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CUMMINS INC.

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CUMMINS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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04/30/2019 | 01:20pm EDT
Cummins Inc. and its consolidated subsidiaries are hereinafter sometimes
referred to as "Cummins," "we," "our" or "us."
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Certain parts of this quarterly report contain forward-looking statements
intended to qualify for the safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
include those that are based on current expectations, estimates and projections
about the industries in which we operate and management's beliefs and
assumptions. Forward-looking statements are generally accompanied by words such
as "anticipates," "expects," "forecasts," "intends," "plans," "believes,"
"seeks," "estimates," "could," "should" or words of similar meaning. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions, which we refer to as "future factors," which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. Some future factors that could cause our results to differ
materially from the results discussed in such forward-looking statements are
discussed below and shareholders, potential investors and other readers are
urged to consider these future factors carefully in evaluating forward-looking
statements. Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date hereof. Future factors that could
affect the outcome of forward-looking statements include the following:
•      any adverse results of our internal review into our emissions

certification process and compliance with emissions standards;

• a sustained slowdown or significant downturn in our markets;

• changes in the engine outsourcing practices of significant customers;

• the development of new technologies that reduce demand for our current

products and services;

• increased scrutiny from regulatory agencies, as well as unpredictability

in the adoption, implementation and enforcement of emissions standards

       around the world;


• product recalls;


• policy changes in international trade;

• the United Kingdom's (U.K.) decision to end its membership in the European

Union;

• lower than expected acceptance of new or existing products or services;

• a slowdown in infrastructure development and/or depressed commodity prices;

• supply shortages and supplier financial risk, particularly from any of our

single-sourced suppliers;

• exposure to potential security breaches or other disruptions to our

information technology systems and data security;

• a major customer experiencing financial distress;

• the actions of, and income from, joint ventures and other investees that

       we do not directly control;


•      our plan to reposition our portfolio of product offerings through
       exploration of strategic acquisitions and divestitures and related
       uncertainties of entering such transactions;

• failure to realize expected results from our investment in Eaton Cummins

Automated Transmission Technologies joint venture;

• 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;

• political, economic and other risks from operations in numerous countries;



• changes in taxation;


• global legal and ethical compliance costs and risks;

• aligning our capacity and production with our demand;

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• product liability claims;

• increasingly stringent environmental laws and regulations;

• future bans or limitations on the use of diesel-powered products;

• the price and availability of energy;

• the performance of our pension plan assets and volatility of discount rates;



• labor relations;


• changes in accounting standards;

• 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 risk factors described in our 2018 Form 10-K, Part I, Item 1A. under

the caption "Risk Factors."



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
quarterly report and we undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ORGANIZATION OF INFORMATION
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) was prepared to provide the reader with a view and
perspective of our business through the eyes of management and should be read in
conjunction with our Management's Discussion and Analysis of Financial Condition
and Results of Operations section of our 2018 Form 10-K. Our MD&A is presented
in the following sections:
• EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS


• OUTLOOK


• RESULTS OF OPERATIONS


• OPERATING SEGMENT RESULTS

• LIQUIDITY AND CAPITAL RESOURCES

• APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

• RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS
We are a global power leader that designs, manufactures, distributes and
services diesel and natural gas engines and powertrain-related component
products, including filtration, aftertreatment, turbochargers, fuel systems,
controls systems, air handling systems, transmissions, electric power generation
systems, batteries and electrified power systems. We sell our products to
original equipment manufacturers (OEMs), distributors, dealers and other
customers worldwide. We have long-standing relationships with many of the
leading manufacturers in the markets we serve, including PACCAR Inc, Navistar
International Corporation, Daimler Trucks North America and Fiat Chrysler
Automobiles (Chrysler). We serve our customers through a network of
approximately 600 wholly-owned and independent distributor locations and over
7,600 dealer locations in more than 190 countries and territories.
Our reportable operating segments consist of Engine, Distribution, Components,
Power Systems and Electrified Power. This reporting structure is organized
according to the products and markets each segment serves. The Engine segment
produces engines (15 liters and less in size) and associated parts for sale to
customers in on-highway and various off-highway markets. Our engines are used in
trucks of all sizes, buses and recreational vehicles, as well as in various
industrial applications, including construction, agriculture, power generation
systems and other off-highway applications. The Distribution segment includes
wholly-owned and partially-owned distributorships engaged in wholesaling
engines, generator sets and service parts, as well as performing service and
repair activities on our products and maintaining relationships with various
OEMs throughout the world. The Components segment sells filtration products,
aftertreatment systems, turbochargers, electronics, fuel systems and
transmissions. The Power Systems segment is an integrated power provider, which
designs, manufactures and sells engines (16 liters and larger) for industrial
applications (including mining, oil and gas, marine and rail), standby and prime
power generator sets, alternators and other power components. The Electrified
Power segment designs, manufactures, sells and supports electrified power
systems ranging from fully electric to hybrid solutions along with innovative
components and subsystems to serve all our markets as they adopt
electrification, meeting the needs of our OEM partners and end customers.
Our financial performance depends, in large part, on varying conditions in the
markets we serve, particularly the on-highway, construction and general
industrial markets. Demand in these markets tends to fluctuate in response to
overall economic conditions. Our sales may also be impacted by OEM inventory
levels, production schedules and stoppages. Economic downturns in markets we
serve generally result in reduced sales of our products and can result in price
reductions in certain products and/or markets. As a worldwide business, our
operations are also affected by currency, political, economic and regulatory
matters, including adoption and enforcement of environmental and emissions
standards, in the countries we serve. As part of our growth strategy, we invest
in businesses in certain countries that carry high levels of these risks such as
China, Brazil, India, Mexico, Russia and countries in the Middle East and
Africa. At the same time, our geographic diversity and broad product and service
offerings have helped limit the impact from a drop in demand in any one industry
or customer or the economy of any single country on our consolidated results.
Worldwide revenues increased 8 percent in the three months ended March 31, 2019,
as compared to the same period in 2018, with all operating segments reporting
higher sales. Net sales in the United States (U.S.) and Canada improved by 13
percent primarily due to increased demand in the North American on-highway
markets (primarily in the heavy-duty and medium-duty truck markets) and in all
of our distribution product lines. International demand (excludes the U.S. and
Canada) improved net sales by 1 percent, with increased sales in Asia Pacific
and China partially offset by lower demand in Russia and India. The increase in
international sales was primarily due to increased demand in our distribution
business in Asia Pacific and increased demand in construction markets in China,
partially offset by unfavorable foreign currency impacts of 5 percent of
international sales (primarily the Chinese renminbi, Euro, Indian rupee,
Brazilian real, Australian dollar and British pound), decreased light commercial
vehicle demand in Russia and lower truck demand in India, which negatively
impacted our emission solutions and turbo technologies businesses.

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The following table contains sales and EBITDA (defined as earnings before
interest expense, income taxes, noncontrolling interests, depreciation and
amortization) by operating segment for the three months ended March 31, 2019 and
April 1, 2018. See the section titled "OPERATING SEGMENT RESULTS" for a more
detailed discussion of net sales and EBITDA by operating segment including the
reconciliation of segment EBITDA to net income attributable to Cummins, Inc.
                                                           Three months ended
Operating
Segments                     March 31, 2019                       April 1, 2018                  Percent change
                                 Percent                             Percent                     2019 vs. 2018
In millions           Sales     of Total     EBITDA       Sales     of Total     EBITDA       Sales         EBITDA
Engine              $ 2,653         44  %   $   438$ 2,446         44  %   $   286           8 %          53  %
Distribution          2,001         33  %       171       1,853         33  %       123           8 %          39  %
Components            1,861         31  %       325       1,753         32  %       227           6 %          43  %
Power Systems         1,077         18  %       138       1,074         19  %       142           - %          (3 )%
Electrified Power         3          -  %       (29 )         2          -  %       (10 )        50 %          NM
Intersegment
eliminations         (1,591 )      (26 )%       (10 )    (1,558 )      (28 )%       (68 )         2 %         (85 )%
Total               $ 6,004        100  %   $ 1,033$ 5,570        100  %   $   700           8 %          48  %


