Cummins Reports Most Profitable Quarter Ever on Strong Sales and Improved Margins
COLUMBUS, Ind.--Oct. 2, 20057, 2005--Cummins Inc. powered to its most profitable quarter ever, today reporting third quarter net income of $145 million, or $2.90 per diluted share, on sales of $2.47 billion. Sales were strong across the entire business and the Company's gross margins rose to their highest levels in more than eight years."We continued to deliver on our commitments to our customers and shareholders in the third quarter," said Cummins Chairman and Chief Executive Officer Tim Solso. "Our business outlook remains positive, and our focus on execution has significantly improved margins and strengthened the bottom line."
Net income in the third quarter rose 25 percent from $116 million in the same period in 2004, while sales increased 12 percent from the $2.19 billion reported in the third quarter of 2004.
For the first nine months of the year, Cummins has earned $383 million, or $7.70 per share, which is more than the Company earned for all of 2004 - its most profitable full year ever.
Earnings before interest and taxes (EBIT) of $240 million also were a record and, at 9.7 percent of sales, were at the high end of the Company's target range of 7 to 10 percent. The Company's gross margin of 22.7 percent was the highest since the second quarter of 1997.
In addition to setting a record for net income and EBIT, the Company achieved a number of other quarterly financial records, including:
-- Engine segment revenues.
-- Engine shipment volumes to DaimlerChrysler for the Dodge Ram.
-- Segment EBIT for the Power Generation segment.
-- Segment EBIT for the Distribution segment.
Third-quarter sales were slightly below the record set in the second quarter of 2005, but improved margins contributed to a 3 percent quarter-to-quarter increase in net income.
"These results are another sign that we are building a "New Cummins" - a company that is less cyclical, more diversified and committed to turning a greater share of its sales into profits," Solso said. "Not only have we delivered higher year-over-year quarterly earnings for seven consecutive quarters, but we also are investing in future growth and focusing on prudent cash management.
"And, as good as 2004 and 2005 have been, I am confident 2006 will be an even better year for Cummins and that we are well-positioned for the future."
Cummins today increased its full-year earnings guidance to $10.70 to $10.80 per share from its previous guidance of $10.10 to $10.30 per share, resulting in fourth-quarter guidance of $3.00 to $3.10 per share.
The Company generated cash from operations of $230 million in the quarter, just off its record set in the fourth quarter of 2004, bringing its total to $385 million for the first nine months of 2005. In addition, the Company has paid down debt by $278 million this year from operating cash.
The Company signed a number of agreements during the quarter that reflect its commitment to future growth.
Cummins announced that its Dongfeng Cummins Engine Company joint venture in China will develop a new 13-liter heavy-duty engine that is expected to be ready for production in 2009. Cummins also entered into a 50/50 joint venture with Shaanxi Automobile Group Co. to produce the Cummins 11-liter ISM engine in Xi'an, China, starting late next year. Cummins is the largest foreign investor in the China diesel engine market.
In late September, the Company announced that it has expanded its partnership with Bluebird Corp. and that the Cummins ISB engine will be available in all Bluebird school buses starting in early 2006.
Cummins also was recognized by Dow Jones for its economic, environmental and social leadership. Cummins was named to Dow Jones' Sustainability World Index for 2005, which represents the top 10 percent of the world's largest 2,500 companies in corporate sustainability metrics.
Third-quarter details
Engine Segment
The Engine Segment sales of $1.67 billion were a quarterly record and 18 percent higher than $1.42 billion in 2004. Segment EBIT rose 59 percent to $153 million from $96 million in 2004.
The segment saw double-digit growth in both on-highway and industrial markets. The introduction of the model year 2006 Dodge Ram drove record engine shipments of 42,200 that were 10 percent higher than last year and 16 percent higher than last quarter.
Heavy-duty engine shipments rose 13 percent worldwide from the same period in 2004 and 12 percent in North America, while worldwide bus engine shipments jumped 88 percent in the quarter. In the off-highway markets, Cummins experienced strong engine shipment gains in the worldwide construction market (21 percent), the oil and gas market (71 percent) and the commercial marine market (25 percent).
