Cummins Revises 2008 Operating Results to Reflect Increased Warranty Liability


PHOTO

COLUMBUS, Ind.February 25, 2009: Cummins Inc. announced today that it has revised its fourth quarter and full year 2008 operating results to reflect a higher warranty liability than previously reported.

As a result of the change, the Company’s Earnings Before Interest and Taxes (EBIT) for the fourth quarter decreased by $73 million, while net income was reduced by $46 million, or 23 cents a share. The change in earnings reflects an $82 million increase in warranty liability, offset by a $9 million reduction in variable and incentive compensation as a result of this change.

The Company’s revised fourth quarter EBIT was $56 million and net income was $43 million, or 22 cents a share. For the full year, the Company’s revised EBIT was $1.22 billion and net income was $755 million, or $3.84 a share. The earnings revisions affect the fourth quarter results of the Company’s Engine and Component segments.

The warranty liability was revised to reflect a change in estimate in the warranty costs primarily for mid-range engine products launched in 2007. In late February, our analysis of recent warranty payments indicated that a revision to our initial warranty liability estimate is appropriate.

The Company is aggressively addressing the product issues and has made modifications that have reduced the failure rate of these products. The increase in the warranty liability reflects higher than expected costs associated with these repairs.

The Company also reaffirmed the financial guidance it gave earlier this month, with sales in 2009 expected to be approximately 20 percent lower than 2008. EBIT margin is expected to be 6.5 percent of sales, excluding restructuring costs associated with job actions announced in the first quarter of 2009.

 

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited) (a)

 
Three months ended
December 31,   September 28,   December 31,
2008 2008 2007
in millions (except per share amounts)
NET SALES $ 3,288 $ 3,693 $ 3,516
Cost of sales 2,754 2,873 2,834
GROSS MARGIN 534 820 682
 
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses 341 388 359
Research, development and engineering expenses 102 113 93
Equity, royalty and interest income from investees (Note 1) 51 66 59
Restructuring charges (Note 2) 37
Other operating (expense) income, net (3 ) (2 ) 13
 
OPERATING INCOME 102 383 302
 
Interest income 4 4 9
Interest expense 9 10 14
Other (expense) income, net (Note 3) (50 ) (7 ) 13
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 47 370 310
 
Income tax (benefit) expense (Note 4) (12 ) 123 97
Minority interests in income of consolidated subsidiaries 16 18 15
NET INCOME $ 43 $ 229 $ 198
 
EARNINGS PER COMMON SHARE
Basic $ 0.22 $ 1.18 $ 1.01
Diluted $ 0.22 $ 1.17 $ 1.00
 
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 194.7 194.9 195.7
Diluted 196.6 196.5 197.5
 
Cash dividends declared per share $ 0.175 $ 0.175 $ 0.125
 

(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 INCOME

(Unaudited) (a)

 
For the years ended
December 31,   December 31,
2008 2007
in millions (except per share amounts)
NET SALES $ 14,342 $ 13,048
Cost of sales 11,402 10,492
GROSS MARGIN 2,940 2,556
 
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses 1,450 1,296
Research, development and engineering expenses 422 329
Equity, royalty and interest income from investees (Note 1) 253 205
Restructuring charges (Note 2) 37
Other operating (expense) income, net (12 ) 22
 
OPERATING INCOME 1,272 1,158
 
Interest income 18 36
Interest expense 42 58
Other (expense) income, net (Note 3) (70 ) 33
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 1,178 1,169
 
Income tax expense (Note 4) 360 381
Minority interests in income of consolidated subsidiaries 63 49
NET INCOME $ 755 $ 739
 
EARNINGS PER COMMON SHARE

Basic

$ 3.87 $ 3.72
Diluted $ 3.84 $ 3.70
 
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 195.0 198.4
Diluted 196.5 199.9
 
Cash dividends declared per share $ 0.60 $ 0.43
 

(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)

