Global Customer Demand, Improved Cost Structure Drive Cummins' Strong First-Quarter Performance

Cummins Inc. (NYSE:CMI) today announced strong first quarter earnings, led by significant sales growth in almost every market. The first-quarter performance demonstrated the benefits of the Company’s ongoing effort to lower its cost structure and to diversify its business beyond the North American heavy-duty truck engine market. The heavy-duty truck market – still the Company’s largest – declined, as expected, due to lower truck sales resulting from new diesel emissions standards. However, results from Cummins’ other operations led the Company to higher sales and net income for the quarter. For the quarter, the Company reported sales of $2.82 billion, up 5.2 percent from $2.68 billion during the same period in 2006. Net income of $143 million ($1.42 per diluted share) increased 5.9 percent from $135 million ($1.35 per diluted share), due to the Company’s focus on strengthening its balance sheet and lowering costs. All earnings per share amounts reflect the two-for-one stock split distributed on April 9, 2007. Earnings before interest and taxes (EBIT) decreased 4.7 percent to $243 million during the first quarter. This reflects lower sales in the North American heavy-duty truck market, investment in global growth opportunities and costs associated with introducing 2007 emissions-compliant products. "Despite the predicted decline in the North American heavy-duty truck market, we achieved outstanding results in the first quarter,” said Tim Solso, Cummins Chairman and Chief Executive Officer. "These results show our strategy is working, and we expect that type of performance to continue the rest of this year and beyond. "We did what we said we would do – continued to deliver superior products and service to our customers, even in the face of significant changes to U.S. emissions regulations. Despite our outstanding performance in the first quarter, we don’t intend to relax. We remain committed to making the 2007 product launch cycle the best in our history and we are focused on controlling our costs and providing the best possible products and service.” Based on the Company’s first-quarter results and updated forecast for the rest of the year, Cummins today also announced that it has increased its full-year profit guidance to $6.00 - $6.50 a share, up from $5.50 – $5.75 a share. Cummins Power Generation continued its strong performance by reporting record sales and Segment EBIT during the quarter. The business saw a significant increase in demand for its commercial generator sets and alternators around the world – most notably in North America, India and the Middle East. Consumer sales also improved and more growth is expected in future quarters from sales of portable generator sets and auxiliary power units for commercial trucks. The Company’s Distribution business performed well during the quarter, with Segment EBIT increasing 26 percent from the same period in 2006 to $39 million. The segment enjoyed strong gains for engine sales in Europe, for generator sets in Europe and the South Pacific and for parts in Europe. Additionally, income from the Company’s distributor joint ventures nearly doubled, driven in part by an increase in orders for power generation equipment in North America. Sales to the North American heavy and medium-duty truck engine markets fell due to the change in emissions standards. Despite the decrease, the Company’s ability to produce new emission-certified engines from the beginning of the year resulted in market share gains with some customers, and an improved cost structure allowed the heavy-duty business to remain profitable. Additionally, the Company showed significant strength in international on-highway engine markets as well as in global industrial markets during the quarter. Capital spending for both the Company and its manufacturing joint ventures is expected to increase significantly in 2007, with the majority going to support growth in current products or expansion into new products. A few examples of current or planned capital spending programs: Additional fuel system assembly capacity in the U.S., Mexico and China. Expansion of exhaust aftertreatment assembly in the U.S. Expanded turbocharger capacity in the U.S., China and India. Increased high-horsepower machining and assembly capacity in the United Kingdom