CUMMINS INC. 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: •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; •theU.K.'s decision to end its membership in theEuropean 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 inEaton Cummins Automated Transmission Technologies joint venture; •political, economic and other risks from operations in numerous countries; 24 -------------------------------------------------------------------------------- Table of Contents •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 risk factors described in Part II, Item 1A. in this quarterly report 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. 25 -------------------------------------------------------------------------------- Table of Contents 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 2019 Form 10-K . Our MD&A is presented in the following sections: •EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS •RESULTS OF OPERATIONS •OPERATING SEGMENT RESULTS •OUTLOOK •LIQUIDITY AND CAPITAL RESOURCES •APPLICATION OF CRITICAL ACCOUNTING ESTIMATES •RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS Overview 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 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, joint venture and independent distributor locations and over 7,600Cummins certified dealer locations in more than 190 countries and territories. Our reportable operating segments consist of Engine, Distribution, Components,Power Systems andNew Power . This reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines (15 liters and smaller) 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 automated 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 New Power segment designs, manufactures, sells and supports electrified power systems ranging from fully electric to hybrid along with innovative components and subsystems, including battery, fuel cell and hydrogen production technologies. We continue to serve all our markets as they adopt electrification and alternative power technologies, 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, public health crises, epidemics or pandemics and regulatory matters, including adoption and enforcement of environmental and emission 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 asChina ,Brazil , India,Mexico ,Russia and countries in theMiddle East andAfrica . 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. 26 -------------------------------------------------------------------------------- Table of Contents COVID-19 Update During the first quarter of 2020, the outbreak of the coronavirus disease of 2019 (COVID-19) spread throughout the world and became a global pandemic. The pandemic triggered a significant downturn in our markets globally and these challenging market conditions could continue for an extended period of time. In an effort to contain the spread of COVID-19, maintain the well-being of our employees and stakeholders, match the reduced demand from our customers and in accordance with governmental requirements, we closed or partially shut down certain office, manufacturing and distribution facilities around the world. These closures expanded and continued intoApril 2020 . While the global market downturn, closures and limitations on movement are expected to be temporary, the duration of the production and supply chain disruptions, and related financial impacts, cannot be estimated at this time. Should the manufacturing and distribution closures continue for an extended period of time or worsen, the impact on our production and supply chain could have a material adverse effect on our results of operations, financial condition and cash flows.
First Quarter 2020
Our first quarter results were impacted by COVID-19, which caused manufacturing and supplier plant closures inChina in early 2020 and other targeted shut-downs beginning in lateMarch 2020 in response to customer plant closures and government actions to slow the spread of the virus. Plants closed inChina during the first quarter were reopened in lateMarch 2020 ; however, additional plants and distribution locations around the world were shut down or working at reduced capacities early in the second quarter. Although these actions did not have a material effect on our results of operations in the first quarter, we expect them to have a significant impact on our second quarter results as well as the results of operations, financial condition and cash flows throughout the remainder of 2020, if the decline in customer demand, government action or our related shut-downs continue for an extended period of time or worsen. Worldwide revenues decreased 17 percent in the three months endedMarch 29, 2020 , compared to the same period in 2019, as we experienced lower demand in all major operating segments and almost all geographic regions of the world due to the anticipated down cycle in almost all of our related markets and the impacts of COVID-19. Net sales in theU.S. andCanada declined 16 percent primarily due to decreased demand in the heavy-duty and medium-duty truck markets (which negatively impacted our emission solutions, automated transmissions and turbo technologies businesses), reduced sales in all of our distribution product lines and lower off-highway demand (primarily construction and oil and gas markets). International demand (excludes theU.S. andCanada ) declined by 17 percent, with lower sales in almost all geographic regions. The decrease in international sales was principally due to lower off-highway demand (mainly international mining markets and construction markets inWestern Europe andAsia Pacific ), decreased demand in our emission solutions and our turbo technologies businesses, reduced demand in most of our distribution product lines and unfavorable foreign currency impacts of 2 percent of international sales (primarily the Brazilian real, Chinese renminbi, Euro and Australian dollar). 