Cummins Net Income Rises Sharply on Record Sales in Second Quarter; Company Increases Full-Year Earnings Guidance
COLUMBUS, Ind.--July 23, 2004--Strong sales in all business units and across nearly every market segment pushed Cummins Inc. to record revenues and sharply higher profits in the second quarter.Sales were $2.12 billion, while net earnings climbed to $82 million, or $1.76 a share, on a fully diluted basis - a 485 percent increase over the same period last year and exceeding earlier guidance of between $1.20 and $1.30 a share for the quarter.
Earnings before interest, taxes and minority interest (EBIT) were $148 million, also a single quarter record for the Company. The EBIT represents 7.0 percent of sales, well within the Company's targeted performance range.
"Our second-quarter results were outstanding and reflect our customers' very positive reactions to our product line," said Tim Solso, Cummins Chairman and Chief Executive Officer. "Sales were very good in all segments, profits were up significantly and margins strong."
Record second-quarter sales of $2.12 billion were 38 percent higher than the $1.54 billion reported for the same period in 2003. Cummins previous sales record was $1.84 billion in the fourth quarter of 1999.
For the first six months of the year, the Company reported net earnings of $115 million - or $2.53 a share on a fully diluted basis - on sales of $3.9 billion.
As a result of continued performance improvement, Cummins has today increased its earnings guidance for the full year. The Company now expects to earn between $5.55 and $5.75 a share in 2004, up from the previous guidance of $4.40 - $4.60 a share.
"We are extremely pleased with the improving results in today's second-quarter report," Solso said. "Even as we are benefiting from the strengthening conditions in many of our markets, we continue to work hard to control costs, raise quality and improve our customer service to position Cummins for sustained growth in 2004 and beyond."
Engine Segment
Engine business sales rose 57 percent from second quarter 2003 to $1.4 billion, led by higher sales in North America for heavy-duty truck engines, worldwide sales of medium-duty trucks, record sales of the Dodge Ram engine and strong worldwide construction and mining volumes. The business reported Segment EBIT of $91 million, compared to $24 million in the second quarter of 2003.
Cummins' share of the North American heavy-duty truck engine market rose more than five percentage points in first five months of the year to 26.8 percent, with an industry-leading 31 percent share for the month of May. For the second quarter, sales volumes in the North American heavy-duty market rose by 105 percent compared to the same period last year.
Second-quarter shipments of the Company's Dodge Ram engine to DaimlerChrysler increased 30 percent over the same period last year, keeping that business on track for another record sales year.
Power Generation Segment
The Company's Power Generation business continued to rebound, posting Segment EBIT of $19 million on sales of $468 million -- the unit's third straight quarterly profit. For the same period last year, Power Generation lost $15 million on sales of $307 million.
Power Generation's results also reflect strong sales and profit gains from the first quarter of 2004, when the unit reported Segment EBIT of $6 million on sales of $369 million.
Market demand for commercial power remains strong in China, India and the Middle East. Year-to-date sales in Asia are approximately double those for the same period in 2003. The Company's consumer power generation business reported record sales in the second quarter as a result of market share gains and increased penetration in the non-motorized RV segment.
Filtration and Other Segment
The Company's Filtration and Other business reported sales of $369 million in the second quarter, up 39 percent from last year and in line with expectations, led by extremely strong sales in the Holset turbocharger business. A broad market recovery also has led to increased demand across many geographic regions, notably in the United States and Asia.
Earnings were negatively affected, however, by high commodity costs - especially steel - which resulted in an additional $5 million in materials costs during the quarter. For the quarter, the business reported Segment EBIT of $24 million, compared to $25 million during the second quarter of 2003.
International Distributor Segment
Sales for the International Distributor business rose 30 percent from the second quarter of 2003 to $220 million in the most recent quarter. The unit earned Segment EBIT of $14 million, up from $12 million for the same period in 2003. Sales were up across all geographic regions, with most distributors achieving sales growth in excess of 10 percent.