and India. New light-duty diesel engine manufacturing and assembly in the United States and China. "Even as Cummins continues to focus on 2007, the Company has committed to investing in profitable future growth opportunities around the world,” Solso said. First quarter details Engine Segment Sales of $1.76 billion were 3 percent lower than the same period in 2006, while Segment EBIT declined by 28 percent to $128 million, or 7.3 percent of sales. Global heavy-duty truck engines shipments decreased 45 percent, while global medium-duty truck engine shipments decreased 7 percent. Shipments to the global construction markets increased 25 percent, while oil and gas shipments jumped 11 percent. Power Generation Segment Sales, Segment EBIT and return on sales reached all-time highs. Sales of $675 million were a 26 percent increase from the same period in 2006, while Segment EBIT rose 71 percent to $77 million, or 11.4 percent of sales. Commercial generator sales rose 27 percent and alternator sales increased 43 percent, as both markets showed strength in almost all geographic areas. Consumer sales improved by 7 percent, aided by the introduction of portable generator sets. Distribution Segment Sales fell 2 percent to $309 million, due to changes in reporting for a North American distributor joint venture. Excluding the reporting change, sales rose 12 percent compared to the first quarter of 2006. Segment EBIT of $39 million, or 12.6 percent of sales, increased 26 percent from the same period in 2006. Components Segment Sales rose 18 percent to $657 million, while Segment EBIT declined 23 percent to $24 million, or 3.7 percent of sales. Significantly stronger results in the Company’s exhaust aftertreatment business were more than offset by the expected decline in heavy-duty volumes in the Fuel Systems division and higher material and new product costs in the Company’s Turbo Technologies division. 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. Webcast information Cummins management will host a teleconference to discuss these results today at 10 a.m. EDT. 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. 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 more than 160 countries through its network of 550 Company-owned and independent distributor facilities and more than 5,000 dealer locations. Cummins reported net income of $715 million on sales of $11.4 billion in 2006. Press releases can be found on the Web at www.cummins.com. 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. CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (a)   Three months ended April 1, April 2, December 31, 2007 2006 2006 Millions (except per share amounts) Net sales $ 2,817  $ 2,678  $ 3,033  Cost of sales 2,265  2,112  2,397  Gross margin 552  566  636    Operating expenses and income Selling and administrative expenses 283  268  300  Research and engineering expenses 80  82  78  Investee equity, royalty and other income 36  31  35  Other operating (expenses) income, net (2  ) 1  3    Operating earnings 223  248  296    Interest income 11  9  14  Interest expense 16  27  20  Other income (expenses), net 9  (2)   (7) Earnings before income taxes and minority interests 227  228  283    Provision for income taxes 75  85  80  Minority interests in earnings of consolidated subsidiaries 9  8  14  Net earnings $ 143  $ 135  $ 189    Earnings per common share (b) Basic $ 1.43  $ 1.52  $ 1.89  Diluted $ 1.42  $ 1.35  $ 1.87    Cash dividends declared per share $ 0.18  $ 0.15  $ 0.18    (a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America. (b) All per share amounts reflect the two-for-one stock split distributed April 9, 2007.   Certain reclassifications have been made to 2006 amounts to conform to the 2007 presentation. CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (a)   April 1, December 31, 2007 2006 Millions(except par value) ASSETS Current assets Cash and cash equivalents $ 521  $ 840  Marketable securities 69  95  Receivables, net 1,917  1,767  Inventories 1,563  1,393  Other current assets 393  393  Total current assets 4,463  4,488  Long-term assets Property, plant and equipment, net 1,541  1,574  Investments in and advances to equity investees 378  345  Goodwill 369  356  Other intangible assets, net 141  128  Other assets 556  574  Total assets $ 7,448  $ 7,465    LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Short-term