 
December 31, December 31,
2008 2007
in millions
(except par value)
ASSETS
Current assets
Cash and cash equivalents $ 426 $ 577
Marketable securities 77 120
Accounts and notes receivable, net 1,782 1,998
Inventories 1,783 1,692
Other current assets 645 428
Total current assets 4,713 4,815
Long-term assets
Property, plant and equipment, net 1,841 1,645
Investments and advances related to equity method investees 588 514
Goodwill and other intangible assets, net 585 538
Other assets 792 683
Total assets $ 8,519 $ 8,195
LIABILITIES
Current liabilities
Current portion of long-term debt and loans payable $ 69 $ 119
Accounts payable (principally trade) 1,009 1,263
Accrued expenses 1,561 1,329
Total current liabilities 2,639 2,711
Long-term liabilities
Long-term debt 629 555
Other liabilities 1,771 1,227
Total liabilities 5,039 4,493
MINORITY INTERESTS 250 293
SHAREHOLDERS’ EQUITY
Common stock, $2.50 par value, 500 and 300 shares authorized, 221.7 and 220.4 shares issued 1,793 1,719
Retained earnings 3,288 2,660
Treasury stock, at cost, 20.4 and 18.2 shares (715 ) (593 )
Common stock held by employee benefits trust, at cost, 5.1 and 6.5 shares (61 ) (79 )
Unearned compensation (5 ) (11 )
Accumulated other comprehensive loss (1,070 ) (287 )
Total shareholders’ equity 3,230 3,409
Total liabilities, minority interests and shareholders’ equity $ 8,519 $ 8,195
 

(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)

 
For the years ended
December 31,   December 31,
2008 2007
in millions
NET CASH PROVIDED BY OPERATING ACTIVITIES (Note 5) $ 987 $ 810
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (543 ) (353 )
Investments in internal use software (82 ) (67 )
Investments in and advances to equity investees (89 ) (66 )
Acquisition of businesses, net of cash acquired (142 ) (20 )
Proceeds from the sale of an equity investment 64 35
Investments in marketable securities—acquisitions (390 ) (405 )
Investments in marketable securities—liquidations 409 395
Purchases of other investments (62 ) (57 )
Other, net (13 ) 23
Net cash used in investing activities (848 ) (515 )
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 76 15
Payments on borrowings and capital lease obligations (152 ) (144 )
Dividend payments on common stock (122 ) (89 )
Proceeds from sale of common stock held by employee benefit trust 63

13

Repurchases of common stock (128 ) (335 )
Other, net 26

(36

)
Net cash used in financing activities (237 ) (576 )
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (53 ) 18
Net decrease in cash and cash equivalents (151 ) (263 )
Cash and cash equivalents at beginning of year 577 840
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 426 $ 577
 

(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)

 
Engine  

Power
Generation

Components Distribution

Non-
segment
items(1)

Total

in millions
Three months ended December 31, 2008
External sales $ 1,590 $ 675 $ 468 $ 555 $ $ 3,288
Intersegment sales   346   212   208   2   (768 )  
Total sales 1,936 887 676 557 (768 ) 3,288
Depreciation and amortization(2) 47 10 16 8 81
Research, development and engineering expense 71 10 21 102
Equity, royalty and interest income from investees 8 6 4 33 51
Restructuring charges 37 37
Interest income 3 1 4
Segment EBIT (40 ) 75 (6 ) 64 (37 ) 56
 
Three months ended September 28, 2008
External sales $ 1,927 $ 653 $ 535 $ 578 $ $ 3,693
Intersegment sales 352 235 266 3 (856 )
Total sales 2,279 888 801 581 (856 ) 3,693
Depreciation and amortization(2) 43 9 16 6 74
Research, development and engineering expense 75 11 27 113
Equity, royalty and interest income from investees 26 6 3 31 66
Interest income 2 1 1 4
Segment EBIT 160 108 61 61 (10 ) 380
 
Three months ended December 31, 2007
External sales $ 1,862 $ 645 $ 542 $ 467 $ $ 3,516
Intersegment sales   293   195   235   1   (724 )  
Total sales 2,155 840 777 468 (724 ) 3,516
Depreciation and amortization(2) 44 11 16 3 74
Research, development and engineering expense 63 9 21 93
Equity, royalty and interest income from investees 26 5 3 25 59
Interest income 6 2 1 9
Segment EBIT 120 86 47 56 15 324
 
