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Cummins Reports Strong Second Quarter Profits

Cummins Inc. (NYSE: CMI) today reported strong profits for the second quarter of 2012.

Second quarter revenue of $4.45 billion decreased 4 percent from the same quarter in 2011. Excluding the impact of divestitures and currency movements, revenues were flat year over year. Growth in North America offset weakness in international markets, particularly China and Brazil.

Earnings before interest and taxes (EBIT) was $669 million or 15.0 percent of sales. Excluding gains from divestitures, EBIT was $663 million or 14.9 percent of sales compared to $707 million or 15.2 percent of sales in the second quarter of 2011.

Net income attributable to Cummins in the second quarter of 2012 was $469 million ($2.47 per diluted share) compared to $505 million in the same period a year ago ($2.60 per diluted share). Excluding gains from divestitures, the Company reported earnings of $2.45 per share compared to $2.41 in the second quarter of 2011.

“The Company continued to deliver strong profits despite the weakening global economic conditions,” said Tom Linebarger, Chairman and Chief Executive Officer. “Second quarter gross margins were at record levels as we continue to drive improvements in productivity and quality. Looking forward, as the global economy improves, our growth opportunities remain strong.”

Based on the current forecast, Cummins expects full year revenues to be $18 billion, with EBIT in the range of 14.25 to 14.75 percent of sales.

Other recent highlights:

  • Cummins increased its dividend by 25 percent.
  • The Company repurchased 1.8 million shares of common stock.
  • Cummins Emission Solutions and Cummins Parts business each recently received supplier Quality Achievement awards from PACCAR for 2011 performance.
  • The Company was recognized by Chrysler Group LLC as the 2012 Sustainability Supplier of the Year.
  • The Company completed the acquisition of the emission control assets of Hilite International.

Second quarter 2012 detail (all comparisons to same period in 2011)

Engine Segment

  • Sales – $2.8 billion, down 2 percent
  • Segment EBIT – $376 million, or 13.2 percent of sales, compared to $377 million or 13.0 percent of sales
  • Improved demand in North American heavy duty truck, medium duty truck and light duty truck and construction markets offset by lower sales to China construction, Brazilian truck and North American oil and gas markets

Components

  • Sales - $1.0 billion, flat
  • Segment EBIT - $116 million, or 11.2 percent of sales, compared to $120 million or 11.6 percent of sales
  • Increased demand in North American on-highway markets and higher product content in Brazil offset by lower demand in Europe and China and the impact of divestitures completed in 2011

Power Generation

  • Sales – $909 million, flat
  • Segment EBIT – $94 million, or 10.3 percent of sales, compared to $105 million or 11.6 percent of sales
  • Higher revenues in North America offsetting lower demand in Europe, China and Latin America

Distribution

  • Sales – $794 million, up 1 percent
  • Segment EBIT – $92 million, or 11.6 percent of sales, compared to $106 million or 13.5 percent of sales
  • Revenue increase driven by strong parts and service growth in several regions offsetting weaker demand in North American oil and gas market and power generation in the Middle East

About Cummins

Cummins Inc., a global power leader, is a corporation of complementary business units that design, manufacture, distribute and service diesel and natural gas engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Headquartered in Columbus, Indiana, (USA) Cummins employs approximately 44,000 people worldwide and serves customers in approximately 190 countries and territories through a network of more than 600 company-owned and independent distributor locations and approximately 6,500 dealer locations. Cummins earned $1.85 billion on sales of $18.0 billion in 2011. Press releases can be found on the Web at www.cummins.com.

Forward-looking disclosure statement

Information provided in this release that is not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our forecasts, guidance, preliminary results, expectations, hopes, beliefs and intentions on strategies regarding the future. These forward looking statements include, without limitation, statements relating to our plans and expectations for our revenues for the second quarter of 2012, as well as the full year. Our 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: the adoption and implementation of global emission standards; the price and availability of energy; the pace of infrastructure development; increasing global competition among our customers; general economic, business and financing conditions; governmental action; changes in our customers’ business strategies; competitor pricing activity; expense volatility; labor relations; and other risks detailed from time to time in our Securities and Exchange Commission filings, including particularly in the Risk Factors section of our 2011 Annual Report on Form 10-K. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this press release and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. More detailed information about factors that may affect our performance may be found in our filings with the Securities and Exchange Commission, which are available at http://www.sec.gov or at http://www.cummins.com in the Investor Relations section of our website.

