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Cummins Reports Third Quarter 2020 Results

·15-min read
  • Third quarter revenues of $5.1 billion; GAAP1 Net Income of $501 million

  • Third quarter EBITDA of 17.1 percent; Diluted EPS of $3.36

  • The company produced record quarterly operating cash flow of $1.2 billion

  • Total liquidity increased to $6.5 billion, including cash and marketable securities of $3.3 billion

Cummins Inc. (NYSE: CMI) today reported results for the third quarter of 2020.

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

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

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

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

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

2020 Outlook:

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

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

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

Third Quarter 2020 Highlights:

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

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

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

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

1 Generally Accepted Accounting Principles

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

Engine Segment

  • Sales - $2.1 billion, down 13 percent

  • Segment EBITDA - $382 million, or 18.1 percent of sales, compared to $341 million or 14.1 percent of sales

  • EBITDA was positively impacted by a $30 million value added tax (VAT) recovery

  • On-highway revenues decreased 13 percent and off-highway revenues declined 9 percent

  • Sales declined by 18 percent in North America but increased 8 percent in international markets primarily due to increased demand in China

Distribution Segment

  • Sales - $1.7 billion, down 14 percent

  • Segment EBITDA - $182 million, or 10.6 percent of sales, compared to $186 million or 9.3 percent of sales

  • Revenues in North America were down 18 percent and international sales declined by 5 percent

  • Demand declined in all lines of business

Components Segment

  • Sales - $1.5 billion, down 7 percent

  • Segment EBITDA - $261 million, or 16.9 percent of sales, compared to $286 million or 17.3 percent of sales

  • Revenues in North America decreased by 24 percent and international sales increased by 26 percent due to higher demand in China and India

Power Systems Segment

  • Sales - $981 million, down 13 percent

  • Segment EBITDA - $101 million, or 10.3 percent of sales, compared to $158 million, or 14.0 percent of sales

  • Power generation revenues decreased by 7 percent while industrial revenues decreased 21 percent due to lower demand in mining and oil and gas markets

New Power Segment

  • Sales - $18 million

  • Segment EBITDA loss - $40 million

  • Costs associated with the development of fuel cells and electrolyzers as well as products to support battery electric vehicles are contributing to EBITDA losses

About Cummins Inc.

Cummins Inc., a global power leader, is a corporation of complementary business segments that design, manufacture, distribute and service a broad portfolio of power solutions. The company’s products range from diesel, natural gas, electric and hybrid powertrains and powertrain-related components including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated transmissions, electric power generation systems, batteries, electrified power systems, hydrogen generation and fuel cell products. Headquartered in Columbus, Indiana (U.S.), since its founding in 1919, Cummins employs approximately 61,600 people committed to powering a more prosperous world through three global corporate responsibility priorities critical to healthy communities: education, environment and equality of opportunity. Cummins serves its customers online, through a network of company-owned and independent distributor locations, and through thousands of dealer locations worldwide and earned about $2.3 billion on sales of $23.6 billion in 2019. See how Cummins is powering a world that’s always on by accessing news releases and more information at https://www.cummins.com/always-on.

