March 29, 2020 and March 31, 2019	4
	Condensed Consolidated Balance Sheets at March 29, 2020 and December 31, 2019	5
	Condensed Consolidated Statements of Cash Flows for the three months ended March 29, 2020 and March 31, 2019	6
	Condensed Consolidated Statements of Changes in Equity for the three months ended March 29, 2020 and March 31, 2019	7
	Notes to Condensed Consolidated Financial Statements	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	44
ITEM 4.	Controls and Procedures	44
	PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	45
ITEM 1A.	Risk Factors	45
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
ITEM 3.	Defaults Upon Senior Securities	55
ITEM 4.	Mine Safety Disclosures	55
ITEM 5.	Other Information	55
ITEM 6.	Exhibits	55
	Signatures	56

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PART I. FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME

(Unaudited)



	Three months ended
In millions, except per share amounts	March 29, 2020		March 31, 2019
NET SALES ^(a)(Note 3)	$	5,011	$	6,004
Cost of sales	3,717		4,472
GROSS MARGIN	1,294		1,532

OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses	546		593
Research, development and engineering expenses	238		237
Equity, royalty and interest income from investees (Note 5)	129		92



Other operating (expense) income, net	(5)		5
OPERATING INCOME	634		799

Interest income	7		12
Interest expense	23		32
Other income, net	37		66
INCOME BEFORE INCOME TAXES	655		845

Income tax expense (Note 6)	127		176
CONSOLIDATED NET INCOME	528		669

Less: Net income attributable to noncontrolling interests	17		6
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	511	$	663

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
Basic	$	3.42	$	4.22
Diluted	$	3.41	$	4.20

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
Basic	149.3		157.2
Dilutive effect of stock compensation awards	0.4		0.5
Diluted	149.7		157.7



^(a)Includes sales to nonconsolidated equity investees of $257 million and $285 million for the three months ended March 29, 2020 and March 31, 2019, respectively.

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three months ended
In millions	March 29, 2020		March 31, 2019
CONSOLIDATED NET INCOME	$	528	$	669
Other comprehensive income (loss), net of tax (Note 13)
Change in pension and other postretirement defined benefit plans	2		(11)
Foreign currency translation adjustments	(162)		84
Unrealized loss on debt securities	—		(1)
Unrealized loss on derivatives	(79)		(1)
Total other comprehensive (loss) income, net of tax	(239)		71
COMPREHENSIVE INCOME	289		740
Less: Comprehensive income attributable to noncontrolling interests	—		9
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.	$	289	$	731

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


In millions, except par value	March 29, 2020		December 31, 2019
ASSETS
Current assets
Cash and cash equivalents	$	1,691	$	1,129

Marketable securities (Note 7)	339		341
Total cash, cash equivalents and marketable securities	2,030		1,470
Accounts and notes receivable, net
Trade and other	3,234		3,387
Nonconsolidated equity investees	271		283
Inventories (Note 8)	3,579		3,486
Prepaid expenses and other current assets	676		761
Total current assets	9,790		9,387
Long-term assets
Property, plant and equipment	8,578		8,699
Accumulated depreciation	(4,450)		(4,454)
Property, plant and equipment, net	4,128		4,245
Investments and advances related to equity method investees	1,304		1,237
Goodwill	1,283		1,286
Other intangible assets, net	965		1,003
Pension assets	989		1,001
Other assets	1,617		1,578
Total assets	$	20,076	$	19,737

LIABILITIES
Current liabilities
Accounts payable (principally trade)	$	2,648	$	2,534
Loans payable (Note 9)	121		100
Commercial paper (Note 9)	1,617		660
Accrued compensation, benefits and retirement costs	322		560
Current portion of accrued product warranty (Note 10)	743		803
Current portion of deferred revenue (Note 3)	527		533

Other accrued expenses (Note 11)	971		1,039
Current maturities of long-term debt (Note 9)	33		31
Total current liabilities	6,982		6,260
Long-term liabilities
Long-term debt (Note 9)	1,580		1,576
Pensions and other postretirement benefits	588		591
Accrued product warranty (Note 10)	640		645
Deferred revenue (Note 3)	837		821
Other liabilities (Note 11)	1,431		1,379
Total liabilities	$	12,058	$	11,272

Commitments and contingencies (Note 12)