______________________________________

"NM" - not meaningful information


Net income attributable to Cummins was $663 million, or $4.20 per diluted share,
on sales of $6.0 billion for the three months ended March 31, 2019, versus the
comparable prior year period net income attributable to Cummins of $325 million,
or $1.96 per diluted share, on sales of $5.6 billion. The increases in net
income and earnings per diluted share were driven by higher net sales, increased
gross margin, a lower effective tax rate due to the absence of $78 million of
unfavorable discrete tax items recognized in the first quarter of 2018 primarily
related to Tax Legislation and an increase in the value of corporate owned life
insurance, partially offset by higher research, development and engineering
expenses, lower equity, royalty and interest income from investees, unfavorable
foreign currency fluctuations (primarily the Australian dollar, Brazilian real,
Canadian dollar and Chinese renminbi) and increased selling, general and
administrative expenses. The increases in gross margin and gross margin
percentage were primarily due to lower warranty costs (due to absence of the
$187 million engine system campaign accrual recorded in the first quarter of
2018), higher volumes and increased pricing, partially offset by unfavorable
foreign currency impacts (primarily the Australian dollar, Brazilian real and
Canadian dollar). See Note 10, "PRODUCT WARRANTY LIABILITY," to the Condensed
Consolidated Financial Statements for additional information on the engine
system campaign.



We generated $412 million of cash from operations for the three months ended,
compared to using $117 million for the comparable period in 2018. Refer to the
section titled "Cash Flows" in the "LIQUIDITY AND CAPITAL RESOURCES" section for
a discussion of items impacting cash flows.

In October 2018, our Board of Directors authorized the acquisition of up to $2
billion of additional common stock. During the first three months of 2019, we
repurchased $100 million, or 0.7 million shares of common stock.

As a well-known seasoned issuer, we filed an automatic shelf registration for an undetermined amount of debt and equity securities with the Securities and Exchange Commission (SEC) on February 13, 2019.


Our debt to capital ratio (total capital defined as debt plus equity) at
March 31, 2019, was 21.7 percent, compared to 23.1 percent at December 31, 2018.
The decrease was primarily due to significant net income and lower outstanding
commercial paper. At March 31, 2019, we had $1.6 billion in cash and marketable
securities on hand and access to our $3.5 billion credit facilities, if
necessary, to meet currently anticipated investment and funding needs.

We expect our effective tax rate for the full year of 2019 to approximate 21.5
percent, excluding any discrete tax items.
Our global pension plans, including our unfunded and non-qualified plans, were
115 percent funded at December 31, 2018. Our U.S. plan, which represents
approximately 54 percent of the worldwide pension obligation, was 131 percent
funded and our U.K. plan was 115 percent funded. We anticipate making additional
defined benefit pension contributions during the remainder of 2019 of $90
million for our U.S. and U.K. pension plans. Approximately $91 million of the
estimated $123 million of U.S. and U.K. pension contributions for the full year
are voluntary. We expect our 2019 net periodic pension cost to approximate $64
million.





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On April 29, 2019, we issued a press release announcing that we are conducting a
formal review of our emissions certification process and compliance with
emissions standards for pick-up truck applications with our regulators and other
agencies, following conversations with the United States Environmental
Protection Agency and the California Air Resources Board regarding certification
for our engines in the model year 2019 RAM 2500 and 3500 trucks. See Note 16,
"SUBSEQUENT EVENT," to the Condensed Consolidated Financial Statements for
additional information.


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OUTLOOK

Our outlook reflects the following positive trends and challenges to our
business that we expect could impact our revenue and earnings potential for the
remainder of 2019.
Positive Trends
•      We anticipate North American medium-duty truck and heavy-duty truck demand

will remain strong.

• We expect demand for pick-up trucks in North America will remain strong.

• We anticipate power generation markets will remain strong, with increased

demand in global data center markets.

• We expect construction markets will remain strong in North America and Europe.

• We expect demand in mining markets to remain strong.

Challenges

• Market demand in truck and construction markets in China is expected to

decline.

• Uncertainty in the U.K. surrounding its ability to negotiate favorable

terms in its withdrawal from the European Union could have material

negative impacts on our European operations in the near and long-term.


•      We are experiencing cost increases primarily as a result of U.S. trade
       tariffs.

• Prolonged trade disputes could negatively impact demand and trigger

additional costs.

• We anticipate demand in oil and gas markets in North America will decline.

• Marine markets are expected to remain weak.

In summary, we expect demand to remain strong in many of our most important markets.

