Global Customer Demand, Improved Cost Structure Drive Cummins' Strong First-Quarter Performance
Power Generation and Distribution Results More Than Offset Impact of Emissions Regulation Changes; Company Increases 2007 Profit Guidance
COLUMBUS, Ind.--(BUSINESS WIRE)--
Cummins Inc. (NYSE:CMI) today announced strong first quarter earnings, led by significant sales growth in almost every market. The first-quarter performance demonstrated the benefits of the Company's ongoing effort to lower its cost structure and to diversify its business beyond the North American heavy-duty truck engine market.
The heavy-duty truck market - still the Company's largest - declined, as expected, due to lower truck sales resulting from new diesel emissions standards. However, results from Cummins' other operations led the Company to higher sales and net income for the quarter.
For the quarter, the Company reported sales of $2.82 billion, up 5.2 percent from $2.68 billion during the same period in 2006. Net income of $143 million ($1.42 per diluted share) increased 5.9 percent from $135 million ($1.35 per diluted share), due to the Company's focus on strengthening its balance sheet and lowering costs. All earnings per share amounts reflect the two-for-one stock split distributed on April 9, 2007.
Earnings before interest and taxes (EBIT) decreased 4.7 percent to $243 million during the first quarter. This reflects lower sales in the North American heavy-duty truck market, investment in global growth opportunities and costs associated with introducing 2007 emissions-compliant products.
"Despite the predicted decline in the North American heavy-duty truck market, we achieved outstanding results in the first quarter," said Tim Solso, Cummins Chairman and Chief Executive Officer. "These results show our strategy is working, and we expect that type of performance to continue the rest of this year and beyond.
"We did what we said we would do - continued to deliver superior products and service to our customers, even in the face of significant changes to U.S. emissions regulations. Despite our outstanding performance in the first quarter, we don't intend to relax. We remain committed to making the 2007 product launch cycle the best in our history and we are focused on controlling our costs and providing the best possible products and service."
Based on the Company's first-quarter results and updated forecast for the rest of the year, Cummins today also announced that it has increased its full-year profit guidance to $6.00 - $6.50 a share, up from $5.50 - $5.75 a share.
Cummins Power Generation continued its strong performance by reporting record sales and Segment EBIT during the quarter. The business saw a significant increase in demand for its commercial generator sets and alternators around the world - most notably in North America, India and the Middle East. Consumer sales also improved and more growth is expected in future quarters from sales of portable generator sets and auxiliary power units for commercial trucks.
The Company's Distribution business performed well during the quarter, with Segment EBIT increasing 26 percent from the same period in 2006 to $39 million. The segment enjoyed strong gains for engine sales in Europe, for generator sets in Europe and the South Pacific and for parts in Europe. Additionally, income from the Company's distributor joint ventures nearly doubled, driven in part by an increase in orders for power generation equipment in North America.
Sales to the North American heavy and medium-duty truck engine markets fell due to the change in emissions standards. Despite the decrease, the Company's ability to produce new emission-certified engines from the beginning of the year resulted in market share gains with some customers, and an improved cost structure allowed the heavy-duty business to remain profitable. Additionally, the Company showed significant strength in international on-highway engine markets as well as in global industrial markets during the quarter.
Capital spending for both the Company and its manufacturing joint ventures is expected to increase significantly in 2007, with the majority going to support growth in current products or expansion into new products.
A few examples of current or planned capital spending programs:
-- Additional fuel system assembly capacity in the U.S., Mexico
and China.
-- Expansion of exhaust aftertreatment assembly in the U.S.
-- Expanded turbocharger capacity in the U.S., China and India.
-- Increased high-horsepower machining and assembly capacity in
the United Kingdom and India.
-- New light-duty diesel engine manufacturing and assembly in the
United States and China.
"Even as Cummins continues to focus on 2007, the Company has committed to investing in profitable future growth opportunities around the world," Solso said.
First quarter details
Engine Segment
Sales of $1.76 billion were 3 percent lower than the same period in 2006, while Segment EBIT declined by 28 percent to $128 million, or 7.3 percent of sales. Global heavy-duty truck engines shipments decreased 45 percent, while global medium-duty truck engine shipments decreased 7 percent. Shipments to the global construction markets increased 25 percent, while oil and gas shipments jumped 11 percent.
