10-QPeriod: Q3 FY2002

CUMMINS INC Quarterly Report for Q3 Ended Sep 29, 2002

Filed November 1, 2002For Securities:CMI

Summary

Cummins Inc. (CMI) reported a significant turnaround in its financial performance for the nine months ended September 29, 2002, compared to the same period in 2001. Net sales increased by 5% to $4.439 billion, driven by a strong rebound in the Engine Business, particularly in heavy-duty truck sales ahead of new emissions standards. The company returned to profitability, reporting net earnings of $23 million for the nine-month period, a substantial improvement from the $105 million net loss in the prior year. This recovery was further bolstered by a net credit from restructuring charges in 2002, contrasting with significant charges in 2001. The company's financial health is improving, with net cash provided by operating activities at $32 million for the nine months, though this was a decrease from the prior year due to increased working capital requirements. Despite credit rating downgrades by Moody's and Standard & Poor's, Cummins remains compliant with its debt covenants, and management believes these downgrades will not materially impact financial results. The focus remains on cost management and navigating market conditions, with a positive outlook driven by demand for cleaner emissions engines.

Key Highlights

  • 1Net sales increased 5% year-over-year to $4.439 billion for the first nine months of 2002.
  • 2The company achieved profitability, reporting net earnings of $23 million for the first nine months of 2002, compared to a net loss of $105 million in the prior year.
  • 3Engine sales, especially in the heavy-duty truck segment, saw a significant 35% increase in Q3 2002 due to pre-emission standard demand.
  • 4Gross margin improved to 18.2% of sales for the first nine months of 2002, up from 17.9% in the prior year, due to better absorption of fixed costs and cost reduction efforts.
  • 5Restructuring charges in the first nine months of 2002 resulted in a net credit of $1 million, a significant improvement from the $125 million charge in the same period of 2001.
  • 6Despite credit rating downgrades by Moody's and S&P, Cummins remains compliant with its financial covenants.
  • 7Cash flow from operations provided $32 million for the nine-month period, though this was a decrease from the prior year due to working capital changes.

Frequently Asked Questions

The primary driver was a significant rebound in the Engine Business, particularly the heavy-duty truck segment. Strong demand in anticipation of new EPA emissions standards effective October 1, 2002, led to increased sales volume, which in turn improved absorption of fixed manufacturing costs and contributed to the company's return to profitability.

Cummins has remained compliant with its debt covenants despite the downgrades. The company has renegotiated terms for its accounts receivable securitization program and distributor financing arrangements to accommodate the lower credit ratings. While interest costs on its revolving credit agreement increased slightly, and standby letters of credit were required for a sale-leaseback agreement, management believes these events will not materially impact financial results.

The Power Generation Business experienced a 15% decline in sales and shifted from a profit to a loss in the first nine months of 2002. This was attributed to weak demand, slow economic growth, a less favorable sales mix, pricing pressures, and underabsorption of fixed costs. Management's ability to navigate these challenges and the future demand for power generation equipment will be key.

In 2002, restructuring efforts resulted in a net credit of $1 million for the first nine months, due to a combination of new charges and significant reversals of previously established reserves for completed or realigned actions. This contrasts sharply with the $125 million restructuring charge recorded in the first nine months of 2001, which was primarily driven by asset impairments related to a cancelled engine development program and workforce reductions due to market downturns.