EQUITY
Cummins Inc. shareholders’ equity
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued	$	2,335	$	2,346
Retained earnings	14,728		14,416
Treasury stock, at cost, 74.9 and 71.7 shares	(7,744)		(7,225)
Common stock held by employee benefits trust, at cost, 0.1 and 0.2 shares	(1)		(2)
Accumulated other comprehensive loss (Note 13)	(2,250)		(2,028)



Total Cummins Inc. shareholders’ equity	7,068		7,507
Noncontrolling interests	950		958
Total equity	$	8,018	$	8,465
Total liabilities and equity	$	20,076	$	19,737

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three months ended
In millions	March 29, 2020		March 31, 2019
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income	$	528	$	669
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Depreciation and amortization	168		157



Deferred income taxes	(11)		11
Equity in income of investees, net of dividends	(78)		(64)
Pension and OPEB expense (Note 4)	27		18
Pension contributions and OPEB payments (Note 4)	(60)		(47)
Stock-based compensation expense	4		9

Restructuring payments (Note 14)	(48)		—


Gain on corporate owned life insurance	(17)		(37)

Foreign currency remeasurement and transaction exposure	3		79
Changes in current assets and liabilities
Accounts and notes receivable	107		(135)
Inventories	(171)		(107)
Other current assets	79		67
Accounts payable	171		166
Accrued expenses	(321)		(293)
Changes in other liabilities	28		64

Other, net	(30)		(145)
Net cash provided by operating activities	379		412

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(75)		(109)
Investments in internal use software	(8)		(20)

Investments in and advances to equity investees	(7)		(10)


Investments in marketable securities—acquisitions	(116)		(121)
Investments in marketable securities—liquidations (Note 7)	95		103


Cash flows from derivatives not designated as hedges	6		55
Other, net	6		31
Net cash used in investing activities	(99)		(71)

CASH FLOWS FROM FINANCING ACTIVITIES

Net borrowings (payments) of commercial paper (Note 9)	957		(71)
Payments on borrowings and finance lease obligations	(10)		(10)
Net borrowings under short-term credit agreements	25		15
Distributions to noncontrolling interests	(13)		(13)
Dividend payments on common stock	(195)		(179)
Repurchases of common stock	(550)		(100)

Other, net	20		11
Net cash provided by (used in) financing activities	234		(347)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	48		31
Net increase in cash and cash equivalents	562		25
Cash and cash equivalents at beginning of year	1,129		1,303
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,691	$	1,328

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)


	Three months ended
In millions, except per share amounts	Common Stock		Additional Paid-in Capital		Retained Earnings		Treasury Stock		Common Stock Held in Trust		Accumulated Other Comprehensive Loss		Total Cummins Inc. Shareholders’ Equity		Noncontrolling Interests		Total Equity
BALANCE AT DECEMBER 31, 2019	$	556	$	1,790	$	14,416	$	(7,225)	$	(2)	$	(2,028)	$	7,507	$	958	$	8,465
Adoption of new accounting standards (Note 16)					(4)								(4)		—		(4)
Net income					511								511		17		528
Other comprehensive loss, net of tax (Note 13)											(222)		(222)		(17)		(239)
Issuance of common stock			9										9		—		9
Employee benefits trust activity			17						1				18		—		18
Repurchases of common stock							(550)						(550)		—		(550)
Cash dividends on common stock, $1.311 per share					(195)								(195)		—		(195)
Distributions to noncontrolling interests													—		(13)		(13)
Stock-based awards			(18)				31						13		—		13

Other shareholder transactions			(19)										(19)		5		(14)
BALANCE AT MARCH 29, 2020	$	556	$	1,779	$	14,728	$	(7,744)	$	(1)	$	(2,250)	$	7,068	$	950	$	8,018

BALANCE AT DECEMBER 31, 2018	$	556	$	1,715	$	12,917	$	(6,028)	$	(5)	$	(1,807)	$	7,348	$	911	$	8,259

Net income					663								663		6		669
Other comprehensive income, net of tax (Note 13)											68		68		3		71
Issuance of common stock			1										1		—		1
Employee benefits trust activity			13						1				14		—		14
Repurchases of common stock							(100)						(100)		—		(100)
Cash dividends on common stock, $1.14 per share					(179)								(179)		—		(179)
Distributions to noncontrolling interests													—		(13)		(13)
Stock-based awards			(11)				17						6		—		6

Other shareholder transactions			(1)										(1)		—		(1)
BALANCE AT MARCH 31, 2019	$	556	$	1,717	$	13,401	$	(6,111)	$	(4)	$	(1,739)	$	7,820	$	907	$	8,727

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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CUMMINS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. NATURE OF OPERATIONS

Cummins Inc. (“Cummins,” “we,” “our” or “us”) was founded in 1919 as Cummins Engine Company, a corporation in Columbus, Indiana, and one of the first diesel engine manufacturers. In 2001, we changed our name to Cummins Inc. We are a global power leader that designs, manufactures, distributes and services 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. We sell our products to original equipment manufacturers (OEMs), distributors, dealers and other customers worldwide. We serve our customers through a network of approximately 600 wholly-owned, joint venture and independent distributor locations and over 7,600 Cummins certified dealer locations in more than 190 countries and territories.