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RESULTS OF OPERATIONS
                                                      Three months ended                Favorable/
                                                   March 31,         April 1,         (Unfavorable)
In millions, except per share amounts                2019              2018         Amount      Percent
NET SALES                                      $     6,004$    5,570$    434          8  %
Cost of sales                                        4,472              4,370         (102 )       (2 )%
GROSS MARGIN                                         1,532              1,200          332         28  %
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses           593                577          (16 )       (3 )%
Research, development and engineering
expenses                                               237                210          (27 )      (13 )%
Equity, royalty and interest income from
investees                                               92                115          (23 )      (20 )%
Other operating income (expense), net                    5                  2            3         NM
OPERATING INCOME                                       799                530          269         51  %
Interest income                                         12                  7            5         71  %
Interest expense                                        32                 24           (8 )      (33 )%
Other income, net                                       66                 10           56         NM
INCOME BEFORE INCOME TAXES                             845                523          322         62  %
Income tax expense                                     176                198           22         11  %
CONSOLIDATED NET INCOME                                669                325          344         NM
Less: Net income attributable to
noncontrolling interests                                 6                  -           (6 )       NM
NET INCOME ATTRIBUTABLE TO CUMMINS INC.        $       663$      325$    338         NM
Diluted Earnings Per Common Share
Attributable to Cummins Inc.$      4.20         $     

1.96 $ 2.24 NM

____________________________________

"NM" - not meaningful information

                                                Three months ended            Favorable/
                                             March 31,        April 1,      (Unfavorable)
Percent of sales                                2019            2018      Percentage Points
Gross margin                                      25.5 %         21.5 %              4.0
Selling, general and administrative
expenses                                           9.9 %         10.4 %     

0.5

Research, development and engineering
expenses                                           3.9 %          3.8 %             (0.1 )


Net Sales
Net sales for the three months ended March 31, 2019, increased by $434 million
versus the comparable period in 2018. The primary drivers were as follows:
•      Engine segment sales increased 8 percent, primarily due to higher volumes
       in most North American heavy-duty and medium-duty truck markets and
       improved demand in global construction markets.

• Distribution segment sales increased 8 percent, primarily due to higher

       demand in most geographic regions, especially in North America, and
       increased demand in all product lines.

• Components segment sales increased 6 percent, primarily due to higher

sales in the emission solutions business from improved demand in North

American truck markets and increased sales in the automated transmissions

business due to higher volumes in the North American heavy-duty truck

market.



These increases were partially offset by unfavorable foreign currency
fluctuations of 2 percent of total sales, primarily in the Chinese renminbi,
Euro, Indian rupee, Brazilian real, Australian dollar and British pound.
Sales to international markets (excluding the U.S. and Canada), based on
location of customers, for the three months ended March 31, 2019, were 39
percent of total net sales compared with 42 percent of total net sales for the
comparable period in 2018. A more detailed discussion of sales by segment is
presented in the "OPERATING SEGMENT RESULTS" section.

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Cost of Sales
The types of expenses included in cost of sales are the following: raw material
consumption, including direct and indirect materials; salaries, wages and
benefits; depreciation on production equipment and facilities and amortization
of technology intangibles; estimated costs of warranty programs and campaigns;
production utilities; production-related purchasing; warehousing, including
receiving and inspection; engineering support costs; repairs and maintenance;
production and warehousing facility property insurance; rent for production
facilities and other production overhead.
Gross Margin
Gross margin increased $332 million for the three months ended March 31, 2019,
versus the comparable period in 2018 and increased 4.0 points as a percentage of
sales. The increases in gross margin and gross margin percentage were primarily
due to lower warranty costs (due to absence of the $187 million engine system
campaign accrual recorded in the first quarter of 2018), higher volumes and
increased pricing, partially offset by unfavorable foreign currency impacts
(primarily the Australian dollar, Brazilian real and Canadian dollar). See Note
10, "PRODUCT WARRANTY LIABILITY," to the Condensed Consolidated Financial
Statements for additional information.
The provision for base warranties issued as a percent of sales for the three
months ended March 31, 2019, was 2.1 percent compared to 2.0 percent for the
comparable period in 2018. A detailed discussion of gross margin by segment is
presented in the "OPERATING SEGMENT RESULTS" section.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $16 million for the three
months ended March 31, 2019, versus the comparable period in 2018, primarily due
to higher compensation expense. Overall, selling, general and administrative
expenses, as a percentage of sales, decreased to 9.9 percent in the three months
ended March 31, 2019, from 10.4 percent in the comparable period in 2018.
Research, Development and Engineering Expenses
Research, development and engineering expenses increased $27 million for the
three months ended March 31, 2019, versus the comparable period in 2018,
primarily due to increased compensation expense driven by headcount growth,
including increased staffing for the Electrified Power segment, and decreased
expense recovery. Overall, research, development and engineering expenses as a
percentage of sales increased to 3.9 percent in the three months ended March 31,
2019, from 3.8 percent in the comparable period in 2018.
Equity, Royalty and Interest Income from Investees
Equity, royalty and interest income from investees decreased $23 million for the
three months ended March 31, 2019, versus the comparable period in 2018,
primarily due to lower earnings at Tata Cummins Ltd., Chongqing Cummins Engine
Company, Ltd., Dongfeng Cummins Emission Solutions Co., Ltd. and Dongfeng
Cummins Engine Company, Ltd.




