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CMI > SEC Filings for CMI > Form 10-Q on 31-Oct-2012All Recent SEC Filings

Show all filings for CUMMINS INC

Form 10-Q for CUMMINS INC


31-Oct-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

Certain parts of this quarterly report contain forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those 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," "could," "should" or words of similar meaning. 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. Some future factors that could cause our results to differ materially from the results discussed in such forward-looking statements are discussed below and shareholders, potential investors and other readers are urged to consider these future factors carefully in evaluating forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. Future factors that could affect the outcome of forward-looking statements include the following:

general economic, business and financing conditions, including emerging markets;

a slowdown in infrastructure development;

increasingly stringent environmental laws and regulations;

unpredictability in the adoption, implementation and enforcement of emission standards around the world;

the actions of joint ventures and other investees that we do not directly control;

changes in the outsourcing practices of significant customers;

any significant problems in our new engine platforms;

currency exchange rate changes;

supply shortages and supplier financial risk;

variability in material and commodity costs;

product recalls and liability claims;

competitor pricing activity;

increasing global competition among our customers;

global political and economic conditions;

changes in taxation;

the price and availability of energy;

increasing our capacity and production at the appropriate pace;

the development of new technologies;

obtaining customers for our new light-duty diesel engine platform;

new governmental actions, legislation and regulations;

the performance of our pension plan assets;

labor relations;

changes in accounting standards;

          our sales mix of products;



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


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technological implementation and cost/financial risks in our 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 and

other risk factors described in our Form 10-K, Part 1, Item IA under the caption "Risk Factors."

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 quarterly report and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.


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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 accompanying Notes to Consolidated Financial Statements in the "Financial Statements" section of our 2011 Form 10-K. Our MD&A is presented in the following sections:

Executive Summary and Financial Highlights

Outlook

Results of Operations

Operating Segment Results

Liquidity and Capital Resources

Application of Critical Accounting Estimates

Recently Adopted and Recently Issued Accounting Pronouncements


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EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS

We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines, engine-related component products, including emission solutions, filtration, fuel systems and air handling systems, and power generation products, including electronic power generation systems and related products. 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, Chrysler Group, LLC, Daimler Trucks North America, Ford Motor Company, Komatsu and Volvo AB. We serve our customers through a network of more than 600 company-owned and independent distributor locations and approximately 6,500 dealer locations in more than 190 countries and territories.

Our reportable operating segments consist of the following: Engine, Components, Power Generation and Distribution. This reporting structure is organized according to the products and markets each segment serves and 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. Our 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 equipment. The Components segment sells filtration products, exhaust aftertreatment systems, turbochargers and fuel systems. The Power Generation segment is an integrated provider of power systems. The segment sells engines, generator sets, alternators, power systems and services. 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 pricing of our products. As a worldwide business, our operations are also affected by currency, political, economic and regulatory matters, including adoption and enforcement of environmental and emission standards, in the countries we serve. As part of our growth strategy, we invest in businesses in certain countries that carry high levels of these risks such as China, Brazil, India, Mexico, Russia and countries in the Middle East and Africa. At the same time, our geographic diversity and broad product and service offerings have helped limit the impact from a drop in demand in any one industry or customer or the economy of any single country on our consolidated results.

The global economy continued to slow throughout 2012. In the first nine months of 2012, we experienced declining demand in certain emerging markets including Brazil and China and a decline in India as the result of foreign currency fluctuations, which were mostly offset by growth in several end markets in North America. The off-highway construction markets in China have continued to deteriorate with shipments to construction markets down 69 percent. The on-highway medium-duty truck market in Brazil declined as the result of the 2011 pre-buy ahead of the new 2012 emission requirements and one of our customers replacing our B6.7 engine with a proprietary engine in 2012 contributing to international medium-duty truck shipments being down 18 percent. North American demand for heavy-duty on-highway products increased 21 percent while medium-duty truck shipments increased 20 percent in the first nine months of 2012 compared to the same period in 2011; although demand in both of these markets was lower in the third quarter of 2012 as compared to the same period in 2011. North American light-duty on-highway demand also improved with an increase in shipments to Chrysler of 42 percent in the first nine months of 2012 compared to the same period in 2011.

