Cummins Announces Results for the First Quarter of 2014; Improving Demand in North America Drives Revenue Growth

COLUMBUS, IN--(Marketwired - April 29, 2014) - Cummins Inc. (NYSE: CMI) today reported results for the first quarter of 2014.

First quarter revenue of $4.4 billion increased 12 percent from the same quarter in 2013. The increase year-over-year was driven by stronger demand in on-highway markets and distributor acquisitions in North America.

Revenues in North America increased 25 percent while international sales were flat compared to the first quarter a year ago. Within international markets, weakness in India, Australia, Mexico and Brazil offset higher revenues in China and Europe.

Earnings before interest and taxes (EBIT) were $528 million for the first quarter or 12.0 percent of sales. This compares to $437 million or 11.1 percent of sales a year ago.

Net income attributable to Cummins in the first quarter was $338 million ($1.83 per diluted share), compared to $282 million ($1.49 per diluted share) in the first quarter of 2013.

"We delivered good incremental margins in the first quarter as demand in on-highway markets in North America improved. We are also well on track to deliver the expected benefits from our North American distributor acquisitions as we execute our plans and end market demand improves. Conditions in a number of international markets remain very weak, particularly in India and Australia, leading to lower demand for power generation and mining equipment," said Chairman and CEO Tom Linebarger. "We continue to release exciting new products that will drive future profitable growth and we repurchased 3 million shares in the first quarter, consistent with our commitment to return 50 percent of full year operating cash flow to shareholders through a combination of dividends and share repurchase."

Based on the current forecast, Cummins expects full year 2014 revenues to grow between 6% and 10%, up from its previous forecast of growth of between 4% and 8%, due largely to improving demand in North America. EBIT is expected to be in the range of 12.75 to 13.25 percent of sales.

Other recent highlights:

• For the seventh consecutive year, Cummins has been named one of the world's most ethical companies by The Ethisphere Institute;

• FORTUNE magazine named Cummins one of America's Most Admired Companies; and

• Cummins became the first company to receive EPA Tier4 Final certification for high-horsepower generator sets.

First quarter 2014 detail (all comparisons to same period in 2013)

Engine Segment

• Sales - $2.6 billion, up 11 percent

• Segment EBIT - $269 million, or 10.5 percent of sales, compared to $195 million or 8.5 percent of sales

• Increased demand in on-highway markets in North America offset weakness in global mining and power generation markets

Components Segment

• Sales - $1.2 billion, up 21 percent

• Segment EBIT - $167 million, or 13.6 percent of sales, compared to $119 million or 11.7 percent of sales

• Higher demand in on-highway markets in North America, Europe and China more than offset weaker demand in Brazil

Power Generation Segment

• Sales - $639 million, down 14 percent

• Segment EBIT - $25 million, or 3.9 percent of sales, compared to $51 million or 6.8 percent of sales

• Lower revenues in most markets particularly India, North America and Asia Pacific

Distribution Segment

• Sales - $950 million, up 22 percent overall and up 1 percent excluding acquisitions

• Segment EBIT - $76 million, or 8.0 percent of sales, compared to $95 million or 12.2 percent of sales, with currency being the largest driver of the reduction in earnings

• Higher revenues were primarily driven by acquisitions and stronger demand for parts and service in the North American and Asia Pacific regions.

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 48,000 people worldwide and serves customers in approximately 190 countries and territories through a network of approximately 600 company-owned and independent distributor locations and approximately 6,800 dealer locations. Cummins earned $1.48 billion on sales of $17.3 billion in 2013. Press releases can be found on the Web at www.cummins.com. Follow Cummins on Twitter at @Cummins and on YouTube at 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 2014. 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 2013 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 is a non-GAAP measure used in this release, and 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.

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.