Other Operating Income (Expense), Net
Other operating income (expense), net was as follows:
                                                  Three months ended
                                               March 31,       April 1,
In millions                                      2019            2018
Royalty income, net                           $     6$      7
Gain on sale of assets, net                         5                -
Amortization of intangible assets                  (5 )             (5 )
Other, net                                         (1 )              -

Total other operating income (expense), net $ 5$ 2



Interest Income
Interest income for the three months ended March 31, 2019, increased $5 million
versus the comparable period in 2018, primarily due to higher interest rates on
cash and marketable securities balances.

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Interest Expense
Interest expense for the three months ended March 31, 2019, increased $8 million
versus the comparable period in 2018, primarily due to an increase in short-term
borrowings and higher interest rates.
Other Income, Net
Other income, net was as follows:
                                                                  Three months ended
                                                             March 31,            April 1,
In millions                                                    2019                 2018

Change in cash surrender value of corporate owned life insurance

                                                $           37     

$ (4 ) Non-service pension and other postretirement benefits credit

                                                               18                  15
Gain on marketable securities, net                                    4                   -
Rental income                                                         2                   2
Dividend income                                                       1                   2
Bank charges                                                         (3 )                (3 )
Foreign currency loss, net                                           (6 )               (11 )
Other, net                                                           13                   9
Total other income, net                                  $           66       $          10


Income Tax Expense
Our effective tax rate for 2019 is expected to approximate 21.5 percent,
excluding any discrete items that may arise.
Our effective tax rate for the three months ended March 31, 2019, was 20.8
percent and contained immaterial discrete items.
Our effective tax rate for the three months ended April 1, 2018, was 37.9
percent and contained $78 million, or $0.47 per share, of unfavorable discrete
tax items, primarily related to a Tax Legislation adjustment of $74 million.
This included $39 million associated with changes related to the Tax Legislation
measurement period adjustment and $35 million associated with the one-time
recognition of deferred tax charges at historical tax rates on intercompany
profit in inventory.
Noncontrolling Interests
Noncontrolling interests eliminate the income or loss attributable to
non-Cummins ownership interests in our consolidated entities. Noncontrolling
interests in income of consolidated subsidiaries for the three months ended
March 31, 2019, increased $6 million versus the comparable period in 2018,
primarily due to increased earnings at Cummins India, Ltd.
Net Income Attributable to Cummins Inc. and Diluted Earnings Per Common Share
Attributable to Cummins Inc.
Net income and diluted earnings per common share attributable to Cummins Inc.
for the three months ended March 31, 2019, increased $338 million and $2.24 per
diluted share, respectively, versus the comparable period in 2018, primarily due
to higher net sales, increased gross margin, a lower effective tax rate due to
the absence of $78 million of unfavorable discrete tax items recognized in the
first quarter of 2018 primarily related to Tax Legislation and an increase in
the value of corporate owned life insurance, partially offset by higher
research, development and engineering expenses, lower equity, royalty and
interest income from investees, unfavorable foreign currency fluctuations
(primarily the Australian dollar, Brazilian real, Canadian dollar and Chinese
renminbi) and increased selling, general and administrative expenses.