Power Generation Segment
Sales, Segment EBIT and return on sales reached all-time highs. Sales of $675 million were a 26 percent increase from the same period in 2006, while Segment EBIT rose 71 percent to $77 million, or 11.4 percent of sales. Commercial generator sales rose 27 percent and alternator sales increased 43 percent, as both markets showed strength in almost all geographic areas. Consumer sales improved by 7 percent, aided by the introduction of portable generator sets.
Distribution Segment
Sales fell 2 percent to $309 million, due to changes in reporting for a North American distributor joint venture. Excluding the reporting change, sales rose 12 percent compared to the first quarter of 2006. Segment EBIT of $39 million, or 12.6 percent of sales, increased 26 percent from the same period in 2006.
Components Segment
Sales rose 18 percent to $657 million, while Segment EBIT declined 23 percent to $24 million, or 3.7 percent of sales. Significantly stronger results in the Company's exhaust aftertreatment business were more than offset by the expected decline in heavy-duty volumes in the Fuel Systems division and higher material and new product costs in the Company's Turbo Technologies division.
Presentation of Non-GAAP Financial Information
EBIT is a non-GAAP 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 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.
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 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 $715 million on sales of $11.4 billion in 2006. Press releases can be found on the Web at www.cummins.com.
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 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
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited) (a)
Three months ended
------------------------------
April 1, April 2, December 31,
2007 2006 2006
-------- -------- ------------
Millions
(except per share amounts)
Net sales $2,817 $2,678 $3,033
Cost of sales 2,265 2,112 2,397
-------- -------- ------------
Gross margin 552 566 636
Operating expenses and income
Selling and administrative expenses 283 268 300
Research and engineering expenses 80 82 78
Investee equity, royalty and other
income 36 31 35
Other operating (expenses) income,
net (2 ) 1 3
-------- -------- ------------
Operating earnings 223 248 296
Interest income 11 9 14
Interest expense 16 27 20
Other income (expenses), net 9 (2) (7)
-------- -------- ------------
Earnings before income taxes and
minority interests 227 228 283
Provision for income taxes 75 85 80
Minority interests in earnings of
consolidated subsidiaries 9 8 14
-------- -------- ------------
Net earnings $ 143 $ 135 $ 189
======== ======== ============
Earnings per common share (b)
Basic $ 1.43 $ 1.52 $ 1.89
Diluted $ 1.42 $ 1.35 $ 1.87
Cash dividends declared per share $ 0.18 $ 0.15 $ 0.18
(a) Prepared on an unaudited basis in accordance with accounting
principles generally accepted in the United States of America.
(b) All per share amounts reflect the two-for-one stock split
distributed April 9, 2007.
Certain reclassifications have been made to 2006 amounts to conform to
the 2007 presentation.
CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (a)
April 1, December 31,
2007 2006
-------- ------------
Millions
(except par value)
ASSETS
Current assets
Cash and cash equivalents $ 521 $ 840
Marketable securities 69 95
Receivables, net 1,917 1,767
Inventories 1,563 1,393
Other current assets 393 393
-------- ------------
Total current assets 4,463 4,488
Long-term assets
Property, plant and equipment, net 1,541 1,574
Investments in and advances to equity
investees 378 345
Goodwill 369 356
Other intangible assets, net 141 128
Other assets 556 574
-------- ------------
Total assets $7,448 $7,465
======== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 82 $ 164
Accounts payable 1,230 1,104
Other accrued expenses 973 1,131
-------- ------------
Total current liabilities 2,285 2,399
Long-term liabilities
Long-term debt 613 647
Other liabilities 1,360 1,363
-------- ------------
Total liabilities 4,258 4,409
-------- ------------
Minority interests 253 254
-------- ------------
Shareholders' equity (b)
Common stock, $2.50 par value, 150 shares
authorized, 110.2 and 110.0 shares issued 275 137
Additional paid-in capital 1,368 1,500
Retained earnings 2,134 2,009
Treasury stock, at cost, 5.9 and 5.8 shares (222) (212)
Common stock held in trust for employee
benefit plans, 3.8 and 3.8 shares (92) (92)
Unearned compensation (13) (14)
Accumulated other comprehensive loss (513) (526)
-------- ------------
Total shareholders' equity 2,937 2,802
-------- ------------
Total liabilities, minority interests and
shareholders' equity $7,448 $7,465
======== ============
(a) Prepared on an unaudited basis in accordance with accounting
principles generally accepted in the United States of America.