Slow growth in the U.S. economy and uncertainty driven by unresolved federal tax and budget issues is causing businesses to hold back on capital expenditures, thus impacting demand for truck and power generation equipment. The governments of China and India have controlled inflation through tight monetary policies in the form of rising interest rates and tightening access to credit, although both countries have begun easing these policies in response to reduced inflationary concerns. Brazil also began easing their monetary policies in the second half of 2012. Easing monetary policies could enhance our end markets; however, there likely would be a delay between when these policies are implemented and when our end markets respond, and we do not believe these policies will have a material positive impact on the remainder of 2012. The European economy remains uncertain with continued volatility in the Euro countries. Although we do not have any significant direct exposure to European sovereign debt, we generated approximately nine percent of our net sales from Euro zone countries in 2011 and approximately eight percent in the first nine months of 2012. As a result of a number of markets unexpectedly slowing in mid-2012, continued weak economic data in a number of regions and increasing levels of uncertainty regarding the direction of the global economy, we implemented a number of cost reduction initiatives in the third quarter of 2012. In October 2012, we announced actions necessary to respond strategically to the current environment by cutting costs while maintaining investments in key growth programs. Actions include a number of measures to reduce costs including planned work week reductions, shutdowns at some manufacturing facilities and some targeted workforce reductions. We expect to reduce our workforce by between 1,000 and 1,500 people by the end of the year.


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The following tables contain sales and earnings before interest expense, income taxes and noncontrolling interests (EBIT) results by operating segment for the three and nine months ended September 30, 2012 and September 25, 2011. Refer to the section titled "Operating Segment Results" for a more detailed discussion of net sales and EBIT by operating segment, including the reconciliation of segment EBIT to income before taxes.

                                                    Three months ended
                          September 30, 2012             September 25, 2011          Percent change
Operating Segments             Percent                        Percent                2012 vs. 2011
In millions           Sales    of Total     EBIT     Sales    of Total     EBIT     Sales       EBIT
Engine               $ 2,527         61 %  $  239   $ 2,955         64 %  $  349       (14 )%     (32 )%
Components               938         23 %      89     1,015         22 %     113        (8 )%     (21 )%
Power Generation         814         20 %      73       874         19 %      92        (7 )%     (21 )%
Distribution             801         19 %      99       783         17 %     104         2 %       (5 )%
Intersegment
eliminations            (962 )      (23 )%      -    (1,001 )      (22 )%      -        (4 )%       -
Non-segment                -          -        (4 )       -          -       (18 )       -        (78 )%
Total                $ 4,118        100 %  $  496   $ 4,626        100 %  $  640       (11 )%     (23 )%

Net income attributable to Cummins was $352 million, or $1.86 per diluted share, on sales of $4.1 billion for the three month interim reporting period ended September 30, 2012, versus the comparable prior year period with net income attributable to Cummins of $452 million, or $2.35 per diluted share, on sales of $4.6 billion. The decrease in income and earnings per share was driven by lower gross margins as lower volumes, particularly in the international construction, international medium-duty truck, North American heavy-duty truck and high-horsepower markets, were partially offset by a lower effective tax rate of 24.1 percent, which included $16 million of favorable discrete items, versus the comparable prior year period of 25.0 percent, which included $29 million of favorable discrete tax items.

                                                      Nine months ended
                           September 30, 2012               September 25, 2011           Percent change
Operating Segments              Percent                          Percent                 2012 vs. 2011
In millions           Sales     of Total     EBIT      Sales     of Total     EBIT      Sales       EBIT
Engine               $  8,227         63 %  $   996   $  8,246         63 %  $ 1,016         -         (2 )%
Components              3,073         24 %      348      2,971         22 %      338         3 %        3 %
Power Generation        2,503         19 %      243      2,578         20 %      286        (3 )%     (15 )%
Distribution            2,370         18 %      285      2,210         17 %      299         7 %       (5 )%
Intersegment
eliminations           (3,131 )      (24 )%       -     (2,878 )      (22 )%       -         9 %        -
Non-segment                 -          -        (49 )        -          -          8         -         NM
Total                $ 13,042        100 %  $ 1,823   $ 13,127        100 %  $ 1,947        (1 )%      (6 )%

"NM" - not meaningful information.