27 -------------------------------------------------------------------------------- Table of Contents 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 endedMarch 29, 2020 andMarch 31, 2019 . 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 toCummins Inc. Three months ended Operating SegmentsMarch 29, 2020 March 31, 2019 Percent change Percent Percent 2020 vs. 2019 In millions Sales of Total EBITDA Sales of Total EBITDA Sales EBITDA Engine$ 2,158 43 %$ 365 $ 2,653 44 %$ 438 (19) % (17) % Distribution 1,814 36 % 158 2,001 33 % 171 (9) % (8) % Components 1,502 30 % 279 1,861 31 % 325 (19) % (14) % Power Systems 884 18 % 77 1,077 18 % 138 (18) % (44) % New Power 10 - % (43) 3 - % (29) NM (48) % Intersegment eliminations (1,357) (27) % 10 (1,591) (26) % (10) (15) % NM Total$ 5,011 100 %$ 846 $ 6,004 100 %$ 1,033 (17) % (18) %
"NM" - not meaningful information
Net income attributable toCummins was$511 million , or$3.41 per diluted share, on sales of$5.0 billion for the three months endedMarch 29, 2020 , versus the comparable prior year period net income attributable toCummins of$663 million , or$4.20 per diluted share, on sales of$6.0 billion . The decreases in net income and earnings per diluted share were driven by lower net sales, decreased gross margin, a smaller gain in fair value of corporate owned life insurance and unfavorable foreign currency fluctuations (primarily the Brazilian real and Australian dollar), partially offset by restructuring actions resulting in lower compensation expenses and favorable adjustments related to India Tax Law Changes inMarch 2020 . The decrease in gross margin was primarily due to lower volumes, partially offset by restructuring actions resulting in lower compensation expenses, lower material costs and decreased warranty expenses. The increase in gross margin as a percentage of sales was principally due to decreased warranty costs and lower variable compensation expenses, partially offset by the impact of lower sales. Diluted earnings per common share for the three months endedMarch 29, 2020 , benefited$0.03 from fewer weighted-average shares outstanding due to the stock repurchase program. We generated$379 million of cash from operations for the three months endedMarch 29, 2020 , compared to$412 million for the comparable period in 2019. Refer to the section titled "Cash Flows" in the "LIQUIDITY AND CAPITAL RESOURCES" section for a discussion of items impacting cash flows. In the first three months of 2020, we purchased$550 million , or 3.5 million shares of common stock. Our debt to capital ratio (total capital defined as debt plus equity) atMarch 29, 2020 , was 29.5 percent, compared to 21.9 percent atDecember 31, 2019 . The increase was primarily due to higher outstanding commercial paper of$957 million sinceDecember 31, 2019 . AtMarch 29, 2020 , we had$2.0 billion in cash and marketable securities on hand and access to our$3.5 billion credit facilities, if necessary, to meet currently anticipated working capital, investment and funding needs. In the first three months of 2020, the investment loss on ourU.S. pension trust was 7.3 percent while ourU.K. pension trust gain was 2.7 percent. Investment performance in both trusts was negatively affected as a result of COVID-19's impact on capital markets. We anticipate making additional defined benefit pension contributions during the remainder of 2020 of$35 million for ourU.S. andU.K. pension plans. Our 2020 annual net periodic pension cost is$102 million . 28
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RESULTS OF OPERATIONS
Three months ended Favorable/
March 29 , March 31 , (Unfavorable)
In millions, except per share amounts 2020 2019 Amount Percent
NET SALES $ 5,011 $ 6,004 $ (993) (17) %
Cost of sales 3,717 4,472 755 17 %
GROSS MARGIN 1,294 1,532 (238) (16) %OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses 546 593 47 8 %
Research, development and engineering expenses 238 237 (1) - %
Equity, royalty and interest income from investees 129 92 37 40 %
Other operating (expense) income, net
(5) 5 (10) NM
OPERATING INCOME 634 799 (165) (21) %
Interest income 7 12 (5) (42) %
Interest expense 23 32 9 28 %
Other income, net 37 66 (29) (44) %
INCOME BEFORE INCOME TAXES 655 845 (190) (22) %
Income tax expense 127 176 49 28 %
CONSOLIDATED NET INCOME 528 669 (141) (21) %
Less: Net income attributable to noncontrolling interests 17 6 (11) NM
NET INCOME ATTRIBUTABLE TO CUMMINS INC. $ 511 $ 663 $ (152) (23) %
Diluted Earnings Per Common Share Attributable to Cummins Inc. $ 3.41 $ 4.20 $ (0.79) (19) %
"NM" - not meaningful information
Three months ended Favorable/
March 29, March 31, (Unfavorable)
Percent of sales 2020 2019 Percentage Points
Gross margin 25.8 % 25.5 % 0.3
Selling, general and administrative expenses 10.9 % 9.9 % (1.0)
Research, development and engineering expenses 4.7 % 3.9 % (0.8)
Net Sales
Net sales for the three months ended March 29, 2020 , decreased by $993 million
versus the comparable period in 2019. The primary drivers were as follows:
•Engine segment sales decreased 19 percent due to lower volumes in the North
American heavy-duty and medium-duty truck markets and lower demand in global
construction markets, especially in North America , Western Europe and Asia
Pacific .