The following files are available for download:

• PDF

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (a)
			Three months ended
In millions, except per share amounts			March 30, 2014				December 31, 2013				March 31, 2013
NET SALES			$	4,406			$	4,588			$	3,922
	Cost of sales			3,290				3,424				2,965
GROSS MARGIN				1,116				1,164				957
OPERATING EXPENSES AND INCOME
	Selling, general and administrative expenses			502				500				444
	Research, development and engineering expenses			190				181				182
	Equity, royalty and interest income from investees (Note 1)			90				80				82
	Other operating income (expense), net			(1	)			(10	)			1
OPERATING INCOME				513				553				414
	Interest income			5				6				5
	Interest expense			17				19				6
	Other income, net			10				7				18
INCOME BEFORE INCOME TAXES				511				547				431
	Income tax expense (Note 2)			153				86				119
CONSOLIDATED NET INCOME				358				461				312
	Less: Net income attributable to noncontrolling interests			20				29				30
NET INCOME ATTRIBUTABLE TO CUMMINS INC.			$	338			$	432			$	282
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
	Basic		$	1.83			$	2.33			$	1.50
	Diluted		$	1.83			$	2.32			$	1.49
WEIGHTED AVERAGE SHARES OUTSTANDING
	Basic			184.3				185.7				188.4
	Diluted			184.7				186.3				188.8
CASH DIVIDENDS DECLARED PER COMMON SHARE			$	0.625			$	0.625			$	0.50
(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)
In millions, except par value							March 30, 2014				December 31, 2013
ASSETS
Current assets
	Cash and cash equivalents						$	2,178			$	2,699
	Marketable securities							129				150
		Total cash, cash equivalents and marketable securities						2,307				2,849
	Accounts and notes receivable, net							2,949				2,649
	Inventories							2,580				2,381
	Prepaid expenses and other current assets							663				760
		Total current assets						8,499				8,639
Long-term assets
	Property, plant and equipment							6,563				6,410
	Accumulated depreciation							(3,331	)			(3,254	)
		Property, plant and equipment, net						3,232				3,156
	Investments and advances related to equity method investees							966				931
	Goodwill							464				461
	Other intangible assets, net							357				357
	Other assets							1,233				1,184
			Total assets				$	14,751			$	14,728
LIABILITIES
Current liabilities
	Loans payable						$	24			$	17
	Accounts payable (principally trade)							1,887				1,557
	Current maturities of long-term debt							37				51
	Current portion of accrued product warranty							345				360
	Accrued compensation, benefits and retirement costs							323				433
	Deferred revenue							295				285
	Taxes payable (including taxes on income)							69				99
	Other accrued expenses							575				566
		Total current liabilities						3,555				3,368
Long-term liabilities
	Long-term debt							1,632				1,672
	Pensions							232				232
	Postretirement benefits other than pensions							347				356
	Other liabilities and deferred revenue							1,251				1,230
		Total liabilities						7,017				6,858
EQUITY
Cummins Inc. shareholders' equity
	Common stock, $2.50 par value, 500 shares authorized, 222.3 and 222.3 shares issued							2,101				2,099
	Retained earnings							8,629				8,406
	Treasury stock, at cost, 38.4 and 35.6 shares							(2,600	)			(2,195	)
	Common stock held by employee benefits trust, at cost, 1.2 and 1.3 shares							(15	)			(16	)
	Accumulated other comprehensive loss
		Defined benefit postretirement plans						(607	)			(611	)
		Other						(148	)			(173	)
		Total accumulated other comprehensive loss						(755	)			(784	)
			Total Cummins Inc. shareholders' equity					7,360				7,510
Noncontrolling interests								374				360
				Total equity				7,734				7,870
					Total liabilities and equity		$	14,751			$	14,728

