10-QPeriod: Q3 FY2003

CUMMINS INC Quarterly Report for Q3 Ended Sep 28, 2003

Filed November 12, 2003For Securities:CMI

Summary

Cummins Inc. (CMI) filed its Form 10-Q for the quarter ended September 28, 2003, reporting net earnings of $24 million, or $0.60 per diluted share, a decrease from the $44 million, or $1.05 per diluted share, reported in the same period of the prior year. This decline was primarily driven by lower sales in the heavy-duty engine business, increased pension and postretirement benefit costs, and higher interest expenses related to increased debt levels and borrowing rates. The company is also addressing a restatement of prior period financial statements, primarily related to unreconciled accounts payable and accounting recognition errors. While this restatement impacted comparative figures for the prior year, management is implementing enhanced control processes. Despite these challenges, Cummins reported increased sales in its Power Generation, Filtration and Other, and International Distributor businesses, showing signs of diversified revenue streams. The company maintained adequate liquidity and remained compliant with its debt covenants following the cure of prior filing delays.

Key Highlights

  • 1Net earnings for the quarter decreased to $24 million ($0.60/share) from $44 million ($1.05/share) in the prior year, impacted by lower engine sales and increased expenses.
  • 2Total net sales for the quarter were $1.634 billion, a slight decrease from $1.648 billion in the prior year, with growth in Power Generation, Filtration, and International Distributor segments offsetting a decline in the Engine business.
  • 3The company is undergoing a restatement of prior period financial statements due to accounting errors, primarily related to accounts payable reconciliation and ERP system integration.
  • 4Operating results in the Engine Business segment saw a decline in EBIT to $36 million from $51 million, largely due to the impact of the previous year's heavy-duty engine pre-buy related to emissions standards.
  • 5Power Generation business achieved breakeven EBIT in the quarter, an improvement from a slight loss in the prior year's comparable period, with sales up 15%.
  • 6The company's financial statements include previously undisclosed items due to the restatement, affecting comparative periods and highlighting the importance of ongoing control enhancements.
  • 7Cummins' credit rating remains below investment grade (Ba2 Negative by Moody's, BB+ Negative by S&P), though the company is in compliance with its debt covenants following the cure of prior filing delays.

Frequently Asked Questions

The primary reasons for the decline in net earnings are lower sales volume in the heavy-duty engine business, increased pension and postretirement benefit expenses, and higher interest expenses resulting from an increase in borrowing rates and debt levels.

The restatement was necessary to correct prior period accounting errors, primarily related to unreconciled accounts payable at two manufacturing locations, largely associated with the integration of a new enterprise resource planning (ERP) system. This also required a restatement of comparative quarterly and nine-month information for 2002.

While the Engine Business saw a decline in sales and earnings due to the prior year's emissions-related pre-buy, the Power Generation, Filtration and Other, and International Distributor segments experienced sales growth. The Power Generation segment reached breakeven operating results in the quarter.

Cummins has cured the previous breaches of its debt filing obligations by filing its delayed reports. As of September 28, 2003, the company is in compliance with all covenants. However, its corporate credit rating remains below investment grade (Ba2 Negative by Moody's and BB+ Negative by S&P).