For the year ended December 31, 2008
External sales $ 7,432 $ 2,601 $ 2,154 $ 2,155 $ $ 14,342
Intersegment sales   1,378   899   998   9   (3,284 )  
Total sales 8,810 3,500 3,152 2,164 (3,284 ) 14,342
Depreciation and amortization(2) 180 41 65 25 311
Research, development and engineering expense 286 41 95 422
Equity, royalty and interest income from investees 99 23 14 117 253
Restructuring charges 37 37
Interest income 10 3 3 2 18
Segment EBIT 535 376 169 242 (102 ) 1,220
 
For the year ended December 31, 2007
External sales $ 7,129 $ 2,375 $ 2,007 $ 1,537 $ $ 13,048
Intersegment sales   1,053   685   925   3   (2,666 )  
Total sales 8,182 3,060 2,932 1,540 (2,666 ) 13,048
Depreciation and amortization(2) 176 42 59 11 288
Research, development and engineering expense 222 34 73 329
Equity, royalty and interest income from investees 92 17 4 92 205
Interest income 26 6 3 1 36
Segment EBIT 589 334 153 187 (36 ) 1,227
 

(1) Includes intercompany eliminations and unallocated corporate expenses. For the three months ended and the year ended December 31, 2008, Non-segment includes a $36 million decrease in cash surrender value in corporate owned life insurance (COLI).

(2) Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount that is included in the Condensed Consolidated Statements of Income as Interest expense.

 
   

CUMMINS INC. AND SUBSIDIARIES

RECONCILIATION OF SEGMENT INFORMATION

(Unaudited)

 

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

 
Three months ended For the years ended
December 31,   September 28,   December 31, December 31,   December 31,
2008 2008 2007 2008 2007
in millions
Segment EBIT $ 56 $ 380 $ 324 $ 1,220 $ 1,227
Less:
Interest expense 9 10 14 42 58
Income before income taxes and minority interests $ 47 $ 370 $ 310 $ 1,178 $ 1,169
 
   

FINANCIAL MEASURES THAT SUPPLEMENT GAAP

(Unaudited)

 

Earnings before interest, taxes and minority interests (EBIT)

 

We define EBIT as earnings before interest expense, income tax expense and minority interests in income of consolidated subsidiaries.  We use EBIT to assess and measure the performance of our operating segments and also as a component in measuring our variable compensation programs.  Below is a reconciliation of EBIT, a non-GAAP financial measure, to our consolidated net income, for each of the applicable periods:

 
 
Three Months Ended For the years ended
December 31,   September 28,   December 31, December 31,   December 31,
2008 2008 2007 2008 2007
in millions
Earnings before interest, income taxes and minority interests $ 56 $ 380 $ 324 $ 1,220 $ 1,227
 
EBIT as a percentage of net sales 1.7 % 10.3 % 9.2 % 8.5 % 9.4 %
 
Less:
Interest expense 9 10 14 42 58
Income tax expense (12 ) 123 97 360 381
Minority interests in income of consolidated subsidiaries 16 18 15 63 49
Net income $ 43 $ 229 $ 198 $ 755 $ 739
 
Net income as a percentage of net sales 1.3 % 6.2 % 5.6 % 5.3 % 5.7 %
 

We believe EBIT is a useful measure of our operating performance for the periods presented as it illustrates our operating performance without regard to financing methods, capital structure or income taxes.  This measure is not in accordance with, or an alternative for, accounting principles generally accepted in the United States of America (GAAP) and may not be consistent with measures used by other companies.  It should be considered supplemental data.