(b) All share amounts reflect the two-for-one stock split distributed
April 9, 2007.
CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (a)
Three months ended
------------------
April 1, April 2,
2007 2006
--------- --------
Millions
Net cash (used in) provided by operating activities $(113) $ 18
--------- --------
Cash flows from investing activities
Capital expenditures (48) (52)
Investments in internal use software (13) (12)
Proceeds from the disposal of property, plant and
equipment 2 22
Investments in and advances to equity investees (17) --
Acquisition of businesses, net of cash acquired (20) --
Investments in marketable securities--acquisitions (68) (38)
Investments in marketable securities--liquidations 94 42
Other, net (3) --
--------- --------
Net cash used in investing activities (73) (38)
--------- --------
Cash flows from financing activities
Proceeds from borrowings 4 19
Payments on borrowings and capital lease
obligations (101) (64)
Dividend payments on common stock (19) (14)
Proceeds from issuing common stock 2 4
Repurchases of common stock (13) (36)
Other, net (8) 7
--------- --------
Net cash used in financing activities (135) (84)
--------- --------
Effect of exchange rate changes on cash and cash
equivalents 2 1
--------- --------
Net decrease in cash and cash equivalents (319) (103)
Cash and cash equivalents at beginning of year 840 779
--------- --------
Cash and cash equivalents at end of period $ 521 $676
========= ========
(a) Prepared on an unaudited basis in accordance with accounting
principles generally accepted in the United States of America.
CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)
Non-
Power segment
Engine Generation Components Distribution items(1) Total
---------------------------------------------------------
Millions
Three months
ended April
1, 2007
External
sales $1,522 $531 $455 $309 $ -- $2,817
Intersegment
sales 243 144 202 -- (589) --
------- ----- --------- ------------ -------- -------
Net sales 1,765 675 657 309 (589) 2,817
Investee
equity,
royalty and
other income 17 3 (1) 17 -- 36
Interest
income 8 2 1 -- -- 11
Segment EBIT 128 77 24 39 (25) 243
Three months
ended April
2, 2006
External
sales $1,599 $411 $355 $313 $ -- $2,678
Intersegment
sales 222 125 200 4 (551) --
------- ----- --------- ------------ -------- -------
Net sales 1,821 536 555 317 (551) 2,678
Investee
equity,
royalty and
other income 17 3 2 9 -- 31
Interest
income 7 1 -- 1 -- 9
Segment EBIT 179 45 31 31 (31) 255
Three months
ended
December 31,
2006
External
sales $1,742 $515 $394 $382 $ -- $3,033
Intersegment
sales 210 143 205 4 (562) --
------- ----- --------- ------------ -------- -------
Net sales 1,952 658 599 386 (562) 3,033
Investee
equity,
royalty and
other income 16 2 1 16 -- 35
Interest
income 11 2 1 -- -- 14
Segment EBIT 181 62 23 39 (2) 303
(1) Includes intercompany eliminations and unallocated corporate
expenses.
A reconciliation of our segment information to the corresponding
amounts in the Consolidated Financial Statements is shown in the
table below:
Three Months Ended
------------------------------
April 1, April 2, December 31,
2007 2006 2006
-------- -------- ------------
Millions
Segment EBIT $243 $255 $303
Less:
Interest expense 16 27 20
-------- -------- ------------
Earnings before income taxes and
minority interests $227 $228 $283
======== ======== ============
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
------------------------------
April 1, April 2, December 31,
2007 2006 2006
-------- -------- ------------
Millions
Earnings before interest expense,
income taxes and minority interests $243 $255 $303
EBIT as a percentage of net sales 8.6 % 9.5 % 10.0 %
Less:
Interest expense 16 27 20
Provision for income taxes 75 85 80
Minority interests in earnings of
consolidated subsidiaries 9 8 14
-------- -------- ------------
Net earnings $143 $135 $189
======== ======== ============
Net earnings as a percentage of net
sales 5.1 % 5.0 % 6.2 %
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.
