Cummins Announces Fourth Quarter and Full Year 2017 Results

• Fourth quarter revenues of $5.5 billion, EBIT of 11.3 percent of sales
• GAAP¹ Net Loss of $274 million, Diluted EPS Loss of $1.65
• Full year revenues of $20.4 billion, EBIT of 12.0 percent of sales
• GAAP Net Income of $999 million, Diluted EPS of $5.97
• Fourth quarter and full year Diluted EPS negatively impacted by $4.68 and $4.65 as a result of charges related to the recently enacted U.S. Tax Cuts and Jobs Act
• The company expects full year 2018 revenues to be up 4 to 8 percent, EBITDA expected to be in the range of 15.8 to 16.2 percent

COLUMBUS, Ind.--(BUSINESS WIRE)-- Cummins Inc. (NYSE: CMI) today reported results for the fourth quarter of 2017.

Fourth quarter revenues of $5.5 billion increased 22 percent from the same quarter in 2016. Strong demand for trucks, construction and mining equipment drove the majority of the revenue increase. Sales in North America and international markets both increased by 22 percent.

Earnings before interest and taxes (EBIT) in the fourth quarter were $620 million, or 11.3 percent of sales, up from $526 million or 11.7 percent of sales a year ago. EBIT was negatively impacted by $39 million as a result of charges incurred by unconsolidated joint ventures related to U.S. tax reform. Excluding the impact of tax reform, EBIT for the fourth quarter of 2017 was $659 million or 12.0 percent of sales.

Net income attributable to Cummins in the fourth quarter was a net loss of $274 million (a loss of $1.65 per diluted share), compared to net income of $378 million ($2.25 per diluted share). Fourth quarter net income included $777 million in one-time charges related to tax reform. Excluding the tax reform impact, net income attributable to Cummins in the fourth quarter was $503 million ($3.03 per diluted share), reflecting a 19.5 percent tax rate.

Revenues for the full year 2017 were $20.4 billion, 17 percent higher than 2016. Revenues in North America increased 15 percent and international sales increased 19 percent.

EBIT for the year was $2.4 billion or 12.0 percent of sales, or 12.2 percent of sales excluding charges related to tax reform. This compares to $2.0 billion or 11.4 percent of sales in 2016.

Net income attributable to Cummins for the full year was $999 million ($5.97 per diluted share), compared to $1.4 billion ($8.23 per diluted share) in 2016. Excluding charges totaling $777 million in connection with tax reform, full year net income attributable to Cummins was $1.8 billion ($10.62 per diluted share), with a full year tax rate of 24.5 percent.

“The Company delivered strong growth, solid profitability and record operating cash flow in 2017,” said Chairman and CEO Tom Linebarger. “We expect demand to remain strong in many of our core markets in 2018 and profitability to improve as a result of higher sales and continued execution of our cost reduction initiatives. The Company again plans to return at least 50 percent of Operating Cash Flow to shareholders in 2018.”

Based on the current forecast, Cummins expects full year 2018 revenues to be up 4 to 8 percent, and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) to be in the range of 15.8 to 16.2 percent of sales. EBITDA for the full year 2017 was 15.0 percent of sales, excluding the impact of US tax reform.

2017 Highlights:

• The Company returned $1.2 billion or 51 percent of Operating Cash Flow to shareholders in the form of dividends and share repurchases
• Cummins and Eaton (NYSE:ETN) partnered to form the Eaton Cummins Automated Transmission Technologies joint venture which will capitalize on the secular shift to more automated transmissions in commercial vehicle markets
• The company announced a new electrified power partnership with GILLIG LLC to integrate and optimize new battery electric technology offered by Cummins that will soon power GILLIG zero-emissions transit buses
• Cummins was named to Ethisphere’s 2017 list of World’s Most Ethical Companies for a 10th consecutive year by the Ethisphere Institute
• DiversityInc named Cummins one of the Top 50 Companies for Diversity for the eleventh consecutive year. Cummins ranked No. 21 on the 2017 annual list, which included more than 1,000 participating companies
• Cummins was one of a select number of companies named to the North American Index of the Dow Jones Sustainability Indices, a leading independent organization measuring corporate sustainability in the world

