EX-99 2 cmi2019q38-kex99.htm EXHIBIT 99 Exhibit
earningsreleasea06.jpg
For Immediate Release

October 29, 2019

Cummins Announces Third Quarter Results

Third quarter revenues of $5.8 billion; GAAP1 Net Income of $622 million
Third quarter EBITDA of 16.6 percent of sales; Diluted EPS of $3.97
Full year 2019 revenues expected to decline 2 percent, lower than previous guidance of flat
Full year EBITDA expected to be 15.9 to 16.3 percent of sales, compared to prior guidance of 16.25 to 16.75 percent
$910 million returned to shareholders during the third quarter in the form of dividends and share repurchases.

COLUMBUS, IND. - Cummins Inc. (NYSE: CMI) today reported results for the third quarter of 2019.

Third quarter revenues of $5.8 billion decreased 3 percent from the same quarter in 2018. Lower demand for trucks and construction equipment drove the majority of the decline. Sales in North America were flat while international revenues decreased 8 percent. Currency negatively impacted revenues by 1 percent, primarily due to a stronger US dollar.

Earnings before interest, taxes, depreciation and amortization (EBITDA) in the third quarter were $958 million, or 16.6 percent of sales, compared to $983 million or 16.5 percent of sales a year ago.

Net income attributable to Cummins in the third quarter was $622 million ($3.97 per diluted share), compared to net income of $692 million ($4.28 per diluted share) last year. Third quarter results were positively impacted by $23 million ($0.14 per diluted share) in discrete tax items and gains of $28 million ($0.18 per diluted share) from closing out certain derivative contracts associated with the company’s foreign exchange hedging program. Third quarter net income included expenses of $35 million ($0.23 per diluted share) related to one-time actions taken to cease development and production of certain products, which will benefit future financial performance.

“Despite weakening conditions in a number of our largest markets, Cummins delivered strong profits, record operating cash flow, and returned a record $910 million of cash to shareholders in the third quarter,” said Chairman and CEO Tom Linebarger. “While we expected to see a moderation of demand in the second half of the year, sales have weakened even faster than we anticipated. Cummins is taking actions to align our cost structure with the lower revenues while maintaining investment in products that will deliver sustainable growth and profitability.”


1


2019 Outlook:

Based on the current forecast, Cummins now expects 2019 revenue to decline 2 percent compared to prior guidance of flat. The reduction in our revenue forecast is driven by lower truck production in North America, India, Brazil, and Europe, as well as lower demand in off-highway markets, including North America construction and global mining markets. The company now expects EBITDA to be in the range of 15.9 to 16.3 percent of sales. This projection for EBITDA is lower than the prior guidance of 16.25 to 16.75 percent, due to the impact of lower volumes and the acquisition of Hydrogenics.

The company plans to return 75 percent of Operating Cash Flow to shareholders in the form of dividends and share repurchases.

Our outlook does not include any potential impact of the company’s review of its emission certification process and compliance with emissions standards or expenses associated with executing future cost reduction initiatives.

Third Quarter 2019 Highlights:

The Company’s new 2020 X15 Efficiency Series engine will meet 2021 greenhouse gas standards one year early in North America, delivering up to 5% better fuel economy than the prior X15 Efficiency Series. The X15 Efficiency Series is paired with a 12-speed Cummins Eaton Joint Venture Automated Manual Transmission and delivers both improved fuel economy and reliability for customers, while lowering greenhouse gas emissions.

Cummins closed on its previously announced acquisition of fuel cell and hydrogen production technologies provider Hydrogenics Corporation. The acquisition was completed for $15.00 per share, representing an enterprise value of $291 million.

The first Cummins-powered battery electric bus entered service in Santa Monica, California.

Cummins was named to the Dow Jones Sustainability North American Index for a 14th consecutive year. The index is considered one of the most prestigious sustainability rankings.

The company returned a record $910 million to shareholders in the form of dividend and share repurchases in the third quarter. We repurchased 4.6 million shares during the quarter, representing 2.9% of shares outstanding.

Cummins and Freightliner announced the increased availability of the Cummins X12 engine. The X12 will be available in a Freightliner Cascadia day cab in 2020, this is the first time the X12 will be utilized in regional haul applications in North America. The X12 combined with the Cummins Eaton Joint Venture transmission delivers substantial value to weight sensitive customers as it is the lightest powertrain available for the Class 8 on-highway market, weighing only 2700 pounds.