•Components segment sales decreased 19 percent, largely due to lower demand in
North America and Western Europe .
•Power Systems sales decreased 18 percent primarily due to lower demand in
international mining markets and power generation markets in North America and
India.
•Distribution segment sales decreased 9 percent principally due to lower demand
in North America , especially in the engine and parts product lines.
•Unfavorable foreign currency fluctuations of 1 percent of total sales,
primarily in the Brazilian real, Chinese renminbi, Euro and Australian dollar.
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Sales to international markets (excluding the U.S. and Canada ), based on
location of customers, for the three months ended March 29, 2020 , were 38
percent of total net sales compared with 39 percent of total net sales for the
comparable period in 2019. A more detailed discussion of sales by segment is
presented in the "OPERATING SEGMENT RESULTS" section.
Cost of Sales
The types of expenses included in cost of sales are the following: parts and
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 decreased $238 million for the three months ended March 29, 2020
and increased 0.3 points as a percentage of sales, versus the comparable period
in 2019. The decrease in gross margin was primarily due to lower volumes,
partially offset by restructuring actions resulting in lower compensation
expenses, lower material costs and decreased warranty expenses. The increase in
gross margin as a percentage of sales was principally due to decreased warranty
costs and lower variable compensation expenses, partially offset by the impact
of lower sales.
The provision for base warranties issued as a percent of sales for the three
months ended March 29, 2020 , was 1.9 percent compared to 2.1 percent for the
comparable period in 2019. 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 decreased $47 million for the three
months ended March 29, 2020 , versus the comparable period in 2019, primarily due
to restructuring actions resulting in lower compensation expenses. Overall,
selling, general and administrative expenses, as a percentage of sales,
increased to 10.9 percent in the three months ended March 29, 2020 , from 9.9
percent in the comparable period in 2019. The increase in selling, general and
administrative expenses as a percentage of sales was primarily due to sales
declining faster than selling, general and administrative expenses decreased,
partially offset by lower compensation expenses.
Research, Development and Engineering Expenses
Research, development and engineering expenses increased $1 million for the
three months ended March 29, 2020 , versus the comparable period in 2019.
Overall, research, development and engineering expenses as a percentage of sales
increased to 4.7 percent in the three months ended March 29, 2020 , from 3.9
percent in the comparable period in 2019. Research, development and engineering
expenses increased as we continued to invest in our products and technologies
despite the decline in sales. Research activities continue to focus on
development of new products to meet future emission standards around the world,
improvements in fuel economy performance of diesel and natural gas-powered
engines and related components as well as development activities around fully
electric, hybrid and hydrogen powertrain solutions.
Equity, Royalty and Interest Income from Investees
Equity, royalty and interest income from investees increased $37 million for the
three months ended March 29, 2020 , versus the comparable period in 2019,
primarily due to a $37 million adjustment as the result of tax changes within
India's 2020-2021 Union Budget of India (India Tax Law Changes) passed in March
2020 and $18 million of technology fee revenue recorded in the first quarter of
2020, partially offset by lower equity earnings in China as the result of
COVID-19. See NOTE 6, "INCOME TAXES" to the Condensed Consolidated Financial
Statements for additional information on India Tax Law Changes.