¹ Generally Accepted Accounting Principles

Fourth quarter 2017 detail

Engine Segment

• Sales - $2.3 billion, up 16 percent
• Segment EBIT - $224 million, or 9.8 percent of sales, compared to $194 million or 9.9 percent of sales
• Segment EBIT was negatively impacted by $23 million as a result of charges recorded by unconsolidated joint ventures related to recent U.S. tax reform
• On-highway revenues increased 14 percent, and off-highway revenues increased 27 percent primarily due to increased global demand in truck and constructions markets

Distribution Segment

• Sales - $1.9 billion, up 16 percent
• Segment EBIT - $97 million, or 5.0 percent of sales, compared to $122 million or 7.3 percent of sales
• Segment EBIT was negatively impacted by $4 million as a result of charges recorded by unconsolidated joint ventures related to recent U.S. tax reform
• Revenues in North America increased by 21 percent and in international markets by 7 percent

Components Segment

• Sales - $1.6 billion, up 32 percent
• Segment EBIT - $168 million, or 10.8 percent of sales, compared to $140 million or 11.9 percent of sales
• Segment EBIT was negatively impacted by $12 million as result of charges recorded by unconsolidated joint ventures related to recent U.S. tax reform
• The Eaton Cummins Automated Transmission joint venture recorded sales of $95 million and an EBIT loss of $14 million in the fourth quarter
• Revenues in North America increased by 35 percent, and international sales grew by 30 percent due to higher commercial truck production in North America and China as well as additional content in India with the introduction of Bharat Stage IV in 2017

Power Systems Segment

• Sales - $1.1 billion, up 18 percent
• Segment EBIT - $95 million, or 8.6 percent of sales, compared to $68 million, or 7.3 percent of sales
• Increased demand in mining, oil and gas and power generation markets drove the growth in sales

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 currently employs approximately 58,600 people worldwide and serves customers in approximately 190 countries and territories through a network of approximately 500 company-owned and independent distributor locations and approximately 7,500 dealer locations. Press releases can be found on the Web at www.cummins.com. Follow Cummins on Twitter at www.twittter.com/cummins and on YouTube at www.youtube.com/cumminsinc.

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 full year of 2018. 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 2016 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

EBIT and EBITDA are non-GAAP measures used in this release, and are defined and reconciled to what management believes to be the most comparable GAAP measures 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 and EBITDA are measures 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. EST. 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.

A reconciliation of our segment information to the corresponding amounts in the Condensed Consolidated Statements of Income is shown in the table below:

CUMMINS INC. AND SUBSIDIARIES
SELECT FOOTNOTE DATA
(Unaudited)

BASIS OF PRESENTATION

Our consolidated financial statements were prepared based on proposed guidance provided by the Financial Accounting Standards Board in their Exposure Draft (ED) released on January 18, 2018, regarding the reclassification of certain stranded effects of income taxes in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017. The ED was not final on our earnings release date of February 6, 2018, but is expected to be final when we file our 2017 Form 10-K the week of February 12, 2018.

EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES

Equity, royalty and interest income from investees included in our Condensed Consolidated Statements of Income for the reporting periods was as follows:

INCOME TAXES

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (Tax Legislation). Among other things, the Tax Legislation changed the U.S. statutory rate to 21 percent effective January 1, 2018. The impact of the Tax Legislation resulted in a net incremental charge to our Condensed Consolidated Statements of Income of $777 million. The components of the 2017 charge were as follows:

The $781 million increase in tax expense is composed of three elements - the remeasurement of deferred taxes, a one-time transitional tax on unrepatriated earnings and withholding taxes on foreign earnings.

We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent. We are still analyzing certain aspects of the Tax Legislation and refining our calculations, which could potentially affect the measurement of these balances. The provisional amount related to the remeasurement of our deferred tax balance is an incremental tax expense of $152 million.

The one-time transition tax is based on our total post-1986 unrepatriated earnings and profits not previously subject to U.S. income tax. The recorded provisional amount for our one-time transition tax is a tax expense of $298 million.