Third quarter 2019 detail (all comparisons to same period in 2018)

Engine Segment

Sales - $2.4 billion, down 11 percent
Segment EBITDA - $341 million, or 14.1 percent of sales, compared to $405 million or 14.9 percent of sales

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The company recorded a $33 million charge related to the decision to cease production of its 5-liter ISV engine for the US pickup market by the end of this year
On-highway revenues decreased 9 percent and off-highway revenues decreased by 20 percent
North America revenues decreased by 6 percent due to lower demand in heavy-duty truck and construction markets while international revenues declined 25 percent primarily due to lower demand in China

Distribution Segment

Sales - $2.0 billion, up 4 percent
Segment EBITDA - $186 million, or 9.3 percent of sales, compared to $155 million or 8.0 percent of sales
Revenues in North America increased by 3 percent and international sales were up 5 percent
Strong demand for power generation equipment in North America, especially data centers, was partially offset by lower demand in oil and gas markets and the unfavorable impact from a stronger US dollar, which impacted sales by 1 percent

Components Segment

Sales - $1.7 billion, down 6 percent
Segment EBITDA - $286 million, or 17.3 percent of sales, compared to $288 million or 16.4 percent of sales
Revenues in North America increased by 2 percent while international sales declined by 18 percent due to lower demand in Europe, India, and China

Power Systems Segment

Sales - $1.1 billion, up 2 percent
Segment EBITDA - $158 million, or 14.0 percent of sales, compared to $163 million or 14.7 percent of sales
Industrial revenues increased 3 percent while power generation revenues grew 2 percent

Electrified Power Segment

Sales - $9 million
Segment EBITDA loss - $36 million

1 Generally Accepted Accounting Principles

About Cummins
Cummins Inc., a global technology leader, is a corporation of complementary business segments designing, manufacturing, distributing and servicing a broad portfolio of power solutions. The company’s products range from diesel and natural gas engines to hybrid and electric platforms, as well as related technologies, including transmissions, battery systems, fuel systems, controls, air handling, filtration, emission solutions, electrical power generation systems, hydrogen generation, energy storage and fuel cell products. Headquartered in Columbus, Indiana (U.S.), since its founding in 1919, Cummins employs approximately 62,600 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 customers in approximately 190 countries and territories through a network of approximately 600 company-owned and independent distributor locations, and over 7,600 dealer locations. In 2018, the company earned about $2.1 billion on sales of $23.8 billion. See how Cummins is powering a world that’s Always On by accessing news releases and more information at https://

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www.cummins.com/always-on. Follow Cummins on Twitter at www.twitter.com/cummins and on YouTube at www.youtube.com/cumminsinc.

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 percentage for the full year of 2019. 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: 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; 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 risks detailed from time to time in our SEC filings, including particularly in the Risk Factors section of our 2018 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.


4






5


CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME
(Unaudited) (a)


 
 
Three months ended
In millions, except per share amounts
 
September 29,
2019
 
September 30,
2018
NET SALES
 
$
5,768

 
$
5,943

Cost of sales
 
4,274

 
4,392

GROSS MARGIN
 
1,494

 
1,551

OPERATING EXPENSES AND INCOME
 
 
 
 
Selling, general and administrative expenses
 
600

 
604

Research, development and engineering expenses
 
242

 
229

Equity, royalty and interest income from investees
 
68

 
90

Other operating income (expense), net
 
(21
)
 
(5
)
OPERATING INCOME
 
699

 
803

Interest income
 
14

 
9

Interest expense
 
26

 
30

Other income, net
 
68

 
23

INCOME BEFORE INCOME TAXES
 
755

 
805

Income tax expense
 
139

 
107

CONSOLIDATED NET INCOME
 
616

 
698

Less: Net income (loss) attributable to noncontrolling interests
 
(6
)
 
6

NET INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
622

 
$
692

 
 
 
 
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
 
 
 
 
Basic
 
$
3.99

 
$
4.29

Diluted
 
$
3.97

 
$
4.28

 
 
 
 
