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Cummins_4q06

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Cummins_4q06

  1. 1. Fourth Quarter 2006 Earnings Teleconference January 29, 2007
  2. 2. Participants Tim Solso Chairman and Chief Executive Officer Jean Blackwell Chief Financial Officer Joe Loughrey Chief Operating Officer Tom Linebarger President – Cummins Power Generation Dean Cantrell Director – Investor Relations 2
  3. 3. Disclosure Regarding Forward-Looking Statements & non-GAAP Financial Measures This presentation contains certain forward-looking information. Any forward-looking statement involves risk and uncertainty. The Company’s future results may be affected by changes in general economic conditions and by the actions of customers and competitors. Actual outcomes may differ materially from what is expressed in any forward-looking statement. A more complete disclosure about forward- looking statements begins on page 60 of our 2005 Form 10-K, and it applies to this presentation. This presentation contains certain non-GAAP financial measures such as earnings before interest and taxes (EBIT). Please refer to our website (www.cummins.com) for the reconciliation of those measures to GAAP financial measures. 3
  4. 4. Long-term Targets* Distribution Segment Sales growth: 10% EBIT margin: 8-10% Selected Financial Data Change Change $ Millions Q406 Q405 Amount Percent Sales 386 346 40 12% EBIT 39 33 6 18% % of Sales 10.1% 9.5% Sales growth driven primarily by generation equipment in the Middle East, Europe, and the South Pacific Higher mix of power generation equipment dampened incremental returns Earnings from joint ventures increased 45% on organic growth and three new distributor joint ventures in North American *Targets represent averages across the economic cycle 4
  5. 5. Long-term Targets* Power Generation Sales growth: 8-10% EBIT margin: 7-9% Segment Selected Financial Data Change Change $ Millions Q406 Q405 Amount Percent Sales 658 575 83 14% EBIT 62 49 13 27% % of Sales 9.4% 8.5% Commercial generator sets and alternator equipment strength in North America, the Middle East, Europe, India and Latin America Consumer softness in RV and recreational marine in North America Q406 earnings includes $9 million gain from disposition of SEG Benefits from volume absorption and price were offset by higher freight and material costs and inefficiencies caused by supply chain constraints *Targets represent averages across the economic cycle 5
  6. 6. Long-term Targets* Engine Segment Sales growth: 6-8% EBIT margin: 7-10% Selected Financial Data Change Change $ Millions Q406 Q405 Amount Percent Sales 1,952 1,838 114 6% EBIT 181 156 25 16% % of Sales 9.3% 8.5% Sales strength on North America heavy-duty truck and high-horsepower industrial markets Favorable volume leverage dampened by higher frequency of supplier delivery issues Higher R&E spend on new engine programs offset better SG&A leverage JV income up 23% due to Dongfeng (China) and Tata (India) performance *Targets represent averages across the economic cycle 6
  7. 7. Engine Segment Sales by Market – On-highway Change Change $ Millions Q406 Q405 Amount Percent Heavy-duty truck 640 568 72 13% Medium-duty truck and bus 256 247 9 4% Light-duty automotive 322 340 (18) (5%) Total on-highway 1,218 1,155 63 5% Global heavy-duty truck shipments up 12%; North America class 8, group 2 build was approximately 343,000 units in 2006 – up 10% from 2005 Medium-duty truck shipments down 5% due to Euro 3 implementation in Brazil, offsetting market share gains in North America Bus shipments up 18% due to North America school bus market share gains Light-duty automotive shipments down 13% from record Q405 as the North American pick-up truck market reacted to higher overall dealer inventory 7
