Cummins Reports Record Sales in Third Quarter; Continued Strong Performance Leads to an Increase in Full-Year Earnings Guidance
COLUMBUS, Ind.--Oct. 2, 20040, 2004--Cummins Inc. today reported record sales for the second consecutive quarter as third-quarter profits substantially exceeded the Company's earlier forecasts.Sales were strong across all business segments and in most markets, led by North American heavy duty truck engine sales and record revenues in the Company's Power Generation segment.
Cummins reported third-quarter revenues of $2.19 billion, a 34 percent increase from $1.63 billion in the same quarter in 2003. The Company's previous quarterly sales record was $2.12 billion in the second quarter of 2004.
Net earnings for the quarter were $116 million, or $2.40 per diluted share -above the Company's previous guidance of $1.30 - $1.40 a share. Cummins earned $24 million, or 60 cents per diluted share, in the third quarter of 2003.
The Company's third-quarter earnings include tax benefits of $37 million, or 74 cents a share, that reflect the impact of the Company's improved earnings performance and outlook. Third quarter results also include a one-time pre-tax charge of $9 million, or 15 cents a share, related to inventory valuation.
Earnings before interest and taxes were $146 million, or 6.7 percent of sales, compared to $61 million, or 3.7 percent last year - and within our targeted EBIT goal of 6 to 9 percent.
"Demand for our products continues to be extremely strong," said Cummins Chairman and Chief Executive Officer Tim Solso. "Our sales were stronger than expected in most markets, led by the North American heavy duty truck engine market, where our sales more than doubled from the same time last year and where we continue to gain market share."
Through August, Cummins share of the North American heavy duty truck engine market was 27 percent, a 5.5 percentage point increase from the beginning of the year.
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 $7.10 and $7.20 a share in 2004, up from the previous guidance of $5.55 - $5.75 a share. The updated guidance includes $1.04 a share related to tax matters - 74 cents a share for the third quarter and 30 cents a share in the fourth quarter. The Company expects to earn between $2.15 and $2.25 a share in the fourth quarter.
The rapid ramp-up in demand for our products has created some inefficiencies and internal capacity constraints, which the Company is addressing and believes will have less of an impact in future periods. The Company also continues to face challenges caused by rising commodities prices, especially steel, and supply chain constraints, which are expected to continue.
"We continue to participate in the strong market recovery and benefit from our geographic diversification," Solso said. "I can't remember a time in my 33-year career with Cummins where all our markets were this strong, and when we were this well-positioned to turn that market strength into earnings and value for our shareholders."
Engine Segment
Engine business sales rose 53 percent from third quarter 2003 to $1.44 billion, led by sharply higher sales in North America. Sales volumes in the North American heavy duty truck market rose 119 percent from the same period in 2003, while medium-duty truck engine shipments rose 74 percent. Shipments of Dodge Ram engines rose 11 percent, building on record performance in that market this year.
Overall, engine shipments rose 30 percent from the third quarter 2003 to more than 106,000 units. The engine business reported Segment EBIT of $96 million, compared to $36 million in the third quarter of 2003.
Power Generation Segment
The Company's Power Generation business posted Segment EBIT of $17 million on sales of $502 million -- the unit's fourth straight quarterly profit. For the same period last year, Power Generation broke even on sales of $363 million.
The Newage alternator division, excluding newly consolidated entities, saw sales increase 51 percent over third quarter 2003. Commercial demand was especially strong in the Middle East and China, where we believe the market will continue to be strong at least through the end of 2005.
The segment's consumer business increased 17 percent, with sales for recreational vehicles posting a 21 percent gain and where Cummins maintains the leading market position.
Filtration and Other Segment
The Company's Filtration and Other business reported sales of $369 million in the third quarter, up 45 percent from last year. A broad market recovery has led to increased demand across many geographic regions, notably in North America.
The segment's Holset turbocharger division reported robust demand, led by the North American heavy duty truck market. Holset sales in China also continue to improve this year, following a slowdown in 2003.
For the quarter, Filtration and Other reported Segment EBIT of $21 million, compared to $16 million during the third quarter of 2003.
International Distributor Segment
Each of our Company-owned distributors around the world enjoyed sales gains compared to the third quarter of 2003, with total sales rising 24 percent to $215 million. Segment EBIT for this business was $12 million. Business was strong across product lines and geographies, particularly in Europe and Asia.
Cash Flow
Strong profits resulted in positive cash flow for the Company in the third quarter, and we are confident that we will continue to be able to pay down our debt with cash flow from operations.
Presentation of Non-GAAP Financial Information
EBIT is a non-GAAP financial 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.
Webcast Information
Cummins management will host a teleconference to discuss these results at 10 a.m. CDT, 11 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 on the Web at www.cummins.com.
Forward Looking Statement Disclosure
Information provided and statements in this release and on the accompanying web cast that are not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the company's expectations, hopes beliefs and intentions on strategies regarding the future. It is important to note that the company's 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, general economic, business and financing conditions, labor relations, governmental action, competitor pricing activity, expense volatility and other risks detailed from time to time in Cummins Securities and Exchange Commission filings.
CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (a)
Unaudited
Three Months
Millions, except Three Months Ended Nine Months Ended Ended
per share Sept. 26, Sept. 28, Sept. 26, Sept. 28, June 27,
amounts 2004 2003 2004 2003 2004
----------------- --------- --------- --------- --------- ------------
Net sales $2,194 $1,634 $6,089 $4,560 $2,124
Cost of goods
sold 1,760 1,341 4,882 3,773 1,696
--------- --------- --------- --------- ------------
Gross margin 434 293 1,207 787 428
Expense and other
income:
Selling and
administrative
expenses 260 208 734 603 251
Research and
engineering
expenses 60 51 175 148 59
Equity, royalty
and other
income from
investees (26) (20) (73) (44) (29)
Interest
expense 28 25 82 65 27
Other income,
net (6) (7) (1) (17) (1)
--------- --------- --------- --------- ------------
Earnings before
income taxes,
minority
interest and
dividends on
preferred
securities of
subsidiary trust 118 36 290 32 121
Provision
(benefit) for
income taxes (4) 9 44 5 34
Minority
interests in
earnings of
consolidated
subsidiaries 6 3 15 9 5
Dividends on
preferred
securities of
subsidiary trust - - - 11 -
--------- --------- --------- --------- ------------
Net earnings $116 $24 $231 $7 $82
========= ========= ========= ========= ============
Earnings per
share:
Basic $2.71 $0.62 $5.54 $0.18 $1.97
Diluted $2.40 $0.60 $4.95 $0.18 $1.76
Cash dividends
declared per
share $0.30 $0.30 $0.90 $0.90 $0.30
Weighted average
shares
outstanding:
Basic 42.7 39.4 41.8 39.0 41.8
Diluted 49.8 45.9 48.7 39.2 48.8
(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
Millions Sept. 26, 2004
-------- Unaudited (a) Dec. 31, 2003
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $421 $108
Marketable securities 86 87
Receivables, net 1,204 929
Inventories 998 733
Other current assets 284 273
---------------- ----------------
Total current assets 2,993 2,130
Long-term assets:
Property, plant and equipment, net 1,570 1,347
Investments in and advances to
equity investees 258 339
Goodwill 353 344
Other intangible assets, net 91 92
Deferred income taxes 711 663
Other assets 192 211
---------------- ----------------
Total assets $6,168 $5,126
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable $49 $28
Current maturities of long-term debt 275 21
Accounts payable 845 557
Accrued product coverage and
marketing expenses 300 246
Other current liabilities 672 539
---------------- ----------------
Total current liabilities 2,141 1,391
Long-term liabilities:
Long-term debt 1,268 1,380
Pensions 387 446
Postretirement benefits other than
pensions 572 577
Other liabilities 325 260
---------------- ----------------
Total liabilities 4,693 4,054
Minority interests 192 123
Shareholders' equity:
Common stock, $2.50 par value, 48.2
and 48.3 shares issued 121 121
Additional contributed capital 1,156 1,113
Retained earnings 760 569
Accumulated other comprehensive loss
Minimum pension liability (435) (434)
Other components, net (83) (58)
Common stock in treasury, at cost,
2.7 and 5.6 shares (108) (225)
Common stock held in trust for
employee benefit plans, 2.2 and
2.3 shares (106) (113)
Unearned compensation (22) (24)
---------------- ----------------
Total shareholders' equity 1,283 949
---------------- ----------------
Total liabilities and shareholders'
equity $6,168 $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
Nine Months Ended
Millions Sept. 26, 2004 Sept. 28, 2003
-------- --------------- --------------
Cash flows from operating activities:
Net earnings $231 $7
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 199 165
Equity in earnings of investees, net
of dividends (10) (31)
Minority interests in earnings of
consolidated subsidiaries 15 9
Pension expense 68 47
Pension contributions (115) (104)
Stock-based compensation expense 12 16
Tax benefit on stock options
exercised 21 -
Amortization of gain on swap unwind (5) (5)
Translation and hedging activities (11) (7)
Changes in assets and liabilities:
Receivables (250) (132)
Inventories (212) (79)
Accounts payable 253 139
Accrued expenses 156 (27)
Other 16 15
--------------- --------------
Net cash provided by operating
activities 368 13
--------------- --------------
Cash flows from investing activities:
Capital expenditures (78) (70)
Investments in internal use software (23) (21)
Proceeds from disposals of equipment 7 7
Investments in and advances (to) from
equity investees (19) 3
Acquisition of businesses, net of cash
acquired (18) -
Investments in marketable securities -
acquisitions (104) (103)
Investments in marketable securities -
liquidations 112 98
--------------- --------------
Net cash used in investing activities (123) (86)
--------------- --------------
Cash flows from financing activities:
Proceeds from borrowings 32 16
Payments on borrowings and capital
lease obligations (54) (132)
Net borrowings under short-term credit
agreements 12 56
Proceeds from issuing common stock 125 37
Dividend payments on common stock (40) (37)
Distributions to minority shareholders (5) (9)
Other (1) (5)
--------------- --------------
Net cash provided by (used in)
financing activities 69 (74)
--------------- --------------
Effect of exchange rate changes on cash
and cash equivalents (1) 3
--------------- --------------
Net increase (decrease) in cash and cash
equivalents 313 (144)
Cash and cash equivalents at beginning
of the period 108 224