Net income attributable to Cummins was $ 1,276 million, or $6.72 per diluted share, on sales of $13.0 billion for the nine month interim reporting period ended September 30, 2012, versus the comparable prior year period with net income attributable to Cummins of $ 1,300 million, or $6.69 per diluted share, on sales of $13.1 billion. The decrease in income was driven by higher operating expenses, lower gains on the disposition of certain assets and liabilities of our exhaust business and lower equity, royalty and interest income from investees, partially offset by improved gross margins and a lower effective tax rate of 25.5 percent versus 28.2 percent in the comparable prior year period. Diluted earnings per share for the nine months ended September 30, 2012, also benefited $0.04 from lower shares due to the stock repurchase program.

We generated $ 787 million of operating cash flows for the nine months ended September 30, 2012, compared to $ 1,368 million for the nine months ended September 25, 2011. Refer to the section titled "Operating Activities" in the "Liquidity and Capital Resources" section for a discussion of items impacting cash flows.

In February 2011, the Board of Directors authorized the acquisition of up to $1 billion of our common stock. We repurchased $231 million in the first nine months of 2012. Our debt to capital ratio (total capital defined as debt plus equity) at September 30, 2012, was 10.5 percent, compared to 11.8 percent at December 31, 2011. In October 2012, Fitch Ratings upgraded our ratings to 'A' and changed our outlook to stable. In addition to the $1.3 billion in cash and marketable securities on hand, we have access to our credit facilities, if necessary, to meet currently anticipated investment and funding needs.


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In July 2012, the Board of Directors authorized a dividend increase of 25 percent from $0.40 per share to $0.50 per share on a quarterly basis.

Our global pension plans, including our unfunded and non-qualified plans, were 98 percent funded at December 31, 2011. Our United States (U.S.) qualified plan, which represents approximately 60 percent of the worldwide pension obligation, was 103 percent funded and our United Kingdom (U.K.) plan was 106 percent funded. We expect to contribute $130 million to our global pension plans in 2012.

In July 2012, we completed the acquisition of Hilite Germany GmbH (Hilite) in a cash transaction for $176 million. We also acquired an additional 45 percent interest in Cummins Central Power for consideration of approximately $20 million.

OUTLOOK

Near-Term

In the first six months of 2012, North American demand in heavy- and medium-duty truck markets remained strong; however, it began to soften in the third quarter.

We expect the following challenges to our business that may reduce our earnings potential in the remainder of 2012:

Our North American heavy-duty truck market could continue to soften or experience further slowing.

One of our Brazilian customers replaced our B6.7 engine with a proprietary engine in 2012, which is being partially offset by the 2012 launch of our ISF and 9 liter engines in new light-duty on-highway and medium-duty truck applications, respectively, with this same customer.

Our 2012 engine sales in Brazil could be negatively impacted by excess Euro V channel inventory.

The weakening economy in Brazil could continue to have adverse impacts on our other businesses.

Demand in certain industrial markets in China could remain low.

The Indian Rupee could continue to depreciate in value, which would create additional pressure on earnings, while higher inflation could negatively impact sales, especially industrial sales.

Demand in certain European markets could continue to decline due to economic uncertainty.

Currency volatility could continue to put pressure on earnings.

North American oil and gas markets could continue to decline.

International mining markets could continue to decline.

Strategic actions announced in October could have a net negative impact on fourth quarter results.

Long-Term

We believe that, over the longer term, there will be economic improvements in most of our current markets and that our opportunities for long-term profitable growth will continue in the future as the result of the following four macroeconomic trends that will benefit our businesses:

tightening emissions controls across the world;

infrastructure needs in emerging markets;

energy availability and cost issues and

globalization of industries like ours.


