Strong Sales and Margins Fuel Another Record Quarter for Cummins
 |
Second-quarter sales of $2.84 billion represented a 14 percent increase from $2.49 billion in the same period in 2005. Net earnings rose 56 percent to $220 million, or $4.38 per diluted share, from $141 million ($2.83 a share) the same period a year ago.
Second-quarter net income includes $28 million, or 55 cents a share, for the favorable resolution of tax audits related to prior years. Absent the tax benefit, net earnings rose 36 percent from the same period last year.
"We had a terrific second quarter and remain on pace for a record 2006," said Cummins Chairman and Chief Executive Officer Tim Solso. "Our markets are strong around most of the world, we are winning new business and we continue to serve our customers well.
"Our financial performance has allowed us to continue to create value for our stakeholders. For example, we have reduced debt significantly and increased our pension funding. At the same time we are investing in growth markets that will enhance our brand position and help us deliver strong returns well into the future."
Earnings Before Interest and Taxes (EBIT) increased 38 percent to $325 million, or 11.4 percent of sales, from $235 million during the second quarter of 2005. Gross margin increased to 23.6 percent - its highest level since 1996 - up from 22.1 percent the same period last year.
Year-to-date cash flow from operations is running $200 million ahead of the same point last year. "As a result of stronger earnings and less cash used for working capital, we are on pace to set a record for cash flow from operations this year," said Cummins Chief Financial Officer Jean Blackwell.
Cummins expects to earn between $3.35 and $3.45 a share in the third quarter and today raised its full-year guidance to $14.00-$14.20, from its previous guidance of $12.40 - $12.60 a share.
Cummins announced this week that it has reached agreement with a major automotive manufacturer to produce and market a light-duty diesel engine that will be used in a variety of automotive applications, including standard pickup trucks and sport utility vehicles. Certain bus, marine and industrial applications also will be served by this engine family.
The first vehicles with this engine are expected to be ready for market by the end of the decade. Cummins anticipates that this diesel engine will provide an average of 30 percent fuel savings, depending on the drive cycle, over gasoline-powered engines for comparable vehicles.
The Company also continued to strengthen its position in the North American medium-duty truck engine market, earning additional business from one of its key customers during the second quarter. PACCAR announced that starting in January 2007 Cummins will be the exclusive supplier of 6- and 8-liter medium-duty truck engines for its Peterbilt and Kenworth trucks.
Additionally, Cummins announced this month that it will increase its quarterly dividend by 20 percent to 36 cents a share and that the Board of Directors has authorized the repurchase of up to 2 million shares of common stock.
"Over the past several years, we have worked hard to reshape our company to become more results-oriented and to focus on turning a greater share of our sales into profits," Solso said. "Our announcement today reflects the results of our ongoing efforts."
Second-quarter details
Engine Segment
Revenues rose 14 percent to $1.9 billion and Segment EBIT increased 22 percent to $190 million, or 10.0 percent of sales. Segment revenues and EBIT were quarterly records.
Shipments to the global on-highway markets were up 15 percent and off-highway market shipments rose 23 percent, as nearly every end market experienced growth. Demand for North American heavy-duty engines remained strong, with shipments up 14 percent from the same period in 2005.
Shipments to the global light-duty automotive and RV markets increased 24 percent. The global construction market remained strong, with sales increasing by 23 percent on strength in North America, China, India and the Middle East.
Power Generation Segment
Segment sales rose 21 percent from the same period last year to $598 million, led by strong gains in the Commercial generator and alternator businesses. Segment EBIT rose 60 percent to $56 million, or 9.4 percent of sales.
Sales of commercial generator sets rose 27 percent, while alternator sales rose 23 percent. Sales grew in most geographic markets, led by North America, India, the Middle East and Latin America. Segment sales in China dropped slightly from the same period in 2005. In the Consumer business, continued softness in the North American motorized RV market was more than offset by gains in the towable RV market, residential standby power and marine sales.
Components Segment
The segment - made up of the Company's filtration, turbocharger, fuel systems and exhaust aftertreatment businesses - continued its recent improvement, posting a 10 percent sales gain to a record $563 million and a 62 percent improvement in Segment EBIT to $34 million, or 6.0 percent of sales.
Strong sales growth in North and Latin American filtration markets, as well as profit improvement initiatives, helped drive this performance
Distribution Segment
Segment Sales grew 13 percent from the second quarter 2005 to $336 million, and Segment EBIT increased 38 percent to $36 million, or 10.7 percent of sales.
The Segment benefited from joint venture income gains at the Company's North American distributors, increases in power generation sales in Europe and the Middle East and strong parts sales in East Asia.