--------------- --------------
Cash and cash equivalents at end of the
period $421 $80
=============== ==============
(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
Power Filtration
Millions Engine Generation And Other
-------- ---------- ---------- ----------
Three Months Ended Sept. 26, 2004
---------------------------------
Net sales (1) $1,438 $502 $369
Segment EBIT 96 17 21
Net assets 1,317 626 766
Three Months Ended Sept. 28, 2003
---------------------------------
Net sales $942 $363 $255
Segment EBIT 36 - 16
Net assets 913 474 664
Nine Months Ended Sept. 26, 2004
--------------------------------
Net sales (1) $3,970 $1,339 $1,085
Segment EBIT 227 42 69
Nine Months Ended Sept. 28, 2003
--------------------------------
Net sales $2,647 $937 $774
Segment EBIT 38 (29) 61
International
Millions Distributor Eliminations Total
-------- ------------- ------------- --------
Three Months Ended Sept. 26, 2004
---------------------------------
Net sales (1) $215 $(330) $2,194
Segment EBIT 12 - 146
Net assets 186 - 2,895
Three Months Ended Sept. 28, 2003
---------------------------------
Net sales $174 $(100) $1,634
Segment EBIT 9 - 61
Net assets 174 - 2,225
Nine Months Ended Sept. 26, 2004
---------------------------------
Net sales (1) $606 $(911) $6,089
Segment EBIT 34 - 372
Nine Months Ended Sept. 28, 2003
---------------------------------
Net sales $479 $(277) $4,560
Segment EBIT 27 - 97
The table below reconciles the segment information to the
corresponding amounts in the Consolidated Financial Statements.
Three Months Ended Nine Months Ended
Sept. 26, Sept. 28, Sept. 26, Sept. 28,
Millions 2004 2003 2004 2003
-------- --------- --------- ---------- ---------
Segment EBIT $146 $61 $372 $97
Less:
Interest expense 28 25 82 65
Income tax provision
(benefit) (4) 9 44 5
Minority interest in
earnings of consolidated
subsidiaries 6 3 15 9
Dividends on preferred
securities - - - 11
--------- --------- ---------- ---------
Consolidated net earnings $116 $24 $231 $7
========= ========= ========== =========
Net assets for operating
segments $2,895 $2,225
Liabilities deducted in
computing net assets 3,040 2,539
Minimum pension liability
excluded from net assets (698) (624)
Deferred tax assets not
allocated to segments 903 820
Debt-related costs not
allocated to segments 28 26
--------- ---------
Consolidated assets $6,168 $4,986
========= =========
(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
nine months ended September 26, 2004, sales in the Engine segment
increased $140 million and $357 million, respectively, sales in the
Power Generation segment decreased $14 million and $31 million,
respectively, sales in the Filtration and Other segment increased $53
million and $153 million, respectively and eliminations increased $179
million and $479 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 Months
Three Months Ended Nine Months Ended Ended
Sept. 26, Sept. 28, Sept. 26, Sept. 28, June 27,
Millions, except
per share
amounts 2004 2003 2004 2003 2004
----------------- --------- --------- --------- --------- ------------
Earnings before
interest, income
taxes, minority
interest and
dividends on
preferred
securities of
subsidiary trust $146 $61 $372 $97 $148
Interest expense 28 25 82 65 27
Provision
(benefit) for
income taxes (4) 9 44 5 34
Minority
interests in
earnings of
consolidated
subsidiaries. 6 3 15 9 5
Dividends on
preferred
securities of
subsidiary trust - - - 11 -
--------- --------- --------- --------- ------------
Net earnings $116 $24 $231 $7 $82
========= ========= ========= ========= ============
-- 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 341 445 466 1,252
----------------------------------------------------------------------
Medium Duty Truck+Bus 165 192 195 552
----------------------------------------------------------------------
Light Duty Auto+RV 274 304 299 877
----------------------------------------------------------------------
Industrial 260 324 334 918
----------------------------------------------------------------------
Stationary Power 99 128 144 371
----------------------------------------------------------------------
TOTAL ENGINE BUSINESS 1,139 1,393 1,438 3,970
----------------------------------------------------------------------
Power Generation 369 468 502 1,339
----------------------------------------------------------------------
Filtration / Other 347 369 369 1,085
----------------------------------------------------------------------
Int'l. Distributors 171 220 215 606
----------------------------------------------------------------------
Eliminations (255) (326) (330) (911)
----------------------------------------------------------------------
TOTAL 1,771 2,124 2,194 6,089
----------------------------------------------------------------------
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 88,200 259,300
----------------------------------------------------------------------
Heavy-duty 15,900 22,100 23,200 61,200
----------------------------------------------------------------------
High Horsepower 2,200 3,100 3,200 8,500
----------------------------------------------------------------------
TOTAL 97,800 116,600 114,600 329,000
----------------------------------------------------------------------
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
----------------------------------------------------------------------