  8. 8. Engine Segment Sales by Market – Off-highway Change Change $ Millions Q406 Q405 Amount Percent Total off-highway 559 507 52 10% Total shipments up 6%, mostly for midrange engines to the construction market Shipments of construction equipment up 12% from strength in international markets such as Korea, India, and the Middle East Higher mix of high-horsepower industrial engines for mining, marine, and oil & gas pushed revenue growth ahead of shipment growth 8
  9. 9. Long-term Targets* Components Segment Sales growth: 8-10% EBIT margin: 7-9% Selected Financial Data Change Change $ Millions Q406 Q405 Amount Percent Sales 599 535 64 12% EBIT 23 24 (1) (4%) % of Sales 3.8% 4.5% Growth in all four businesses in this segment; strongest growth from Emission Solutions (up $22M) and Turbo Technologies (up $29M) Filtration and Fuel Systems business achieved positive incremental return on sales New product introduction and aggressive production ramp up at Emission Solutions and Turbo Technologies negatively impacted gross margins Turbo Technologies experienced cost pressure related to metal markets *Targets represent averages across the economic cycle 9
  10. 10. Cummins Inc. Selected Income Statement Data Q406 Q405 Net Earnings ($M) 189 167 Earnings Per Share $3.75 $3.31 Product Coverage (% of Net Sales) 2.3% 2.5% Gross Margin (% of Net Sales) 22.1% 22.5% SAR (% of Net Sales) 13.6% 13.9% Net earnings increased 13% on 10% increase in sales Higher material costs, freight expense and inefficiencies caused by supply chain and machining constraints across our operating segments squeezed gross margin % Foreign exchange had $40M and $7M favorable impact to sales and EBIT, respectively 10
  11. 11. Joint Venture Income Change Change $ Millions Q406 Q405 Amount Percent Engine 16 13 3 23% On-highway 10 7 3 43% Off-highway 4 4 0 0% Rec. Marine 2 2 0 0% Power Generation 2 3 (1) (33%) Distribution 16 11 5 45% Components 1 1 0 0% Total JV Income 35 28 7 25% Engine joint venture income up 23% due primarily to on-highway markets served by Dongfeng (China) and Tata (India) joint ventures Distributor joint venture income increased 45% on organic growth and three new distributor joint ventures in North American 11
  12. 12. Income Tax Provision $ Millions Q406 Q405 FY2006 FY2005 Discrete items (10) (13) (26) (24) Rate Provision 90 76 350 240 Recorded Tax Provision 80 63 324 216 Profit Before Tax 283 243 1,083 798 ETR 28.3% 25.9% 29.9% 27.1% Q406 tax provision includes a $10 million credit ($0.20 per share) for the retroactive extension of the R&D federal tax credit for 2006 FY2006 includes the $10 million credit ($0.21 per share) for the R&D tax credit from Q4 plus additional net benefit of $16 million ($0.32 per share) recognized in Q1 and Q2 (re: favorable tax resolution less new state tax legislation) 12
  13. 13. Cash Flow Q406 Q405 FY2006 FY2005 Operating Cash Flow ($M) 227 375 840 760 Working Capital (% of Net Sales) 18.1% 17.1% Pension contributions in Q406 of $112 million, up $82 million from Q405 Working capital net cash outflow of $10 million in Q406 compared to net cash inflow of $38 million in Q405 13
  14. 14. Guidance for 2007 Consolidated Results Item Full Year Guidance Earning per Share $11.00 to $11.50 Revenue Up 0% to 5% Joint Venture Earnings Up 5% Effective Tax Rate 33% Capital Expenditures ($M) $320 to $350 Global Pension Funding ($M) $230 to $240 14
  15. 15. Guidance for 2007 Segment Results Power Item Engine Generation Components Distribution Revenue Flat Up 10-12% Up 18-22% Up 7-10% Joint Venture Down ~20% Flat Up ~35% Up ~35% Earnings Slightly Near or EBIT Relative Below the Above top below or at equal to top to Target low end of end of target low end of end of target Range target range range target range range 15