 
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
 
 

 
 
Basic
 
155.9

 
161.3

Diluted
 
156.6

 
161.8

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


















6


CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME
(Unaudited) (a)


 
 
Nine months ended
In millions, except per share amounts
 
September 29,
2019
 
September 30,
2018
NET SALES
 
$
17,993

 
$
17,645

Cost of sales
 
13,326

 
13,454

GROSS MARGIN
 
4,667

 
4,191

OPERATING EXPENSES AND INCOME
 
 
 
 
Selling, general and administrative expenses
 
1,822

 
1,794

Research, development and engineering expenses
 
730

 
658

Equity, royalty and interest income from investees
 
256

 
315

Other operating income (expense), net
 
(25
)
 
1

OPERATING INCOME
 
2,346

 
2,055

Interest income
 
38

 
26

Interest expense
 
87

 
82

Other income, net
 
174

 
44

INCOME BEFORE INCOME TAXES
 
2,471

 
2,043

Income tax expense
 
501

 
466

CONSOLIDATED NET INCOME
 
1,970

 
1,577

Less: Net income attributable to noncontrolling interests
 
10

 
15

NET INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
1,960

 
$
1,562

 
 
 
 
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
 
 
 
 
Basic
 
$
12.50

 
$
9.57

Diluted
 
$
12.45

 
$
9.53

 
 
 
 
 
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
 
 
 
 
Basic
 
156.8

 
163.3

Diluted
 
157.4

 
163.9

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

7


CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (a)


In millions, except par value
 
September 29,
2019
 
December 31,
2018
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
1,560

 
$
1,303

Marketable securities
 
303

 
222

Total cash, cash equivalents and marketable securities
 
1,863

 
1,525

Accounts and notes receivable, net
 
3,934

 
3,866

Inventories
 
3,821

 
3,759

Prepaid expenses and other current assets
 
610

 
668

Total current assets
 
10,228

 
9,818

Long-term assets
 
 
 
 
Property, plant and equipment, net
 
4,056

 
4,096

Investments and advances related to equity method investees
 
1,250

 
1,222

Goodwill
 
1,288

 
1,126

Other intangible assets, net
 
1,022

 
909

Pension assets
 
970

 
929

Other assets
 
1,532

 
962

Total assets
 
$
20,346

 
$
19,062

 
 
 
 
 
LIABILITIES
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable (principally trade)
 
$
2,830

 
$
2,822

Loans payable
 
103

 
54

Commercial paper
 
902

 
780

Accrued compensation, benefits and retirement costs
 
494

 
679

Current portion of accrued product warranty
 
817

 
654

Current portion of deferred revenue
 
545

 
498

Other accrued expenses
 
997

 
852

Current maturities of long-term debt
 
37

 
45

Total current liabilities
 
6,725

 
6,384

Long-term liabilities
 
 
 
 
Long-term debt
 
1,619

 
1,597

Pensions and other postretirement benefits
 
521

 
532

Accrued product warranty
 
645

 
740

Deferred revenue
 
769

 
658

Other liabilities
 
1,314

 
892

Total liabilities
 
$
11,593

 
$
10,803

 
 
 
 
 
EQUITY
 
 
 
 
Cummins Inc. shareholders’ equity
 
 
 
 
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued
 
$
2,322

 
$
2,271

Retained earnings
 
14,315

 
12,917

Treasury stock, at cost, 69.2 and 64.4 shares
 
(6,784
)
 
(6,028
)
Common stock held by employee benefits trust, at cost, 0.3 and 0.4 shares
 
(3
)
 
(5
)
Accumulated other comprehensive loss
 
(2,040
)
 
(1,807
)
Total Cummins Inc. shareholders’ equity
 
7,810

 
7,348

Noncontrolling interests
 
943

 
911

Total equity
 
$
8,753

 
$
8,259

Total liabilities and equity
 
$
20,346

 
$
19,062

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



8


CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (a)



 
 
Nine months ended
In millions
 
September 29,
2019
 
September 30,
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Consolidated net income
 
$
1,970

 
$
1,577

Adjustments to reconcile consolidated net income to net cash provided by operating activities
 
 
 
 
Depreciation and amortization
 
493

 
456

Deferred income taxes
 
(14
)
 