 
   

CUMMINS INC. AND SUBSIDIARIES

SELECTED FOOTNOTE DATA

(Unaudited)

 

NOTE 1.  EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES

 

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

 
Three months ended For the years ended
December 31,   September 28,   December 31, December 31,   December 31,
2008 2008 2007 2008 2007
in millions
North American distributors $ 28 $ 26 $ 24 $ 100 $ 83
Dongfeng Cummins Engine Company, Ltd. 5 16 12 55 41
Chongqing Cummins Engine Company, Ltd. 7 9 7 30 22
Shanghai Fleetguard Filter Co. Ltd. 1 2 2 8 6
Tata Cummins Ltd. 4 7 13
Cummins MerCruiser Diesel Marine LLC (2

)

(1

)

2 3 11
All others 6 9 4 28 16
Cummins share of net income 45 61 55 231 192
Royalty and interest income 6 5 4 22 13
Equity, royalty and interest income from investees $ 51 $ 66 $ 59 $ 253 $ 205
 
 

NOTE 2.  RESTRUCTURING CHARGES

 

We have executed restructuring actions primarily in the form of voluntary and involuntary separation programs in the fourth quarter of 2008. These actions were in response to the continued deterioration we saw in our U.S. businesses and most key markets around the world in the second half of 2008, as well as a reduction in orders in most U.S. and global markets for 2009. We reduced our worldwide professional workforce by approximately 650 employees.  We offered a voluntary retirement package to certain active professional employees in the United States based on a clearly defined set of criteria.  We also took involuntary actions which included certain hourly employees.  The compensation packages contained salary and continuation of benefits, including health care, life insurance and outplacement services. The voluntary retirement package was accepted by approximately 150 employees.  The remaining reductions of approximately 500 employees were involuntary. The expenses recorded during the year ended December 31, 2008 included severance costs related to both voluntary and involuntary terminations. During 2008, we incurred total pretax expenses related to the restructuring initiative of approximately $37 million.

 

Employee termination and severance costs were recorded based on approved plans developed by the businesses and corporate management which specified positions to be eliminated, benefits to be paid under existing severance plans or statutory requirements and the expected timetable for completion of the plan.  Estimates of restructuring were made based on information available at the time charges were recorded.  Due to the inherent uncertainty involved, actual amounts paid for such activities may differ from amounts initially recorded and we may need to revise previous estimates.

 
   

CUMMINS INC. AND SUBSIDIARIES

SELECTED FOOTNOTE DATA

(Unaudited)

 

NOTE 3.  OTHER (EXPENSE) INCOME

 

Other (expense) income included the following:

 
Three months ended For the years ended
December 31,   September 28,   December 31, December 31,   December 31,
2008 2008 2007 2008 2007
in millions
Other (expense) income:
Change in cash surrender value of corporate owned life insurance $ (36 ) $ $ $ (36 ) $
Foreign currency (losses) gains (23 ) (10 ) 12 (46 ) 28
Other, net 9 3 1 12 5
Total other (expense) income, net $ (50 ) $ (7 ) $ 13 $ (70 ) $ 33
 
 

NOTE 4.  INCOME TAXES

 

Our effective benefit rate in the fourth quarter of 2008 was 25.5 percent compared to an effective tax rate of 31.3 percent for 2007.  The change is primarily due to greater foreign earnings in 2008, which are subject to lower tax rates. The fourth quarter effective benefit rate also includes a $10 million (0.8 percent) reduction due to the legislative reinstatement of the U.S. research tax credit. The full-year 2008 effective tax rate was 30.6 percent and we expect our full-year 2009 effective tax rate to be sustained at approximately 31 percent.

 

NOTE 5.  DEPRECIATION AND AMORTIZATION

 

Depreciation and amortization expense included in operating activities of the Condensed Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2007 was $314 million and $290 million, respectively.

 

About Cummins

Cummins Inc., a global power leader, is a corporation of complementary business units that design, manufacture, distribute and service engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Headquartered in Columbus, Indiana, (USA) Cummins serves customers in approximately 190 countries and territories through a network of more than 500 company-owned and independent distributor locations and approximately 5,200 dealer locations. Cummins reported net income of $755 million on sales of $14.34 billion in 2008. Press releases can be found on the Web at CUMMINS.

Presentation of Non-GAAP Financial Information

EBIT is a non-GAAP measure used in this release. EBIT 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 EBIT is a measure used internally to assess the performance of the operating units.

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