Cummins Revises 2008 Operating Results to Reflect Increased Warranty Liability
Company Reaffirms Sales and Earnings Guidance for 2009
COLUMBUS, Ind.--(BUSINESS WIRE)-- Cummins Inc. (NYSE: CMI) announced today that it has revised its fourth quarter and full year 2008 operating results to reflect a higher warranty liability than previously reported.
As a result of the change, the Company's Earnings Before Interest and Taxes (EBIT) for the fourth quarter decreased by $73 million, while net income was reduced by $46 million, or 23 cents a share. The change in earnings reflects an $82 million increase in warranty liability, offset by a $9 million reduction in variable and incentive compensation as a result of this change.
The Company's revised fourth quarter EBIT was $56 million and net income was $43 million, or 22 cents a share. For the full year, the Company's revised EBIT was $1.22 billion and net income was $755 million, or $3.84 a share. The earnings revisions affect the fourth quarter results of the Company's Engine and Component segments.
The warranty liability was revised to reflect a change in estimate in the warranty costs primarily for mid-range engine products launched in 2007. In late February, our analysis of recent warranty payments indicated that a revision to our initial warranty liability estimate is appropriate.
The Company is aggressively addressing the product issues and has made modifications that have reduced the failure rate of these products. The increase in the warranty liability reflects higher than expected costs associated with these repairs.
The Company also reaffirmed the financial guidance it gave earlier this month, with sales in 2009 expected to be approximately 20 percent lower than 2008. EBIT margin is expected to be 6.5 percent of sales, excluding restructuring costs associated with job actions announced in the first quarter of 2009.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (a)
Three months ended
December 31, September 28, December 31,
2008 2008 2007
in millions (except per share amounts)
NET SALES $ 3,288 $ 3,693 $ 3,516
Cost of sales 2,754 2,873 2,834
GROSS MARGIN 534 820 682
OPERATING EXPENSES AND INCOME
Selling, general and 341 388 359
administrative expenses
Research, development and 102 113 93
engineering expenses
Equity, royalty and interest 51 66 59
income from investees (Note 1)
Restructuring charges (Note 2) 37 -- --
Other operating (expense) income, (3 ) (2 ) 13
net
OPERATING INCOME 102 383 302
Interest income 4 4 9
Interest expense 9 10 14
Other (expense) income, net (Note (50 ) (7 ) 13
3)
INCOME BEFORE INCOME TAXES AND 47 370 310
MINORITY INTERESTS
Income tax (benefit) expense (12 ) 123 97
(Note 4)
Minority interests in income of 16 18 15
consolidated subsidiaries
NET INCOME $ 43 $ 229 $ 198
EARNINGS PER COMMON SHARE
Basic $ 0.22 $ 1.18 $ 1.01
Diluted $ 0.22 $ 1.17 $ 1.00
WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic 194.7 194.9 195.7
Diluted 196.6 196.5 197.5
Cash dividends declared per share $ 0.175 $ 0.175 $ 0.125
(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)
For the years ended
December 31, December 31,
2008 2007
in millions (except per share amounts)
NET SALES $ 14,342 $ 13,048
Cost of sales 11,402 10,492
GROSS MARGIN 2,940 2,556
OPERATING EXPENSES AND INCOME
Selling, general and administrative 1,450 1,296
expenses
Research, development and engineering 422 329
expenses
Equity, royalty and interest income from 253 205
investees (Note 1)
Restructuring charges (Note 2) 37 --
Other operating (expense) income, net (12 ) 22
OPERATING INCOME 1,272 1,158
Interest income 18 36
Interest expense 42 58
Other (expense) income, net (Note 3) (70 ) 33
INCOME BEFORE INCOME TAXES AND MINORITY 1,178 1,169