  16. 16. A New Cummins – 2006 Highlights Improved debt to capital from 42% to 22% Actively repurchased 1 million shares Record $840 million from operating activities 6.3% – highest net earnings % since 1984 46% average total return to shareholders since 2002 Third consecutive year to exceed both ROANA and ROE targets 16
  17. 17. A New Cummins – 2006 Highlights 2000 2006 Earnings from China ($M) 3 65 Earnings from India ($M) 13 52 Earnings from North American Distributors 4 56 Earnings from Joint Ventures 7 140 17
  18. 18. A New Cummins – 2006 Highlights 2000 2006 Nearly doubled revenue $6.6B $11.4B Exceeded targeted EBIT range as % 1.4% 10.4% sales Net Earnings increased more than $14M $715M fifty-fold EPS increased more than forty-fold $0.35 $14.21 18
  19. 19. Confident in our ability to perform in 2007 and beyond We have fundamentally changed our business model Our customers recognize Cummins for its technology leadership We are investing in the next generation of profitable growth opportunities 19
  20. 20. Thank You for Your Interest in Cummins We will now take your questions. Contact Information: Dean Cantrell Director – Investor Relations (812) 377-3121 Investor_Relations@Cummins.com www.cummins.com 20
  21. 21. Non-GAAP Reconciliations
  22. 22. Non-GAAP Reconciliation – EBIT Three Months Ended Millions December 31, December 31, October 1, 2006 2005 2006 Segment EBIT $ 303 $ 269 $ 296 Less: Interest Expense $ 20 $ 26 $ 23 Earnings before income taxes and minority $ 283 $ 243 $ 273 interests EBIT = Earnings before interest, taxes, and minority interests. We use EBIT to assess and measure the performance of our operating segments and also as a component in measuring our variable compensation programs. The table above reconciles EBIT, a non-GAAP financial measure, to our consolidated earnings before income taxes and minority interests, for each of the applicable periods. 22
  23. 23. Non-GAAP Reconciliation – EBIT Year Ended Millions December 31, December 31, 2006 2005 Segment EBIT $ 1,179 $ 907 Less: Interest Expense $ 96 $ 109 Earnings before income taxes and minority $ 1,083 $ 798 interests EBIT = Earnings before interest, taxes, and minority interests. We use EBIT to assess and measure the performance of our operating segments and also as a component in measuring our variable compensation programs. The table above reconciles EBIT, a non-GAAP financial measure, to our consolidated earnings before income taxes and minority interests, for each of the applicable periods. 23
  24. 24. Non-GAAP Reconciliation – Cash From Operations Excluding Pension Contributions Year Ended Millions December 31, December 31, 2006 2005 Cash provided by operations $ 840 $ 760 Add back: pension contributions $ 266 $ 151 Cash provided by operations $ 1,106 $ 911 excluding pension contributions We believe cash 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. 24
  25. 25. Appendix
  26. 26. Long-term Targets* Sales growth: 8-10% Cummins Inc. EBIT margin: 7-10% ROANA: 22% Selected Financial Data ROE: 18% Change Change $ Millions 2006 2005 Amount Percent Sales 11,362 9,918 1,444 15% EBIT 1,179 907 272 30% % of Sales 10.4% 9.1% ROANA 31% 27% ROE 25% 26% Record annual revenue and operating earnings for the company and each of our operating segments Record cash from operations and 21% increase in cash provided by operations excluding pension contributions Third consecutive year to exceed both ROANA and ROE targets *Targets represent averages across the economic cycle 26
  27. 27. Cummins Inc. 2006 Revenue by Segment Components 2006 – Outstanding Year Segment 17% Record revenue and Engine EBIT for the company Segment 55% Distribution and each operating Segment 10% segment Record net income Record cash flow from operations for the year Power Gen Segment 18% 2006 Data Sales: $11.4 billion EBIT: $1,179 million EBIT Margin: 10.4% (Target: 7-10%) 27