(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)
				Three months ended
In millions				March 30, 2014				March 31, 2013
CASH FLOWS FROM OPERATING ACTIVITIES
	Consolidated net income			$	358			$	312
	Adjustments to reconcile consolidated net income to net cash provided by operating activities
		Depreciation and amortization			105				98
		Gain on fair value adjustment for consolidated investees			(6	)			(7	)
		Deferred income taxes			22				5
		Equity in income of investees, net of dividends			(52	)			(36	)
		Pension contributions in excess of expense			(100	)			(54	)
		Other post-retirement benefits payments in excess of expense			(8	)			(8	)
		Stock-based compensation expense			10				7
		Excess tax benefits on stock-based awards			(5	)			(7	)
		Translation and hedging activities			(3	)			(5	)
	Changes in current assets and liabilities, net of acquisitions
		Accounts and notes receivable			(232	)			(29	)
		Inventories			(135	)			(177	)
		Other current assets			2				158
		Accounts payable			302				204
		Accrued expenses			(95	)			(142	)
	Changes in other liabilities and deferred revenue				50				47
	Other, net				50				62
NET CASH PROVIDED BY OPERATING ACTIVITIES					263				428
CASH FLOWS FROM INVESTING ACTIVITIES
	Capital expenditures				(107	)			(114	)
	Investments in internal use software				(14	)			(12	)
	Investments in and advances to equity investees				(6	)			(24	)
	Acquisitions of businesses, net of cash acquired				(90	)			(17	)
	Investments in marketable securities -- acquisitions				(84	)			(133	)
	Investments in marketable securities -- liquidations				108				187
	Cash flows from derivatives not designated as hedges				5				(30	)
	Other, net				1				-
Net cash used in investing activities					(187	)			(143	)
CASH FLOWS FROM FINANCING ACTIVITIES
	Proceeds from borrowings				7				-
	Payments on borrowings and capital lease obligations				(25	)			(27	)
	Net borrowings (payments) under short-term credit agreements				(39	)			15
	Distributions to noncontrolling interests				(13	)			(19	)
	Dividend payments on common stock				(115	)			(95	)
	Repurchases of common stock				(419	)			-
	Excess tax benefits on stock-based awards				5				7
	Other, net				(3	)			16
Net cash used in financing activities					(602	)			(103	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS					5				(68	)
Net increase (decrease) in cash and cash equivalents					(521	)			114
Cash and cash equivalents at beginning of year					2,699				1,369
CASH AND CASH EQUIVALENTS AT END OF PERIOD				$	2,178			$	1,483

(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)
In millions			Engine				Components				Power Generation				Distribution				Non-segment Items(1)				Total
Three months ended March 30, 2014
External sales			$	2,090			$	922			$	452			$	942			$	-			$	4,406
Intersegment sales				473				308				187				8				(976	)			-
	Total sales			2,563				1,230				639				950				(976	)			4,406
Depreciation and amortization (2)				51				26				12				16				-				105
Research, development and engineering expenses				116				53				19				2				-				190
Equity, royalty and interest income from investees				32				9				8				41				-				90
Interest income				2				1				1				1				-				5
Segment EBIT				269				167				25				76		(3)		(9	)			528
Segment EBIT as a percentage of total sales				10.5	%			13.6	%			3.9	%			8.0	%							12.0	%
Three months ended December 31, 2013
External sales			$	2,131			$	859			$	533			$	1,065			$	-			$	4,588
Intersegment sales				431				276				226				8				(941	)			-
	Total sales			2,562				1,135				759				1,073				(941	)			4,588
Depreciation and amortization (2)				49				25				13				14				-				101
Research, development and engineering expenses				106				53				20				2				-				181
Equity, royalty and interest income from investees				30				7				2				41				-				80
Interest income				3				1				1				1				-				6
Segment EBIT				235				140				46				107				38				566
Segment EBIT as a percentage of total sales				9.2	%			12.3	%			6.1	%			10.0	%							12.3	%
Three months ended March 31, 2013
External sales			$	1,885			$	722			$	539			$	776			$	-			$	3,922
Intersegment sales				418				296				207				2				(923	)			-
	Total sales			2,303				1,018				746				778				(923	)			3,922
Depreciation and amortization (2)				52				24				12				10				-				98
Research, development and engineering expenses				105				57				18				2				-				182
Equity, royalty and interest income from investees				23				7				7				45				-				82
Interest income				2				1				2				-				-				5
Segment EBIT				195				119				51				95		(3)		(23	)			437
Segment EBIT as a percentage of total sales				8.5	%			11.7	%			6.8	%			12.2	%							11.1	%

(1)	Includes intersegment sales and profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three months ended March 30, 2014, December 31, 2013 and March 31, 2013.
(2)	Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Income as "Interest expense."
(3)	Distribution segment EBIT for the three months ended March 30, 2014, included a $6 million gain on the fair value adjustment resulting from the acquisition of a controlling interest in Cummins Mid-South LLC. Distribution segment EBIT for the three months ended March 31, 2013, included a $7 million gain on the fair value adjustment resulting from the acquisition of a controlling interest in Cummins Northwest LLC.

