Cummins Inc. and its consolidated subsidiaries are hereinafter sometimes referred to as "Cummins," "the Company," "the registrant," "we," "our," or "us."

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

Certain parts of this quarterly report contain forward-looking statements that are based on current expectations, estimates and projections about the industries in which we operate and management's beliefs and assumptions. Forward-looking statements are generally accompanied by words, such as "anticipates," "expects," "forecasts," "intends," "plans," "believes," "seeks," "estimates" or similar expressions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which we refer to as "future factors," which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Future factors that could cause our results to differ materially from the results discussed in such forward-looking statements are discussed below. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Future factors that could affect the outcome of forward-looking statements include the following:

† price and product competition by foreign and domestic competitors, including new entrants;

† rapid technological developments of diesel engines;

† the ability to continue to introduce competitive new products in a timely, cost-effective manner;

† the sales mix of products;

† the continued achievement of lower costs and expenses;

† domestic and foreign governmental and public policy changes, including environmental regulations;

† protection and validity of patent and other intellectual property rights;

† reliance on large customers;

† technological, implementation and cost/financial risks in increasing use of large, multi-year contracts;

† the cyclical nature of some of our markets;

† the outcome of pending and future litigation and governmental proceedings;

† continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support our future business;

† the overall stability of global economic markets and conditions; and

† other risk factors described in Part II of this report under the caption "Risk Factors Relating to Our Business."

In addition, such statements could be affected by general industry and market conditions and growth rates, general domestic and international economic conditions, including the price of crude oil (diesel fuel), interest rate and currency exchange rate fluctuations, commodity prices and other future factors.

ORGANIZATION OF INFORMATION

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") was prepared to provide the reader with a view and perspective of our business through the eyes of management and should be read in conjunction with our Consolidated Financial Statements and related Notes to Consolidated Financial Statements in the "Financial Statements" section of our 2008 Form 10-K. Our MD&A is presented in the following sections:

† Executive Summary and Financial Highlights

† Results of Operations

† Restructuring and Other Charges

† Outlook

† Operating Segment Results

† Liquidity and Capital Resources

† Off Balance Sheet Financing

† Application of Critical Accounting Estimates

† Recently Adopted and Recently Issued Accounting Pronouncements

EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS

We are a leading global power provider that designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration and exhaust aftertreatment, turbochargers, fuel systems, controls and air handling systems. We sell our products to Original Equipment Manufacturers (OEMs), distributors and other customers worldwide. We have long-standing relationships with many of the leading manufacturers in the markets we serve, including PACCAR Inc., International Truck and Engine Corporation (Navistar International Corporation), Chrysler Group, LLC (Chrysler), Volvo AB, Daimler Trucks North America, Ford Motor Company, Case New Holland, Komatsu, and Volkswagen. We serve our customers through a network of more than 500 company-owned and independent distributor locations and approximately 5,200 dealer locations in more than 190 countries and territories.

Our reportable operating segments consist of the following: Engine, Power Generation, Components and Distribution. This reporting structure is organized according to the products and markets each segment serves. This type of reporting structure allows management to focus its efforts on providing enhanced service to a wide range of customers. The Engine segment produces engines and parts for sale to customers in on-highway and various industrial markets. The engines are used in trucks of all sizes, buses and recreational vehicles, as well as various industrial applications including construction, mining, agriculture, marine, oil and gas, rail and military. The Power Generation segment is an integrated provider of power systems which sells engines, generator sets and alternators. The Components segment includes sales of filtration products, exhaust aftertreatment systems, turbochargers and fuel systems. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets, and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world.

Our financial performance depends, in large part, on varying conditions in the markets we serve, particularly the on-highway, construction and general industrial markets. Demand in these markets tends to fluctuate in response to overall economic conditions and is particularly sensitive to changes in interest rate levels and our customers' access to credit. Our sales may also be impacted by OEM inventory levels and production schedules and stoppages. Economic downturns in markets we serve generally result in reductions in sales and could impact pricing of our products. As a worldwide business, our operations are also affected by political, economic and regulatory matters, including environmental and emissions standards, in the countries we serve. At the same time, our geographic diversity and broad product and service offerings have helped limit the impact of any one industry or customer and the economy of any single country on our consolidated results.