NOTE 2. BASIS OF PRESENTATION

Interim Condensed Financial Statements

The unaudited Condensed Consolidated Financial Statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows. All such adjustments are of a normal recurring nature. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles in the United States of America (GAAP) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations.

These interim condensed financial statements should be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. Our interim period financial results for the three month periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

Reclassifications

Certain amounts for prior year periods have been reclassified to conform to the presentation of the current year.

Use of Estimates in Preparation of Financial Statements

Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts presented and disclosed in our Condensed Consolidated Financial Statements. Significant estimates and assumptions in these Condensed Consolidated Financial Statements require the exercise of judgment. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.

Reporting Period

Our reporting period usually ends on the Sunday closest to the last day of the quarterly calendar period. The first quarters of 2020 and 2019 ended on March 29 and March 31, respectively. Our fiscal year ends on December 31, regardless of the day of the week on which December 31 falls.

Weighted-Average Diluted Shares Outstanding

The weighted-average diluted common shares outstanding excludes the anti-dilutive effect of certain stock options. The options excluded from diluted earnings per share were as follows:

Three months ended

March 29,
2020

March 31,
2019

Options excluded

1,234,188

783,576

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NOTE 3. REVENUE RECOGNITION

Long-term Contracts

Most of our contracts are for a period of less than one year. We have certain long-term maintenance agreements, construction contracts and extended warranty coverage arrangements that span a period in excess of one year. The aggregate amount of the transaction price for long-term maintenance agreements and construction contracts allocated to performance obligations that had not been satisfied as of March 29, 2020, was $967 million. We expect to recognize the related revenue of $237 million over the next 12 months and $730 million over periods up to 10 years. See Note 10, "PRODUCT WARRANTY LIABILITY," for additional disclosures on extended warranty coverage arrangements. Our other contracts generally are for a duration of less than one year, include payment terms that correspond to the timing of costs incurred when providing goods and services to our customers or represent sales-based royalties.

Deferred and Unbilled Revenue

The following is a summary of our unbilled and deferred revenue and related activity:


In millions	March 29, 2020		December 31, 2019
Unbilled revenue	$	91	$	68
Deferred revenue, primarily extended warranty	1,364		1,354

We recognized revenue of $112 million and $109 million for the three months ended March 29, 2020 and March 31, 2019, respectively, that was included in the deferred revenue balance at the beginning of each year. We did not record any impairment losses on our unbilled revenues during the three months ended March 29, 2020 or March 31, 2019.

Disaggregation of Revenue

Consolidated Revenue

The table below presents our consolidated sales by geographic area. Net sales attributed to geographic areas were based on the location of the customer.


	Three months ended
In millions	March 29, 2020		March 31, 2019
United States	$	2,852	$	3,436

China	522		573


India	170		224

Other international	1,467		1,771
Total net sales	$	5,011	$	6,004

Segment Revenue

Engine segment external sales by market were as follows:


	Three months ended
In millions	March 29, 2020		March 31, 2019
Heavy-duty truck	$	519	$	723
Medium-duty truck and bus	490		610
Light-duty automotive	327		330
Total on-highway	1,336		1,663
Off-highway	243		321
Total sales	$	1,579	$	1,984

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Distribution segment external sales by region were as follows:


	Three months ended
In millions	March 29, 2020		March 31, 2019
North America	$	1,245	$	1,392
Asia Pacific	192		220
Europe	135		123
China	68		81
Africa and Middle East	51		55
Russia	41		35
Latin America	39		40
India	36		47
Total sales	$	1,807	$	1,993

Distribution segment external sales by product line were as follows:


	Three months ended
In millions	March 29, 2020		March 31, 2019
Parts	$	783	$	841
Power generation	375		401
Service	327		362
Engines	322		389
Total sales	$	1,807	$	1,993

Components segment external sales by business were as follows:

Three months ended

In millions

March 29,
2020

March 31,
2019

Emission solutions