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Other Operating (Expense) Income, Net
Other operating (expense) income, net was as follows:
Three months ended
March 29, March 31,
In millions 2020 2019
Amortization of intangible assets $ (5) $ (5)
Loss on write off of assets (2) -
(Loss) gain on sale of assets, net (1) 5
Royalty income, net 2 6
Other, net 1 (1)
Total other operating (expense) income, net $ (5) $ 5
Interest Income
Interest income decreased $5 million for the three months ended March 29, 2020 ,
versus the comparable period in 2019, primarily due to lower rates of return.
Interest Expense
Interest expense decreased $9 million for the three months ended March 29, 2020 ,
versus the comparable period in 2019, mainly due to lower interest rates despite
an increase in short-term borrowings.
Other Income, Net
Other income, net was as follows:
Three months ended
March 29, March 31,
In millions 2020 2019
Gain on corporate owned life insurance $ 17 $ 37
Non-service pension and other postretirement benefits credit 16 18
Rental income 2 2
Foreign currency loss, net (1) (6)
(Loss) gain on marketable securities, net (3) 4
Bank charges (3) (3)
Other, net 9 14
Total other income, net $ 37 $ 66
Income Tax Expense
Our effective tax rate for the three months ended March 29, 2020 , was 19.4
percent. Our effective tax rate for the three months ended March 31, 2019 , was
20.8 percent and contained immaterial discrete items.
The three months ended March 29, 2020 , contained $18 million of favorable net
discrete tax items, primarily due to 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 ,
or $0.23 per share. See NOTE 6, "INCOME TAXES" to the Condensed Consolidated
Financial Statements for additional information on India Tax Law Changes.
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 29, 2020 , increased $11 million , versus the comparable period in 2019,
primarily due to a $19 million unfavorable adjustment as the result of India Tax
Law Changes passed in March 2020 . See NOTE 6, "INCOME TAXES" to the Condensed
Consolidated Financial Statements for additional information on India Tax Law
Changes.
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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 29, 2020 , decreased $152 million and $0.79 per
diluted share versus the comparable period in 2019, primarily due to lower net
sales, decreased gross margin, a smaller gain in fair value of corporate owned
life insurance and unfavorable foreign currency fluctuations (primarily the
Brazilian real and Australian dollar), partially offset by restructuring actions
resulting in lower compensation expenses and favorable adjustments related to
India Tax Law Changes in March 2020 . Diluted earnings per common share for the
three months ended March 29, 2020 , benefited $0.03 from fewer weighted-average
shares outstanding due to the stock repurchase program.
Comprehensive Income - Foreign Currency Translation Adjustment
The foreign currency translation adjustment was a net loss of $162 million for
the three months ended March 29, 2020 , compared to a net gain of $84 million for
the three months ended March 31, 2019 , and was driven by the following:
Three months ended
March 29, 2020 March 31, 2019
Translation Primary currency Translation Primary currency
In millions adjustment driver vs. U.S. dollar adjustment driver vs. U.S. dollarWholly-owned subsidiaries$ (124) Brazilian real, Indian $74 British pound , Chinese rupee, Chinese renminbi renminbi, British pound Equity method investments (21) Chinese renminbi, 7 Chinese renminbi Indian rupee offset by British pound Consolidated subsidiaries with (17) Indian rupee3 Indian rupee a noncontrolling interest Total$ (162) $ 84 32
-------------------------------------------------------------------------------- Table of Contents OPERATING SEGMENT RESULTS Our reportable operating segments consist of the Engine, Distribution, Components,Power Systems andNew 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. 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. Segment amounts exclude certain expenses not specifically identifiable to segments. See Note 15, "OPERATING SEGMENTS," to the Condensed Consolidated Financial Statements for additional information. Our first quarter results were impacted by COVID-19, which caused manufacturing and supplier plant closures inChina in early 2020 and other targeted shut-downs beginning in lateMarch 2020 in response to customer plant closures and government actions to slow the spread of the virus. Plants closed inChina during the first quarter were reopened in lateMarch 2020 ; however, additional plants and distribution locations around the world were shut down or working at reduced capacities early in the second quarter. Although these actions did not have a material effect on our results of operations in the first quarter, we expect them to have a significant impact on our second quarter results as well as the results of operations, financial condition and cash flows throughout the remainder of 2020, if the decline in customer demand, government action or our related shut-downs continue for an extended period of time or worsen. 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 29, March 31, (Unfavorable) In millions 2020 2019 Amount Percent External sales$ 1,579 $ 1,984 $ (405) (20) % Intersegment sales 579 669 (90) (13) % Total sales 2,158 2,653 (495) (19) % Research, development and engineering expenses 80 78 (2) (3) % Equity, royalty and interest income from investees 78 56 22 39 % Interest income (1) 4 4 - - % Segment EBITDA 365 438 (73) (17) % Percentage Points Segment EBITDA as a percentage of total sales 16.9 % 16.5 % 0.4
(1) "Interest income" is managed at the corporate level and allocated to each operating segment.