Cash from operations excluding pension contributions
For the three months ended
--------------------------
April 1, April 2,
2007 2006
------------- ------------
Cash (used in) provided by operations $(113) $18
Add back: pension contributions 61 41
------------- ------------
Cash (used in) provided by operations
excluding pension contributions $ (52) $59
============= ============
We believe cash (used in) provided by operations excluding pension
contributions is a useful measure of our operating performance for
the periods presented as it illustrates our operating performance
without regard to funding decisions. This measure is not in
accordance with, or an alternative for, 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
------------------------------
April 1, April 2, December 31,
2007 2006 2006
-------- -------- ------------
Millions
(except per share amounts)
Net earnings for basic EPS $ 143 $ 135 $ 189
Interest on junior convertible
subordinated debentures, net of tax -- 3 --
-------- -------- ------------
Net earnings for diluted EPS $ 143 $ 138 $ 189
======== ======== ============
Weighted-average common shares
outstanding:
Basic 100.0 88.7 100.2
Dilutive effect of stock compensation
awards 0.5 0.7 0.9
Dilutive effect of junior convertible
subordinated debentures -- 12.6 --
-------- -------- ------------
Diluted 100.5 102.0 101.1
======== ======== ============
Earnings per common share:
Basic $1.43 $1.52 $1.89
Diluted $1.42 $1.35 $1.87
The Board of Directors authorized a two-for-one split of Cummins stock
on March 8, 2007, which was distributed on April 9, 2007, to
shareholders of record as of March 26, 2007. All share and per share
amounts have been adjusted to reflect the two-for-one stock split.
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
------------------------------
April 1, April 2, December 31,
2007 2006 2006
-------- -------- ------------
Millions
Dongfeng Cummins Engine Company, Ltd $ 6 $ 5 $ 3
North American distributors 15 9 14
Cummins Mercruiser 3 1 2
Chongqing Cummins 5 3 2
Tata Cummins 2 3 3
Fleetguard Shanghai 1 1 1
All others 1 4 5
-------- -------- ------------
Cummins share of net earnings 33 26 30
Royalty and other income 3 5 5
-------- -------- ------------
Investee equity, royalty and other
income $36 $31 $35
======== ======== ============
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 research tax credits. Our effective tax rate for the three months ended April 1, 2007, was 33.0 percent. Our effective tax rate for the three months ended April 2, 2006, was 37.3 percent. The effective tax rate for the three months ended April 2, 2006, was higher than 35 percent due to a tax bill passed in Indiana during March 2006 that has the effect of lowering our effective tax rate in Indiana over time. As a result, our first quarter 2006 tax provision includes a $12 million charge, or $0.12 per share, to adjust deferred tax assets to their ultimate expected realizable value based upon this action. NOTE 4. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense included in operating activities of the Condensed Consolidated Statements of Cash Flows for the three months ended April 1, 2007 and April 2, 2006, was $68 million and $74 million, respectively. NOTE 5. SHIPPING AND HANDLING COSTS Our shipping and handling costs are expensed as incurred. Those shipping and handling costs associated with operations of our inventory distribution centers and warehouse facilities were previously classified as "Selling and administrative expenses" in our Condensed Consolidated Statements of Earnings. In accordance with Emerging Issues Task Force (EITF) Issue No. 00-10 "Accounting for Shipping and Handling Fees and Costs," we previously disclosed the amount of shipping and handling costs included as "Selling and administrative expenses" in the notes to our consolidated financial statements. Beginning January 1, 2007, we revised our accounting policy and all shipping and handling costs are now classified as "Cost of sales." This presentation is more consistent with current industry practice. For purposes of comparability, the $33 million previously classified as "Selling and administrative expenses" in 2006 has been adjusted retrospectively to apply the new method. This change had no impact on operating earnings, EBIT, net earnings, or earnings per share.
CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTAL STATEMENTS OF EARNINGS INFORMATION
(Unaudited)
Shipping and handling costs associated with operations of our
inventory distribution centers and warehouse facilities were
previously classified as "Selling and administrative expenses" in our
Consolidated Statements of Earnings. In accordance with Emerging
Issues Task Force (EITF) Issue No. 00-10 "Accounting for Shipping and
Handling Fees and Costs," we previously disclosed the amount of
shipping and handling costs included as "Selling and administrative
expenses" in the notes to our consolidated financial statements.