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RESULTS OF OPERATIONS



                                                  Three months ended                  Favorable/                   Nine months ended                   Favorable/
                                           September 30,      September 25,         (Unfavorable)           September 30,      September 25,          (Unfavorable)
In millions (except per share amounts)         2012               2011           Amount       Percent           2012               2011            Amount       Percent
NET SALES                                 $         4,118    $         4,626    $    (508 )        (11 )%  $        13,042    $        13,127    $      (85 )         (1 )%
Cost of sales                                       3,076              3,438          362           11 %             9,592              9,779           187            2 %
GROSS MARGIN                                        1,042              1,188         (146 )        (12 )%            3,450              3,348           102            3 %
OPERATING EXPENSES AND INCOME
Selling, general and administrative
expenses                                              456                489           33            7 %             1,418              1,341           (77 )         (6 )%
Research, development and engineering
expenses                                              186                164          (22 )        (13 )%              554                450          (104 )        (23 )%
Equity, royalty and interest income
from investees                                         94                102           (8 )         (8 )%              302                315           (13 )         (4 )%
Gain on sale of businesses                              -                  -            -            -                   6                 68           (62 )        (91 )%
Other operating income (expense), net                  (1 )                2           (3 )         NM                   3                 (4 )           7           NM
OPERATING INCOME                                      493                639         (146 )        (23 )%            1,789              1,936          (147 )         (8 )%
Interest income                                         5                  9           (4 )        (44 )%               20                 25            (5 )        (20 )%
Interest expense                                        9                 11            2           18 %                25                 34             9           26 %
Other income (expense), net                            (2 )               (8 )          6           75 %                14                (14 )          28           NM
INCOME BEFORE INCOME TAXES                            487                629         (142 )        (23 )%            1,798              1,913          (115 )         (6 )%
Income tax expense                                    117                157           40           25 %               458                539            81           15 %
CONSOLIDATED NET INCOME                               370                472         (102 )        (22 )%            1,340              1,374           (34 )         (2 )%
Less: Net income attributable to
noncontrolling interests                               18                 20            2           10 %                64                 74            10           14 %
NET INCOME ATTRIBUTABLE TO CUMMINS
INC.                                      $           352    $           452    $    (100 )        (22 )%  $         1,276    $         1,300    $      (24 )         (2 )%
Diluted earnings per common share
attributable to Cummins Inc.              $          1.86    $          2.35    $   (0.49 )        (21 )%  $          6.72    $          6.69    $     0.03            -




                              Three months ended             Favorable/              Nine months ended              Favorable/
                        September 30,    September 25,      (Unfavorable)      September 30,    September 25,      (Unfavorable)
Percent of sales            2012             2011         Percentage Points        2012             2011         Percentage Points
Gross margin                     25.3 %           25.7 %               (0.4 )           26.5 %           25.5 %                1.0
Selling, general and
administrative
expenses                         11.1 %           10.6 %               (0.5 )           10.9 %           10.2 %               (0.7 )
Research, development
and engineering
expenses                          4.5 %            3.5 %               (1.0 )            4.2 %            3.4 %               (0.8 )

Net Sales



Net sales for the three months ended September 30, 2012, decreased versus the
comparable period in 2011.  The decrease in sales by segment was primarily
driven by the following:



          Foreign currency fluctuations unfavorably impacted sales.



          Engine segment sales decreased by 14 percent due to lower volumes in

international construction markets, primarily in China, international medium-duty truck markets, especially in Brazil, and North American heavy-duty truck markets.

Components segment sales, excluding acquisitions, decreased by ten percent due to decreased demand in the turbo technologies and filtration businesses and $18 million of sales in the third quarter of 2011 related to assets sold during 2011.

Power Generation segment sales decreased by seven percent due to unfavorable foreign currency fluctuations and lower volumes in the generator technologies, power systems and power solutions businesses, primarily in international markets.

Distribution segment sales, excluding acquisitions, decreased by seven percent primarily due to unfavorable foreign currency fluctuations and lower volumes of both engine products in North America and global power generation products.

Net sales for the nine months ended September 30, 2012, decreased slightly versus the comparable period in 2011. The decrease in sales by segment was primarily driven by the following:

Foreign currency fluctuations unfavorably impacted sales.


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Power Generation segment sales decreased by three percent due to unfavorable foreign currency fluctuations and lower demand in the generator technologies and power solutions businesses, which were partially offset by growing demand in the power product business, especially in North America.

Engine segment sales were down slightly as weakness in industrial demand, especially in international construction markets, and lower volumes in the Brazilian medium-duty truck market were offset by growth in the North American on-highway markets in the first half of the year, led by the heavy-duty business.

These decreases were partially offset by the following:

. . .

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