CMI Cummins Inc

• First quarter revenues of $4.3 billion, EBIT of 11.3 percent of sales
• Cummins reaffirms full year guidance for revenues and EBIT
• Company announces a second quarter change to Operating Segments

Cummins Inc. (NYSE: CMI) today reported results for the first quarter of 2016.

First quarter revenues of $4.3 billion decreased 9 percent from the same quarter in 2015. Lower production in the North American heavy-duty truck market and weak global demand for off-highway and power generation equipment contributed to the reduction in sales. Currency negatively impacted revenues by approximately 3 percent compared to last year, primarily due to a stronger US dollar.

Revenues in North America decreased 10 percent while international sales declined by 8 percent. Within international markets revenues in Latin America and Asia declined the most.

Earnings before interest and taxes (EBIT) in the first quarter were $484 million, or 11.3 percent of sales, down from $562 million or 11.9 percent of sales a year ago.

Net income attributable to Cummins in the first quarter was $321 million ($1.87 per diluted share), compared to $387 million ($2.14 per diluted share) in the first quarter of 2015. The tax rate in the first quarter of 2016, was 28.4 percent.

“Our results for the first quarter reflect solid execution of our cost reduction plans in the face of very challenging market conditions,” said Rich Freeland Chief Operating Officer. “Benefits from restructuring actions, material cost reduction projects and lower warranty costs all helped to mitigate the impact of lower sales.”

Based on the current forecast, Cummins expects full year 2016 revenues to be down 5 to 9 percent, and EBIT to be in the range of 11.6 to 12.2 percent of sales, unchanged from our forecast three months ago.

Effective April 2016, we re-organized our business to combine our Power Generation Segment and our High Horsepower engine business creating the Power Systems Segment. Going forward we will present results for four operating segments: Engine, Distribution, Components and Power Systems. We will begin to report results for our new reporting structure in the second quarter of 2016 and will also reflect this change for historical periods. “The formation of the Power Systems Segment combines two businesses that are already strongly interdependent and will allow us to streamline business and technical processes to accelerate innovation, grow market share and more efficiently manage our supply chain and manufacturing operations,” said Chairman and CEO Tom Linebarger.

Other recent highlights:

• Our QSK95 diesel engine received Tier 4 Final certification from the EPA for the US locomotive market.
• We announced a joint venture with Olayan to expand access to markets and enhance the service and support provided to customers in the Middle East.
• Ethisphere Institute named Cummins to its list of the world’s most ethical companies for the 9th straight year.
• We returned $745 million to shareholders in the form of dividends and share repurchases in the first quarter, consistent with our plans to return 75 percent of Operating Cash Flow to shareholders in 2016.

First quarter 2016 detail (all comparisons to same period in 2015)

Engine Segment

• Sales - $2.3 billion, down 10 percent.
• Segment EBIT - $200 million, or 8.6 percent of sales, compared to $253 million or 9.7 percent of sales.
• Sales declined due to lower production in the North American heavy-duty truck market and weak demand in power generation, oil and gas, commercial marine and mining markets.

Distribution Segment

• Sales - $1.5 billion, down 1 percent.
• Segment EBIT - $95 million, or 6.5 percent of sales, compared to $88 million or 6.0 percent of sales.
• Increased revenue from acquisitions and growth in international markets were more than offset by lower sales in off-highway markets in North America and the negative impact of currency.

Components Segment

• Sales - $1.2 billion, down 5 percent.
• Segment EBIT - $173 million, or 14.0 percent of sales, compared to $195 million or 15.0 percent of sales.
• Lower sales in North America and the unfavorable impact of currency more than offset growth in China.

Power Generation Segment

• Sales - $550 million, down 19 percent.
• Segment EBIT - $31 million, or 5.6 percent of sales, compared to $49 million, or 7.2 percent of sales.
• Weaker sales in most regions, with Asia and Latin America declining the most.

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 55,200 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 7,200 dealer locations. Cummins earned $1.4 billion on sales of $19.1 billion in 2015. Press releases can be found on the Web at www.cummins.com. Follow Cummins on Twitter at www.twittter.com/cummins and on YouTube at www.youtube.com/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 2016. 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 2015 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.