Beginning January 1, 2007, we revised our accounting policy and all
shipping and handling costs are classified as "Cost of sales." This
presentation is more consistent with current industry practice. For
purposes of comparability, amounts previously classified as "Selling
and administrative expenses" in previous periods have been adjusted
retrospectively to apply the new method. The Consolidated Statements
of Earnings for each of the quarterly periods in 2006 and for the
2006 and 2005 annual periods with all shipping and handling costs
included in "Cost of sales" follows:
For the years
For the three months ended ended
--------------------------------- ----------------
April 2, July 2, Oct. 1, Dec. 31, December 31,
2006 2006 2006 2006 2006 2005
-------- ------- ------- -------- -------- -------
Millions
Net sales $2,678 $2,842 $2,809 $3,033 $11,362 $9,918
Cost of sales 2,112 2,196 2,192 2,397 8,897 7,874
-------- ------- ------- -------- -------- -------
Gross margin 566 646 617 636 2,465 2,044
Operating expenses
and income
Selling and
administrative
expenses 268 294 291 300 1,153 1,003
Research and
engineering
expenses 82 80 81 78 321 278
Investee equity,
royalty and other
income 31 37 37 35 140 131
Other operating
income
(expenses), net 1 -- (4) 3 -- --
-------- ------- ------- -------- -------- -------
Operating earnings 248 309 278 296 1,131 894
Interest income 9 10 14 14 47 24
Interest expense 27 26 23 20 96 109
Other (expenses)
income, net (2) 6 4 (7) 1 (11)
-------- ------- ------- -------- -------- -------
Earnings before
income taxes and
minority interests 228 299 273 283 1,083 798
Provision for income
taxes 85 67 92 80 324 216
Minority interests
in earnings of
consolidated
subsidiaries 8 12 10 14 44 32
-------- ------- ------- -------- -------- -------
Net earnings $ 135 $ 220 $ 171 $ 189 $ 715 $ 550
======== ======= ======= ======== ======== =======
Note:
Amounts reclassified
from "Selling and
administrative
expenses" to "Cost
of sales" $ 33 $ 26 $ 37 $ 34 $ 130 $ 142
----------------------------------------------------------------------
Sales
$Millions Q1 Q2 Q3 Q4 YTD
----------------------------------------
2007
Engine Business
Heavy-Duty
Truck 424 424
Medium Duty
Truck+Bus 206 206
Light Duty
Auto+RV 288 288
Industrial 617 617
Stationary
Power 230 230
----------------------------------------
TOTAL ENGINE
BUSINESS 1,765 0 0 0 1,765
Power Generation 675 675
Components 657 657
Distributors 309 309
Eliminations (589) (589)
----------------------------------------
TOTAL 2,817 0 0 0 2,817
========================================
2006
Engine Business
Heavy-Duty
Truck 608 618 632 640 2,498
Medium Duty
Truck+Bus 215 247 253 256 971
Light Duty
Auto+RV 331 341 267 322 1,261
Industrial 481 516 507 559 2,063
Stationary
Power 186 174 183 175 718
----------------------------------------
TOTAL ENGINE
BUSINESS 1,821 1,896 1,842 1,952 7,511
Power Generation 536 598 624 658 2,416
Components 555 563 564 599 2,281
Distributors 317 336 346 386 1,385
Eliminations (551) (551) (567) (562) (2,231)
----------------------------------------
TOTAL 2,678 2,842 2,809 3,033 11,362
========================================
----------------------------------------------------------------------
----------------------------------------------------------------------
Engine Shipments
Units Q1 Q2 Q3 Q4 YTD
----------------------------------------
2007
Midrange 107,200 107,200
Heavy-duty 19,000 19,000
High Horsepower 4,300 4,300
----------------------------------------
TOTAL 130,500 0 0 0 130,500
========================================
2006
Midrange 114,500 121,800 104,800 118,800 459,900
Heavy-duty 30,100 31,400 31,000 30,900 123,400
High Horsepower 3,700 4,000 4,100 4,500 16,300
----------------------------------------
TOTAL 148,300 157,200 139,900 154,200 599,600
========================================
----------------------------------------------------------------------
Source: Cummins Inc.
Released April 27, 2007