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Comprehensive Income - Foreign Currency Translation Adjustment
The foreign currency translation adjustment was a net gain of $84 million for
the three months ended March 31, 2019, compared to a net gain of $84 million for
the three months ended April 1, 2018, and was driven by the following:
                                                          Three months ended
                                    March 31, 2019                                April 1, 2018
                                              Primary currency                                 Primary currency
                           Translation        driver vs. U.S.                                  driver vs. U.S.
In millions                adjustment              dollar          Translation adjustment           dollar
Wholly-owned           $              74     British pound,       $               70          British pound,
subsidiaries                                 Chinese renminbi                                 Chinese renminbi
                                                                                              offset by Indian
                                                                                              rupee
Equity method                          7     Chinese renminbi                     22          Chinese renminbi
investments                                  offset by British
                                             pound
Consolidated                           3     Indian rupee(8 )        Indian rupee
subsidiaries with a
noncontrolling
interest
Total                  $              84                          $               84










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OPERATING SEGMENT RESULTS
Our reportable operating segments consist of the Engine, Distribution,
Components, Power Systems and Electrified Power segments. This reporting
structure is organized according to the products and markets each segment
serves. We use segment EBITDA as a primary basis for the Chief Operating
Decision Maker to evaluate the performance of each of our reportable operating
segments. Segment amounts exclude certain expenses not specifically identifiable
to segments. See Note 14, "OPERATING SEGMENTS," to the Condensed Consolidated
Financial Statements for additional information.
Following is a discussion of results for each of our operating segments.
Engine Segment Results
Financial data for the Engine segment was as follows:
                                                 Three months ended                Favorable/
                                              March 31,        April 1,           (Unfavorable)
In millions                                     2019             2018          Amount       Percent
External sales                             $      1,984$    1,813$      171           9  %
Intersegment sales                                  669             633             36           6  %
Total sales                                       2,653           2,446            207           8  %
Research, development and engineering
expenses                                             78              79              1           1  %
Equity, royalty and interest income from
investees                                            56              67            (11 )       (16 )%
Interest income                                       4               2              2         100  %
Segment EBITDA                                      438             286            152          53  %

                                                                                Percentage Points
Segment EBITDA as a percentage of total
sales                                              16.5 %          11.7 %                      4.8


Sales for our Engine segment by market were as follows:

                                                     Three months ended                 Favorable/
                                                  March 31,        April 1,            (Unfavorable)
In millions                                          2019            2018          Amount        Percent
Heavy-duty truck                                $       979$      815$     164           20  %
Medium-duty truck and bus                               721             692            29            4  %
Light-duty automotive                                   382             402           (20 )         (5 )%
Total on-highway                                      2,082           1,909           173            9  %
Off-highway                                             571             537            34            6  %
Total sales                                     $     2,653$    2,446$     207            8  %

                                                                                     Percentage Points
On-highway sales as percentage of total sales            78 %            78 %                        -


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

                          Three months ended            Favorable/
                         March 31,     April 1,        (Unfavorable)
                           2019          2018       Amount      Percent
Heavy-duty                33,900         26,600      7,300       27  %
Medium-duty               79,000         74,000      5,000        7  %
Light-duty                56,400         61,900     (5,500 )     (9 )%
Total unit shipments     169,300        162,500      6,800        4  %



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Sales

Engine segment sales for the three months ended March 31, 2019, increased $207
million versus the comparable period in 2018. The following were the primary
drivers by market:
•      Heavy-duty truck sales increased $164 million, primarily due to higher
       volumes in the North American heavy-duty truck market with increased
       shipments of 31 percent.

• Off-highway sales increased $34 million, primarily due to improved demand

in global construction markets with increased international unit shipments

of 10 percent, mainly in China, and increased unit shipments of 27 percent

in North America.

• Medium-duty truck and bus sales increased $29 million, primarily due to

higher volumes in the North American medium-duty truck market with

increased engine shipments of 17 percent.



These increases were partially offset by unfavorable foreign currency
fluctuations, primarily in the Brazilian real and Chinese renminbi.
Segment EBITDA
Engine segment EBITDA for the three months ended March 31, 2019, increased $152
million versus the comparable period in 2018, primarily due to higher gross
margin, partially offset by increased selling, general and administrative
expenses and decreased equity, royalty and interest income from investees. The
increase in gross margin was primarily due to the absence of a $93 million
engine system campaign accrual recorded in the first quarter of 2018, improved
pricing and higher volumes, partially offset by increased manufacturing
expenses. The increase in selling, general and administrative expenses was
primarily due to higher compensation expense. The decrease in equity, royalty
and interest income from investees was primarily due to lower earnings at Tata
Cummins, Ltd. and Dongfeng Cummins Engine Co.