Forward-looking disclosure statement

Information provided in this release that is not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our forecasts, guidance, preliminary results, expectations, hopes, beliefs and intentions on strategies regarding the future. These forward-looking statements include, without limitation, statements relating to our plans and expectations for our revenues and EBITDA. Our actual future results could differ materially from those projected in such forward-looking statements because of a number of factors, including, but not limited to: market slowdown due to the impacts from COVID-19 pandemic, other public health crises, epidemics or pandemics; impacts to manufacturing and supply chain abilities from an extended shutdown or disruption of our operations due to the COVID-19 pandemic; supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers, including suppliers that may be impacted by the COVID-19 pandemic; aligning our capacity and production with our demand, including impacts of COVID-19; a major customer experiencing financial distress, particularly related to the COVID-19 pandemic; any adverse results of our internal review into our emissions certification process and compliance with emission standards; increased scrutiny from regulatory agencies, as well as unpredictability in the adoption, implementation and enforcement of emission standards around the world; disruptions in global credit and financial markets as the result of the COVID-19 pandemic; adverse impacts from government actions to stabilize credit markets and financial institutions and other industries; product recalls; the development of new technologies that reduce demand for our current products and services; policy changes in international trade; a slowdown in infrastructure development and/or depressed commodity prices; the U.K.'s exit from the European Union (EU); labor relations or work stoppages; reliance on our executive leadership team and other key personnel; lower than expected acceptance of new or existing products or services; changes in the engine outsourcing practices of significant customers; our plan to reposition our portfolio of product offerings through exploration of strategic acquisitions and divestitures and related uncertainties of entering such transactions; exposure to potential security breaches or other disruptions to our information technology systems and data security; challenges or unexpected costs in completing cost reduction actions and restructuring initiatives; failure to realize expected results from our investment in Eaton Cummins Automated Transmission Technologies joint venture; political, economic and other risks from operations in numerous countries; competitor activity; increasing competition, including increased global competition among our customers in emerging markets; foreign currency exchange rate changes; variability in material and commodity costs; the actions of, and income from, joint ventures and other investees that we do not directly control; changes in taxation; global legal and ethical compliance costs and risks; product liability claims; increasingly stringent environmental laws and regulations; the performance of our pension plan assets and volatility of discount rates, particularly those related to the sustained slowdown of the global economy due to the COVID-19 pandemic; future bans or limitations on the use of diesel-powered products; the price and availability of energy; our sales mix of products; protection and validity of our patent and other intellectual property rights; the outcome of pending and future litigation and governmental proceedings; continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support our future business; and other risks detailed from time to time in our SEC filings, including particularly in the Risk Factors section of our 2019 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this press release and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available at http://www.sec.gov or at http://www.cummins.com in the Investor Relations section of our website.

Presentation of Non-GAAP Financial Information

EBITDA is a non-GAAP measure used in this release and is defined and reconciled to what management believes to be the most comparable GAAP measure in a schedule attached to this release. Cummins presents this information as it believes it is useful to understanding the Company's operating performance, and because EBITDA is a measure used internally to assess the performance of the operating units.

Webcast information

Cummins management will host a teleconference to discuss these results today at 10 a.m. EST. This teleconference will be webcast and available on the Investor Relations section of the Cummins website at www.cummins.com. Participants wishing to view the visuals available with the audio are encouraged to sign-in a few minutes prior to the start of the teleconference.

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME

(Unaudited) (a)

Three months ended

In millions, except per share amounts

September 27,

2020

June 28,

2020

September 29,

2019

NET SALES

$

5,118

$

3,852

$

5,768

Cost of sales

3,769

2,962

4,274

GROSS MARGIN

1,349

890

1,494

OPERATING EXPENSES AND INCOME

Selling, general and administrative expenses

533

470

600

Research, development and engineering expenses

224

189

242

Equity, royalty and interest income from investees

98

115

68

Other operating expense, net

(20

)

(10

)

(21

)

OPERATING INCOME

670

336

699

Interest income

4

4

14

Interest expense

25

23

26

Other income, net

37

45

68

INCOME BEFORE INCOME TAXES

686

362

755

Income tax expense

182

93

139

CONSOLIDATED NET INCOME

504

269

616

Less: Net income (loss) attributable to noncontrolling interests

3

(7

)

(6

)

NET INCOME ATTRIBUTABLE TO CUMMINS INC.

$

501

$

276

$

622

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.

Basic

$

3.39

$

1.87

$

3.99

Diluted

$

3.36

$

1.86

$

3.97

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING

Basic

147.9

147.6

155.9

Diluted

148.9

148.0

156.6

(a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME

(Unaudited) (a)

Nine months ended

In millions, except per share amounts

September 27,

2020

September 29,

2019

NET SALES

$

13,981

$

17,993

Cost of sales

10,448

13,326

GROSS MARGIN

3,533

4,667

OPERATING EXPENSES AND INCOME

Selling, general and administrative expenses

1,549

1,822

Research, development and engineering expenses

651

730

Equity, royalty and interest income from investees

342

256

Other operating expense, net

(35

)

(25

)

OPERATING INCOME

1,640

2,346

Interest income

15

38

Interest expense

71

87

Other income, net

119

174

INCOME BEFORE INCOME TAXES

1,703

2,471

Income tax expense

402

501

CONSOLIDATED NET INCOME

1,301

1,970

Less: Net income attributable to noncontrolling interests

13

10

NET INCOME ATTRIBUTABLE TO CUMMINS INC.