The Company's Middle East and Africa distributors saw sales rise a combined 84 percent over the same period last year, while sales in Northeast Asia (Japan and Korea) rose 38 percent and sales in China jumped 44 percent.
Cash Flow
Strong profits have resulted in an increase in the Company's cash flow. For the second quarter, the Company reported $196 million in cash flow from operations. The Company expects capital spending for 2004 to be between $135 and $145 million, due to the recent financial statement consolidation of additional operating units.
"We have seen strong improvement in our cash flow situation, which is providing the funds necessary to continue to pay down our debt and provide sufficient liquidity to fund growth," said Cummins Chief Financial Officer Jean Blackwell.
Earnings Guidance
In addition to increasing its guidance for the full year, the Company today issued guidance for the third quarter of $1.30-$1.40 a share. The guidance reflects normal seasonal patterns in some markets, as well as potential supply chain constraints and inefficiencies, and rising commodities prices - most notably steel.
Presentation of Non-GAAP Financial Information
EBIT is a non-GAAP financial measure used in this release. This measure 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.
Webcast Information
Cummins management will host a teleconference to discuss these results at 9 a.m. CDT, 10 a.m. EDT. This teleconference will be webcast and available on the Investor Relations section of the Cummins website at www.cummins.com.
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 its customers through more than 680 company-owned and independent distributor locations in 137 countries and territories. Cummins also provides service through a dealer network of more than 5,000 facilities in 197 countries and territories. With more than 24,000 employees worldwide, Cummins reported sales of $6.3 billion in 2003. Press releases can be found by accessing the Cummins home page at www.cummins.com.
CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS(a)
Unaudited
Three
Three Months Six Months Months
Ended Ended Ended
June June June June March
Millions, except 27, 29, 27, 29, 28,
per share amounts 2004 2003 2004 2003 2004
----------------- ------ ------ ------ ------ ------
Net sales $2,124 $1,539 $3,895 $2,926 $1,771
Cost of goods sold 1,696 1,263 3,122 2,432 1,426
------ ------ ------ ------ ------
Gross margin 428 276 773 494 345
Expense and other income:
Selling and
administrative expenses 251 200 474 395 223
Research and
engineering expenses 59 50 115 97 56
Equity, royalty and other
income from investees (29) (17) (47) (24) (18)
Interest expense 27 20 54 40 27
Other (income) expense, net (1) (3) 5 (10) 6
------ ------ ------ ------ ------
Earnings (loss) before
income taxes, minority
interest and dividends on
preferred securities of
subsidiary trust 121 26 172 (4) 51
Provision (benefit) for
income taxes 34 5 48 (4) 14
Minority interests in earnings
of consolidated subsidiaries 5 2 9 6 4
Dividends on
preferred securities of
subsidiary trust - 5 - 11 -
------ ------ ------ ------ ------
Net earnings (loss) $ 82 $ 14 $ 115 $ (17) $ 33
====== ====== ====== ====== ======
Earnings per share:
Basic $ 1.97 $ 0.34 $ 2.80 $(0.45) $ 0.81
Diluted $ 1.76 $ 0.34 $ 2.53 $(0.45) $ 0.76
Cash dividends
declared per share $ 0.30 $ 0.30 $ 0.60 $ 0.60 $ 0.30
Weighted average shares
outstanding:
Basic 41.8 39.0 41.2 39.0 40.5
Diluted 48.8 39.0 48.1 39.0 47.3
(a) Prepared in accordance with accounting principles generally
accepted in the United States of America, on an unaudited basis.
CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 27,
2004
Millions Unaudited Dec. 31,
-------- (a) 2003
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 322 $ 108
Marketable securities 86 87
Receivables, net 1,200 929
Inventories 936 733
Other current assets 287 273
-------- --------
Total current assets 2,831 2,130
Long term assets:
Property, plant and equipment, net 1,580 1,347
Investments in and advances to equity investees 250 339
Goodwill 353 344
Other intangible assets, net 87 92
Deferred income taxes 663 663
Other assets 197 211
-------- --------
Total assets $ 5,961 $ 5,126
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable $ 41 $ 28
Current maturities of long-term debt 257 21
Accounts payable 849 557
Accrued product coverage and marketing expenses 294 246
Other current liabilities 614 539
-------- --------
Total current liabilities 2,055 1,391
Long-term liabilities:
Long-term debt 1,299 1,380
Pensions 446 446
Postretirement benefits other than pensions 565 577
Other liabilities 285 260
-------- --------
Total liabilities 4,650 4,054
Minority interests 185 123
Shareholders' equity:
Common stock, $2.50 par value,
48.2 and 48.3 shares issued 121 121
Additional contributed capital 1,134 1,113
Retained earnings 658 569
Accumulated other comprehensive loss
Minimum pension liability (435) (434)
Other components, net (66) (58)
Common stock in treasury, at cost,
3.9 and 5.6 shares (157) (225)
Common stock held in trust for
employee benefit plans, 2.2 and 2.3 shares (108) (113)
Unearned compensation (21) (24)
-------- --------
Total shareholders' equity 1,126 949
-------- --------
Total liabilities and shareholders' equity $ 5,961 $ 5,126
======== ========
(a) Prepared in accordance with accounting principles generally
accepted in the United States of America, on an unaudited basis.
CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(a)
Unaudited
Six Months Ended
Millions June 27, June 29,
-------- 2004 2003
-------- --------
Cash flows from operating activities:
Net earnings (loss) $ 115 $ (17)
Adjustments to reconcile
net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 128 109
Dividends over (under) equity in
earnings of investees 4 (15)
Minority interests in earnings of
consolidated subsidiaries 9 6
Stock-based compensation expense 7 1
Tax benefit on stock options exercised 10 -
Amortization of gain on swap unwind (3) (3)
Translation and hedging activities (8) -
Changes in assets and liabilities:
Receivables (239) (89)
Proceeds from sale of receivables - 5
Inventories (148) (71)
Accounts payable 257 84
Accrued expenses 108 (48)
Other 12 1
------- -------
Net cash provided by (used in) operating
activities 252 (37)
------- -------
Cash flows from investing activities:
Capital expenditures (37) (43)
Investments in internal use software (16) (13)
Proceeds from disposals of equipment 5 5
Investments in and advances (to) from
equity investees (21) 15
Acquisition of businesses, net of cash acquired (18) -
Investments in marketable securities -
acquisitions (72) (55)
Investments in marketable securities -
liquidations 80 65
Other 1 -
------- -------
Net cash used in investing activities (78) (26)
------- -------
Cash flows from financing activities:
Proceeds from borrowings 19 10
Payments on borrowings and
capital lease obligations (37) (125)
Net borrowings under short-term credit agreements 15 46
Proceeds from issuing common stock 72 -
Dividend payments on common stock (26) (25)
Distributions to minority shareholders - (8)
Other (2) (3)
------- -------
Net cash provided by (used in)
financing activities 41 (105)
------- -------
Effect of exchange rate changes on
cash and cash equivalents (1) 3
------- -------
Net increase (decrease) in cash and cash equivalents 214 (165)
Cash and cash equivalents at beginning of the period 108 224
------- -------
Cash and cash equivalents at end of the period $ 322 $ 59
======= =======
(a) Prepared in accordance with accounting principles generally
accepted in the United States of America, on an unaudited basis.
CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
SEGMENT INFORMATION
Unaudited
Inter-
Power Filtration national Elimin-
Millions Engine Generation And Other Distributor ations Total
------------ ------- ---------- ---------- ----------- ------- -------
Three Months
Ended June
27, 2004
------------
Net
sales (1) $1,393 $ 468 $ 369 $ 220 $ (326) $2,124
Segment EBIT 91 19 24 14 - 148
Net assets 1,196 596 767 189 - 2,748
Three Months
Ended June
29, 2003
------------
Net sales $ 889 $ 307 $ 265 $ 169 $ (91) $1,539
Segment EBIT 24 (15) 25 12 - 46
Net assets 850 465 664 177 - 2,156
Six Months
Ended June
27, 2004
----------
Net
sales (1) $2,532 $ 837 $ 716 $ 391 $ (581) $3,895
Segment EBIT 131 25 48 22 - 226
Six Months
Ended June
29, 2003
------------
Net sales $1,705 $ 574 $ 519 $ 305 $ (177) $2,926
Segment EBIT 2 (29) 45 18 - 36
The table below reconciles the segment information to the
corresponding amounts in the Consolidated Financial Statements.
Three Months Ended Six Months Ended
June 27, June 29, June 27, June 29,
Millions 2004 2003 2004 2003
-------- -------- -------- -------- --------
Segment EBIT $ 148 $ 46 $ 226 $ 36
Less:
Interest expense 27 20 54 40
Income tax
provision (benefit) 34 5 48 (4)
Minority interest in
earnings of consolidated
subsidiaries 5 2 9 6
Dividends on preferred
securities - 5 - 11
------- ------- ------- -------
Consolidated net earnings (loss) $ 82 $ 14 $ 115 $ (17)
======= ======= ======= =======
Net assets for
operating segments $ 2,748 $ 2,156
Liabilities deducted in
computing net assets 2,986 2,506
Minimum pension liability
excluded from net assets (698) (624)
Deferred tax assets not
allocated to segments 855 821
Debt-related costs
not allocated to segments 70 26
------- -------
Consolidated assets $ 5,961 $ 4,885
======= =======
(1) Prior to January 1, 2004, intersegment transactions between the
Engine segment and the Power Generation segment and between the
Filtration and Other segment and the Engine segment were reported
at cost and no sale reported by the transferor segment. Beginning
January 1, 2004, this inter-segment activity is reflected in the
sales and unit shipments of the transferor segments at a market
based transfer price discounted for certain items; further,
certain intersegment cost allocations to the transferor segments
have been eliminated. In addition, certain engines made by the
Engine segment and sold to International Distributors through
Power Generation were previously recorded as a sale to Power
Generation; however under the new methodology Power Generation
records a sales commission. We believe the methodology change
allows our segment management to focus on those pricing decisions
and cost structuring actions that are within their control. As a
result of the change in methodology in the three and six months
ended June 27, 2004, sales in the Engine segment increased $128
million and $217 million, respectively, sales in the Power
Generation segment decreased $8 million and $17 million,
respectively, sales in the Filtration and Other segment increased
$53 million and $100 million, respectively and eliminations
increased $173 million and $300 million, respectively. The impact
on segment EBIT was immaterial for each segment in both periods.
NON-GAAP FINANCIAL MEASURES (Unaudited)
Earnings before interest, taxes, minority interests and preferred dividends (EBIT)
We define EBIT as earnings before interest, taxes, minority interest, preferred dividends and the cumulative effect of any accounting changes. 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 earnings, for each of the applicable periods:
Three
Three Months Six Months Months
Ended Ended Ended
Millions, except June 27, June 29, June 27, June 29, March 28,
per share amounts 2004 2003 2004 2003 2004
----------------- -------- -------- -------- -------- ---------
Earnings before
interest, income taxes,
minority interest and
dividends on preferred
securities of
subsidiary trust $ 148 $ 46 $ 226 $ 36 $ 78
Interest expense 27 20 54 40 27
Provision (benefit) for
income taxes 34 5 48 (4) 14
Minority interests
in earnings of
consolidated
subsidiaries 5 2 9 6 4
Dividends on preferred
securities of
subsidiary trust - 5 - 11 -
------- ------- ------- ------- --------
Net earnings (loss) $ 82 $ 14 $ 115 $ (17) $ 33
======= ======= ======= ======= ========
-- Interest expense between accounting periods is not comparable due to the issuance of a new accounting standard. In May 2003, the FASB issued SFAS 150 which required that dividends on our Convertible Preferred Securities of Subsidiary Trust be classified as interest expense after July 1, 2003. This reclassification results in interest expense not being comparable for the periods presented.