INTERESTS
Income tax expense (Note 4) 360 381
Minority interests in income of 63 49
consolidated subsidiaries
NET INCOME $ 755 $ 739
EARNINGS PER COMMON SHARE
Basic $ 3.87 $ 3.72
Diluted $ 3.84 $ 3.70
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 195.0 198.4
Diluted 196.5 199.9
Cash dividends declared per share $ 0.60 $ 0.43
(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)
December 31, December 31,
2008 2007
in millions
(except par value)
ASSETS
Current assets
Cash and cash equivalents $ 426 $ 577
Marketable securities 77 120
Accounts and notes receivable, net 1,782 1,998
Inventories 1,783 1,692
Other current assets 645 428
Total current assets 4,713 4,815
Long-term assets
Property, plant and equipment, net 1,841 1,645
Investments and advances related to equity method 588 514
investees
Goodwill and other intangible assets, net 585 538
Other assets 792 683
Total assets $ 8,519 $ 8,195
LIABILITIES
Current liabilities
Current portion of long-term debt and loans payable $ 69 $ 119
Accounts payable (principally trade) 1,009 1,263
Accrued expenses 1,561 1,329
Total current liabilities 2,639 2,711
Long-term liabilities
Long-term debt 629 555
Other liabilities 1,771 1,227
Total liabilities 5,039 4,493
MINORITY INTERESTS 250 293
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value, 500 and 300 shares 1,793 1,719
authorized, 221.7 and 220.4 shares issued
Retained earnings 3,288 2,660
Treasury stock, at cost, 20.4 and 18.2 shares (715 ) (593 )
Common stock held by employee benefits trust, at (61 ) (79 )
cost, 5.1 and 6.5 shares
Unearned compensation (5 ) (11 )
Accumulated other comprehensive loss (1,070 ) (287 )
Total shareholders' equity 3,230 3,409
Total liabilities, minority interests and $ 8,519 $ 8,195
shareholders' equity
(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)
For the years ended
December 31, December 31,
2008 2007
in millions
NET CASH PROVIDED BY OPERATING ACTIVITIES (Note $ 987 $ 810
5)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (543 ) (353 )
Investments in internal use software (82 ) (67 )
Investments in and advances to equity investees (89 ) (66 )
Acquisition of businesses, net of cash acquired (142 ) (20 )
Proceeds from the sale of an equity investment 64 35
Investments in marketable (390 ) (405 )
securities--acquisitions
Investments in marketable 409 395
securities--liquidations
Purchases of other investments (62 ) (57 )
Other, net (13 ) 23
Net cash used in investing activities (848 ) (515 )
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 76 15
Payments on borrowings and capital lease (152 ) (144 )
obligations
Dividend payments on common stock (122 ) (89 )
Proceeds from sale of common stock held by 63 13
employee benefit trust
Repurchases of common stock (128 ) (335 )
Other, net 26 (36 )
Net cash used in financing activities (237 ) (576 )
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH (53 ) 18
EQUIVALENTS
Net decrease in cash and cash equivalents (151 ) (263 )
Cash and cash equivalents at beginning of year 577 840
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 426 $ 577
(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)
Power Non-
Engine Generation Components Distribution segment Total
items(1)
in millions
Three months
ended
December 31,
2008
External $ 1,590 $ 675 $ 468 $ 555 $ -- $ 3,288
sales
Intersegment 346 212 208 2 (768 ) --
sales
Total sales 1,936 887 676 557 (768 ) 3,288
Depreciation
and 47 10 16 8 ― 81
amortization
(2)
Research,
development
and 71 10 21 ― ― 102
engineering
expense
Equity,
royalty and
interest 8 6 4 33 -- 51
income from
investees
Restructuring ― ― ― ― 37 37
charges
Interest 3 ― ― 1 -- 4
income
Segment EBIT (40 ) 75 (6 ) 64 (37 ) 56
Three months
ended
September 28,
2008
