10-QPeriod: Q2 FY2004

CUMMINS INC Quarterly Report for Q2 Ended Jun 27, 2004

Filed August 3, 2004For Securities:CMI

Summary

Cummins Inc. reported a significant turnaround in its financial performance for the second quarter and first half of 2004 compared to the same periods in 2003. Net sales dramatically increased, driven by robust demand across all business segments, particularly in the North American heavy-duty truck market, where the company saw a substantial gain in market share. The company also benefited from improved global economic conditions, leading to stronger performance in its Power Generation and Filtration and Other segments. This quarter also saw the adoption of new accounting standards (FIN 46R) which resulted in the consolidation of several joint ventures, increasing the company's reported assets and liabilities but not materially impacting net earnings or debt covenants. Management expressed optimism for the remainder of 2004, projecting a 25% increase in total revenues and continued strong performance driven by market recovery and new product introductions, while also focusing on debt reduction and regaining investment-grade credit ratings.

Key Highlights

  • 1Net sales surged to $2.124 billion for Q2 2004, a 38% increase from $1.539 billion in Q2 2003. For the first half, sales reached $3.895 billion, up 33% from $2.926 billion.
  • 2Net earnings for Q2 2004 were $82 million ($1.76/share diluted), a substantial improvement from $14 million ($0.34/share diluted) in Q2 2003. First half earnings were $115 million ($2.53/share diluted) versus a loss of $17 million (-$0.45/share diluted) in the prior year.
  • 3The Engine segment showed exceptional growth, with sales up 57% in Q2 2004, driven by strong demand in the North American heavy-duty truck market, leading to a market share increase to 26.9%.
  • 4The company adopted new accounting standards (FIN 46R) in Q1 and Q2 2004, leading to the consolidation of three joint ventures and one distributor, increasing total assets by $296 million and total debt by $130 million, with no material impact on net earnings.
  • 5Gross margin improved significantly to 20.2% in Q2 2004 from 17.9% in Q2 2003, attributed to higher volumes, manufacturing cost absorption, and favorable currency exchange rates.
  • 6Liquidity remains strong with $322 million in cash and cash equivalents and $248 million available under its revolving credit facility, with management expecting sufficient cash flow to fund operations, capital expenditures, and debt repayment.
  • 7Credit rating agencies S&P and Fitch revised their outlook for Cummins to 'Stable' from 'Negative', reflecting improved operating performance and positive economic developments.

Frequently Asked Questions

The primary drivers were a strong recovery in demand across nearly all automotive and industrial markets, particularly the North American heavy-duty truck market where Cummins gained significant market share. Improved global economic conditions also boosted performance in the Power Generation and Filtration and Other segments. Higher sales volumes led to better absorption of fixed manufacturing costs, improving gross margins.

The adoption of FIN 46R resulted in the consolidation of three previously equity-accounted joint ventures and one distributor onto Cummins' balance sheet. This led to an increase in total assets by $296 million and total debt by $130 million as of June 27, 2004. However, management stated that this consolidation had no material impact on net earnings or future debt covenants.

Cummins anticipates a strong performance for the rest of 2004, projecting total revenues to be 25% higher than 2003. This outlook is supported by continued strong demand in the North American heavy-duty truck market, recovery in medium-duty and recreational vehicle markets, and robust international sales, particularly for power generation equipment. The company also expects to generate sufficient cash flow to fund operations, capital expenditures, and reduce debt.

While Cummins' credit ratings remain below investment grade (Ba2 from Moody's, BB+ from S&P, BB- from Fitch), two major rating agencies, Standard & Poor's and Fitch, have revised their outlook for Cummins to 'Stable' from 'Negative'. This change reflects the company's improved operating performance and positive economic trends. Cummins' stated goal is to regain an investment-grade credit rating.