$

1,288

$

1,960

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.

Basic

$

8.69

$

12.50

Diluted

$

8.65

$

12.45

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING

Basic

148.3

156.8

Diluted

148.9

157.4

(a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) (a)

In millions, except par value

September 27,

2020

December 31,

2019

ASSETS

Current assets

Cash and cash equivalents

$

2,967

$

1,129

Marketable securities

345

341

Total cash, cash equivalents and marketable securities

3,312

1,470

Accounts and notes receivable, net

3,628

3,670

Inventories

3,470

3,486

Prepaid expenses and other current assets

652

761

Total current assets

11,062

9,387

Long-term assets

Property, plant and equipment, net

4,087

4,245

Investments and advances related to equity method investees

1,418

1,237

Goodwill

1,288

1,286

Other intangible assets, net

990

1,003

Pension assets

1,010

1,001

Other assets

1,713

1,578

Total assets

$

21,568

$

19,737

LIABILITIES

Current liabilities

Accounts payable (principally trade)

$

2,597

$

2,534

Loans payable

129

100

Commercial paper

316

660

Accrued compensation, benefits and retirement costs

433

560

Current portion of accrued product warranty

646

803

Current portion of deferred revenue

540

533

Other accrued expenses

990

1,039

Current maturities of long-term debt

58

31

Total current liabilities

5,709

6,260

Long-term liabilities

Long-term debt

3,609

1,576

Pensions and other postretirement benefits

571

591

Accrued product warranty

635

645

Deferred revenue

837

821

Other liabilities

1,566

1,379

Total liabilities

$

12,927

$

11,272

EQUITY

Cummins Inc. shareholders’ equity

Common stock, $2.50 par value, 500 shares authorized, 222.5 and 222.4 shares issued

$

2,385

$

2,346

Retained earnings

15,118

14,416

Treasury stock, at cost, 74.4 and 71.7 shares

(7,696

)

(7,225

)

Common stock held by employee benefits trust, at cost, 0.0 and 0.2 shares

(2

)

Accumulated other comprehensive loss

(2,107

)

(2,028

)

Total Cummins Inc. shareholders’ equity

7,700

7,507

Noncontrolling interests

941

958

Total equity

$

8,641

$

8,465

Total liabilities and equity

$

21,568

$

19,737

(a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (a)

Three months ended

In millions

September 27,

2020

June 28,

2020

September 29,

2019

CASH FLOWS FROM OPERATING ACTIVITIES

Consolidated net income

$

504

$

269

$

616

Adjustments to reconcile consolidated net income to net cash provided by (used in) operating activities

Depreciation and amortization

166

165

178

Deferred income taxes

4

(31

)

Equity in income of investees, net of dividends

(12

)

(46

)

(1

)

Pension and OPEB expense

27

27

19

Pension contributions and OPEB payments

(20

)

(22

)

(38

)

Stock-based compensation expense

10

8

9

Restructuring payments

(19

)

(33

)

Gain on corporate owned life insurance

(12

)

(21

)

(9

)

Foreign currency remeasurement and transaction exposure

(5

)

(5

)

(100

)

Changes in current assets and liabilities, net of acquisitions

Accounts and notes receivable

(123

)

63

211

Inventories

174

(53

)

63

Other current assets

(22

)

16

33

Accounts payable

329

(391

)

(151

)

Accrued expenses

186

(101

)

120

Changes in other liabilities

9

171

48

Other, net

27

(69

)

156

Net cash provided by (used in) operating activities

1,223

(22

)

1,123

CASH FLOWS FROM INVESTING ACTIVITIES

Capital expenditures

(116

)