CUMMINS INC. AND SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)
A reconciliation of our segment information to the corresponding amounts in the Condensed Consolidated Statements of Income is shown in the table below:
			Three months ended
In millions			March 30, 2014			December 31, 2013			March 31, 2013
Total EBIT			$	528		$	566		$	437
Less: Interest expense				17			19			6
	Income before income taxes		$	511		$	547		$	431

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 for the reporting periods was as follows:
				Three months ended
In millions				March 30, 2014				December 31, 2013				March 31, 2013
Distribution Entities
North American distributors				$	32			$	31			$	35
Komatsu Cummins Chile, Ltda.					6				8				5
All other distributors					1				-				-
Manufacturing Entities
Dongfeng Cummins Engine Company, Ltd.					14				18				12
Chongqing Cummins Engine Company, Ltd.					11				14				12
Beijing Foton Cummins Engine Co., Ltd. (Light-duty)					6				3				1
Shanghai Fleetguard Filter Co., Ltd.					3				2				3
Tata Cummins, Ltd.					2				1				1
Cummins Westport, Inc.					1				(1	)			-
Beijing Foton Cummins Engine Co., Ltd. (Heavy-duty)					(6	)			(7	)			(3	)
All other manufacturers					9				2				7
	Cummins share of net income				79				71				73
Royalty and interest income					11				9				9
		Equity, royalty and interest income from investees		$	90			$	80			$	82

NOTE 2. INCOME TAXES

Our effective tax rate for the year is expected to approximate 28.5 percent, excluding any one-time items that may arise. The research tax credit expired December 31, 2013 and has not yet been renewed by Congress. Our tax rate is generally less than the 35 percent U.S. statutory income tax rate primarily due to lower tax rates on foreign income. The effective tax rate for the three months ended March 30, 2014, was 29.9 percent. This tax rate includes a $12 million discrete tax expense primarily attributable to state deferred tax adjustments, as well as a $5 million discrete net tax benefit resulting from a $70 million dividend paid from China earnings generated prior to 2012.

Our tax rate for the three month period ended December 31, 2013 was 15.7 percent. We recorded $70 million or $0.38 per share of tax benefits in the fourth quarter of 2013. The income tax provision for the fourth quarter of 2013 was net of the following items:

One-time impacts of foreign legal entity restructuring actions		$	16
One-time impacts of reconciliation of state income tax provision to tax return			17
Lower operating rate primarily resulting from recognition of state and federal research and development credits and the recurring impacts of foreign legal entity restructuring actions			37
	Total	$	70

Our effective tax rate for the three months ended March 31, 2013, was 27.6 percent. This tax rate included a discrete tax benefit of $28 million attributable to the 2012 research credit reinstated in January 2013 as well as a discrete tax expense of $17 million, which primarily related to the write-off of a deferred tax asset deemed unrecoverable. The increase in the three month effective tax rate from 2013 to 2014 is attributable primarily to one-time discrete tax benefits in 2013 that did not repeat in 2014 and changes in U.S. state tax legislation that unfavorably impacted our 2014 effective tax rate.

NOTE 3. ACQUISITION  

Cummins Mid-South LLC

On February 14, 2014, we acquired the remaining 62.2 percent interest in Cummins Mid-South LLC (Mid-South) from the former distributor principal. The preliminary purchase consideration was $116 million, which included $32 million in cash and an additional $61 million paid to eliminate outstanding debt. The remaining $23 million will be paid in future periods, subject to customary purchase price adjustments. The acquisition was accounted for as a business combination and the results of the acquired entity were included in the Distribution operating segment subsequent to the acquisition date. As a result of this transaction, first quarter 2014 Distribution segment results included a $6 million gain, as we were required to re-measure our pre-existing 37.8 percent ownership interest in Mid-South to fair value. The transaction generated $3 million of goodwill based on the preliminary purchase price allocation. Net sales for Mid-South were $368 million for the year ended December 31, 2013. This amount is not fully incremental to our consolidated sales as the amount would be reduced by the elimination of sales to the previously unconsolidated entity.