-- 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.
Supplemental Data
-----------------
Sales
----------------------------------------------------------------------
$Millions Q1 Q2 Q3 Q4 YTD
----------------------------------- ------ ------ ------ ------ ------
2004:
----------------------------------- ------ ------ ------ ------ ------
Engine Business
----------------------------------- ------ ------ ------ ------ ------
Heavy-Duty Truck 341 445 786
----------------------------------- ------ ------ ------ ------ ------
Medium Duty Truck+Bus 165 192 357
----------------------------------- ------ ------ ------ ------ ------
Light Duty Auto+RV 274 304 578
----------------------------------- ------ ------ ------ ------ ------
Industrial 260 324 584
----------------------------------- ------ ------ ------ ------ ------
Stationary Power 99 128 227
----------------------------------- ------ ------ ------ ------ ------
TOTAL ENGINE BUSINESS 1,139 1,393 2,532
----------------------------------- ------ ------ ------ ------ ------
Power Generation 369 468 837
----------------------------------- ------ ------ ------ ------ ------
Filtration / Other 347 369 716
----------------------------------- ------ ------ ------ ------ ------
Int'l. Distributors 171 220 391
----------------------------------- ------ ------ ------ ------ ------
Eliminations (255) (326) (581)
----------------------------------- ------ ------ ------ ------ ------
TOTAL 1,771 2,124 3,895
----------------------------------- ------ ------ ------ ------ ------
2003:
----------------------------------- ------ ------ ------ ------ ------
Engine Business
----------------------------------- ------ ------ ------ ------ ------
Heavy-Duty Truck 236 266 278 320 1,100
----------------------------------- ------ ------ ------ ------ ------
Medium Duty Truck+Bus 122 141 140 157 560
----------------------------------- ------ ------ ------ ------ ------
Light Duty Auto+RV 222 228 264 221 935
----------------------------------- ------ ------ ------ ------ ------
Industrial 236 254 260 286 1,036
----------------------------------- ------ ------ ------ ------ ------
TOTAL ENGINE BUSINESS 816 889 942 984 3,631
----------------------------------- ------ ------ ------ ------ ------
Power Generation 267 307 363 392 1,329
----------------------------------- ------ ------ ------ ------ ------
Filtration / Other 254 265 255 282 1,056
----------------------------------- ------ ------ ------ ------ ------
Int'l. Distributors 136 169 174 190 669
----------------------------------- ------ ------ ------ ------ ------
Eliminations (86) (91) (100) (112) (389)
----------------------------------- ------ ------ ------ ------ ------
TOTAL 1,387 1,539 1,634 1,736 6,296
----------------------------------- ------ ------ ------ ------ ------
Engine Shipments
----------------------------------------------------------------------
Units Q1 Q2 Q3 Q4 YTD
---------------------------- ------- -------- ------- ------- --------
2004:
---------------------------- ------- -------- ------- ------- --------
Midrange 79,700 91,400 171,100
---------------------------- ------- -------- ------- ------- --------
Heavy-duty 15,900 22,100 38,000
---------------------------- ------- -------- ------- ------- --------
High Horsepower 2,200 3,100 5,300
---------------------------- ------- -------- ------- ------- --------
TOTAL 97,800 116,600 214,400
---------------------------- ------- -------- ------- ------- --------
2003:
---------------------------- ------- -------- ------- ------- --------
Midrange 66,300 69,800 73,800 70,900 280,800
---------------------------- ------- -------- ------- ------- --------
Heavy-duty 10,700 12,800 13,200 16,000 52,700
---------------------------- ------- -------- ------- ------- --------
High Horsepower 1,900 2,000 2,400 2,500 8,800
---------------------------- ------- -------- ------- ------- --------
TOTAL 78,900 84,600 89,400 89,400 342,300
---------------------------- ------- -------- ------- ------- --------