CMI Financial Analysis

Analysis Date: 2/5/2025

Business Model

Cummins Inc. operates through five business segments: Engine, Components, Distribution, Power Systems, and Accelera. Revenue is generated from the sale of engines, components, power generation systems, and related services to a global customer base across various markets including heavy and medium-duty trucks, light-duty automotive, off-highway equipment, power generation, and distribution.

Revenue Sources

• Engine Segment: Sales of diesel and natural gas engines for trucks, buses, and off-highway applications.
• Components Segment: Sales of aftertreatment systems, turbochargers, filtration products (Atmus Filtration Technologies until March 18, 2024), drivetrain and braking systems, and automated transmissions.
• Distribution Segment: Sales of parts, power generation products, engines, and service offerings through a global distribution network.
• Power Systems Segment: Sales of power generation systems, industrial engines, and generator technologies.
• Accelera Segment: Sales related to new power technologies including eMobility solutions, batteries, fuel cells, and electrolyzers.

Income Statement Analysis

• Net sales decreased slightly by 1% compared to Q4 2023, primarily due to softened demand in North America heavy-duty truck and pickup markets and the separation of Atmus, offset by growth in Distribution and Power Systems segments.
• Gross margin improved to 25.4% from 23.7% due to stronger power generation and aftermarket demand, favorable pricing, and improved operational efficiency.
• Operating expenses decreased significantly, primarily due to a substantial decrease in 'Other Operating Expense, Net' which was $215 million in Q4 2024 compared to $2,060 million in Q4 2023. This prior year figure included a large charge related to Settlement Agreements.
• Equity, royalty and interest income from investees decreased by 38% due to lower technology fees and costs related to the ramp-up of Amplify Cell Technology battery venture.

Balance Sheet Analysis

• Total cash, cash equivalents and marketable securities decreased by 17.5%, indicating a decrease in liquid assets, possibly due to investments or operational uses of cash.
• Accounts and notes receivable decreased by 7.2%, potentially reflecting lower sales or improved collection efficiency.
• Inventories increased slightly by 1.1%, suggesting stable inventory levels relative to the prior year.
• Prepaid expenses and other current assets increased significantly by 30.7%, which may require further investigation to understand the nature of these assets.
• Total current liabilities decreased by 13.1%, mainly due to a substantial decrease in 'Other Accrued Expenses' by 49.4%, suggesting improved liability management or one-time settlements in the prior year.
• Current maturities of long-term debt increased significantly by 459.3%, indicating a substantial portion of long-term debt becoming due within the next year.
• Total equity increased by 14.2%, driven by a significant increase in retained earnings (16.7%), reflecting overall profitability and earnings accumulation.

Capital Allocation

Cummins is committed to returning cash to shareholders, demonstrated by increasing its common stock cash dividend for the 15th straight year and returning $969 million to shareholders through dividends in 2024. The company also focuses on business reinvestment, as evidenced by capital expenditures of $1.2 billion in 2024, supporting new product development like the HELM engine platform and capacity expansion in power generation. Share repurchases were conducted via the tax-free exchange of shares in the Atmus separation, reducing outstanding shares by approximately 5.6 million.

Management Commentary

We delivered strong operational results in the Q4, which resulted in revenue achieving the top end of our prior guidance and EBITDA margins exceeding our projections.

2024 was a record year for revenues, EBITDA and earnings per share, reflecting the strong demand for our products and the strong hard work of our employees.

Despite a relatively flat revenue forecast and expected weakness in North American heavy duty truck, we expect to further improve profitability and cash flow in 2025.

We are committed to significant loss reduction [in Accelera]. But right now, we are not on track towards that breakeven [for Accelera], but we do feel we're very much on track for the overall company targets.

There's a very real chance that we'll see improvement in that [heavy duty market] over the course of this year just depending on what the underlying economy and interest rates do.

Overall Sentiment: Positive and confident about the core business performance and future profitability, while cautiously managing expectations for Accelera to achieve breakeven and acknowledging near-term market headwinds in North America heavy duty truck market offset by strengths in other markets, particularly power generation.

Recommendation

Rating: Hold

Reason for Rating: Given the strong performance in Power Systems and Distribution segments offsetting weakness in Engine and Components due to market conditions, coupled with improved profitability guidance for 2025 despite flat revenue outlook, a 'Hold' recommendation is appropriate. The strategic reorganization of Accelera and its ongoing losses present a mixed outlook for future growth areas. The company's strong cash flow and commitment to shareholder returns provide stability.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 2/5/2025, 4:47:21 AM