Presentation of Non-GAAP Financial Information

Net income attributable to Cummins excluding gain on divestitures and EBIT are non-GAAP measures used in this release, and are 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 today at 10 a.m. EDT. This teleconference will be webcast and available on the Investor Relations section of the Cummins website at www.cummins.com . Participants wishing to view the visuals available with the audio are encouraged to sign-in a few minutes prior to the start of the teleconference.

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (a)
           
Three months ended
July 1, April 1, June 26,
In millions, except per share amounts 2012 2012 2011
NET SALES $ 4,452 $ 4,472 $ 4,641
Cost of sales   3,242   3,274   3,438  
GROSS MARGIN 1,210 1,198 1,203
 
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses 487 475 463
Research, development and engineering expenses 187 181 157
Equity, royalty and interest income from investees (Note 1) 104 104 117
Gain on sale of businesses 6 - 68
Other operating income (expense), net   2   2   -  
OPERATING INCOME 648 648 768
 
Interest income 7 8 10
Interest expense 8 8 13
Other income (expense), net   14   2   (3 )
INCOME BEFORE INCOME TAXES 661 650 762
 
Income tax expense (Note 2)   166   175   225  
CONSOLIDATED NET INCOME 495 475 537
 
Less: Net income attributable to noncontrolling interests   26   20   32  
NET INCOME ATTRIBUTABLE TO CUMMINS INC. $ 469 $ 455 $ 505  
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE
TO CUMMINS INC.
Basic $ 2.47 $ 2.39 $ 2.61
Diluted $ 2.47 $ 2.38 $ 2.60
 
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 189.8 190.4 193.8
Diluted 190.1 190.8 194.4
 
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.40 $ 0.40 $ 0.2625

(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)
       
Six months ended
In millions, except per share amounts July 1, 2012 June 26, 2011
NET SALES $ 8,924 $ 8,501
Cost of sales   6,516   6,341  
GROSS MARGIN 2,408 2,160
 
OPERATING EXPENSES AND INCOME
Selling, general and administrative expenses 962 852
Research, development and engineering expenses 368 286
Equity, royalty and interest income from investees (Note 1) 208 213
Gain on sale of businesses 6 68
Other operating income (expense), net   4   (6 )
OPERATING INCOME 1,296 1,297
 
Interest income 15 16
Interest expense 16 23
Other income (expense), net   16   (6 )
INCOME BEFORE INCOME TAXES 1,311 1,284
 
Income tax expense (Note 2)   341   382  
CONSOLIDATED NET INCOME 970 902
 
Less: Net income attributable to noncontrolling interests   46   54  
NET INCOME ATTRIBUTABLE TO CUMMINS INC. $ 924 $ 848  
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE
TO CUMMINS INC.
Basic $ 4.86 $ 4.36
Diluted $ 4.85 $ 4.34
 
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 190.1 194.6
Diluted 190.5 195.2
 
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.80 $ 0.525

(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)
In millions, except par value   July 1, 2012     December 31, 2011
ASSETS
Current assets
  Cash and cash equivalents $ 1,145 $ 1,484
Marketable securities   261     277  
  Total cash, cash equivalents and marketable securities 1,406 1,761
Accounts and notes receivable, net 2,620 2,526
Inventories 2,581 2,141
Prepaid expenses and other current assets   639     663  
  Total current assets   7,246     7,091  
Long-term assets
Property, plant and equipment 5,475 5,245
Accumulated depreciation   (3,051 )   (2,957 )
Property, plant and equipment, net   2,424     2,288  
Investments and advances related to equity method investees 890 838
Goodwill 345 339
Other intangible assets, net 268 227
Other assets   996     885  
  Total assets $ 12,169   $ 11,668  
 
LIABILITIES
Current liabilities
Loans payable $ 58 $ 28
Accounts payable (principally trade) 1,634 1,546
Current portion of accrued product warranty 407 422
Accrued compensation, benefits and retirement costs 340 511
Deferred revenue 208 208
Taxes payable (including taxes on income) 258 282
Other accrued expenses   665     660  
Total current liabilities   3,570     3,657  
Long-term liabilities
Long-term debt 653 658
Pensions 118 205
Postretirement benefits other than pensions 425 432
Other liabilities and deferred revenue   966     885  
Total liabilities   5,732     5,837  
 