  CUMMINS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (a)   Three months ended April 3,   March 29, In millions, except per share amounts 2016 2015 NET SALES $ 4,291 $ 4,709 Cost of sales 3,235   3,514   GROSS MARGIN 1,056 1,195 OPERATING EXPENSES AND INCOME Selling, general and administrative expenses 490 517 Research, development and engineering expenses 166 195 Equity, royalty and interest income from investees (Note 1) 72 68 Other operating expense, net (2 ) (3 ) OPERATING INCOME 470 548 Interest income 6 5 Interest expense 19 14 Other income, net 8   9   INCOME BEFORE INCOME TAXES 465 548 Income tax expense (Note 2) 132   144   CONSOLIDATED NET INCOME 333 404 Less: Net income attributable to noncontrolling interests 12   17   NET INCOME ATTRIBUTABLE TO CUMMINS INC. $ 321   $ 387     EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. Basic $ 1.87 $ 2.14 Diluted $ 1.87 $ 2.14   WEIGHTED AVERAGE SHARES OUTSTANDING Basic 171.8 180.6 Diluted 172.0 181.0   CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.975 $ 0.78   (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)     April 3, December 31, In millions, except par value 2016 2015 ASSETS Current assets Cash and cash equivalents $ 915 $ 1,711 Marketable securities 359   100   Total cash, cash equivalents and marketable securities 1,274 1,811 Accounts and notes receivable, net 2,921 2,820 Inventories 2,759 2,707 Prepaid expenses and other current assets 514   609   Total current assets 7,468   7,947   Long-term assets Property, plant and equipment 7,360 7,322 Accumulated depreciation (3,648 ) (3,577 ) Property, plant and equipment, net 3,712 3,745 Investments and advances related to equity method investees 1,053 975 Goodwill 485 482 Other intangible assets, net 344 328 Pension assets 763 735 Other assets 1,002   922   Total assets $ 14,827   $ 15,134     LIABILITIES Current liabilities Accounts payable (principally trade) $ 1,809 $ 1,706 Loans payable 117 24 Commercial paper 50 — Accrued compensation, benefits and retirement costs 302 409 Current portion of accrued product warranty 350 359 Current portion of deferred revenue 425 403 Other accrued expenses 815 863 Current maturities of long-term debt 49   39  

Total current liabilities

3,917   3,803   Long-term liabilities Long-term debt 1,614 1,576 Postretirement benefits other than pensions 339 349 Pensions 298 298 Other liabilities and deferred revenue 1,399   1,358   Total liabilities $ 7,567   $ 7,384     EQUITY Cummins Inc. shareholders’ equity Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued $ 2,076 $ 2,178 Retained earnings 10,473 10,322 Treasury stock, at cost, 52.0 and 47.2 shares (4,203 ) (3,735 ) Common stock held by employee benefits trust, at cost, 0.8 and 0.9 shares (9 ) (11 ) Accumulated other comprehensive loss (1,417 ) (1,348 ) Total Cummins Inc. shareholders’ equity 6,920 7,406 Noncontrolling interests 340   344   Total equity $ 7,260   $ 7,750   Total liabilities and equity $ 14,827   $ 15,134     (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 April 3,   March 29, In millions 2016 2015 CASH FLOWS FROM OPERATING ACTIVITIES Consolidated net income $ 333 $ 404 Adjustments to reconcile consolidated net income to net cash provided by operating activities Restructuring actions and other charges, net of cash payments (25 ) — Depreciation and amortization 128 128 Deferred income taxes (2 ) (1 ) Equity in income of investees, net of dividends (48 ) (53 ) Pension contributions in excess of expense (50 ) (96 ) Other post-retirement benefits payments in excess of expense (8 ) (8 ) Stock-based compensation expense 5 5 Translation and hedging activities (14 ) 7 Changes in current assets and liabilities, net of acquisitions Accounts and notes receivable (98 ) (276 ) Inventories (54 ) (98 ) Other current assets 188 20 Accounts payable 103 147 Accrued expenses (283 ) (35 ) Changes in other liabilities and deferred revenue 78 59 Other, net 10   (30 ) Net cash provided by operating activities 263   173     CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (71 ) (100 ) Investments in internal use software (13 ) (8 ) Investments in and advances to equity investees (25 ) 10 Acquisitions of businesses, net of cash acquired (1 ) (11 ) Investments in marketable securities—acquisitions (291 ) (95 ) Investments in marketable securities—liquidations 35 71 Cash flows from derivatives not designated as hedges (26 ) 4 Other, net 4   4   Net cash used in investing activities (388 ) (125 )   CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings 105 2 Net borrowings of commercial paper 50 — Payments on borrowings and capital lease obligations (15 ) (18 ) Distributions to noncontrolling interests (10 ) (1 ) Dividend payments on common stock (170 ) (140 ) Repurchases of common stock (575 ) (137 ) Other, net (17 ) (2 ) Net cash used in financing activities (632 ) (296 ) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (39 ) (56 ) Net decrease in cash and cash equivalents (796 ) (304 ) Cash and cash equivalents at beginning of year 1,711   2,301   CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 915   $ 1,997     (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 Distribution Components