Sales for our Engine segment by market were as follows:
Three months ended Favorable/
March 29, March 31, (Unfavorable)
In millions 2020 2019 Amount Percent
Heavy-duty truck $ 750 $ 979 $ (229) (23) %
Medium-duty truck and bus 618 721 (103) (14) %
Light-duty automotive 353 382 (29) (8) %
Total on-highway 1,721 2,082 (361) (17) %
Off-highway 437 571 (134) (23) %
Total sales $ 2,158 $ 2,653 $ (495) (19) %
Percentage Points
On-highway sales as percentage of total sales 80 % 78 % 2
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Table of Contents 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 29, March 31, (Unfavorable)
2020 2019 Amount Percent
Heavy-duty 25,800 33,900 (8,100) (24) %
Medium-duty 61,200 79,000 (17,800) (23) %
Light-duty 49,400 56,400 (7,000) (12) %
Total unit shipments 136,400 169,300 (32,900) (19) %
Sales
Engine segment sales for the three months ended March 29, 2020 , decreased $495
million versus the comparable period in 2019. The following were the primary
drivers by market:
•Heavy-duty truck sales decreased $229 million principally due to lower volumes
in the North American heavy-duty truck market with lower shipments of 36
percent.
•Off-highway sales decreased $134 million primarily due to lower demand in
global construction markets, especially in North America , Western Europe and
Asia Pacific .
•Medium-duty truck and bus sales decreased $103 million mainly due to lower
demand in North American and Brazilian medium-duty truck markets.
Segment EBITDA
Engine segment EBITDA for the three months ended March 29, 2020 , decreased $73
million versus the comparable period in 2019, primarily due to lower gross
margin, partially offset by increased equity, royalty and interest income from
investees and lower selling, general and administrative expenses. The decrease
in gross margin was mainly due to lower volumes, partially offset by lower
compensation expenses. The decrease in selling, general and administrative
expenses was primarily due to restructuring actions resulting in lower
compensation expenses, partially offset by higher consulting expenses. The
increase in equity, royalty and interest income from investees was due to higher
earnings at Tata Cummins Ltd. largely due to an $18 million adjustment related
to India Tax Law Changes passed in March 2020 and $18 million of technology fee
revenue recorded in the first quarter of 2020, partially offset by lower
earnings at Dongfeng Cummins Engine Co. See NOTE 6, "INCOME TAXES" to the
Condensed Consolidated Financial Statements for additional information on India
Tax Law Changes.
Distribution Segment Results
Financial data for the Distribution segment was as follows:
Three months ended Favorable/
March 29, March 31, (Unfavorable)
In millions 2020 2019 Amount Percent
External sales $ 1,807 $ 1,993 $ (186) (9) %
Intersegment sales 7 8 (1) (13) %
Total sales 1,814 2,001 (187) (9) %
Research, development and engineering expenses 7 7 - - %
Equity, royalty and interest income from investees 21 11 10 91 %
Interest income (1) 1 4 (3) (75) %
Segment EBITDA 158 171 (13) (8) %
Percentage Points
Segment EBITDA as a percentage of total sales 8.7 % 8.5 % 0.2
(1) "Interest income" is managed at the corporate level and allocated to each operating segment.