(167
)
Equity in income of investees, net of dividends
 
(44
)
 
(156
)
Pension contributions (in excess of) under expense, net
 
(62
)
 
36

Other postretirement benefits payments in excess of expense, net
 
(12
)
 
(8
)
Stock-based compensation expense
 
37

 
38

Gain on corporate owned life insurance
 
(64
)
 
(8
)
Foreign currency remeasurement and transaction exposure
 
(54
)
 
(27
)
Changes in current assets and liabilities, net of acquisitions
 
 
 
 
Accounts and notes receivable
 
(101
)
 
(429
)
Inventories
 
(62
)
 
(773
)
Other current assets
 
48

 
(100
)
Accounts payable
 
(3
)
 
467

Accrued expenses
 
(74
)
 
276

Changes in other liabilities
 
168

 
118

Other, net
 
117

 
88

Net cash provided by operating activities
 
2,343

 
1,388

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Capital expenditures
 
(395
)
 
(361
)
Investments in internal use software
 
(50
)
 
(55
)
Investments in and advances to equity investees
 
(16
)
 
(9
)
Acquisitions of businesses, net of cash acquired
 
(237
)
 
(70
)
Investments in marketable securities—acquisitions
 
(367
)
 
(316
)
Investments in marketable securities—liquidations
 
296

 
298

Cash flows from derivatives not designated as hedges
 
(86
)
 
(56
)
Other, net
 
26

 
50

Net cash used in investing activities
 
(829
)
 
(519
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Net borrowings of commercial paper
 
122

 
502

Payments on borrowings and finance lease obligations
 
(47
)
 
(54
)
Net borrowings under short-term credit agreements
 
53

 
9

Distributions to noncontrolling interests
 
(33
)
 
(30
)
Dividend payments on common stock
 
(562
)
 
(537
)
Repurchases of common stock
 
(806
)
 
(879
)
Other, net
 
75

 
29

Net cash used in financing activities
 
(1,198
)
 
(960
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
 
(59
)
 
(56
)
Net increase (decrease) in cash and cash equivalents
 
257

 
(147
)
Cash and cash equivalents at beginning of year
 
1,303

 
1,369

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
1,560

 
$
1,222

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


9

CUMMINS INC. AND SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)

 
In millions
 
Engine
 
Distribution
 
Components
 
Power Systems
 
Electrified Power
 
Total Segments
 
Intersegment Eliminations (1)
 
Total
 
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

 
Segment EBITDA
 
341

 
186

 
286

 
158

 
(36
)
 
935

 
23

 
958

 
Depreciation and amortization (2)
 
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
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
2,082

 
$
1,927

 
$
1,297

 
$
636

 
$
1

 
$
5,943

 
$

 
$
5,943

 
Intersegment sales
 
644

 
4

 
457

 
471

 
1

 
1,577

 
(1,577
)
 

 
Total sales
 
2,726

 
1,931

 
1,754

 
1,107

 
2

 
7,520

 
(1,577
)
 
5,943

 
Research, development and engineering expenses
 
74

 
5

 
71

 
57

 
22

 
229

 

 
229

 
Equity, royalty and interest income from investees
 
55

 
9

 
12

 
14

 

 
90

 

 
90

 
Interest income
 
3

 
4

 
1

 
1

 

 
9

 

 
9

 
Segment EBITDA
 
405

 
155

 
288

 
163

 
(30
)
 
981

 
2

 
983

 
Depreciation and amortization (2)
 
46

 
27

 
44

 
29

 
2

 
148

 

 
148

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA as a percentage of total sales
 
14.9
%
 
8.0
%
 
16.4
%
 
14.7
%
 
NM

 
13.0
%
 
 
 
16.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
"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 29, 2019 and September 30, 2018.
(2) 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 expense."