PowerGeneration

Non-segment Items (1)

Total Three months ended April 3, 2016 External sales $ 1,624 $ 1,458 $ 897 $ 312 $ — $ 4,291 Intersegment sales 710   5   340   238   (1,293 ) —   Total sales 2,334 1,463 1,237 550 (1,293 ) 4,291 Depreciation and amortization(2) 58 26 27 16 — 127 Research, development and engineering expenses 97 2 54 13 — 166 Equity, royalty and interest income from investees 41 18 8 5 — 72 Interest income 3 1 1 1 — 6 Segment EBIT 200 95 173 31 (15 ) 484   Segment EBIT as a percentage of total sales 8.6 % 6.5 % 14.0 % 5.6 % 11.3 %   Three months ended March 29, 2015 External sales $ 1,889 $ 1,469 $ 931 $ 420 $ — $ 4,709 Intersegment sales 707   7   368   260   (1,342 ) —   Total sales 2,596 1,476 1,299 680 (1,342 ) 4,709 Depreciation and amortization(2) 58 27 26 16 — 127 Research, development and engineering expenses 114 3 61 17 — 195 Equity, royalty and interest income from investees 30 20 9 9 — 68 Interest income 2 1 1 1 — 5 Segment EBIT 253 88 195 49 (23 ) 562   Segment EBIT as a percentage of total sales 9.7 % 6.0 % 15.0 % 7.2 % 11.9 %                          

(1)

 

Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three months ended April 3, 2016 and March 29, 2015.

(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."

 

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 April 3,   March 29, In millions 2016 2015 Total segment EBIT $ 484 $ 562 Less: Interest expense 19   14 Income before income taxes $ 465   $ 548    

CUMMINS INC. AND SUBSIDIARIESSELECTED 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 April 3,   March 29, In millions 2016 2015 Distribution Entities Komatsu Cummins Chile, Ltda. $ 10 $ 7 North American distributors 5 10 All other distributors — 1 Manufacturing Entities Beijing Foton Cummins Engine Co., Ltd. 18 7 Chongqing Cummins Engine Company, Ltd. 8 12 Dongfeng Cummins Engine Company, Ltd. 7 14 All other manufacturers 16   7 Cummins share of net income 64 58 Royalty and interest income 8   10 Equity, royalty and interest income from investees $ 72   $ 68  

NOTE 2. INCOME TAXES

Our income tax rates are generally less than the 35 percent U.S. income tax rate primarily because of lower taxes on foreign earnings and the research tax credit. The effective tax rate for the three months ended April 3, 2016, was 28.4 percent and did not include any discrete items. Our effective tax rate for the three months ended March 29, 2015, was 26.3 percent. This tax rate included an $18 million discrete tax benefit to reflect the release of reserves for uncertain tax positions related to a favorable federal audit settlement.

CUMMINS INC. AND SUBSIDIARIESFINANCIAL MEASURES THAT SUPPLEMENT GAAP(Unaudited)

Net income and diluted earnings per share (EPS) attributable to Cummins Inc. excluding special items

We believe these are useful measures of our operating performance for the periods presented as they illustrate our operating performance without regard to special items including tax adjustments. These measures are 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. The following table reconciles net income attributable to Cummins Inc. to net income attributable to Cummins Inc. excluding special items for the following periods:

    Three months ended April 3, 2016   March 29, 2015 In millions Net Income   Diluted EPS Net Income   Diluted EPS Net income attributable to Cummins Inc. $ 321 $ 1.87 $ 387 $ 2.14 Less Tax benefit —   —   18   0.10 Net income attributable to Cummins Inc. excluding special items $ 321   $ 1.87   $ 369   $ 2.04

Earnings before interest, income 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, GAAP 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 April 3, 2016   March 29, 2015 Earnings before interest expense and income taxes $ 484   $ 562     EBIT as a percentage of net sales 11.3 % 11.9 %   Less Interest expense 19 14 Income tax expense 132   144   Consolidated net income 333   404     Less Net income attributable to noncontrolling interests 12   17   Net income attributable to Cummins Inc. $ 321   $ 387     Net income attributable to Cummins Inc. as a percentage of net sales 7.5 % 8.2 %  

CUMMINS INC. AND SUBSIDIARIESBUSINESS UNIT SALES DATA(Unaudited)