  28. 28. Cummins Inc. 2006 Revenue by Marketing Territory Africa/Middle East International revenue Canada 5% 7% is 50% of consolidated revenue Mexico/Latin America Pre-emission demand 8% has accelerated US growth rate United States Most international 50% areas growing at Asia/Australia 16% double digit rate Europe/CIS 14% 28
  29. 29. Cummins – Historical Performance Sales EBIT $12,000 1400 $11,362 $1,179 $9,918 1200 $10,000 $8,438 1000 $907 $8,000 $ Millons $ Millons 800 $6,296 $5,853 $6,000 $543 600 $4,000 400 $181 $2,000 $139 200 $0 0 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 29
  30. 30. Engine Segment 2006 Revenue by Product Emission regulations Parts and Service 20% create opportunities Midrange (3-9L) 37% Aftermarket revenue creates stable earnings Emerging markets Strategic OEM partnerships High Horsepower (19-91L) 14% 2006 Segment Data Heavy-Duty Sales: $7.5 billion (10-15L) 29% EBIT: $733 million EBIT Margin: 9.8% (Target: 7-10%) 30
  31. 31. Engine Segment 2006 Revenue by Market Application Heavy-duty Truck Stationary Power 10% demand remains strong Mining/Rail Heavy-duty Govt/O&G truck 33% Share gains in Medium- Marine 12% duty Truck & Bus Off-highway markets supported by non- Construction residential construction & Ag 15% and commodity markets Medium-duty Light-duty Truck & bus 13% 2006 Segment Data Automotive Sales: $7.5 billion & RV 17% EBIT: $733 million EBIT Margin: 9.8% (Target: 7-10%) 31
  32. 32. Engines – Historical Performance Sales Segment EBIT 8000 800 $7,511 $733 $6,657 7000 700 $582 6000 600 $5,424 5000 500 $M $M 4000 400 $3,435 $3,582 $328 3000 300 2000 200 1000 100 $62 $37 0 0 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 32
  33. 33. Power Generation Segment 2006 Revenue by Product Turnaround complete Alternators Commercial 19% 56% Strengthening markets Expanding market share Rental 2% Consumer growth opportunities Growing project business Consumer 13% capability Power Electronics 6% 2006 Segment Data Energy Sales: $2.4 billion Solutions 4% EBIT: $220 million EBIT Margin: 9.1% (Target: 7-9%) 33
  34. 34. Power Generation – Historical Performance Sales Segment EBIT 3000 250 $220 $2,416 2500 200 $1,999 $145 2000 150 $1,842 $M $M 1500 100 $1,329 $1,226 $60 1000 50 500 0 ($19) ($25) 0 -50 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 34
  35. 35. Components Segment 2006 Revenue by Product Specialty Strategic advantage in Filtration 6% Air Intake emissions compliance Systems Turbocharger 11% Significant future growth 27% in revenue and earnings Multiple new product Acoustic introductions Exhaust 12% Winning non-CMI Fuel business Systems 17% Engine Filtration 2006 Segment Data Catalytic 21% Sales: $2.3 billion Exhaust EBIT: $107 million 6% EBIT Margin: 4.7% (Target: 7-9%) 35
  36. 36. Components – Historical Performance Sales Segment EBIT 120 2500 $2,281 $107 $2,000 100 $94 2000 $89 $86 $1,783 $84 80 1500 $1,292 $M $M 60 $951 1000 40 500 20 0 0 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 36
  37. 37. Distribution Segment 2006 Revenue by Product Service Broadening product 18% offering Engines 20% Expanding global coverage Increasing equity ownership Excelling in customer Parts, support Filters, & Consumables Power 38% Generation 2006 Segment Data 24% Sales: $1.4 billion EBIT: $144 million EBIT Margin: 10.4% (Target: 8-10%) 37
  38. 38. Distribution – Historical Performance Sales Segment EBIT 1600 160 $144 $1,385 1400 140 $1,191 1200 120 $107 $973 1000 100 $79 $M $M 800 80 $669 $574 600 60 $51 $33 400 40 200 20 0 0 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 38

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