EQUITY
Cummins Inc. shareholders’ equity
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.2 shares issued 2,036 2,001
Retained earnings 6,810 6,038
Treasury stock, at cost, 32.0 and 30.2 shares (1,777 ) (1,587 )
Common stock held by employee benefits trust, at cost, 1.6 and 1.8 shares (20 ) (22 )
Accumulated other comprehensive loss
Defined benefit postretirement plans (703 ) (724 )
Other   (243 )   (214 )
Total accumulated other comprehensive loss   (946 )   (938 )
Total Cummins Inc. shareholders’ equity 6,103 5,492
Noncontrolling interests   334     339  
Total equity   6,437     5,831  
Total liabilities and equity $ 12,169   $ 11,668  

(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)
      Six months ended
In millions July 1, 2012     June 26, 2011
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income $ 970 $ 902
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Depreciation and amortization 171 159
Gain on sale of businesses (6 ) (68 )
Deferred income taxes (39 ) 87
Equity in income of investees, net of dividends (25 ) 2
Pension contributions in excess of expense (52 ) (47 )
Other post-retirement benefits payments in excess of expense (7 ) (10 )
Stock-based compensation expense 21 18
Excess tax benefits on stock-based awards (11 ) (4 )
Translation and hedging activities 7 (6 )
Changes in current assets and liabilities, net of acquisitions and divestitures:
Accounts and notes receivable (116 ) (513 )
Inventories (439 ) (290 )
Other current assets (47 ) 11
Accounts payable 61 307
Accrued expenses (173 ) 169
Changes in other liabilities and deferred revenue 103 58
Other, net   (21 )   (31 )
Net cash provided by operating activities   397     744  
 
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (266 ) (215 )
Investments in internal use software (40 ) (22 )
Investments in and advances to equity investees (40 ) (20 )
Proceeds from sale of business, net of cash sold - 111
Acquisition of businesses, net of cash acquired (12 ) -
Investments in marketable securities—acquisitions (276 ) (361 )
Investments in marketable securities—liquidations 280 343
Cash flows from derivatives not designated as hedges 1 6
Other, net   3     7  
Net cash used in investing activities   (350 )   (151 )
 
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 46 60
Payments on borrowings and capital lease obligations (75 ) (94 )
Net borrowings under short-term credit agreements 3 11
Distributions to noncontrolling interests (32 ) (26 )
Dividend payments on common stock (152 ) (102 )
Repurchases of common stock (196 ) (373 )
Excess tax benefits on stock-based awards 11 4
Other, net   9     7  
Net cash used in financing activities   (386 )   (513 )
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS   -     8  
Net increase (decrease) in cash and cash equivalents (339 ) 88
Cash and cash equivalents at beginning of year   1,484     1,023  
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,145   $ 1,111  

(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   Components  

Power Generation

  Distribution  

Non-segment Items (1)

  Total
In millions
Three months ended July 1, 2012
External sales $ 2,381 $ 710 $ 572 $ 789 $ - $ 4,452
Intersegment sales 460 326 337 5 (1,128 )   -
  Total sales 2,841 1,036 909 794 (1,128 ) 4,452
Depreciation and amortization (2) 47 19 11 8 - 85
Research, development and engineering expenses 115 51 19 2 - 187
Equity, royalty and interest income from investees 37 8 10 49 - 104
Interest income 3 1 3 - - 7
Segment EBIT 376 116 94 92 (9 ) 669
 
Three months ended April 1, 2012
External sales $ 2,412 $ 774 $ 516 $ 770 $ - $ 4,472
Intersegment sales 447   325   264   5   (1,041 )   -
Total sales 2,859 1,099 780 775 (1,041 ) 4,472
Depreciation and amortization (2) 47 19 11 7 - 84
Research, development and engineering expenses 111 51 18 1 - 181
Equity, royalty and interest income from investees 38 8 10 48 - 104
Interest income 4 1 2 1 - 8
Segment EBIT 381 143 76 94 (36 ) 658
 