10

CUMMINS INC. AND SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In millions
 
Engine
 
Distribution
 
Components
 
Power Systems
 
Electrified Power
 
Total Segments
 
Intersegment Eliminations (1)
 
Total
 
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

 
Segment EBITDA
 
1,195

 
529

 
908

 
469

 
(98
)
 
3,003

 
46

 
3,049

 
Depreciation and amortization (2)
 
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
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
5,945

 
$
5,762

 
$
4,012

 
$
1,922

 
$
4

 
$
17,645

 
$

 
$
17,645

 
Intersegment sales
 
1,923

 
16

 
1,382

 
1,505

 
1

 
4,827

 
(4,827
)
 

 
Total sales
 
7,868

 
5,778

 
5,394

 
3,427

 
5

 
22,472

 
(4,827
)
 
17,645

 
Research, development and engineering expenses
 
229

 
15

 
195

 
174

 
45

 
658

 

 
658

 
Equity, royalty and interest income from investees
 
189

 
33

 
42

 
51

 

 
315

 

 
315

 
Interest income
 
8

 
9

  
4

 
5

 

 
26

 

 
26

 
Segment EBITDA
 
1,053

 
423

 
752

 
491

 
(61
)
 
2,658

 
(78
)
 
2,580

 
Depreciation and amortization (2)
 
142

 
81

 
137

 
91

 
4

 
455

 

 
455

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA as a percentage of total sales
 
13.4
%
 
7.3
%
 
13.9
%
 
14.3
%
 
NM

 
11.8
%
 
 
 
14.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
"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 nine months ended September 29, 2019 and September 30, 2018.
(2) 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 $1 million for the nine months ended September 29, 2019 and September 30, 2018, respectively. A portion of depreciation expense is included in "Research, development and engineering expense."



11


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 29,
2019
 
September 30,
2018
 
September 29,
2019
 
September 30,
2018
Total EBITDA
 
$
958

 
$
983

 
$
3,049

 
$
2,580

Less:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
177

 
148

 
491

 
455

Interest expense
 
26

 
30

 
87

 
82

Income before income taxes
 
$
755

 
$
805

 
$
2,471

 
$
2,043



12


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 29,
2019
 
September 30,
2018
 
September 29,
2019
 
September 30,
2018
Manufacturing entities
 

 

 

 

Beijing Foton Cummins Engine Co., Ltd.
 
$
15

 
$
18

 
$
56

 
$
63

Dongfeng Cummins Engine Company, Ltd.
 
10

 
13

 
40

 
47

Chongqing Cummins Engine Company, Ltd.
 
10

 
11

 
32

 
43

All other manufacturers
 
21

 
30

 
76

 
100

Distribution entities
 


 


 


 


Komatsu Cummins Chile, Ltda.
 
6

 
5

 
19

 
18

All other distributors
 
1

 

 

 

Cummins share of net income
 
63

 
77

 
223

 
271

Royalty and interest income
 
5

 
13

 
33

 
44

Equity, royalty and interest income from investees
 
$
68

 
$
90

 
$
256

 
$
315


ACQUISITION
On September 9, 2019, we acquired an 81 percent interest in Hydrogenics Corporation for total consideration of $235 million. The Hydrogen Company, a wholly-owned subsidiary of L’Air Liquide, S.A., will maintain a non-controlling interest in Hydrogenics. We accounted for the transaction as a business combination and included it in the Electrified Power segment in the third quarter of 2019. The preliminary purchase price allocation was as follows:
Entity Acquired (Dollars in millions)
 
Date of Acquisition
 
Additional Percent Interest Acquired
 
Payments to Former Owners
 
Total Purchase Consideration
 
Type of Acquisition(1)
 
Goodwill Acquired
 
Intangibles Recognized (2)
 
Net Sales Previous Fiscal Year Ended
Hydrogenics Corporation
 
09/09/19
 
81%
 
$
235

 
$
235

 
COMB
 
$
166

 
$
158

 
$
34

____________________________________________________
(1) The newly consolidated entity was accounted for as a business combination (COMB).
(2) Intangible assets acquired in business combinations were mostly technology and customer related, the majority of which will be amortized over a period of up to 20 years from the date of the acquisition.
INCOME TAXES
 
Our effective tax rate for 2019 is expected to approximate 21.5 percent, excluding any discrete items that may arise.
Our effective tax rates for the three and nine months ended September 29, 2019, were 18.4 percent and 20.3 percent, respectively.
The three months ended September 29, 2019, contained $23 million, or $0.14 per share, of favorable net discrete tax items, primarily due to withholding taxes and provision to return adjustments. The nine months ended September 29, 2019, contained $30 million, or $0.19 per share, of favorable net discrete tax items, primarily due to withholding taxes and provision to return adjustments.