However, as was the case in the first half of 2009, the widespread nature of the current global economic downturn continues to create immediate challenges for most of our businesses and the markets in which they operate. Demand in most of our markets around the world appears to have reached bottom and we are seeing signs that markets are stabilizing at these levels. We are also seeing improvement in emerging markets including China, India and Brazil. In North America, we are seeing improvement in demand in the second half of the year relating to higher engine sales prior to the 2010 emissions standards change. This increase in demand is consistent with prior emissions standard implementations. We expect demand to remain weak in most of our other markets throughout the remainder of 2009. We took actions to align our businesses with reduced customer demand in the first nine months of 2009. These actions included global workforce reductions and closing certain manufacturing operations. Costs associated with these restructuring actions, in conjunction with the significantly reduced demand, negatively impacted our operating results for the three and nine months ended September 27, 2009. Should our performance for the remainder of the year differ adversely from our projections, we could be required to take additional actions as local conditions require.

While we expect global demand for our products to be weak for the remainder of the year (excluding the North American on-highway markets), certain emerging markets are expected to improve in the fourth quarter of the year. The actions that were initiated in the fourth quarter of 2008 and the first nine months of 2009 have and will continue to enable us to navigate through the downturn and position us to respond to market conditions when and where they improve. Our short term priorities remain:

† to align costs and capacity with the real demand for our products, so that we maintain a solid profit through the downturn;

† to manage the business in such a way that generates positive cash flow; and

† to continue to invest in critical technologies and products for 2010 and beyond.

Net income attributable to Cummins was $95 million, or $0.48 per diluted share, on sales of $2.5 billion for the three month interim reporting period ended September 27, 2009, versus the comparable prior year period with net income attributable to Cummins of $229 million, or $1.17 per diluted share, on sales of $3.7 billion. The decrease in income was driven by a 31 percent decrease in net sales and a 39 percent decrease in gross margin primarily due to significantly lower demand and volumes across most of our businesses. Restructuring and other charges in the third quarter of 2009 were $22 million ($15 million after-tax, or $0.08 per diluted share).

Net income attributable to Cummins was $158 million, or $0.80 per diluted share, on sales of $7.4 billion for the nine month interim reporting period ended September 27, 2009, versus the comparable prior year period with net income attributable to Cummins of $712 million, or $3.62 per diluted share, on sales of $11.1 billion. The decrease in income was driven by a 33 percent decrease in net sales and a 42 percent decrease in gross margin, as we were impacted by lower demand across most of our businesses. Focused cost reduction efforts helped mitigate the impact of lower volumes. Restructuring and other charges in the first three quarters of 2009 were $95 million ($63 million after-tax, or $0.32 per diluted share). For a detailed discussion of restructuring see Note 5, "RESTRUCTURING AND OTHER CHARGES" in the Notes to the Condensed Consolidated Financial Statements.

We continued to strengthen our balance sheet in a challenging environment. Cash, cash equivalents and marketable securities increased $331 million from year end as we reduced inventories by 18 percent in the same period. We also reduced total debt by $17 million compared to December 31, 2008.

RESULTS OF OPERATIONS



                               Three months ended               Favorable/                Nine months ended               Favorable/
                        September 27,      September 28,      (Unfavorable)        September 27,     September 28,      (Unfavorable)
In millions (except
per share amounts)          2009               2008          Amount    Percent         2009              2008          Amount    Percent
Net sales              $         2,530    $         3,693   $ (1,163 )     (31 )% $         7,400   $        11,054   $ (3,654 )     (33 )%
Cost of sales                    2,027              2,873        846        29 %            6,004             8,648      2,644        31 %
Gross margin                       503                820       (317 )     (39 )%           1,396             2,406     (1,010 )     (42 )%
Operating expenses
and income
Selling, general and
administrative
expenses                           304                388         84        22 %              891             1,109        218        20 %
Research,
development and
engineering expenses                90                113         23        20 %              254               320         66        21 %
Equity, royalty and
interest income from
investees                           57                 66         (9 )     (14 )%             147               202        (55 )     (27 )%
Restructuring and
other charges                       22                  -        (22 )      NM                 95                 -        (95 )      NM
Other operating
income (expense),
net                                  3                 (2 )        5        NM                 (6 )              (9 )        3        33 %
Operating income                   147                383       (236 )     (62 )%             297             1,170       (873 )     (75 )%
Interest income                      2                  4         (2 )     (50 )%               5                14         (9 )     (64 )%
Interest expense                     9                 10          1        10 %               26                33          7        21 %
Other income
(expense), net                       6                 (7 )       13        NM                (10 )             (20 )       10        50 %
Income before income
taxes                              146                370       (224 )     (61 )%             266             1,131       (865 )     (76 )%
Income tax expense                  36                123         87        71 %               72               372        300        81 %
Net income                         110                247       (137 )     (55 )%             194               759       (565 )     (74 )%
Less: net income
attributable to
noncontrolling
interests                           15                 18          3        17 %               36                47         11        23 %
Net income
attributable to
Cummins Inc.           $            95    $           229   $   (134 )     (59 )% $           158   $           712   $   (554 )     (78 )%
Diluted earnings per
common share
attributable to
Cummins Inc.           $          0.48    $          1.17   $  (0.69 )     (59 )% $          0.80   $          3.62   $  (2.82 )     (78 )%

Net Sales

Net sales for the three and nine month periods ended September 27, 2009, decreased in all segments versus the comparable periods in 2008, primarily due to decreased demand due to the global economic downturn.