Three months ended June 26, 2011
External sales $ 2,476 $ 741 $ 649 $ 775 $ - $ 4,641
Intersegment sales 424 291 260 10 (985 )   -
Total sales 2,900 1,032 909 785 (985 ) 4,641
Depreciation and amortization (2) 44 18 11 5 - 78
Research, development and engineering expenses 102 43 12 - - 157
Equity, royalty and interest income from investees 49 9 13 46 - 117
Interest income 6 1 3 - - 10
Segment EBIT 377 120 105 106 67 775
 
Six months ended July 1, 2012
External sales $ 4,793 $ 1,484 $ 1,088 $ 1,559 $ - $ 8,924
Intersegment sales 907 651 601 10 (2,169 )   -
Total sales 5,700 2,135 1,689 1,569 (2,169 ) 8,924
Depreciation and amortization (2) 94 38 22 15 - 169
Research, development and engineering expenses 226 102 37 3 - 368
Equity, royalty and interest income from investees 75 16 20 97 - 208
Interest income 7 2 5 1 - 15
Segment EBIT 757 259 170 186 (45 ) 1,327
 
Six months ended June 26, 2011
External sales $ 4,482 $ 1,401 $ 1,206 $ 1,412 $ - $ 8,501
Intersegment sales 809 555 498 15 (1,877 )   -
Total sales 5,291 1,956 1,704 1,427 (1,877 ) 8,501
Depreciation and amortization (2) 89 36 21 11 - 157
Research, development and engineering expenses 182 80 23 1 - 286
Equity, royalty and interest income from investees 91 17 21 84 - 213
Interest income 9 2 4 1 - 16
Segment EBIT 667 225 194 195 26 1,307

(1)

  Includes intersegment sales and profit in inventory eliminations and unallocated corporate expenses. The three and six months ended July 1, 2012, include a $6 million gain ($4 million after-tax) related to adjustments from our 2011 divestitures. There were no significant unallocated corporate expenses for the three months ended April 1, 2012. The three and six months ended June 26, 2011, include a $68 million gain ($37 million after-tax) related to the sale of certain assets and liabilities of our exhaust business from the Components segment. The gains have been excluded from segment results as they were not considered in our evaluation of operating results for the three and six months ended July 1, 2012 and June 26, 2011. There were no other significant unallocated corporate expenses for the three and six months ended July 1, 2012 and June 26, 2011.

(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 Statements of Income is shown in the table below:

 
Three months ended Six months ended
July 1,   April 1,   June 26, July 1,   June 26,
In millions 2012 2012 2011 2012 2011
Segment EBIT $ 669 $ 658 $ 775 $ 1,327 $ 1,307
Less
Interest expense   8   8   13   16   23
Income before income taxes $ 661 $ 650 $ 762 $ 1,311 $ 1,284
 
         
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 for the interim reporting periods was as follows:

 
Three months ended Six months ended
July 1,   April 1,   June 26, July 1,   June 26,
In millions 2012 2012 2011 2012 2011
Distribution Entities
North American distributors $ 38 $ 40 $ 35 $ 78 $ 65
Komatsu Cummins Chile, Ltda. 6 5 6 11 10
All other distributors 2 1 1 3 2
Manufacturing Entities
Chongqing Cummins Engine Company, Ltd. 17 18 19 35 31
Dongfeng Cummins Engine Company, Ltd. 17 16 26 33 49
Cummins Westport, Inc. 4 5 3 9 4
Shanghai Fleetguard Filter Co., Ltd. 4 3 4 7 8
Tata Cummins, Ltd. 3 4 3 7 7
Beijing Foton Cummins Engine Co., Ltd. 2 (2 ) (1 ) - (3 )
Valvoline Cummins, Ltd. 2 2 2 4 4
Komatsu manufacturing alliances 1 (1 ) (1 ) - 1
All other manufacturers   (1 )   1     6     -   12  
Cummins share of net income $ 95 $ 92 $ 103 $ 187 $ 190
Royalty and interest income   9     12     14     21   23  
Equity, royalty and interest income from investees $ 104   $ 104   $ 117   $ 208 $ 213  
 

NOTE 2. INCOME TAXES

Our effective tax rate for the year is expected to approximate 26 percent, absent any discrete period activity. Our tax rate is generally less than the 35 percent U.S. income tax rate primarily due to lower tax rates on foreign income. The tax rates for the three and six month periods ended July 1, 2012, were 25.1 percent and 26.0 percent, respectively.

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