While third-quarter sales were slightly higher than the previous record set in the second quarter of 2005, Segment EBIT for the third quarter was just below the record EBIT of the second quarter, driven by lower joint venture income.
Power Generation Segment
Power Generation sales rose 2 percent from the same period in 2004 to $504 million, but Segment EBIT more than tripled to a record $46 million, reflecting significantly improved pricing across most markets that helped yield the Segment's highest margins in four years.
Most major markets remained strong, led by economic activity in the United States and related markets, and economic development in the Middle East. Sales in the Company's commercial markets rose 3 percent, while consumer genset sales rose 4 percent.
Marine and commercial mobile markets, as well as increases in the towable trailer business, helped offset a softening in the recreational vehicle market. This trend should continue into 2006, with double-digit sales growth expected in all consumer segments except recreational vehicles.
Components Segment
Revenues for the Components Segment were $481 million for the quarter, an 8 percent increase over the third quarter of 2004. However, the higher volume was offset by greater supply chain costs and logistics inefficiencies, and higher research and administrative expenses. As a result, Components reported Segment EBIT of $21 million compared to $23 million for the same period in 2004.
The four businesses in this segment - Fleetguard, Emission Solutions, Holset turbochargers and Fuel Systems - each experienced a quarterly growth in revenue. Holset experienced a 12 percent sales gain from 2004 largely on the strength of improved aftermarket sales worldwide.
Fleetguard and Emission Solutions reported strong aftermarket sales gains in North America and Latin America, which helped boost overall combined sales in those businesses by 6 percent.
Higher research and engineering expenses were incurred to develop products that will assist both the Company and its customers in meeting new diesel emission standards for 2006 in Europe and 2007 in the United States.
Distribution Segment
The Distribution Segment, which continues to meet its goal of growing earnings at a faster percentage rate than sales, reported sales of $295 million for the third quarter, an 18 percent increase over the same period last year. Segment EBIT was a record $28 million, a 40 percent increase from $20 million during the same period in 2004.
Segment sales remained strong across all product lines and most geographies, and were accompanied by improved gross margins. Sales in the Company's Central region - Europe, Russia, the Middle East and Africa - rose 41 percent, while Latin America sales increased 27 percent.
Engines and parts sales were particularly strong in Europe, while the Middle East distributors saw significant growth in sales of power generation products. Those gains and others helped offset weakness in East Asia and the costs associated with the acquisition of a new distributor in Belgium.
Webcast information
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.
About Cummins Inc.
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 more than 160 countries through its network of 550 Company-owned and independent distributor facilities and more than 5,000 dealer locations. With more than 28,000 employees worldwide, Cummins reported sales of $8.4 billion in 2004. Press releases can be found on the Web at www.cummins.com.
CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited) (a)
Three Months Ended Nine Months Ended
Millions, except per Sept. 25, Sept. 26, June 26, Sept. 25, Sept. 26,
share amounts 2005 2004 2005 2005 2004
--------------------- ------------------------------------------------
Net sales $2,467 $2,194 $2,490 $7,165 $6,089
Cost of sales 1,906 1,760 1,940 5,598 4,882
--------- --------- -------- --------- ---------
Gross margin 561 434 550 1,567 1,207
Expense and other income
Selling and
administrative
expenses 286 260 287 832 734
Research and
engineering
expenses 71 60 73 207 175
Equity, royalty and
other income from
investees (28) (26) (35) (94) (73)
Interest expense 27 27 28 83 81
Other income, net (8) (5) (10) (16) --
--------- --------- -------- --------- ---------
Total expense and
other income 348 316 343 1,012 917
--------- --------- -------- --------- ---------
Earnings before
income taxes and
minority interests 213 118 207 555 290
Provision (benefit)
for income taxes 61 (4) 58 153 44
Minority interests in
earnings of
consolidated
subsidiaries 7 6 8 19 15
--------- --------- -------- --------- ---------
Net earnings $145 $116 $141 $383 $231
========= ========= ======== ========= =========
Earnings per share
Basic $3.27 $2.71 $3.20 $8.68 $5.54
Diluted $2.90 $2.40 $2.83 $7.70 $4.95
Cash dividends
declared per share $0.30 $0.30 $0.30 $0.90 $0.90
Weighted average shares
outstanding
Basic 44.4 42.8 44.1 44.1 41.8
Diluted 51.2 49.8 51.0 51.0 48.7
(a) Prepared on an unaudited basis in accordance with accounting
principles generally accepted in the United States of America.