External $ 1,927 $ 653 $ 535 $ 578 $ -- $ 3,693
sales
Intersegment 352 235 266 3 (856 ) --
sales
Total sales 2,279 888 801 581 (856 ) 3,693
Depreciation
and 43 9 16 6 -- 74
amortization
(2)
Research,
development
and 75 11 27 -- -- 113
engineering
expense
Equity,
royalty and
interest 26 6 3 31 -- 66
income from
investees
Interest 2 1 1 -- -- 4
income
Segment EBIT 160 108 61 61 (10 ) 380
Three months
ended
December 31,
2007
External $ 1,862 $ 645 $ 542 $ 467 $ -- $ 3,516
sales
Intersegment 293 195 235 1 (724 ) --
sales
Total sales 2,155 840 777 468 (724 ) 3,516
Depreciation
and 44 11 16 3 ― 74
amortization
(2)
Research,
development
and 63 9 21 ― ― 93
engineering
expense
Equity,
royalty and
interest 26 5 3 25 -- 59
income from
investees
Interest 6 2 1 -- -- 9
income
Segment EBIT 120 86 47 56 15 324
For the year
ended
December 31,
2008
External $ 7,432 $ 2,601 $ 2,154 $ 2,155 $ -- $ 14,342
sales
Intersegment 1,378 899 998 9 (3,284 ) --
sales
Total sales 8,810 3,500 3,152 2,164 (3,284 ) 14,342
Depreciation
and 180 41 65 25 ― 311
amortization
(2)
Research,
development
and 286 41 95 ― ― 422
engineering
expense
Equity,
royalty and
interest 99 23 14 117 -- 253
income from
investees
Restructuring ― ― ― ― 37 37
charges
Interest 10 3 3 2 -- 18
income
Segment EBIT 535 376 169 242 (102 ) 1,220
For the year
ended
December 31,
2007
External $ 7,129 $ 2,375 $ 2,007 $ 1,537 $ -- $ 13,048
sales
Intersegment 1,053 685 925 3 (2,666 ) --
sales
Total sales 8,182 3,060 2,932 1,540 (2,666 ) 13,048
Depreciation
and 176 42 59 11 ― 288
amortization
(2)
Research,
development
and 222 34 73 ― ― 329
engineering
expense
Equity,
royalty and
interest 92 17 4 92 -- 205
income from
investees
Interest 26 6 3 1 -- 36
income
Segment EBIT 589 334 153 187 (36 ) 1,227
(1) Includes intercompany eliminations and unallocated corporate expenses. For the
three months ended and the year ended December 31, 2008, Non-segment includes a $36
million decrease in cash surrender value in corporate owned life insurance (COLI).
(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 Financial Statements is shown in the table below:
Three months ended For the years ended
December 31, September 28, December 31, December 31, December 31,
2008 2008 2007 2008 2007
in millions
Segment $ 56 $ 380 $ 324 $ 1,220 $ 1,227
EBIT
Less:
Interest 9 10 14 42 58
expense
Income
before
income $ 47 $ 370 $ 310 $ 1,178 $ 1,169
taxes and
minority
interests
FINANCIAL MEASURES THAT SUPPLEMENT GAAP
(Unaudited)
Earnings before interest, taxes and minority interests (EBIT)
We define EBIT as earnings before interest expense, income tax expense and
minority 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. Below is a
reconciliation of EBIT, a non-GAAP financial measure, to our consolidated net
income, for each of the applicable periods:
Three Months Ended For the years ended
December September December December December 31,
31, 28, 31, 31,
2008 2008 2007 2008 2007
in millions
Earnings
before
interest, $ 56 $ 380 $ 324 $ 1,220 $ 1,227
income taxes
and minority
interests
EBIT as a
percentage 1.7 % 10.3 % 9.2 % 8.5 % 9.4 %
of net sales
Less:
Interest 9 10 14 42 58
expense
Income tax (12 ) 123 97 360 381
expense
Minority
interests in
income of 16 18 15 63 49
consolidated
subsidiaries
Net income $ 43 $ 229 $ 198 $ 755 $ 739
Net income
as a 1.3 % 6.2 % 5.6 % 5.3 % 5.7 %
percentage
of net sales
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 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 was as follows:
Three months ended For the years ended
December September December 31, December 31, December 31,
31, 28,
2008 2008 2007 2008 2007
in millions
North
American $ 28 $ 26 $ 24 $ 100 $ 83
distributors
Dongfeng
Cummins
Engine 5 16 12 55 41
Company,
Ltd.