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.
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. Cummins reported net income of $550 million on sales of $9.9 billion in 2005.
CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited) (a)
Three months ended Six months ended
------------------------- -----------------
July 2, June 26, April 2, July 2, June 26,
2006 2005 2006 2006 2005
------- -------- -------- -------- --------
Millions
(except per share amounts)
Net sales $2,842 $ 2,490 $ 2,678 $ 5,520 $ 4,698
Cost of sales 2,170 1,940 2,079 4,249 3,692
------- -------- -------- -------- --------
Gross margin 672 550 599 1,271 1,006
Operating expenses and
income
Selling and
administrative expenses 320 287 301 621 546
Research and engineering
expenses 80 73 82 162 136
Investee equity, royalty
and other income (37) (38) (31) (68) (72)
Other operating income,
net -- (3) (1) (1) (3)
------- -------- -------- -------- --------
Operating earnings 309 231 248 557 399
Interest income (10) (4) (9) (19) (9)
Interest expense 26 28 27 53 56
Other (income) expenses,
net (6) -- 2 (4) 10
------- -------- -------- -------- --------
Earnings before income
taxes and minority
interests 299 207 228 527 342
Provision for income taxes 67 58 85 152 92
Minority interests in
earnings of consolidated
subsidiaries 12 8 8 20 12
------- -------- -------- -------- --------
Net earnings $ 220 $ 141 $ 135 $ 355 $ 238
Earnings per share
Basic $4.81 $ 3.20 $ 3.04 $ 7.87 $ 5.40
Diluted $4.38 $ 2.83 $ 2.70 $ 7.08 $ 4.80
Cash dividends declared per
share $0.30 $ 0.30 $ 0.30 $ 0.60 $ 0.60
(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 2005 amounts to
conform to the 2006 presentation.
CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (a)
July 2, December 31,
2006 2005
------- ------------
Millions
(except par value)
ASSETS
Current assets
Cash and cash equivalents $ 878 $ 779
Marketable securities 66 61
Receivables, net 1,691 1,423
Inventories 1,314 1,174
Deferred income taxes 333 363
Prepaid expenses and other current assets 139 116
------- ------------
Total current assets 4,421 3,916
Long-term assets
Property, plant and equipment, net 1,519 1,557
Investments in and advances to equity investees 304 278
Goodwill 358 358
Other intangible assets, net 109 100
Deferred income taxes 444 500
Other assets 182 176
------- ------------
Total assets $7,337 $6,885
======= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 265 $ 154
Accounts payable 1,066 904
Other accrued expenses 1,281 1,160
------- ------------
Total current liabilities 2,612 2,218
Long-term liabilities
Long-term debt 739 1,213
Pensions 267 396
Postretirement benefits other than pensions 533 554
Other liabilities and deferred revenue 447 415
------- ------------
Total liabilities 4,598 4,796
------- ------------
Minority interests 236 225
Shareholders' equity
Common stock, $2.50 par value, 150 shares
authorized, 55.0 and 48.5 shares issued 137 121
Additional contributed capital 1,487 1,201
Retained earnings 1,686 1,360
Accumulated other comprehensive loss
Minimum pension liability adjustment (523) (523)
Foreign currency translation adjustments (53) (84)
Unrealized gain on marketable securities 1 3
Unrealized gain on derivatives 30 1
------- ------------
Total accumulated other comprehensive loss (545) (603)
------- ------------
Common stock in treasury, at cost, 2.4 and 2.0
shares (154) (101)
Common stock held in trust for employee benefit
plans, 1.9 and 2.0 shares (94) (97)
Unearned compensation (14) (17)
------- ------------
Total shareholders' equity 2,503 1,864
------- ------------
Total liabilities and shareholders' equity $7,337 $6,885
======= ============
(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 2005 amounts to
conform to the 2006 presentation.
CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (a)
Six months ended
----------------
July 2, June 26,
2006 2005
------- --------
Millions
Net cash provided by operating activities $355 $155
------- --------
Cash flows from investing activities
Capital expenditures (102) (78)
Investments in marketable securities--acquisitions (99) (60)
Investments in marketable securities--liquidations 92 69
Other, net (1) (7)
------- --------
Net cash used in investing activities (110) (76)
------- --------
Cash flows from financing activities
Proceeds from borrowings 54 41
Payments on borrowings and capital lease obligations (111) (319)
Dividend payments on common stock (28) (28)
Proceeds from issuing common stock 6 12
Repurchases of common stock (62) --
Other, net (5) 14
------- --------
Net cash used in financing activities (146) (280)
------- --------
Effect of exchange rate changes on cash and cash
equivalents -- (6)
------- --------
Net increase (decrease) in cash and cash equivalents 99 (207)
Cash and cash equivalents at beginning of year 779 611
------- --------
Cash and cash equivalents at end of period $878 $404
======= ========
(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 the 2005 amounts to
conform to 2006 presentation.
CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)
Power Distri- Elimi-
Engine Generation Components bution nations Total
------ ---------- ---------- ------- ------- -------
Millions
Three months
ended July 2,
2006
Net sales $1,896 $ 598 $ 563 $336 $ (551) $2,842
Investee equity,
royalty and
other income 18 3 2 14 -- 37
Segment EBIT 190 56 34 36 9 325
Three months
ended June 26,
2005
Net sales $1,667 $ 493 $ 511 $297 $ (478) $2,490
Investee equity,
royalty and
other income 25 3 2 8 -- 38
Segment EBIT 156 35 21 26 (3) 235
Three months
ended April 2,
2006
Net sales $1,821 $536 $555 $317 $(551) $2,678
Investee equity,
royalty and
other income 17 3 2 9 -- 31
Segment EBIT 179 45 31 31 (31) 255
Six months ended
July 2, 2006
Net sales $3,717 $1,134 $1,118 $653 $(1,102) $5,520
Investee equity,
royalty and
other income 35 6 4 23 -- 68
Segment EBIT 369 101 65 67 (22) 580
Six months ended
June 26, 2005
Net sales $3,147 $ 920 $ 984 $550 $ (903) $4,698
Investee equity,
royalty and
other income 50 4 4 14 -- 72
Segment EBIT 273 50 44 46 (15) 398
A reconciliation of our segment information to the corresponding
amounts in the Consolidated Financial Statements is shown in the table
below:
Three months ended Six months ended
------------------------- ----------------
July 2, June 26, April 2, July 2, June 26,
2006 2005 2006 2006 2005
------- -------- -------- ------- --------
Millions
Segment EBIT $325 $235 $255 $580 $398
Less:
Interest expense 26 28 27 53 56
------- -------- -------- ------- --------
Earnings before income taxes
and minority interests $299 $207 $228 $527 $342
======= ======== ======== ======= ========
Certain reclassifications have been made to 2005 amounts to conform to
the 2006 presentation.
CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
FINANCIAL MEASURES THAT SUPPLEMENT GAAP
(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 Six Months Ended
------------------------- ----------------
July 2, June 26, April 2, July 2, June 26,
2006 2005 2006 2006 2005
------- -------- -------- ------- --------
Millions
Earnings before interest,
income taxes and minority
interests $325 $235 $255 $580 $398
EBIT as a percentage of net
sales 11.4% 9.4% 9.5% 10.5% 8.5%
Less:
Interest expense 26 28 27 53 56
Provision for income taxes 67 58 85 152 92
Minority interests in
earnings of consolidated
subsidiaries 12 8 8 20 12
------- -------- -------- ------- --------
Net earnings $220 $141 $135 $355 $238
======= ======== ======== ======= ========
Net earnings as a percentage
of net sales 7.7 % 5.7 % 5.0 % 6.4 % 5.1%
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 CONSOLIDATED SUBSIDIARIES
SELECTED FOOTNOTE DATA
(Unaudited)
NOTE 1. EARNINGS PER SHARE
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 Six months ended
------------------------- ----------------
July 2, June 26, April 2, July 2, June 26,
2006 2005 2006 2006 2005
------- -------- -------- ------- --------
Millions
(except per share amounts)
Net earnings for basic EPS $220.1 $141.2 $134.6 $354.7 $237.8
Interest on junior
convertible subordinated
debentures, net of tax 2.7 3.2 3.2 5.9 6.5
------- -------- -------- ------- --------
Net earnings for diluted
EPS $222.8 $144.4 $137.8 $360.6 $244.3
======= ======== ======== ======= ========
Weighted-average common
shares outstanding:
Basic 45.7 44.1 44.3 45.0 44.0
Dilutive effect of stock
compensation awards 0.4 0.6 0.4 0.4 0.6
Dilutive effect of junior
convertible subordinated
debentures 4.7 6.3 6.3 5.5 6.3
------- -------- -------- ------- --------
Diluted 50.8 51.0 51.0 50.9 50.9
======= ======== ======== ======= ========
Earnings per share:
Basic $ 4.81 $ 3.20 $ 3.04 $ 7.87 $ 5.40
Diluted $ 4.38 $ 2.83 $ 2.70 $ 7.08 $ 4.80
NOTE 2. INVESTEE EQUITY, ROYALTY AND OTHER INCOME
Investee equity, royalty and other income included in our
Condensed Consolidated Statements of Earnings for the interim
reporting periods was as follows:
Three months ended Six months ended
------------------------- ----------------