A more detailed discussion of sales by segment is presented in the "OPERATING SEGMENT RESULTS" section.

Sales to international markets based on location of customers for the three and nine month periods ended September 27, 2009, were 54 percent of total net sales for both periods, compared with 61 percent and 60 percent of total net sales for the comparable periods in 2008.

A summary of net sales (dollar amount and percentage of total) by geographic territory follows:

                                    Three months ended                                  Nine months ended
In millions            September 27, 2009        September 28, 2008        September 27, 2009        September 28, 2008
United States        $      1,161        46 %  $      1,447        39 %  $      3,414        46 %  $       4,471       40 %
Asia/Australia                563        22 %           799        22 %         1,579        21 %          2,339       21 %
Europe/CIS(1)                 323        13 %           622        17 %         1,071        15 %          2,013       18 %
Mexico/Latin
America                       261        10 %           411        11 %           645         9 %          1,166       11 %
Africa/Middle East            155         6 %           242         6 %           458         6 %            633        6 %
Canada                         67         3 %           172         5 %           233         3 %            432        4 %
Total
international               1,369        54 %         2,246        61 %         3,986        54 %          6,583       60 %
Total consolidated
net sales            $      2,530       100 %  $      3,693       100 %  $      7,400       100 %  $      11,054      100 %

Gross Margin



Significant drivers of the change in gross margins for the three and nine month
periods ended September 27, 2009, versus the comparable periods ended September
28, 2008, were as follows:



                               Increase (Decrease)
                                  2009 vs. 2008
In millions         Three months ended      Nine months ended
Volume/Mix         $               (417 )  $            (1,151 )
Currency                             (9 )                  (26 )
Warranty expense                     (3 )                  (39 )
Price                                56                    197
Production costs                     38                     68
Material costs                       19                    (59 )
Other                                (1 )                    -
Total              $               (317 )  $            (1,010 )

Gross margin decreased by $317 million and $1,010 million for the three and nine month periods ended September 27, 2009, versus the comparable periods in 2008, and decreased as a percentage of sales by 2.3 percentage points and 2.9 percentage points, respectively. For the three and nine months ended September 27, 2009, versus the comparable period in 2008, the decrease was led by lower volumes which were partially offset by improved pricing and decreased production costs. The decreases in volumes were due to lower sales resulting from the global economic downturn. The increased materials costs for the nine months ended were largely due to losses on hedged commodities which were partially offset by decreasing commodity costs. The provision for warranties issued as a percent of sales was 3.3 percent for both periods in 2009 compared to 2.7 percent and 2.9 percent in 2008 for the three and nine month periods, respectively.

A more detailed discussion of margin by segment is presented in the "OPERATING SEGMENT RESULTS" section.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three and nine month periods ended September 27, 2009, decreased versus the comparable periods in 2008, primarily due to decreases of $46 million and $98 million in compensation and related expenses and decreases of $20 million and $71 million in discretionary spending, in order to conserve cash, respectively. Compensation and related expenses include salaries, fringe benefits and variable compensation. Variable compensation was reduced due to lower sales and income compared to the prior year period. Selling, general and administrative expenses also decreased due to cost savings from restructuring actions. Overall, selling, general and administrative expenses as a percentage of sales increased to 12.0 percent for both periods in 2009 compared to 10.5 percent and 10.0 percent in 2008 for the three and nine month periods ended, respectively.

Research, Development and Engineering Expenses

Research, development and engineering expenses for the three and nine month periods ended September 27, 2009, decreased versus the comparable periods in 2008, primarily due to a decrease in the number of engineering projects to conserve cash while focusing on the development of critical technologies and new products, decreased compensation and related expenses due to implemented severance programs and increased reimbursements for engineering projects. Compensation and related expenses include salaries, fringe benefits and variable compensation. Overall, research, development and engineering expenses as a percentage of sales increased to 3.6 percent and 3.4 percent in 2009 from 3.1 percent and 2.9 percent in 2008 for the three and nine month periods ended, respectively. Research activities continue to focus on development of new products to meet future environmental standards around the world and improvements to fuel economy performance.