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Sales for our Distribution segment by region were as follows:
Three months ended Favorable/
March 29, March 31, (Unfavorable)
In millions 2020 2019 Amount Percent
North America $ 1,246 $ 1,399 $ (153) (11) %
Asia Pacific 196 220 (24) (11) %
Europe 136 123 13 11 %
China 68 82 (14) (17) %
Africa and Middle East 51 55 (4) (7) %
Latin America 39 40 (1) (3) %
India 36 47 (11) (23) %
Russia 42 35 7 20 %
Total sales $ 1,814 $ 2,001 $ (187) (9) %
Sales for our Distribution segment by product line were as follows:
Three months ended Favorable/
March 29, March 31, (Unfavorable)
In millions 2020 2019 Amount Percent
Parts $ 787 $ 844 $ (57) (7) %
Power generation 376 403 (27) (7) %
Service 328 363 (35) (10) %
Engines 323 391 (68) (17) %
Total sales $ 1,814 $ 2,001 $ (187) (9) %
Sales
Distribution segment sales for the three months ended March 29, 2020 , decreased
$187 million versus the comparable period in 2019. The following were the
primary drivers by region:
•North American sales decreased $153 million due to decreased demand in all
product lines, especially engine sales in oil and gas markets and parts.
•Unfavorable foreign currency fluctuations, principally in the Australian
dollar, Euro, Brazilian real and Chinese renminbi.
Segment EBITDA
Distribution segment EBITDA for the three months ended March 29, 2020 , decreased
$13 million versus the comparable period in 2019, primarily due to lower gross
margin and unfavorable foreign currency fluctuations in emerging markets
(especially Africa ), partially offset by lower selling, general and
administrative expenses and higher equity, royalty and interest income from
investees. The decrease in gross margin was mainly due to lower volume,
partially offset by lower compensation expenses. The decrease in selling,
general and administrative expenses was due to restructuring actions resulting
in lower compensation expenses and lower travel expenses, partially offset by
higher consulting expenses. The increase in equity, royalty and interest income
from investees was largely due to higher earnings at Valvoline Cummins Ltd. , due
to a $5 million adjustment related to India Tax Law Changes passed in March
2020 , and Komatsu Cummins Chile, Ltda. See NOTE 6, "INCOME TAXES" to the
Condensed Consolidated Financial Statements for additional information on India
Tax Law Changes.
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Components Segment Results
Financial data for the Components segment was as follows:
Three months ended Favorable/
March 29, March 31, (Unfavorable)
In millions 2020 2019 Amount Percent
External sales $ 1,115 $ 1,401 $ (286) (20) %
Intersegment sales 387 460 (73) (16) %
Total sales 1,502 1,861 (359) (19) %
Research, development and engineering expenses 68 75 7 9 %
Equity, royalty and interest income from investees 21 10 11 NM
Interest income (1) 1 2 (1) (50) %
Segment EBITDA 279 325 (46) (14) %
Percentage Points
Segment EBITDA as a percentage of total sales 18.6 % 17.5 % 1.1
"NM" - not meaningful information (1) "Interest income" is managed at the corporate level and allocated to each operating segment.
Sales for our Components segment by business were as follows:
Three months ended Favorable/
March 29, March 31, (Unfavorable)
In millions 2020 2019 Amount Percent
Emission solutions $ 664 $ 854 $ (190) (22) %
Filtration 312 325 (13) (4) %
Turbo technologies 270 335 (65) (19) %
Electronics and fuel systems 174 198 (24) (12) %
Automated transmissions 82 149 (67) (45) %
Total sales $ 1,502 $ 1,861 $ (359) (19) %
Sales
Components segment sales for the three months ended March 29, 2020 , decreased
$359 million versus the comparable period in 2019. The following were the
primary drivers by business:
•Emission solutions sales decreased $190 million primarily due to weaker demand
in North America and Western Europe .