(77

)

(153

)

Investments in internal use software

(12

)

(13

)

(16

)

Investments in and advances to equity investees

(13

)

(10

)

2

Acquisitions of businesses, net of cash acquired

(222

)

Investments in marketable securities—acquisitions

(137

)

(169

)

(108

)

Investments in marketable securities—liquidations

154

159

143

Cash flows from derivatives not designated as hedges

7

(28

)

(60

)

Other, net

14

3

(4

)

Net cash used in investing activities

(103

)

(135

)

(418

)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from borrowings

1,977

22

Net (payments) borrowings of commercial paper

(1,711

)

410

468

Payments on borrowings and finance lease obligations

(16

)

(15

)

(30

)

Net borrowings (payments) under short-term credit agreements

2

(21

)

(4

)

Distributions to noncontrolling interests

(13

)

(20

)

Dividend payments on common stock

(194

)

(193

)

(204

)

Repurchases of common stock

(706

)

Other, net

59

23

9

Net cash provided by (used in) financing activities

104

226

(487

)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

(8

)

(9

)

(55

)

Net increase in cash and cash equivalents

1,216

60

163

Cash and cash equivalents at beginning of period

1,751

1,691

1,397

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

2,967

$

1,751

$

1,560

(a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (a)

Nine months ended

In millions

September 27,

2020

September 29,

2019

CASH FLOWS FROM OPERATING ACTIVITIES

Consolidated net income

$

1,301

$

1,970

Adjustments to reconcile consolidated net income to net cash provided by operating activities

Depreciation and amortization

499

493

Deferred income taxes

(7

)

(14

)

Equity in income of investees, net of dividends

(136

)

(44

)

Pension and OPEB expense

81

56

Pension contributions and OPEB payments

(102

)

(130

)

Stock-based compensation expense

22

37

Restructuring payments

(100

)

Gain on corporate owned life insurance

(50

)

(64

)

Foreign currency remeasurement and transaction exposure

(7

)

(54

)

Changes in current assets and liabilities, net of acquisitions

Accounts and notes receivable

47

(101

)

Inventories

(50

)

(62

)

Other current assets

73

48

Accounts payable

109

(3

)

Accrued expenses

(236

)

(74

)

Changes in other liabilities

208

168

Other, net

(72

)

117

Net cash provided by operating activities

1,580

2,343

CASH FLOWS FROM INVESTING ACTIVITIES

Capital expenditures

(268

)

(395

)

Investments in internal use software

(33

)

(50

)

Investments in and advances to equity investees

(30

)

(16

)

Acquisitions of businesses, net of cash acquired

(237

)

Investments in marketable securities—acquisitions

(422

)

(367

)

Investments in marketable securities—liquidations

408

296

Cash flows from derivatives not designated as hedges

(15

)

(86

)

Other, net

23

26

Net cash used in investing activities

(337

)

(829

)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from borrowings

1,999

10

Net (payments) borrowings of commercial paper

(344

)

122

Payments on borrowings and finance lease obligations

(41

)

(47

)

Net borrowings under short-term credit agreements

6

53

Distributions to noncontrolling interests

(26

)

(33

)

Dividend payments on common stock

(582

)

(562

)

Repurchases of common stock

(550

)

(806

)

Other, net

102

65

Net cash provided by (used in) financing activities

564

(1,198

)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

31

(59

)

Net increase in cash and cash equivalents

1,838

257

Cash and cash equivalents at beginning of year

1,129

1,303

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

2,967

$

1,560

(a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.