borrowings $ 82  $ 164  Accounts payable 1,230  1,104  Other accrued expenses 973  1,131  Total current liabilities 2,285  2,399  Long-term liabilities Long-term debt 613  647  Other liabilities 1,360  1,363  Total liabilities 4,258  4,409    Minority interests 253  254  Shareholders’ equity (b) Common stock, $2.50 par value, 150 shares authorized, 110.2 and 110.0 shares issued 275  137  Additional paid-in capital 1,368  1,500  Retained earnings 2,134  2,009  Treasury stock, at cost, 5.9 and 5.8 shares (222)   (212) Common stock held in trust for employee benefit plans, 3.8 and 3.8 shares (92)   (92) Unearned compensation (13)   (14) Accumulated other comprehensive loss (513)   (526) Total shareholders’ equity 2,937  2,802  Total liabilities, minority interests and shareholders’ equity $ 7,448  $ 7,465    (a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America. (b) All share amounts reflect the two-for-one stock split distributed April 9, 2007. CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (a)   Three months ended April 1, April 2, 2007 2006 Millions Net cash (used in) provided by operating activities $ (113)   $ 18    Cash flows from investing activities Capital expenditures (48)   (52) Investments in internal use software (13)   (12) Proceeds from the disposal of property, plant and equipment 2  22  Investments in and advances to equity investees (17)   —  Acquisition of businesses, net of cash acquired (20)   —  Investments in marketable securities—acquisitions (68)   (38) Investments in marketable securities—liquidations 94  42  Other, net (3)   —  Net cash used in investing activities (73)   (38) Cash flows from financing activities Proceeds from borrowings 4  19  Payments on borrowings and capital lease obligations (101)   (64) Dividend payments on common stock (19)   (14) Proceeds from issuing common stock 2  4  Repurchases of common stock (13)   (36) Other, net (8)   7  Net cash used in financing activities (135)   (84) Effect of exchange rate changes on cash and cash equivalents 2  1  Net decrease in cash and cash equivalents (319)   (103) Cash and cash equivalents at beginning of year 840  779  Cash and cash equivalents at end of period $ 521  $ 676    (a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America. CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES SEGMENT INFORMATION (Unaudited)   Engine PowerGeneration Components Distribution Non-segment items(1) Total Millions Three months ended April 1, 2007 External sales $ 1,522  $ 531  $ 455  $ 309  $ —  $ 2,817  Intersegment sales   243    144    202    —    (589)     —  Net sales 1,765  675  657  309  (589)   2,817  Investee equity, royalty and other income 17  3  (1)   17  —  36  Interest income 8  2  1  —  —  11  Segment EBIT 128  77  24  39  (25)   243    Three months ended April 2, 2006 External sales $ 1,599  $ 411  $ 355  $ 313  $ —  $ 2,678  Intersegment sales   222    125    200    4    (551)     —  Net sales 1,821  536  555  317  (551)   2,678  Investee equity, royalty and other income 17  3  2  9  —  31  Interest income 7  1  —  1  —  9  Segment EBIT 179  45  31  31  (31)   255    Three months ended December 31, 2006 External sales $ 1,742  $ 515  $ 394  $ 382  $ —  $ 3,033  Intersegment sales 210  143  205  4  (562)   —  Net sales 1,952  658  599  386  (562)   3,033  Investee equity, royalty and other income 16  2  1  16  —  35  Interest income 11  2  1  —  —  14  Segment EBIT 181  62  23  39  (2)   303    (1) Includes intercompany eliminations and unallocated corporate expenses. A reconciliation of our segment information to the corresponding amounts in the Consolidated Financial Statements is shown in the table below:   Three Months Ended April 1, April 2, December 31, 2007 2006 2006 Millions Segment EBIT $ 243  $ 255  $ 303  Less: Interest expense 16  27  20  Earnings before income taxes and minority interests $ 227  $ 228  $ 283  CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES FINANCIAL MEASURES THAT SUPPLEMENT GAAP (Unaudited)   Earnings before interest, taxes and minority interests (EBIT)   We define EBIT as earnings before interest expense, provision for income taxes and minority interests in earnings 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 earnings, for each of the applicable periods:   Three Months Ended April 1, April 2, December 31, 2007 2006 2006 Millions Earnings before interest expense, income