Engine Segment Sales by Market and Unit Shipments by Engine Classification

2016           In millions Q1 Q2 Q3 Q4 YTD Heavy-duty truck $ 631 $ — $ — $ — $ 631 Medium-duty truck and bus 549 — — — 549 Light-duty automotive 433 — — — 433 Industrial 539 — — — 539 Stationary power 182   —   —   —   182 Total sales $ 2,334   $ —   $ —   $ —   $ 2,334   2015 In millions Q1 Q2 Q3 Q4 YTD Heavy-duty truck $ 757 $ 875 $ 784 $ 700 $ 3,116 Medium-duty truck and bus 608 674 585 640 2,507 Light-duty automotive 381 354 339 401 1,475 Industrial 616 624 617 601 2,458 Stationary power 234   270   203   186   893 Total sales $ 2,596   $ 2,797   $ 2,528   $ 2,528   $ 10,449  

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

2016           Units Q1 Q2 Q3 Q4 YTD Mid-range 117,100 — — — 117,100 Heavy-duty 19,700 — — — 19,700 High-horsepower 2,800   —   —   —   2,800 Total units 139,600   —   —   —   139,600   2015 Units Q1 Q2 Q3 Q4 YTD Mid-range 112,400 120,000 107,400 116,600 456,400 Heavy-duty 28,700 32,800 28,600 24,300 114,400 High-horsepower 3,500   3,700   3,200   3,400   13,800 Total units 144,600   156,500   139,200   144,300   584,600  

Distribution Segment Sales by Business

2016           In millions Q1 Q2 Q3 Q4 YTD Parts and filtration $ 647 $ — $ — $ — $ 647 Engines 242 — — — 242 Power generation 275 — — — 275 Service 299   —   —   —   299 Total sales $ 1,463   $ —   $ —   $ —   $ 1,463   2015 In millions Q1 Q2 Q3 Q4 YTD Parts and filtration $ 573 $ 598 $ 604 $ 648 $ 2,423 Engines 321 318 323 332 1,294 Power generation 298 272 323 397 1,290 Service 284   307   301   330   1,222 Total sales $ 1,476   $ 1,495   $ 1,551   $ 1,707   $ 6,229  

Component Segment Sales by Business

2016           In millions Q1 Q2 Q3 Q4 YTD Emission solutions $ 607 $ — $ — $ — $ 607 Turbo technologies 265 — — — 265 Filtration 252 — — — 252 Fuel systems 113   —   —   —   113 Total sales $ 1,237   $ —   $ —   $ —   $ 1,237   2015 In millions Q1 Q2 Q3 Q4 YTD Emission solutions $ 613 $ 679 $ 607 $ 600 $ 2,499 Turbo technologies 301 307 266 267 1,141 Filtration 255 266 240 249 1,010 Fuel systems 130   145   127   120   522 Total sales $ 1,299   $ 1,397   $ 1,240   $ 1,236   $ 5,172  

Power Generation Segment Sales by Business

In the first quarter of 2016, our Power Generation segment reorganized its reporting structure to include the following product lines:

• Power generation - We manufacture generators for commercial and consumer applications ranging from 2 kilowatts to 3.5 megawatts, as well as paralleling systems and transfer switches for applications such as data centers, health care facilities and waste water treatment plants. We also provide turnkey solutions for distributed generation and energy management applications using natural gas or biogas as a fuel. The business also serves global rental accounts for diesel and gas generator sets.
• Generator technologies - We design, manufacture, sell and service A/C generator/alternator products internally as well as to other generator set assemblers. Our products are sold under the Stamford, AVK and Markon brands and range in output from 3 kilovolt-amperes (kVA) to 12,000 kVA.

Sales for our Power Generation segment by business (including 2015 and 2014 reorganized balances) were as follows:

2016           In millions Q1 Q2 Q3 Q4 YTD Power generation $ 477 $ — $ — $ — $ 477 Generator technologies 73   —   —   —   73 Total sales $ 550   $ —   $ —   $ —   $ 550   2015 In millions Q1 Q2 Q3 Q4 YTD Power generation $ 582 $ 655 $ 573 $ 572 $ 2,382 Generator technologies 98   92   86   82   358 Total sales $ 680   $ 747   $ 659   $ 654   $ 2,740   2014 In millions YTD Power generation $ 2,447 Generator technologies 449   Total sales $ 2,896  

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Cummins Inc.Carole Casto, 317-610-2480Executive Director - Corporate Communicationscarole.casto@cummins.com