Analysis of Debt
Total Debt (Carrying Amount)
Cummins Inc., balance sheet: debt
US$ in millions
Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).
Total debt (carrying amount) exhibited a significant upward trajectory between 2019 and 2022, followed by a moderate reduction in 2023. The total debt obligation rose from US$ 2,367 million in 2019 to a peak of US$ 7,855 million in 2022, representing a substantial increase in the company's leverage before declining to US$ 6,696 million at the end of 2023.
- Long-Term Debt Trends
- Long-term debt serves as the primary component of the total debt structure. A sharp increase occurred between 2019 and 2020, where the balance rose from US$ 1,576 million to US$ 3,610 million. This upward trend continued through 2023, reaching US$ 4,802 million. The consistent growth in this category suggests a strategic shift toward long-term financing to support operations or capital expenditures.
- Short-Term Financing and Liquidity Volatility
- Commercial paper and current maturities of long-term debt displayed significant volatility, particularly in 2022. Commercial paper spiked to US$ 2,574 million in 2022 from US$ 313 million in 2021, while current maturities also peaked at US$ 573 million in the same year. By 2023, these figures retreated to US$ 1,496 million and US$ 118 million, respectively, indicating a temporary surge in short-term borrowing requirements or a realignment of debt maturity profiles during 2022.
- Loans Payable Analysis
- Loans payable demonstrated a steady and incremental increase over the five-year period. Starting at US$ 100 million in 2019, the balance grew consistently to reach US$ 280 million by December 31, 2023. While this represents a growth in absolute terms, it remains the smallest component of the overall debt portfolio.
The overall debt profile indicates a transition toward higher long-term liabilities, supplemented by periodic fluctuations in short-term funding instruments. The peak in total debt observed in 2022 was primarily driven by a convergence of high commercial paper issuance and elevated current maturities, both of which were partially reduced by the end of 2023.
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Total Debt (Fair Value)
| Dec 31, 2023 | |
|---|---|
| Selected Financial Data (US$ in millions) | |
| Total debt (fair value) | 6,375) |
| Financial Ratio | |
| Debt, fair value to carrying amount ratio | 0.95 |
Based on: 10-K (reporting date: 2023-12-31).
Weighted-average Interest Rate on Debt
Weighted-average interest rate on debt: 3.74%
| Interest rate | Debt amount1 | Interest rate × Debt amount | Weighted-average interest rate2 |
|---|---|---|---|
| 3.31% | 280) | 9) | |
| 5.43% | 1,496) | 81) | |
| 0.00% | 160) | —) | |
| 0.75% | 500) | 4) | |
| 6.75% | 58) | 4) | |
| 7.12% | 250) | 18) | |
| 1.50% | 850) | 13) | |
| 4.88% | 500) | 24) | |
| 2.60% | 650) | 17) | |
| 7.48% | 165) | 12) | |
| 5.00% | 111) | 6) | |
| Total | 5,020) | 188) | |
| 3.74% | |||
Based on: 10-K (reporting date: 2023-12-31).
1 US$ in millions
2 Weighted-average interest rate = 100 × 188 ÷ 5,020 = 3.74%
Interest Costs Incurred
Cummins Inc., interest costs incurred
US$ in millions
Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).
The total interest cost incurred exhibits a period of relative stability between 2019 and 2021, followed by an aggressive acceleration in costs throughout 2022 and 2023. Total interest incurred rose from 112 million US$ in 2019 to 383 million US$ by the end of 2023, representing a total increase of approximately 242% over the five-year period.
- Total Interest Incurred Trend
- From 2019 to 2021, total interest costs remained range-bound between 102 million US$ and 113 million US$. However, a sharp inflection point occurred in 2022, where costs nearly doubled to 204 million US$. This upward trajectory intensified in 2023, with costs increasing by an additional 88% to reach 383 million US$.
- Interest Expense Composition
- The majority of the cost burden is attributed to interest expense, which mirrors the overall trend of the total interest incurred. After remaining stable near 100-111 million US$ from 2019 through 2021, the expense surged to 199 million US$ in 2022 and peaked at 375 million US$ in 2023. This indicates a substantial increase in the cost of servicing debt or a significant expansion of the debt portfolio during the final two years of the period.
- Interest Capitalization Patterns
- Interest capitalized represents a minimal fraction of the total interest incurred. While these values were negligible between 2019 and 2021, ranging from 2 million US$ to 3 million US$, there is a observable increase in 2022 (5 million US$) and 2023 (8 million US$). This suggests a slight increase in long-term asset construction or investment projects that allow for interest capitalization, though the primary driver of total costs remains the direct interest expense.
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Adjusted Interest Coverage Ratio
Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).
2023 Calculations
1 Interest coverage ratio (without capitalized interest) = EBIT ÷ Interest expense
= 2,001 ÷ 375 = 5.34
2 Adjusted interest coverage ratio (with capitalized interest) = EBIT ÷ Interest incurred
= 2,001 ÷ 383 = 5.22
A significant downward trend in interest coverage capabilities is evident from 2019 through 2023. While coverage metrics remained relatively stable during the first three years of the period, a sharp acceleration in the decline occurred starting in 2022, culminating in a substantial reduction in the margin available to service interest payments by the end of 2023.
- Interest Coverage Ratio (without capitalized interest)
- This metric stood at 27.00 in 2019, experiencing a slight decrease to 24.38 in 2020 before recovering to 25.78 in 2021. A marked deterioration followed, with the ratio falling to 15.17 in 2022 and further dropping to 5.34 by December 31, 2023, representing a substantial contraction in the ratio over the five-year period.
- Adjusted Interest Coverage Ratio (with capitalized interest)
- The adjusted ratio closely mirrors the trajectory of the non-adjusted metric, starting at 26.28 in 2019 and remaining stable through 2021 at 25.33. A severe contraction is observed in the subsequent two years, with the ratio falling to 14.79 in 2022 and reaching a period low of 5.22 in 2023.
- Comparative Analysis of Interest Impact
- A consistent narrow gap is maintained between the two ratios throughout the observed period. The adjusted ratio, which accounts for capitalized interest, remains marginally lower than the ratio excluding it, indicating that capitalized interest expenses exert a constant but minor downward pressure on the coverage metrics. The precipitous decline observed between 2021 and 2023 affects both ratios equally, suggesting the trend is driven by broader changes in operating income or total interest expenses rather than changes in capitalization policies.
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