Distribution Segment Results
Financial data for the Distribution segment was as follows:
                                                 Three months ended                Favorable/
                                              March 31,        April 1,           (Unfavorable)
In millions                                     2019             2018          Amount       Percent
External sales                             $      1,993$    1,847$      146           8  %
Intersegment sales                                    8               6              2          33  %
Total sales                                       2,001           1,853            148           8  %
Research, development and engineering
expenses                                              7               5             (2 )       (40 )%
Equity, royalty and interest income from
investees                                            11              13             (2 )       (15 )%
Interest income                                       4               2              2         100  %
Segment EBITDA                                      171             123             48          39  %

                                                                                Percentage Points
Segment EBITDA as a percentage of total
sales                                               8.5 %           6.6 %                      1.9



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Sales for our Distribution segment by region were as follows:

                               Three months ended               Favorable/
                            March 31,        April 1,         (Unfavorable)
In millions                    2019            2018         Amount      Percent
North America            $    1,399$    1,276$   123        10  %
Asia Pacific                    220                189         31        16  %
Europe                          123                132         (9 )      (7 )%
China                            82                 78          4         5  %
Africa and Middle East           55                 60         (5 )      (8 )%
India                            47                 45          2         4  %
Latin America                    40                 38          2         5  %
Russia                           35                 35          -         -  %
Total sales              $    2,001$    1,853$   148         8  %

Sales for our Distribution segment by product line were as follows:

                         Three months ended               Favorable/
                      March 31,        April 1,          (Unfavorable)
In millions              2019            2018         Amount       Percent
Parts              $      844$      808$       36        4 %
Power generation          403                326            77       24 %
Engines                   391                367            24        7 %
Service                   363                352            11        3 %
Total sales        $    2,001$    1,853$      148        8 %


Sales
Distribution segment sales for the three months ended March 31, 2019, increased
$148 million versus the comparable period in 2018. The following were the
primary drivers by region:
•      North American sales increased $123 million, representing 83 percent of

the total change in Distribution segment sales, primarily due to increased

       demand in the power generation data centers and engines product lines.


•      Asia Pacific sales increased $31 million, primarily due to higher volumes

in whole goods.



These increases were partially offset by unfavorable foreign currency
fluctuations, primarily in the Australian dollar, Canadian dollar, Euro, Indian
rupee and Chinese renminbi.
Segment EBITDA
Distribution segment EBITDA for the three months ended March 31, 2019, increased
$48 million versus the comparable period in 2018, primarily due to higher gross
margin, partially offset by unfavorable foreign currency fluctuations (primarily
in the Australian dollar, South African rand, Argentine peso and Canadian
dollar). The increase in gross margin was primarily due to higher volumes and
improved pricing, partially offset by increased compensation expense and
unfavorable foreign currency fluctuations (primarily in the Australian dollar,
Canadian dollar and South African rand).




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Components Segment Results
Financial data for the Components segment was as follows:
                                                 Three months ended                 Favorable/
                                              March 31,        April 1,           (Unfavorable)
In millions                                     2019             2018          Amount        Percent
External sales                             $      1,401$    1,313$       88            7  %
Intersegment sales                                  460             440             20            5  %
Total sales                                       1,861           1,753            108            6  %
Research, development and engineering                75              62            (13 )        (21 )%
expenses
Equity, royalty and interest income from             10              16             (6 )        (38 )%
investees
Interest income                                       2               1              1          100  %
Segment EBITDA                                      325             227             98           43  %

                                                                                Percentage Points
Segment EBITDA as a percentage of total            17.5 %          12.9 %                       4.6
sales


Sales for our Components segment by business were as follows:

                                     Three months ended               Favorable/
                                  March 31,        April 1,         (Unfavorable)
In millions                          2019            2018         Amount      Percent
Emission solutions             $      854$      775$    79        10  %
Turbo technologies                    335                340         (5 )      (1 )%
Filtration                            325                320          5         2  %
Electronics and fuel systems          198                201         (3 )      (1 )%
Automated transmissions               149                117         32        27  %
Total sales                    $    1,861$    1,753$   108         6  %


Sales
Components segment sales for the three months ended March 31, 2019, increased
$108 million versus the comparable period in 2018. The following were the
primary drivers by business:
•      Emission solutions sales increased $79 million, primarily due to stronger

demand for trucks in North America, partially offset by weaker market

demand for trucks in China and India.