Certain reclassifications have been made to 2004 amounts to
conform to the 2005 presentation.
CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited) (a)
Millions, except par value
---------------------------
Sept. 25, 2005 Dec. 31, 2004
----------------------------
ASSETS
Current assets
Cash and cash equivalents $561 $611
Marketable securities 53 62
Receivables, net 1,538 1,160
Inventories 1,198 1,016
Deferred income taxes 239 301
Prepaid expenses and other current
assets 97 106
-------------- -------------
Total current assets 3,686 3,256
Long-term assets
Property, plant and equipment, net 1,555 1,648
Investments in and advances to equity
investees 291 286
Goodwill 357 355
Other intangible assets, net 94 93
Deferred income taxes 689 689
Other assets 190 183
-------------- -------------
Total assets $6,862 $6,510
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $100 $327
Accounts payable 982 823
Accrued product coverage and marketing
expenses 319 279
Other accrued expenses 827 751
-------------- -------------
Total current liabilities 2,228 2,180
Long-term liabilities
Long-term debt 1,252 1,299
Pensions 412 466
Postretirement benefits other than pensions 556 570
Other long-term liabilities 432 386
-------------- -------------
Total liabilities 4,880 4,901
Minority interests 221 208
Shareholders' equity
Common stock, $2.50 par value, 48.5 and
48.2 shares issued 121 121
Additional contributed capital 1,195 1,167
Retained earnings 1,207 866
Accumulated other comprehensive loss
Minimum pension liability (499) (499)
Other components, net (83) (41)
Common stock in treasury, at cost, 1.6
and 2.2 shares (65) (88)
Common stock held in trust for employee
benefit plans, 2.0 and 2.2 shares (98) (104)
Unearned compensation (17) (21)
-------------- -------------
Total shareholders' equity 1,761 1,401
-------------- -------------
Total liabilities and shareholders'
equity $6,862 $6,510
============== =============
(a) Prepared on an unaudited basis in accordance with accounting
principles generally accepted in the United States of America.
Certain reclassifications have been made to 2004 amounts to
conform to the 2005 presentation.
CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (a)
Millions
--------- Nine Months Ended
Sept. 25, 2005 Sept. 26, 2004
-----------------------------
Cash flows from operating activities
Net earnings $383 $231
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 216 199
Loss on disposal of property, plant
and equipment, net 3 8
Deferred income tax provision (benefit) 71 (23)
Equity in earnings of investees, net
of dividends (12) (10)
Minority interests in earnings of
consolidated subsidiaries 19 15
Pension expense 80 68
Pension contributions (121) (115)
Stock-based compensation expense 11 12
Tax benefit on stock options exercised 7 21
Amortization of gain on terminated
interest rate swaps (1) (5)
Translation and hedging activities 8 (11)
Changes in current assets and liabilities:
Receivables (405) (250)
Inventories (196) (212)
Other current assets 8 2
Accounts payable 175 253
Accrued expenses 103 179
Changes in long-term liabilities 49 (3)
Other, net (13) 9
-------------- --------------
Net cash provided by operating activities 385 368
-------------- --------------
Cash flows from investing activities
Capital expenditures (121) (78)
Investments in internal use software (25) (23)
Proceeds from disposals of property,
plant and equipment 13 7
Investments in and advances to equity
investees (4) (19)
Acquisition of businesses, net of cash
acquired (2) (18)
Investments in marketable securities -
acquisitions (89) (81)
Investments in marketable securities -
liquidations 98 99
Other, net 5 --
-------------- --------------
Net cash used in investing activities (125) (113)
-------------- --------------
Cash flows from financing activities
Proceeds from borrowings 65 9
Payments on borrowings and capital
lease obligations (344) (41)
Net borrowings under short-term credit
agreements 1 12
Distributions to minority shareholders (16) (5)
Proceeds from issuing common stock 27 125
Dividend payments on common stock (42) (40)
Other, net 4 (1)
-------------- --------------
Net cash (used in) provided by financing
activities (305) 59
-------------- --------------
Effect of exchange rate changes on cash
and cash equivalents (5) (1)
-------------- --------------
Net (decrease) increase in cash and cash
equivalents (50) 313
Cash and cash equivalents at beginning
of the year 611 108
-------------- --------------
Cash and cash equivalents at end of the
period $561 $421
============== ==============
(a) Prepared on an unaudited basis in accordance with accounting
principles generally accepted in the United States of America.