July 2, June 26, April 2, July 2, June 26,
2006 2005 2006 2006 2005
------- -------- -------- ------- --------
Millions
Dongfeng Cummins Engine
Company, Ltd. $ 7 $13 $ 5 $12 $28
North American distributors 12 6 9 21 12
Cummins Mercruiser 3 3 1 4 5
Chongqing Cummins 4 4 3 7 6
Tata Cummins 3 1 3 6 2
Fleetguard Shanghai 1 1 1 2 2
All others 4 4 4 8 5
------- -------- -------- ------- --------
Cummins share of net
earnings 34 32 26 60 60
Royalty and other income 3 6 5 8 12
------- -------- -------- ------- --------
Investee equity, royalty and
other income $37 $38 $31 $68 $72
======= ======== ======== ======= ========
NOTE 3. PROVISION FOR INCOME TAXES
Our tax rates are generally less than the 35 percent U.S. income
tax rate primarily because of lower taxes on foreign earnings, export
tax benefits and (for 2005) research tax credits. The U.S. tax
research credit expired on December 31, 2005 and has not yet been
renewed.
Our income tax provision for the three months ended July 2, 2006,
was reduced by $28 million, or $0.55 per share, due to the favorable
resolution of tax uncertainties related to prior years. In addition,
our provision for the six months ended July 2, 2006 was also impacted
by a $12 million, or $0.23 per share, increase in the first quarter
for the effect of new Indiana tax legislation. As a result, our
effective tax rate for the three and six months ended July 2, 2006 was
22 percent and 29 percent, respectively. Our 2005 provision was
reduced by $10 million ($6 million in the first quarter and $4 million
in the second quarter) for the tax benefits of foreign dividend
distributions which qualified for a special 85-percent deduction under
The American Jobs Creation Act of 2004. As a result, our effective tax
rate for the three and six months ended June 26, 2005 was 28 percent
and 27 percent, respectively.
NOTE 4. DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense included in operating
activities of the Condensed Consolidated Statements of Cash Flows was
as follows:
Six months ended
----------------
July 2, June 26,
2006 2005
------- --------
Millions
Depreciation and amortization $148 $144
----------------------------------------------------------------------
Sales
$Millions Q1 Q2 Q3 Q4 YTD
-- -- -- -- ---
2006
Engine Business
Heavy-Duty
Truck 608 618 1,226
Medium Duty
Truck+Bus 215 247 462
Light Duty
Auto+RV 331 341 672
Industrial 481 516 997
Stationary
Power 186 174 360
----------------------------------------
TOTAL
ENGINE
BUSINESS 1,821 1,896 3,717
Power Generation 536 598 1,134
Components 555 563 1,118
Distributors 317 336 653
Eliminations (551) (551) (1,102)
----------------------------------------
TOTAL 2,678 2,842 5,520
========================================
2005
Engine Business
Heavy-Duty
Truck 494 553 524 568 2,139
Medium Duty
Truck+Bus 191 228 238 247 904
Light Duty
Auto+RV 255 269 314 340 1,178
Industrial 399 458 427 507 1,791
Stationary
Power 141 159 169 176 645
----------------------------------------
TOTAL
ENGINE
BUSINESS 1,480 1,667 1,672 1,838 6,657
Power Generation 427 493 504 575 1,999
Components 473 511 481 535 2,000
Distributors 253 297 295 346 1,191
Eliminations (425) (478) (485) (541) (1,929)
----------------------------------------
TOTAL 2,208 2,490 2,467 2,753 9,918
========================================
----------------------------------------------------------------------
----------------------------------------------------------------------
Engine Shipments
Units Q1 Q2 Q3 Q4 YTD
-- -- -- -- ---
2006
Midrange 114,500 121,800 236,200
Heavy-duty 30,100 31,400 61,500
High
Horsepower 3,700 4,000 7,800
----------------------------------------
TOTAL 148,300 157,200 305,500
========================================
2005
Midrange 90,900 101,800 106,100 120,400 419,200
Heavy-duty 24,900 27,500 26,300 28,900 107,600
High
Horsepower 3,100 3,800 3,300 4,200 14,400
----------------------------------------
TOTAL 118,900 133,100 135,700 153,500 541,200
========================================