Withholding tax is an additional cost associated with the distribution of earnings from some jurisdictions. As a result of the Tax Legislation, we reconsidered previous assertions regarding earnings that were considered permanently reinvested, which requires us to record withholding taxes on earnings likely to be distributed in the foreseeable future. The assertion as to which earnings are permanently reinvested for purposes of calculating withholding tax is provisional as we refine the underlying calculations of the amount of earnings subject to the tax and the rate at which it will be taxed. The recorded provisional amount for the withholding tax resulted in an incremental tax expense of $331 million.

Our unconsolidated equity investees were also unfavorably impacted by the new tax legislation by $39 million, due to $32 million of withholding taxes on foreign earnings and $7 million due to the remeasurement of deferred taxes. In addition, our noncontrolling interests included a $43 million credit related to the withholding taxes on foreign earnings.

Our income tax rates are generally less than the 35 percent U.S. statutory income tax rate, primarily because of lower taxes on foreign earnings and research tax credits. Our effective tax rate for 2017 was 151.8 percent and 58.0 percent for the fourth quarter and full year, respectively, compared to 22.0 percent and 24.6 percent for the fourth quarter and full year in 2016. Our 2017 effective tax rate excluding the Tax Legislation was 19.5 percent and 24.5 percent for the fourth quarter and full year, respectively.

We expect our 2018 effective tax rate to be 23 percent, excluding any discrete items (including adjustments to provisional estimates) that may arise.

CUMMINS INC. AND SUBSIDIARIES
FINANCIAL MEASURES THAT SUPPLEMENT GAAP
(Unaudited)

Condensed Consolidated Statements of Income excluding impacts of Tax Legislation

Reconciliation of Non GAAP measures - Earnings before interest, income taxes and noncontrolling interests

We define EBIT as earnings before interest expense, income tax expense and noncontrolling interests in income 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. This measure is not in accordance with, or an alternative for, accounting principles generally accepted in the United States and may not be consistent with measures used by other companies. It should be considered supplemental data. Below is a reconciliation of “Net income attributable to Cummins Inc.” to EBIT for each of the applicable periods:

Reconciliation of Non GAAP measures - Earnings before interest, income taxes, noncontrolling interests, depreciation and amortization

We define EBITDA as earnings before interest expense, income tax expense, noncontrolling interests, depreciation and amortization in income of consolidated subsidiaries. We will use EBITDA to assess and measure the performance of our operating segments and also as a component in measuring our variable compensation programs beginning January 1, 2018. This measure is not in accordance with, or an alternative for, accounting principles generally accepted in the United States and may not be consistent with measures used by other companies. It should be considered supplemental data. Below is a reconciliation of “Net income attributable to Cummins Inc.” to EBITDA for each of the applicable periods:

CUMMINS INC. AND SUBSIDIARIES
BUSINESS UNIT SALES DATA
(Unaudited)

Engine Segment Sales by Market and Unit Shipments by Engine Classification

Sales for our Engine segment by market were as follows:

Unit shipments by engine classification (including unit shipments to Power Systems and off-highway engine units included in their respective classification) were as follows:

Distribution Segment Sales by Product Line

Sales for our Distribution segment by product line were as follows:

Component Segment Sales by Business

In the first quarter of 2017, our Components segment reorganized its reporting structure to move our electronics business out of the emission solutions business and into the fuel systems business to enhance operational, administrative and product development efficiencies. Prior year sales were reclassified to conform with this change. We renamed our fuel systems business to electronics and fuel systems.

In the third quarter of 2017, we formed the Eaton Cummins Automated Transmission Technologies joint venture (ECJV), which was consolidated and included in our Components segment as the automated transmissions business.

Sales for our Components segment by product line were as follows:

Power Systems Segment Sales by Product Line and Unit Shipments by Engine Classification

In the first quarter of 2017, our Power Systems segment reorganized its product lines to better reflect how the segment is managed. Prior year sales were reclassified to reflect these changes.

Sales for our Power Systems segment by product line were as follows:

High-horsepower unit shipments by engine classification were as follows:

View source version on businesswire.com: http://www.businesswire.com/news/home/20180206005327/en/

Cummins Inc.
Carole Casto, 317-610-2480
Vice President - Marketing and Communications
carole.casto@cummins.com

Source: Cummins Inc.

Released February 6, 2018