Cummins Results Parallel Global Slowdown, Recovery

Engine manufacturer Cummins Inc. has reported higher sales and significantly improved profits in the first quarter compared to the same period in 2009, in close parallel to the economic and market factors affecting the entire heavy-duty engine market.

Gains came on the strength of the company’s performance in key international markets, and cost reductions and productivity gains in manufacturing facilities.

Sales of $2.48 billion rose 2% from $2.44 billion in the first quarter in 2009, as growth in the company’s components and distribution segments slightly more than offset declines in the engine and power generation segments.

Net income attributable to Cummins Inc. increased to US$149 million, or $0.75 a share, from US$7 million, or $0.04 a share, during the same period in 2009. Earnings Before Interest and Taxes (EBIT) rose to US$266 million, or 10.7% of sales, compared to the US$94 million, or 3.9% of sales a year ago, which excluded restructuring charges.

Compared to the fourth quarter of 2009, sales were down 27% due to lower demand in North America, but EBIT remained strong at 10.7% of sales, compared to the 11.4% reported last quarter, which excluded restructuring charges.

Three of the company’s four business segments reported improved profits compared to the first quarter of 2009, with only the later-cycle power generation business reporting a decline.

The company’s operational improvements were most evident in the engine and components segments, where gross margins and EBIT improved significantly, while the distribution segment continued its strong performance.

“Our strength in large developing markets such as China, India and Brazil has given us a significant boost as those economies have continued to recover from the recession more quickly than other regions,” said Cummins chairman and chief executive officer Tim Solso.

“In addition, while demand in the North American on-highway truck markets was very low as we expected due to the implementation of new emissions standards in the U.S. in January 2010, our work during the downturn to reduce costs and improve productivity, largely through our well-established Six Sigma quality program, has allowed us to be much more efficient and to respond quickly to the volatility in demand,” Solso added.

Based on the first quarter results and its forecast for the remainder of the year, the company today increased its sales and EBIT guidance for 2010. The company now expects sales to be $12 billion and to earn an EBIT margin of 10% of sales.

The company benefited from stronger demand in China, India and Brazil as those countries continue their recovery from the recession in 2009. Demand for trucks, construction, mining and distributed power generation equipment strengthened in all three countries – as well as with European OEM customers that export to China, India and the Middle East, and is expected to continue through 2010.

The company reported weaker demand in North America with medium-duty truck and bus, and heavy-duty engine shipments declining 80% from the same period a year ago – and by approximately 90% from the fourth quarter of last year.

Demand in the North American on-highway engine markets is expected to remain weak through the end of the second quarter, before gradually improving in the second half of the year.

Joint venture income more than doubled year-over-year to US$76 million in the first quarter, largely on increased volume at the company’s engine joint ventures in China and India.

The company also expects to generate positive cash flow in 2010 and is forecasting capital spending of approximately US$400 million for the year, an increase of nearly 30% from 2009, to fund projects critical to the company’s long-term growth.

“Our employees worldwide have done outstanding work, which is reflected in our strong first quarter results, but our priorities for the year have not changed,” said Tom Linebarger, Cummins president and chief operating officer.

“We remain focused on managing the business conservatively so that we can earn a solid profit for the duration of the global downturn and position the company for strong profitable growth in all markets as the economy recovers,” Linebarger said.

Detailed Results

First quarter details (all comparisons are to same period in 2009)

Engine Segment

* Sales – US$1.42 billion, down 5%

* Segment EBIT – US$133 million (9.3% of sales), compared to a loss of US$16 million

* Total on-highway sales decreased 13%

Revenues in worldwide heavy-duty truck fell 36%; worldwide medium-duty truck and bus revenues decreased 5%; sales to the light-duty automotive market increased 33% on the launch of 2010 model year Dodge Ram pickup

Industrial sales increased 24%

Construction sales increased 62%; marine engine sales increased 13%; mining sales increased 28%; oil and gas sales fell 80%

Power Generation

* Sales – US$517 million, down 21%

* Segment EBIT – US$34 million (6.6% of sales), down 51% from US$69 million (10.5% of sales)

* Commercial Product sales down 27%; Commercial Projects down 21%; Generator Technologies down 21%; Power Electronics down 13%. Consumer sales rose 43%.

Markets with the largest declines were Western Europe, Middle East, Africa and North America. The segment saw sales gains in India, China and Eastern Europe.

Components

* Sales – US$630 million, up 19%

* Segment EBIT – US$57 million (9.0% of sales), up from US$1 million (0.2% of sales)

* Emission Solutions sales up 30%; Turbo Technologies sales up 28%; Filtration up 13%; Fuel Systems down 4%

* Fuel systems sales decreased mainly as result of demand decline in North American truck and bus engine markets.

* Turbo Technologies sales growth led by large increases in volumes in China and recovery in aftermarket sales.

* Emission Solutions sales gain driven by higher volumes in North America as a result of the transition to the EPA 2010 emissions standards.

Distribution

* Sales – US$476 million, up 15%

* Segment EBIT – US$72 million (15.1% of sales), up 24% from US$58 million (14.0% of sales). Gain of US$12 million on the acquisition of the Cummins Western Canada distributor contributed to improved segment EBIT margin.

* Cummins Western Canada consolidation contributed $54 million in sales. Largest sales declines by region were in Europe and North and Central America, excluding Western Canada. Asia Pacific posted largest revenue gain. Aftermarket growth in most regions more than offset decline in power generation and engine sales.

Joint Ventures

* Total income – US$76 million, up 130% from US$33 million

* Engine JVs accounted for nearly all of the gain from previous year, led by China and India JVs.