13


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


Reconciliation of Non GAAP measures - Earnings before interest, income taxes, noncontrolling interests, depreciation and amortization (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 for 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 29,
2019
 
September 30,
2018
 
September 29,
2019
 
September 30,
2018
Net income attributable to Cummins Inc.
 
$
622

 
$
692

 
$
1,960

 
$
1,562

 
 
 
 
 
 
 
 
 
Net income attributable to Cummins Inc. as a percentage of net sales
 
10.8
%
 
11.6
%
 
10.9
%
 
8.9
%
 
 
 
 
 
 
 
 
 
Add:
 
 
 
 
 
 
 
 
Net income (loss) attributable to noncontrolling interests
 
(6
)
 
6

 
10

 
15

Consolidated net income
 
616

 
698

 
1,970

 
1,577

 
 
 
 
 
 
 
 
 
Add:
 
 
 
 
 
 
 
 
Interest expense
 
26

 
30

 
87

 
82

Income tax expense
 
139

 
107

 
501

 
466

Depreciation and amortization
 
177

 
148

 
491

 
455

EBITDA
 
$
958

 
$
983

 
$
3,049

 
$
2,580

 
 
 
 
 
 
 
 
 
EBITDA as a percentage of net sales
 
16.6
%
 
16.5
%
 
16.9
%
 
14.6
%


14


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


Net income and diluted earnings per share (EPS) attributable to Cummins Inc. excluding special discrete tax items

We believe these are useful measures of our operating performance for the periods presented as they illustrate our operating performance without regard to other discrete tax adjustments. These measures are not in accordance with, or an alternative for GAAP and may not be consistent with measures used by other companies. This should be considered supplemental data. The following table reconciles net income and diluted EPS attributable to Cummins Inc. to net income and diluted EPS attributable to Cummins Inc. excluding special discrete tax items for the following periods:

 
 
 
 
Three months ended
 
 
 
 
September 29,
2019
 
September 30,
2018
 
In millions, except per share amounts
 
Net Income
 
Diluted EPS
 
Net Income
 
Diluted EPS
 
Net income and diluted EPS attributable to Cummins Inc.
 
$
622

 
$
3.97

 
$
692

 
$
4.28

 
Special discrete tax items
 
(23
)
 
(0.14
)
 
(37
)
 
(0.23
)
 
Net income and diluted EPS attributable to Cummins Inc. excluding special discrete tax items
 
$
599

 
$
3.83

 
$
655

 
$
4.05


 
 
 
 
 
Nine months ended
 
 
 
 
 
September 29,
2019
 
September 30,
2018
 
In millions, except per share amounts
 
Net Income
 
Diluted EPS
 
Net Income
 
Diluted EPS
 
Net income and diluted EPS attributable to Cummins Inc.
 
$
1,960

 
$
12.45

 
$
1,562

 
$
9.53

 
Special discrete tax items (1)
 
(30
)
 
(0.19
)
 
37

 
0.23

 
Net income and diluted EPS attributable to Cummins Inc. excluding special discrete tax items
 
$
1,930

 
$
12.26

 
$
1,599

 
$
9.76

 
 
 
 
 
 
 
 
 
 
 
 
(1
)
 
Our effective tax rate for the nine months ended September 30, 2018, was 22.8 percent and contained $37 million, or $0.23 per share, of unfavorable net discrete tax items, primarily due to $48 million of unfavorable discrete items related to Tax Legislation, partially offset by $11 million of other favorable discrete items.

15


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:
2019
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Heavy-duty truck
 
$
979

 
$
970

 
$
851

 
$

 
$
2,800

Medium-duty truck and bus
 
721

 
739

 
645

 

 
2,105

Light-duty automotive
 
382

 
480

 
478

 

 
1,340

Off-highway
 
571

 
514

 
442

 

 
1,527

Total sales
 
$
2,653

 
$
2,703

 
$
2,416

 
$

 
$
7,772

 
 