Chongqing
Cummins
Engine 7 9 7 30 22
Company,
Ltd.
Shanghai
Fleetguard 1 2 2 8 6
Filter Co.
Ltd.
Tata Cummins ― ― 4 7 13
Ltd.
Cummins
MerCruiser (2 ) (1 ) 2 3 11
Diesel
Marine LLC
All others 6 9 4 28 16
Cummins
share of net 45 61 55 231 192
income
Royalty and
interest 6 5 4 22 13
income
Equity,
royalty and
interest $ 51 $ 66 $ 59 $ 253 $ 205
income from
investees
NOTE 2. RESTRUCTURING CHARGES
We have executed restructuring actions primarily in the form of voluntary and
involuntary separation programs in the fourth quarter of 2008. These actions
were in response to the continued deterioration we saw in our U.S. businesses
and most key markets around the world in the second half of 2008, as well as a
reduction in orders in most U.S. and global markets for 2009. We reduced our
worldwide professional workforce by approximately 650 employees. We offered a
voluntary retirement package to certain active professional employees in the
United States based on a clearly defined set of criteria. We also took
involuntary actions which included certain hourly employees. The compensation
packages contained salary and continuation of benefits, including health care,
life insurance and outplacement services. The voluntary retirement package was
accepted by approximately 150 employees. The remaining reductions of
approximately 500 employees were involuntary. The expenses recorded during the
year ended December 31, 2008 included severance costs related to both voluntary
and involuntary terminations. During 2008, we incurred total pretax expenses
related to the restructuring initiative of approximately $37 million.
Employee termination and severance costs were recorded based on approved plans
developed by the businesses and corporate management which specified positions
to be eliminated, benefits to be paid under existing severance plans or
statutory requirements and the expected timetable for completion of the plan.
Estimates of restructuring were made based on information available at the time
charges were recorded. Due to the inherent uncertainty involved, actual amounts
paid for such activities may differ from amounts initially recorded and we may
need to revise previous estimates.
CUMMINS INC. AND SUBSIDIARIES
SELECTED FOOTNOTE DATA
(Unaudited)
NOTE 3. OTHER (EXPENSE) INCOME
Other (expense) income included the following:
Three months ended For the years ended
December 31, September December 31, December December 31,
28, 31,
2008 2008 2007 2008 2007
in millions
Other
(expense)
income:
Change in
cash
surrender
value of $ (36 ) $ ― $ ― $ (36 ) $ ―
corporate
owned
life
insurance
Foreign
currency (23 ) (10 ) 12 (46 ) 28
(losses)
gains
Other, 9 3 1 12 5
net
Total
other
(expense) $ (50 ) $ (7 ) $ 13 $ (70 ) $ 33
income,
net
NOTE 4. INCOME TAXES
Our effective benefit rate in the fourth quarter of 2008 was 25.5 percent
compared to an effective tax rate of 31.3 percent for 2007. The change is
primarily due to greater foreign earnings in 2008, which are subject to lower
tax rates. The fourth quarter effective benefit rate also includes a $10
million (0.8 percent) reduction due to the legislative reinstatement of the
U.S. research tax credit. The full-year 2008 effective tax rate was 30.6
percent and we expect our full-year 2009 effective tax rate to be sustained at
approximately 31 percent.
NOTE 5. DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense included in operating activities of the
Condensed Consolidated Statements of Cash Flows for the years ended December
31, 2008 and 2007 was $314 million and $290 million, respectively.
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 approximately 190 countries and territories through a network of more than 500 company-owned and independent distributor locations and approximately 5,200 dealer locations. Cummins reported net income of $755 million on sales of $14.34 billion in 2008. Press releases can be found on the Web at www.cummins.com.
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.
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 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.
Source: Cummins Inc.
Released February 25, 2009