taxes and minority interests $ 243  $ 255  $ 303    EBIT as a percentage of net sales 8.6  % 9.5  % 10.0  %   Less: Interest expense 16  27  20  Provision for income taxes 75  85  80  Minority interests in earnings of consolidated subsidiaries 9  8  14  Net earnings $ 143  $ 135  $ 189    Net earnings as a percentage of net sales 5.1  % 5.0  % 6.2  %   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. Cash from operations excluding pension contributions   For the three months ended April 1, April 2, 2007 2006 Cash (used in) provided by operations $ (113)   $ 18  Add back: pension contributions 61  41  Cash (used in) provided by operations excluding pension contributions $ (52)   $ 59    We believe cash (used in) provided by operations excluding pension contributions is a useful measure of our operating performance for the periods presented as it illustrates our operating performance without regard to funding decisions. This measure is not in accordance with, or an alternative for, GAAP and may not be consistent with measures used by other companies. It should be considered supplemental data. CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES SELECTED FOOTNOTE DATA (Unaudited)   NOTE 1. EARNINGS PER SHARE   The following is a reconciliation of net earnings and weighted-average common shares outstanding for purposes of calculating basic and diluted net earnings per share:   Three months ended April 1, April 2, December 31, 2007 2006 2006 Millions (except per share amounts) Net earnings for basic EPS $ 143  $ 135  $ 189  Interest on junior convertible subordinated debentures, net of tax —  3  —  Net earnings for diluted EPS $ 143  $ 138  $ 189  Weighted-average common shares outstanding: Basic 100.0  88.7  100.2  Dilutive effect of stock compensation awards 0.5  0.7  0.9  Dilutive effect of junior convertible subordinated debentures —  12.6  —  Diluted 100.5  102.0  101.1  Earnings per common share: Basic $ 1.43  $ 1.52  $ 1.89  Diluted $ 1.42  $ 1.35  $ 1.87    The Board of Directors authorized a two-for-one split of Cummins stock on March 8, 2007, which was distributed on April 9, 2007, to shareholders of record as of March 26, 2007. All share and per share amounts have been adjusted to reflect the two-for-one stock split. NOTE 2. INVESTEE EQUITY, ROYALTY AND OTHER INCOME   Investee equity, royalty and other income included in our Condensed Consolidated Statements of Earnings for the interim reporting periods was as follows:   Three months ended April 1, April 2, December 31, 2007 2006 2006 Millions Dongfeng Cummins Engine Company, Ltd $ 6  $ 5  $ 3  North American distributors 15  9  14  Cummins Mercruiser 3  1  2  Chongqing Cummins 5  3  2  Tata Cummins 2  3  3  Fleetguard Shanghai 1  1  1  All others 1  4  5  Cummins share of net earnings 33  26  30  Royalty and other income 3  5  5  Investee equity, royalty and other income $ 36  $ 31  $ 35  NOTE 3. PROVISION FOR INCOME TAXES   Our tax rates are generally less than the 35 percent U.S. income tax rate primarily because of lower taxes on foreign earnings, export tax benefits and research tax credits.   Our effective tax rate for the three months ended April 1, 2007, was 33.0 percent. Our effective tax rate for the three months ended April 2, 2006, was 37.3 percent. The effective tax rate for the three months ended April 2, 2006, was higher than 35 percent due to a tax bill passed in Indiana during March 2006 that has the effect of lowering our effective tax rate in Indiana over time. As a result, our first quarter 2006 tax provision includes a $12 million charge, or $0.12 per share, to adjust deferred tax assets to their ultimate expected realizable value based upon this action.   NOTE 4. DEPRECIATION AND AMORTIZATION   Depreciation and amortization expense included in operating activities of the Condensed Consolidated Statements of Cash Flows for the three months ended April 1, 2007 and April 2, 2006, was $68 million and $74 million, respectively.   