CUMMINS INC. AND SUBSIDIARIES

SEGMENT INFORMATION

(Unaudited)

In millions

Engine

Distribution

Components

Power

Systems

New

Power

Total

Segments

Intersegment

Eliminations (1)

Total

Three months ended September 27, 2020

External sales

$

1,617

$

1,715

$

1,201

$

567

$

18

$

5,118

$

$

5,118

Intersegment sales

495

6

340

414

1,255

(1,255

)

Total sales

2,112

1,721

1,541

981

18

6,373

(1,255

)

5,118

Research, development and engineering expenses

72

9

64

53

26

224

224

Equity, royalty and interest income (loss) from investees

74

13

13

(2

)

98

98

Interest income

1

1

1

1

4

4

EBITDA (2)

382

182

261

101

(40

)

886

(10

)

876

Depreciation and amortization (3)

51

30

47

32

5

165

165

EBITDA as a percentage of total sales

18.1

%

10.6

%

16.9

%

10.3

%

NM

13.9

%

17.1

%

Three months ended September 29, 2019

External sales

$

1,822

$

2,001

$

1,253

$

683

$

9

$

5,768

$

$

5,768

Intersegment sales

594

3

397

443

1,437

(1,437

)

Total sales

2,416

2,004

1,650

1,126

9

7,205

(1,437

)

5,768

Research, development and engineering expenses

79

7

73

58

25

242

242

Equity, royalty and interest income from investees

34

12

9

13

68

68

Interest income

5

4

2

3

14

14

EBITDA (2)

341

186

286

158

(36

)

935

23

958

Depreciation and amortization (3)

50

29

67

29

2

177

177

EBITDA as a percentage of total sales

14.1

%

9.3

%

17.3

%

14.0

%

NM

13.0

%

16.6

%

"NM" - not meaningful information

(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three months ended September 27, 2020 and September 29, 2019.

(2) EBITDA is defined as earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests.

(3) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Net Income as "Interest expense." A portion of depreciation expense is included in "Research, development and engineering expenses."

CUMMINS INC. AND SUBSIDIARIES

SEGMENT INFORMATION

(Unaudited)

In millions

Engine

Distribution

Components

Power

Systems

New

Power

Total

Segments

Intersegment

Eliminations (1)

Total

Nine months ended September 27, 2020

External sales

$

4,133

$

5,123

$

3,192

$

1,495

$

38

$

13,981

$

$

13,981

Intersegment sales

1,560

17

1,001

1,147

3,725

(3,725

)

Total sales

5,693

5,140

4,193

2,642

38

17,706

(3,725

)

13,981

Research, development and engineering expenses

217

20

187

148

79

651

651

Equity, royalty and interest income (loss) from investees

236

45

46

18

(3

)

342

342

Interest income

6

3

3

3

15

15

EBITDA (2)

897

500

681

269

(121

)

2,226

45

2,271

Depreciation and amortization (3)

155

91

142

96

13

497

497

EBITDA as a percentage of total sales

15.8

%

9.7

%

16.2

%

10.2

%

NM

12.6

%

16.2

%

Nine months ended September 29, 2019

External sales

$

5,879

$

6,009

$

4,055

$

2,030

$

20

$

17,993

$

$

17,993

Intersegment sales

1,893

24

1,302

1,376

4,595

(4,595

)

Total sales

7,772

6,033

5,357

3,406

20

22,588

(4,595

)

17,993

Research, development and engineering expenses

245

21

223

171

70

730

730

Equity, royalty and interest income from investees

152

35

30

39

256

256

Interest income

13

12

6

7

38

38

EBITDA (2)

1,195

529

908

469

(98

)

3,003

46

3,049

Depreciation and amortization (3)

151

86

160

88

6

491

491

EBITDA as a percentage of total sales

15.4

%

8.8

%

16.9

%

13.8

%

NM

13.3

%

16.9

%

"NM" - not meaningful information

(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the nine months ended September 27, 2020 and September 29, 2019.

(2) EBITDA is defined as earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests.

(3) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Net Income as "Interest expense." The amortization of debt discount and deferred costs was $2 million and $2 million for the nine months ended September 27, 2020 and September 29, 2019, respectively. A portion of depreciation expense is included in "Research, development and engineering expense."