• Automated transmissions delivered higher sales of $32 million, primarily

due to increased heavy-duty truck demand in North America.



These increases were partially offset by unfavorable foreign currency
fluctuations, primarily in the Chinese renminbi, Euro and Indian rupee.
Segment EBITDA
Components segment EBITDA for the three months ended March 31, 2019, increased
$98 million versus the comparable period in 2018, as higher gross margin was
partially offset by increased research, development and engineering expenses,
lower equity, royalty and interest income from investees and unfavorable foreign
currency fluctuations, primarily in the Chinese renminbi and Brazilian real. The
increase in gross margin was primarily due to the absence of a $94 million
engine system campaign accrual recorded in the first quarter of 2018, lower
material costs and increased volumes, partially offset by lower pricing and
unfavorable foreign currency fluctuations primarily in the Chinese renminbi and
Brazilian real. The increase in research, development and engineering expenses
was primarily due to lower expense recovery and additional spending in the
automated transmissions business. The decrease in equity, royalty and interest
income from investees was primarily due to lower earnings at Dongfeng Cummins
Emission Solutions Co., Ltd and Shanghai Fleetguard Filter Co.




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Power Systems Segment Results
Financial data for the Power Systems segment was as follows:
                                                 Three months ended                  Favorable/
                                              March 31,         April 1,           (Unfavorable)
In millions                                     2019              2018          Amount        Percent
External sales                             $        623$      595$       28            5  %
Intersegment sales                                  454              479            (25 )         (5 )%
Total sales                                       1,077            1,074              3            -  %
Research, development and engineering
expenses                                             56               57              1            2  %
Equity, royalty and interest income from
investees                                            15               19             (4 )        (21 )%
Interest income                                       2                2              -            -  %
Segment EBITDA                                      138              142             (4 )         (3 )%

                                                                                 Percentage Points
Segment EBITDA as a percentage of total
sales                                              12.8 %           13.2 %                      (0.4 )



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

                               Three months ended               Favorable/
                            March 31,        April 1,         (Unfavorable)
In millions                    2019            2018         Amount      Percent
Power generation         $      567$      571$    (4 )      (1 )%
Industrial                      420                414          6         1  %
Generator technologies           90                 89          1         1  %
Total sales              $    1,077$    1,074$     3         -  %





Sales
Power Systems segment sales for the three months ended March 31, 2019, were
relatively flat versus the comparable period in 2018, primarily due to increased
industrial sales of $6 million due to higher demand in certain international
markets, especially oil and gas markets in China, partially offset by lower
demand in North American oil and gas markets.
Sales increases were partially offset by the following:
•      Unfavorable foreign currency fluctuations primarily in the Indian rupee,

British pound and Chinese renminbi.

• Power generation sales decreased $4 million, primarily due to lower demand

       in most international markets, partially offset by stronger demand in
       North America.


Segment EBITDA
Power Systems segment EBITDA for the three months ended March 31, 2019,
decreased $4 million versus the comparable period in 2018, primarily due to
lower gross margin and decreased equity, royalty and interest income from
investees, partially offset by a gain on sale of assets and favorable foreign
currency fluctuations (primarily in the Indian rupee and British pound). The
decrease in gross margin was primarily due to decreased volumes and unfavorable
mix, partially offset by favorable foreign currency fluctuations (primarily in
the British pound and Indian rupee) and improved pricing. The decrease in
equity, royalty and interest income from investees was primarily due to lower
earnings at Chongqing Cummins Engine Co.



Electrified Power Segment Results
The Electrified Power segment is currently in the development phase with a
primary focus on research and development activities around fully electric and
hybrid powertrain solutions. Financial data for the Electrified Power segment
was as follows:

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                                                    Three months ended                     Favorable/
                                               March 31,            April 1,             (Unfavorable)
In millions                                      2019                 2018            Amount         Percent
Total sales                                $           3         $          2     $        1            50 %
Research, development and engineering
expenses                                              21                    7            (14 )          NM
Segment EBITDA                                       (29 )                (10 )          (19 )          NM

____________________________________

"NM" - not meaningful information

Reconciliation of Segment EBITDA to Net Income Attributable to Cummins Inc. The table below reconciles the segment information to the corresponding amounts in the Condensed Consolidated Statements of Net Income:

© Edgar Online, source Glimpses

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