Certain reclassifications have been made to 2004 amounts to
conform to the 2005 presentation.
CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)
Power
Gener- Compo- Distri- Elimina-
Millions Engine ation nents bution tions Total
----------------------------------------------------------------------
Three Months Ended
September 25, 2005
Net sales $1,672 $504 $481 $295 $(485) $2,467
Equity, royalty and
other income from
investees 14 2 3 9 -- 28
Segment EBIT 153 46 21 28 (8) 240
Net assets for
operating segments 1,343 688 965 316 -- 3,312
----------------------------------------------------------------------
Three Months Ended
September 26, 2004
Net sales $1,419 $493 $445 $249 $(412) $2,194
Equity, royalty and
other income from
investees 15 1 3 7 -- 26
Segment EBIT 96 15 23 20 (9) 145
Net assets for
operating segments 1,116 623 873 264 -- 2,876
----------------------------------------------------------------------
Three Months Ended
June 26, 2005
Net sales $1,667 $493 $511 $297 $(478) $2,490
Equity, royalty and
other income from
investees 22 3 2 8 -- 35
Segment EBIT 156 35 21 26 (3) 235
Net assets for
operating segments 1,220 647 962 314 -- 3,143
----------------------------------------------------------------------
Nine Months Ended
September 25, 2005
Net sales $4,819 $1,424 $1,465 $845 $(1,388) $7,165
Equity, royalty and
other income from
investees 58 6 7 23 -- 94
Segment EBIT 426 96 65 74 (23) 638
----------------------------------------------------------------------
Nine Months Ended
September 26, 2004
Net sales $3,920 $1,322 $1,305 $673 $(1,131) $6,089
Equity, royalty and
other income from
investees 46 2 7 18 -- 73
Segment EBIT 228 38 71 51 (17) 371
----------------------------------------------------------------------
The table below reconciles the segment information to the
corresponding amounts in the Consolidated Financial Statements.
Three Months Ended Nine Months Ended
Sept. 25, Sept. 26, June 26, Sept. 25, Sept. 26,
Millions 2005 2004 2005 2005 2004
-------------------- --------- --------- -------- --------- ---------
Segment EBIT $240 $145 $235 $638 $371
Less:
Interest expense 27 27 28 83 81
Provision (benefit)
for income taxes 61 (4) 58 153 44
Minority interests
in earnings of
consolidated
subsidiaries 7 6 8 19 15
--------- --------- -------- --------- ---------
Net earnings $145 $116 $141 $383 $231
========= ========= ======== ========= =========
Net assets for
operating segments $3,312 $2,876 $3,143
Liabilities deducted
in computing net
assets 3,421 3,040 3,292
Minimum pension
liability excluded
from net assets (826) (698) (826)
Deferred tax assets
not allocated to
segments 928 903 943
Debt-related costs
not allocated to
segments 27 28 28
--------- --------- --------
Total assets $6,862 $6,149 $6,580
========= ========= ========
Certain reclassifications have been made to 2004 amounts to
conform to the 2005 presentation.
CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
EARNINGS PER SHARE INFORMATION
(Unaudited)
The following is a reconciliation of net earnings and
weighted-average common shares outstanding for purposes of calculating
basic and diluted net earnings per share:
Three Months Ended Nine Months Ended
Millions, except per Sept. 25, Sept. 26, June 26, Sept. 25, Sept. 26,
share amounts 2005 2004 2005 2005 2004
---------------------------------------------------------------------
Net earnings for
basic EPS $145.3 $116.0 $141.2 $383.0 $231.3
Interest expense on
junior convertible
subordinated
debentures, net
of tax 3.2 3.3 3.2 9.7 9.8
---------------------------------------------------------------------
Net earnings for
diluted EPS $148.5 $119.3 $144.4 $392.7 $241.1
=====================================================================
Weighted average
shares outstanding:
Basic 44.4 42.8 44.1 44.1 41.8
Dilutive effect of
stock compensation
awards 0.5 0.7 0.6 0.6 0.6
Dilutive effect of
junior convertible
subordinated
debentures 6.3 6.3 6.3 6.3 6.3
---------------------------------------------------------------------
Diluted 51.2 49.8 51.0 51.0 48.7
=====================================================================
Earnings per share:
Basic $3.27 $2.71 $3.20 $8.68 $5.54
Diluted $2.90 $2.40 $2.83 $7.70 $4.95
CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
NON-GAAP FINANCIAL MEASURES
(Unaudited)
Earnings before interest, taxes and minority interests (EBIT)
We define EBIT as earnings before interest expense, provision
for income taxes and minority interests in earnings 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 earnings, for
each of the applicable periods:
Three Months Ended Nine Months Ended
Sept. 25, Sept. 26, June 26, Sept. 25, Sept. 26,
Millions 2005 2004 2005 2005 2004
-------------------- --------- --------- -------- --------- ---------
Earnings before
interest, income
taxes and minority
interests $240 $145 $235 $638 $371
EBIT as a percentage
of net sales 9.7% 6.6% 9.4% 8.9% 6.1%
Less:
Interest expense 27 27 28 83 81
Provision (benefit)
for income taxes 61 (4) 58 153 44
Minority interests
in earnings of
consolidated
subsidiaries 7 6 8 19 15
--------- --------- -------- --------- ---------
Net earnings $145 $116 $141 $383 $231
========= ========= ======== ========= =========
Net earnings as a
percentage of net
sales 5.9% 5.3% 5.7% 5.3% 3.8%
-- 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
---- ---- ---- ---- -----
2005
Engine Business
Heavy-Duty
Truck 494 553 524 1,571
Medium Duty
Truck+Bus 191 228 238 657
Light Duty
Auto+RV 255 269 314 838
Industrial 399 458 427 1,284
Stationary
Power 141 159 169 469
----------------------------------------
TOTAL ENGINE
BUSINESS 1,480 1,667 1,672 4,819
Power Generation 427 493 504 1,424
Components 473 511 481 1,465
Distributors 253 297 295 845
Eliminations (425) (478) (485) (1,388)
----------------------------------------
TOTAL 2,208 2,490 2,467 7,165
========================================
2004
Engine Business
Heavy-Duty
Truck 342 427 455 476 1,700
Medium Duty
Truck+Bus 145 164 182 202 693
Light Duty
Auto+RV 271 291 288 279 1,129
Industrial 273 360 350 397 1,380
Stationary
Power 96 132 144 150 522
----------------------------------------
TOTAL ENGINE
BUSINESS 1,127 1,374 1,419 1,504 5,424
Power Generation 369 460 493 520 1,842
Components 415 445 445 478 1,783
Distributors 171 253 249 300 973
Eliminations (311) (408) (412) (453) (1,584)
----------------------------------------
TOTAL 1,771 2,124 2,194 2,349 8,438
========================================
Engine Shipments
Units Q1 Q2 Q3 Q4 YTD
---- ---- ---- ---- -----
2005
Midrange 90,900 101,800 106,100 298,800
Heavy-duty 24,900 27,500 26,300 78,700
High
Horsepower 3,100 3,800 3,300 10,200
----------------------------------------
TOTAL 118,900 133,100 135,700 387,700
========================================
2004
Midrange 79,700 98,300 94,000 96,700 368,700
Heavy-duty 15,900 22,100 23,200 26,000 87,200
High
Horsepower 2,200 3,100 3,200 3,600 12,100
----------------------------------------
TOTAL 97,800 123,500 120,400 126,300 468,000
========================================