CUMMINS INC. AND SUBSIDIARIES
RECONCILIATION OF SEGMENT INFORMATION
(Unaudited)

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

Three months ended

Nine months ended

In millions

September 27,
2020

September 29,
2019

September 27,
2020

September 29,
2019

Total EBITDA

$

876

$

958

$

2,271

$

3,049

Less:

Depreciation and amortization

165

177

497

491

Interest expense

25

26

71

87

Income before income taxes

$

686

$

755

$

1,703

$

2,471

CUMMINS INC. AND SUBSIDIARIES
SELECT FOOTNOTE DATA
(Unaudited)

EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES

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

Three months ended

Nine months ended

In millions

September 27,
2020

September 29,
2019

September 27,
2020

September 29,
2019

Manufacturing entities

Beijing Foton Cummins Engine Co., Ltd.

$

30

$

15

$

81

$

56

Dongfeng Cummins Engine Company, Ltd.

20

10

54

40

Chongqing Cummins Engine Company, Ltd.

7

10

27

32

All other manufacturers

22

(1)

21

100

(1)(2)

76

Distribution entities

Komatsu Cummins Chile, Ltda.

6

6

23

19

All other distributors

1

1

1

Cummins share of net income

86

63

286

223

Royalty and interest income

12

5

56

33

Equity, royalty and interest income from investees

$

98

$

68

$

342

$

256

(1) Includes impairment charges of $10 million and $13 million for the three and nine months ended September 27, 2020, respectively, for a joint venture in the Power Systems segment.

(2) Includes $37 million in adjustments related to tax changes within India's 2020-2021 Union Budget of India (India Tax Law Changes) passed in March 2020.

INCOME TAXES

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

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

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

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

In millions

Favorable

(Unfavorable)

Equity, royalty and interest income from investees

$

37

Income tax expense (1)

17

Less: Net income attributable to noncontrolling interests

(19

)

Net income statement impact

$

35

(1) The adjustment to "Income tax expense" includes $15 million of discrete items.

AVAILABLE LIQUIDITY AND CREDIT RATINGS

Available Liquidity

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

September 27, 2020

In millions

Total

U.S.

International

Primary location of international

balances

Cash and cash equivalents

$

2,967

$

1,793

$

1,174

China, Mexico, Singapore, Belgium, Australia, Netherlands, Canada

Marketable securities (1)

345

75

270

India

Total

$

3,312

$

1,868

$

1,444

Available credit capacity

Revolving credit facilities (2)

$

3,184

International and other uncommitted domestic credit facilities

$

191

(1) The majority of marketable securities could be liquidated into cash within a few days.

(2) The five-year credit facility for $2.0 billion and the 364-day credit facility for $1.5 billion, maturing August 2023 and August 2021, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At September 27, 2020, we had $316 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facilities to $3.2 billion.

Credit Ratings

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

Long-Term

Short-Term

Credit Rating Agency (1)

Senior Debt

Rating

Debt Rating

Outlook

Standard and Poor’s Rating Services

A+

A1

Stable

Moody’s Investors Service, Inc.

A2

P1

Stable

(1) Credit ratings are not recommendations to buy, are subject to change, and each rating should be evaluated independently of any other rating. In addition, we undertake no obligation to update disclosures concerning our credit ratings, whether as a result of new information, future events or otherwise.

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

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

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

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

Three months ended

Nine months ended

In millions

September 27,
2020

June 28,
2020

September 29,
2019

September 27,
2020

September 29,
2019

Net income attributable to Cummins Inc.

$

501

$

276

$

622

$

1,288

$

1,960

Net income attributable to Cummins Inc. as a percentage of net sales

9.8

%

7.2

%

10.8

%

9.2

%

10.9

%

Add:

Net income (loss) attributable to noncontrolling interests

3

(7

)

(6

)

13

10

Consolidated net income

504

269

616

1,301

1,970

Add:

Interest expense

25

23

26

71

87

Income tax expense

182

93

139

402

501

Depreciation and amortization

165

164

177

497

491

EBITDA

$

876

$

549

$

958

$

2,271

$

3,049

EBITDA as a percentage of net sales

17.1

%

14.3

%

16.6

%

16.2

%

16.9

%

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

Engine Segment Sales by Market and Unit Shipments by Engine Classification

Sales for our Engine segment by market were as follows:

2020

In millions

Q1

Q2

Q3

Q4

YTD

Heavy-duty truck

$

750

$

415

$

694

$

$

1,859

Medium-duty truck and bus

618

391

492

1,501

Light-duty automotive

353

180

522

1,055

Off-highway

437

437

404

1,278

Total sales

$

2,158

$

1,423

$

2,112

$

$

5,693

2019

In millions

Q1

Q2

Q3

Q4

YTD

Heavy-duty truck

$

979

$

970

$

851

$

755

$

3,555

Medium-duty truck and bus

721

739

645

602

2,707

Light-duty automotive

382

480

478

464

1,804

Off-highway

571

514

442

463

1,990

Total sales

$

2,653

$

2,703

$

2,416

$

2,284

$

10,056

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

2020

Units

Q1

Q2

Q3

Q4

YTD

Heavy-duty

25,800

15,900

23,300

65,000

Medium-duty

61,200

44,900

50,100

156,200

Light-duty

49,400

29,800

67,200

146,400

Total units

136,400

90,600

140,600

367,600

2019

Units

Q1

Q2

Q3

Q4

YTD

Heavy-duty

33,900

35,000

28,000

25,700

122,600

Medium-duty

79,000

76,400

63,200

64,800

283,400

Light-duty

56,400

64,100

62,600

62,800

245,900

Total units

169,300

175,500

153,800

153,300

651,900

Distribution Segment Sales by Product Line

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

2020

In millions

Q1

Q2

Q3

Q4

YTD

Parts

$

787

$

654

$

722

$

$

2,163

Power generation

376

377

416

1,169

Service

328

297

304

929

Engines

323

277

279

879

Total sales

$

1,814

$

1,605

$

1,721

$

$

5,140

2019

In millions

Q1

Q2

Q3

Q4

YTD

Parts

$

844

$

833

$

798

$

815

$

3,290

Power generation

403

427

467

487

1,784

Service

363

373

376

367

1,479

Engines

391

395

363

369

1,518

Total sales

$

2,001

$

2,028

$

2,004

$

2,038

$

8,071

Component Segment Sales by Product Line

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

2020

In millions

Q1

Q2

Q3

Q4

YTD

Emission solutions

$

664

$

472

$

665

$

$

1,801

Filtration

312

255

314

881

Turbo technologies

270

216

281

767

Electronics and fuel systems

174

164

187

525

Automated transmissions

82

43

94

219

Total sales

$

1,502

$

1,150

$

1,541

$

$

4,193

2019

In millions

Q1

Q2

Q3

Q4

YTD

Emission solutions

$

854

$

828

$

745

$

695

$

3,122

Filtration

325

331

310

315

1,281

Turbo technologies

335

319

279

285

1,218

Electronics and fuel systems

198

212

170

179

759

Automated transmissions

149

156

146

83

534

Total sales

$

1,861

$

1,846

$

1,650

$

1,557

$

6,914

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

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

2020

In millions

Q1

Q2

Q3

Q4

YTD

Power generation

$

519

$

424

$

601

$

$

1,544

Industrial

296

291

309

896

Generator technologies

69

62

71

202

Total sales

$

884

$

777

$

981

$

$

2,642

2019

In millions

Q1

Q2

Q3

Q4

YTD

Power generation

$

567

$

668

$

647

$

636

$

2,518

Industrial

420

432

392

332

1,576

Generator technologies

90

103

87

86

366

Total sales

$

1,077

$

1,203

$

1,126

$

1,054

$

4,460

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

2020

Units

Q1

Q2

Q3

Q4

YTD

Power generation

1,800

1,000

2,300

5,100

Industrial

1,000

1,000

1,200

3,200

Total units

2,800

2,000

3,500

8,300

2019

Units

Q1

Q2

Q3

Q4

YTD

Power generation

2,100

2,300

2,300

2,400

9,100

Industrial

1,600

1,600

1,400

1,400

6,000

Total units

3,700

3,900

3,700

3,800

15,100

View source version on businesswire.com: https://www.businesswire.com/news/home/20201027005192/en/

Contacts

Jon Mills
Director, External Communications
(317) 658-4540
jon.mills@cummins.com