CUMMINS INC. AND SUBSIDIARIES

FINANICAL MEASURES THAT SUPPLEMENT GAAP

(Unaudited)

Earnings before interest, taxes and noncontrolling interests

We define EBIT as earnings before interest expense, income tax expense and noncontrolling interests in income of consolidated subsidiaries (EBIT). 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 of America and may not be consistent with measures used by other companies. It should be considered supplemental data. Below is a reconciliation of EBIT to "Net income attributable to Cummins Inc.," for each of the applicable periods:

				Three months ended
In millions				March 30, 2014				December 31, 2013				March 31, 2013
Earnings before interest expense and income taxes				$	528			$	566			$	437
EBIT as a percentage of net sales					12.0	%			12.3	%			11.1	%
Less
	Interest expense				17				19				6
	Income tax expense				153				86				119
Consolidated net income					358				461				312
Less
	Net income attributable to noncontrolling interests				20				29				30
		Net income attributable to Cummins Inc.		$	338			$	432			$	282
Net income attributable to Cummins Inc. as a percentage of net sales					7.7	%			9.4	%			7.2	%

CUMMINS INC. AND SUBSIDIARIES

BUSINESS UNIT SALES DATA

(Unaudited)

Engine segment net sales by market

2014
In millions			Q1			Q2			Q3			Q4			YTD
Heavy-duty truck			$	722		$	-		$	-		$	-		$	722
Medium-duty truck and bus				601			-			-			-			601
Light-duty automotive and RV				361			-			-			-			361
Industrial				700			-			-			-			700
Stationary power				179			-			-			-			179
	Total sales		$	2,563		$	-		$	-		$	-		$	2,563
2013
In millions				Q1			Q2			Q3			Q4			YTD
Heavy-duty truck			$	654		$	723		$	690		$	638		$	2,705
Medium-duty truck and bus				448			595			570			572			2,185
Light-duty automotive and RV				260			345			330			365			1,300
Industrial				714			762			709			811			2,996
Stationary power				227			231			193			176			827
	Total sales		$	2,303		$	2,656		$	2,492		$	2,562		$	10,013

Unit shipments by engine classification (including unit shipments to Power Generation)

2014
Units			Q1		Q2		Q3		Q4		YTD
Midrange			118,900		-		-		-		118,900
Heavy-duty			28,800		-		-		-		28,800
High-horsepower			3,400		-		-		-		3,400
	Total units		151,100		-		-		-		151,100
2013
Units			Q1		Q2		Q3		Q4		YTD
Midrange			94,600		121,900		113,800		115,700		446,000
Heavy-duty			24,900		28,300		26,500		25,700		105,400
High-horsepower			4,200		3,600		3,500		3,500		14,800
	Total units		123,700		153,800		143,800		144,900		566,200

Component segment sales by business

2014
In millions			Q1			Q2			Q3			Q4			YTD
Emission Solutions			$	543		$	-		$	-		$	-		$	543
Turbo Technologies				313			-			-			-			313
Filtration				265			-			-			-			265
Fuel systems				109			-			-			-			109
	Total sales		$	1,230		$	-		$	-		$	-		$	1,230
2013
In millions				Q1			Q2			Q3			Q4			YTD
Emission Solutions			$	400		$	444		$	458		$	489		$	1,791
Turbo Technologies				266			294			263			292			1,115
Filtration				255			271			248			254			1,028
Fuel systems				97			108			103			100			408
	Total sales		$	1,018		$	1,117		$	1,072		$	1,135		$	4,342

Power Generation segment sales by business

2014
In millions			Q1			Q2			Q3			Q4			YTD
Power products			$	373		$	-		$	-		$	-		$	373
Power systems				137			-			-			-			137
Alternators				105			-			-			-			105
Power solutions				24			-			-			-			24
	Total sales		$	639		$	-		$	-		$	-		$	639
2013
In millions				Q1			Q2			Q3			Q4			YTD
Power products			$	409		$	474		$	421		$	421		$	1,725
Power systems				179			187			122			168			656
Alternators				126			125			126			119			496
Power solutions				32			28			43			51			154
	Total sales		$	746		$	814		$	712		$	759		$	3,031

Distribution segment sales by business

2014
In millions			Q1			Q2			Q3			Q4			YTD
Parts and filtration			$	382		$	-		$	-		$	-		$	382
Power generation				193			-			-			-			193
Engines				174			-			-			-			174
Service				201			-			-			-			201
	Total sales		$	950		$	-		$	-		$	-		$	950
2013
In millions				Q1			Q2			Q3			Q4			YTD
Parts and filtration			$	322		$	369		$	377		$	397		$	1,465
Power generation				163			241			234			293			931
Engines				152			183			170			208			713
Service				141			161			163			175			640
	Total sales		$	778		$	954		$	944		$	1,073		$	3,749