 
 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Heavy-duty truck
 
$
815

 
$
920

 
$
958

 
$
959

 
$
3,652

Medium-duty truck and bus
 
692

 
777

 
699

 
687

 
2,855

Light-duty automotive
 
402

 
444

 
517

 
456

 
1,819

Off-highway
 
537

 
555

 
552

 
596

 
2,240

Total sales
 
$
2,446

 
$
2,696

 
$
2,726

 
$
2,698

 
$
10,566

Unit shipments by engine classification (including unit shipments to Power Systems and off-highway engine units included in their respective classification) were as follows:
2019
 
 
 
 
 
 
 
 
 
 
Units
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Heavy-duty
 
33,900

 
35,000

 
28,000

 

 
96,900

Medium-duty
 
79,000

 
76,400

 
63,200

 

 
218,600

Light-duty
 
56,400

 
64,100

 
62,600

 

 
183,100

Total units
 
169,300

 
175,500

 
153,800

 

 
498,600

 
 
 
 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
 
 
Units
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Heavy-duty
 
26,600

 
32,000

 
34,600

 
35,300

 
128,500

Medium-duty
 
74,000

 
83,500

 
76,000

 
77,600

 
311,100

Light-duty
 
61,900

 
68,500

 
76,800

 
66,200

 
273,400

Total units
 
162,500

 
184,000

 
187,400

 
179,100

 
713,000


16


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


Distribution Segment Sales by Product Line
Sales for our Distribution segment by product line were as follows:
2019
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Parts
 
$
844

 
$
833

 
$
798

 
$

 
$
2,475

Power generation
 
403

 
427

 
467

 

 
1,297

Engines
 
391

 
395

 
363

 

 
1,149

Service
 
363

 
373

 
376

 

 
1,112

Total sales
 
$
2,001

 
$
2,028

 
$
2,004

 
$

 
$
6,033

 
 
 
 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Parts
 
$
808

 
$
817

 
$
800

 
$
809

 
$
3,234

Power generation
 
326

 
346

 
359

 
455

 
1,486

Engines
 
367

 
461

 
400

 
406

 
1,634

Service
 
352

 
370

 
372

 
380

 
1,474

Total sales
 
$
1,853

 
$
1,994

 
$
1,931

 
$
2,050

 
$
7,828

Component Segment Sales by Product Line
Sales for our Components segment by product line were as follows:
2019
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Emission solutions
 
$
854

 
$
828

 
$
745

 
$

 
$
2,427

Turbo technologies
 
335

 
319

 
279

 

 
933

Filtration
 
325

 
331

 
310

 

 
966

Electronics and fuel systems
 
198

 
212

 
170

 

 
580

Automated transmissions
 
149

 
156

 
146

 

 
451

Total sales
 
$
1,861

 
$
1,846

 
$
1,650

 
$

 
$
5,357

 
 
 
 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Emission solutions
 
$
775

 
$
841

 
$
769

 
$
792

 
$
3,177

Turbo technologies
 
340

 
355

 
317

 
331

 
1,343

Filtration
 
320

 
324

 
308

 
313

 
1,265

Electronics and fuel systems
 
201

 
226

 
210

 
201

 
838

Automated transmissions
 
117

 
141

 
150

 
135

 
543

Total sales
 
$
1,753

 
$
1,887

 
$
1,754

 
$
1,772

 
$
7,166


17


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


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:
2019
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Power generation
 
$
567

 
$
668

 
$
647

 
$

 
$
1,882

Industrial
 
420

 
432

 
392

 

 
1,244

Generator technologies
 
90

 
103

 
87

 

 
280

Total sales
 
$
1,077

 
$
1,203

 
$
1,126

 
$

 
$
3,406

 
 
 
 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Power generation
 
$
571

 
$
666

 
$
636

 
$
713

 
$
2,586

Industrial
 
414

 
483

 
380

 
386

 
1,663

Generator technologies
 
89

 
97

 
91

 
100

 
377

Total sales
 
$
1,074

 
$
1,246

 
$
1,107

 
$
1,199

 
$
4,626

High-horsepower unit shipments by engine classification were as follows:
2019
 
 
 
 
 
 
 
 
 
 
Units
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Power generation
 
2,100

 
2,300

 
2,300

 

 
6,700

Industrial
 
1,600

 
1,600

 
1,400

 

 
4,600

Total units
 
3,700

 
3,900

 
3,700

 

 
11,300