NOTE 5. SHIPPING AND HANDLING COSTS   Our shipping and handling costs are expensed as incurred. Those shipping and handling costs associated with operations of our inventory distribution centers and warehouse facilities were previously classified as "Selling and administrative expenses" in our Condensed Consolidated Statements of Earnings. In accordance with Emerging Issues Task Force (EITF) Issue No. 00-10 "Accounting for Shipping and Handling Fees and Costs," we previously disclosed the amount of shipping and handling costs included as "Selling and administrative expenses" in the notes to our consolidated financial statements. Beginning January 1, 2007, we revised our accounting policy and all shipping and handling costs are now classified as "Cost of sales." This presentation is more consistent with current industry practice. For purposes of comparability, the $33 million previously classified as "Selling and administrative expenses" in 2006 has been adjusted retrospectively to apply the new method. This change had no impact on operating earnings, EBIT, net earnings, or earnings per share. CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES SUPPLEMENTAL STATEMENTS OF EARNINGS INFORMATION (Unaudited)   Shipping and handling costs associated with operations of our inventory distribution centers and warehouse facilities were previously classified as "Selling and administrative expenses" in our Consolidated Statements of Earnings. In accordance with Emerging Issues Task Force (EITF) Issue No. 00-10 "Accounting for Shipping and Handling Fees and Costs," we previously disclosed the amount of shipping and handling costs included as "Selling and administrative expenses" in the notes to our consolidated financial statements. Beginning January 1, 2007, we revised our accounting policy and all shipping and handling costs are classified as "Cost of sales." This presentation is more consistent with current industry practice. For purposes of comparability, amounts previously classified as "Selling and administrative expenses" in previous periods have been adjusted retrospectively to apply the new method. The Consolidated Statements of Earnings for each of the quarterly periods in 2006 and for the 2006 and 2005 annual periods with all shipping and handling costs included in "Cost of sales" follows:   For the three months ended For the years ended April 2, July 2, Oct. 1, Dec. 31, December 31, 2006 2006 2006 2006 2006 2005 Millions Net sales $ 2,678  $ 2,842  $ 2,809  $ 3,033  $ 11,362  $ 9,918  Cost of sales 2,112  2,196  2,192  2,397  8,897  7,874    Gross margin 566  646  617  636  2,465  2,044    Operating expenses and income Selling and administrative expenses 268  294  291  300  1,153  1,003  Research and engineering expenses 82  80  81  78  321  278  Investee equity, royalty and other income 31  37  37  35  140  131  Other operating income (expenses), net 1  —  (4)   3  —  —    Operating earnings 248  309  278  296  1,131  894    Interest income 9  10  14  14  47  24  Interest expense 27  26  23  20  96  109  Other (expenses) income, net (2)   6  4  (7)   1  (11)   Earnings before income taxes and minority interests 228  299  273  283  1,083  798    Provision for income taxes 85  67  92  80  324  216  Minority interests in earnings of consolidated subsidiaries 8  12  10  14  44  32    Net earnings $ 135  $ 220  $ 171  $ 189  $ 715  $ 550    Note: Amounts reclassified from "Selling and administrative expenses” to "Cost of sales” $ 33  $ 26  $ 37  $ 34  $ 130  $ 142                  Sales $Millions Q1 Q2 Q3 Q4 YTD   2007  Engine Business Heavy-Duty Truck 424  424  Medium Duty Truck+Bus 206  206  Light Duty Auto+RV 288  288  Industrial 617  617  Stationary Power 230        230  TOTAL ENGINE BUSINESS 1,765  0  0  0  1,765  Power Generation 675  675  Components 657  657  Distributors 309  309  Eliminations (589)       (589) TOTAL 2,817  0  0  0  2,817      2006  Engine Business Heavy-Duty Truck 608  618  632  640  2,498  Medium Duty Truck+Bus 215  247  253  256  971  Light Duty Auto+RV 331  341  267  322  1,261  Industrial 481  516  507  559  2,063  Stationary Power 186  174  183  175  718  TOTAL ENGINE BUSINESS 1,821  1,896  1,842  1,952  7,511  Power Generation 536  598  624  658  2,416  Components 555  563  564  599  2,281  Distributors 317  336  346  386  1,385  Eliminations (551) (551) (567) (562) (2,231) TOTAL 2,678  2,842  2,809  3,033  11,362                                    Engine Shipments Units Q1 Q2 Q3 Q4 YTD   2007  Midrange 107,200  107,200  Heavy-duty 19,000  19,000  High Horsepower 4,300        4,300  TOTAL 130,500  0  0  0  130,500    2006  Midrange 114,500  121,800  104,800  118,800  459,900  Heavy-duty 30,100  31,400  31,000  30,900  123,400  High Horsepower 3,700  4,000  4,100  4,500  16,300  TOTAL 148,300  157,200  139,900  154,200  599,600