Equity, Royalty and Interest Income From Investees



Equity, royalty and interest income from investees for the three and nine month
periods ended September 27, 2009, decreased versus the comparable periods in
2008, primarily due to the following:



                                                                 Increase/(Decrease)
                                                      September 27, 2009 vs. September 28, 2008
In millions                                        Three months ended            Nine months ended
Dongfeng Cummins Engine Company, Ltd. (DCEC)     $                   (5 )      $                  (32 )
Cummins MerCruiser Diesel LLC (MerCruiser)                           (1 )                         (10 )
Chongqing Cummins Engine Company, Ltd. (CCEC)                        (1 )                           5
Tata Cummins Ltd. (TCL)                                               2                            (5 )

These decreases for both periods were primarily due to lower demand as a result of the global economic conditions. For the nine months ended September 27, 2009, the effects of the global economic downturn were partially offset by the increase in income from CCEC due to a one-time tax benefit recorded in the second quarter of 2009.

Other Operating Income (Expense), net



                                            Three months ended                           Nine months ended
                                  September 27,             September 28,      September 27,           September 28,
In millions                            2009                     2008               2009                     2008
Other operating income
(expense):
Flood gain (loss)                $              8 (1)      $             -    $             5 (1)     $             (6 )
Royalty income                                  2                        2                  6                        9
Amortization of intangible
assets                                         (1 )                     (4 )               (5 )                     (9 )
Gain (loss) on sale of fixed
assets                                         (2 )                      2                 (1 )                      5
Royalty expense                                (2 )                     (2 )               (7 )                     (6 )
Other income (expense), net                    (2 )                      -                 (4 )                     (2 )
Total other income (expense),
net                              $              3          $            (2 )  $            (6 )       $             (9 )

Interest Income

Interest income for the three and nine month periods ended September 27, 2009, decreased versus the comparable periods in 2008, primarily due to lower interest rates in 2009 compared to 2008.

Interest Expense

Interest expense for the three and nine month periods ended September 27, 2009, decreased versus the comparable periods in 2008, primarily due to declining short-term interest rates and lower debt.

Other Income (Expense), Net



                                     Three months ended                     Nine months ended
                              September 27,       September 28,      September 27,      September 28,
In millions                       2009                2008               2009               2008
Other income (expense):
Foreign currency gains
(losses), net                $            (1 )   $           (10 )  $           (18 )  $           (23 )
Dividend income                            1                   2                  3                  4
Bank charges                              (3 )                (4 )              (10 )               (9 )
Other, net                                 9                   5                 15                  8
Total other income
(expense), net               $             6     $            (7 )  $           (10 )  $           (20 )

Income Tax Expense

Our effective tax rate for the year is expected to approximate 27 percent, absent any additional discrete period activity. Our tax rate is generally less than the 35 percent U.S. income tax rate primarily due to lower tax rates on foreign income and research tax credits. The tax rates for the three and nine month periods ended September 27, 2009, were 25 percent and 27 percent, respectively. Our effective tax rate for both comparable prior year periods was 33 percent. The lower effective tax rates for both periods in 2009 compared to 2008 are primarily due to research tax credits, which were not included in the 2008 effective tax rates until the U.S. research credit was retroactively reinstated in the fourth quarter of 2008.

Noncontrolling Interests

Noncontrolling interests eliminate the income or loss attributable to non-Cummins ownership interests in our consolidated entities. Noncontrolling interests in income of consolidated subsidiaries for the three and nine month periods ended September 27, 2009, decreased versus the comparable periods in 2008, primarily due to lower income at Cummins India Ltd., a publicly traded company at various exchanges in India, reflecting the decline in demand as a result of the global economic downturn.

Net income and diluted earnings per share attributable to Cummins Inc.

Net income and diluted earnings per share attributable to Cummins Inc. for the three and nine month periods ended September 27, 2009, decreased versus the comparable periods in 2008, primarily due to significantly lower volumes, restructuring charges and lower equity income. These decreases were partially offset by lower income tax expense, decreased selling, general and administrative expenses, and lower research, development and engineering expenses.

RESTRUCTURING AND OTHER CHARGES

2009 Restructuring Actions

In 2009, we executed restructuring actions in response to a reduction in orders in most of our U.S. and foreign markets due to the continuing deterioration in the global economy. We reduced our global workforce by approximately 1,000 professional employees. In addition, we took numerous employee actions at many of our manufacturing locations, including approximately 3,150 hourly employees, significant downsizing at numerous facilities and complete closure of several facilities and branch distributor locations. Employee termination and

severance costs were recorded based on approved plans developed by the . . .