•Automated transmissions sales decreased $67 million primarily due to lower
heavy-duty truck demand in North America .
•Turbo technologies sales decreased $65 million mainly due to weaker market
demand in North America and Western Europe .
Segment EBITDA
Components segment EBITDA for the three months ended March 29, 2020 , decreased
$46 million versus the comparable period in 2019, mainly due to lower gross
margin, partially offset by lower selling, general and administrative expenses,
increased equity, royalty and interest income from investees and decreased
research, development and engineering expenses. The decrease in gross margin was
mainly due to lower volumes, partially offset by restructuring actions resulting
in lower compensation expenses. Selling, general and administrative expenses
decreased due to restructuring actions resulting in lower compensation expenses
and decreased consulting expenses. The decrease in research, development and
engineering expenses was principally due to lower compensation expenses. The
increase in equity, royalty and interest income from investees was primarily due
to higher earnings at Fleetguard Filtration Systems India Pvt. due to a $14
million adjustment related to India Tax Law Changes passed in March 2020 . See
NOTE 6, "INCOME TAXES" to the Condensed Consolidated Financial Statements for
additional information on India Tax Law Changes.
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Power Systems Segment Results
Financial data for the Power Systems segment was as follows:
Three months ended Favorable/
March 29, March 31, (Unfavorable)
In millions 2020 2019 Amount Percent
External sales $ 500 $ 623 $ (123) (20) %
Intersegment sales 384 454 (70) (15) %
Total sales 884 1,077 (193) (18) %
Research, development and engineering expenses 54 56 2 4 %
Equity, royalty and interest income from investees 9 15 (6) (40) %
Interest income (1) 1 2 (1) (50) %
Segment EBITDA 77 138 (61) (44) %
Percentage Points
Segment EBITDA as a percentage of total sales 8.7 % 12.8 % (4.1)
(1) "Interest income" is managed at the corporate level and allocated to each operating segment.
Sales for our Power Systems segment by product line were as follows:
Three months ended Favorable/
March 29, March 31, (Unfavorable)
In millions 2020 2019 Amount Percent
Power generation $ 519 $ 567 $ (48) (8) %
Industrial 296 420 (124) (30) %
Generator technologies 69 90 (21) (23) %
Total sales $ 884 $ 1,077 $ (193) (18) %
Sales
Power Systems segment sales for the three months ended March 29, 2020 , decreased
$193 million versus the comparable period in 2019. The following were the
primary drivers by product line:
•Industrial sales decreased $124 million due to lower demand in international
mining markets and decreased demand in oil and gas markets in North America and
China .
•Power generation sales decreased $48 million due to lower demand in North
America and India.
•Unfavorable foreign currency fluctuations primarily in the Brazilian real,
Chinese renminbi and Indian rupee.
Segment EBITDA
Power Systems segment EBITDA for the three months ended March 29, 2020 ,
decreased $61 million versus the comparable period in 2019, primarily due to
lower gross margin and decreased equity, royalty and interest income from
investees, partially offset by lower selling, general and administrative
expenses. The decrease in gross margin was mainly due to lower volumes,
partially offset by lower warranty expenses. Selling, general and administrative
expenses decreased primarily due to restructuring actions resulting in lower
compensation expenses and decreased travel expenses. The decrease in equity,
royalty and interest income from investees was primarily due to lower earnings
at Chongqing Cummins Engine Co., Ltd.
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New Power Segment Results
The New Power segment designs, manufactures, sells and supports electrified
power systems ranging from fully electric to hybrid along with innovative
components and subsystems, including battery, fuel cell and hydrogen production
technologies. The New Power segment is currently in the development phase with a
primary focus on research and development activities for all of our power
systems, components and subsystems. Financial data for the New Power segment was
as follows:
Three months ended Favorable/
March 29, March 31, (Unfavorable)
In millions 2020 2019 Amount Percent
Total external sales $ 10 $ 3 $ 7 NM
Research, development and engineering expenses 29 21 (8) (38) %
Segment EBITDA (43) (29) (14) (48) %
"NM" - not meaningful information
Reconciliation of Segment EBITDA to Net Income Attributable to
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