CUMMINS INC - 10-Q Quarterly Report

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b‑2 of the Exchange Act). Yes X No _

As of March 27, 2005, there were 46,372,813 shares of $2.50 par value per share common stock outstanding.

CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 27, 2005

CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

	Three Months Ended
	March 27,	March 28,
Millions, except per share amounts	2005	2004
Net sales (includes related party sales of $263 and $197, respectively)	$ 2,208	$ 1,771
Cost of sales (includes related party purchases of $39 and $147, respectively)	1,752	1,426
Gross margin	456	345
Expenses and other income
Selling and administrative expenses	259	223
Research and engineering expenses	63	56
Equity, royalty and other income from investees (Note 2)	(31)	(18)
Interest expense	28	27
Other expense, net (Note 11)	2	6
Earnings before income taxes and minority interests	135	51
Provision for income taxes	34	14
Minority interests in earnings of consolidated subsidiaries	4	4
Net earnings	$ 97	$ 33

Earnings Per Share (Note 10)
Basic	$ 2.20	$ 0.81
Diluted	$ 1.96	$ 0.76

Cash dividends declared per share	$ 0.30	$ 0.30

The accompanying notes are an integral part of the consolidated financial statements.

CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
	March 27,	December 31,	March 28,
Millions, except par values	2005	2004*	2004
ASSETS
Current assets
Cash and cash equivalents	$ 261	$ 611	$ 131
Marketable securities	48	62	74
Receivables, net	1,321	1,039	996
Receivables from related parties	116	121	87
Inventories (Note 3)	1,065	1,016	863
Deferred income taxes	289	301	195
Prepaid expenses and other current assets	102	106	100
Total current assets	3,202	3,256	2,446
Long-term assets
Property, plant and equipment, net of accumulated depreciation of
$2,323, $2,277 and $2,094, respectively	1,606	1,648	1,544
Investments in and advances to equity investees	303	286	265
Goodwill (Note 4)	354	355	356
Other intangible assets, net (Note 4)	91	93	92
Deferred income taxes	689	689	663
Other assets	180	183	213
Total assets	$ 6,425	$ 6,510	$ 5,579

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings (Note 5)	$ 113	$ 327	$ 286
Accounts payable	942	823	765
Accrued product coverage and marketing expenses	308	279	281
Other accrued expenses	644	751	544
Total current liabilities	2,007	2,180	1,876
Long-term liabilities
Long-term debt	1,255	1,299	1,231
Pensions	487	466	447
Postretirement benefits other than pensions	570	570	565
Other long-term liabilities	396	386	263
Total liabilities	4,715	4,901	4,382
Commitments and contingencies (Note 8)	—	—	—
Minority interests	216	208	187

Shareholders' equity
Common stock, $2.50 par value, 150 shares authorized
48.4, 48.2 and 48.2 shares issued, respectively	121	121	121
Additional contributed capital	1,176	1,167	1,118
Retained earnings	948	866	588
Accumulated other comprehensive loss
Minimum pension liability	(499)	(499)	(435)
Other components, net	(50)	(41)	(49)
Common stock in treasury, at cost, 2.1, 2.2 and 5.1 shares, respectively	(83)	(88)	(202)
Common stock held in trust for employee benefit plans, 2.1, 2.2 and 2.3
shares, respectively	(102)	(104)	(110)
Unearned compensation	(17)	(21)	(21)
Total shareholders' equity	1,494	1,401	1,010
Total liabilities and shareholders' equity	$ 6,425	$ 6,510	$ 5,579

The accompanying notes are an integral part of the consolidated financial statements.

CUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
	Three Months Ended
	March 27,		March 28,
Millions	2005		2004

Cash flows from operating activities
Net earnings	$	97	$	33
Adjustments to reconcile net earnings to net cash (used in)
provided by operating activities:
Depreciation and amortization		72		60
(Gain) loss on disposal of property, plant and equipment		(1)		1
Deferred income tax expense		16		—
Equity in earnings of investees, net of dividends		(19)		(12)
Minority interests in earnings of consolidated subsidiaries		4		4
Pension expense		26		22
Pension contributions		(11)		(23)
Stock-based compensation expense		3		9
Tax benefit on stock options exercised		1		3
Amortization of gain on terminated interest rate swaps		(1)		(2)
Translation and hedging activities		(1)		(13)
Changes in assets and liabilities:
Receivables		(283)		(119)
Inventories		(53)		(83)
Accounts payable		120		172
Accrued expenses		(74)		(6)
Other, net		42		10
Net cash (used in) provided by operating activities		(62)		56

Cash flows from investing activities
Capital expenditures		(31)		(9)
Investments in internal use software		(6)		(8)
Proceeds from disposals of property, plant and equipment		10		1
Investments in and advances to equity investees		(5)		(18)
Investments in marketable securities – acquisitions		(26)		(25)
Investments in marketable securities – liquidations		39		30
Other, net		1		—
Net cash used in investing activities		(18)		(29)

Cash flows from financing activities
Proceeds from borrowings		25		2
Payments on borrowings and capital lease obligations		(294)		(15)
Net borrowings under short-term credit agreements		10		1
Distributions to minority shareholders		(5)		—
Proceeds from issuing common stock		7		22
Dividend payments on common stock		(14)		(13)
Other, net		3		—
Net cash used in financing activities		(268)		(3)
Effect of exchange rate changes on cash and cash equivalents		(2)		(1)

Net (decrease) increase in cash and cash equivalents		(350)		23
Cash and cash equivalents at beginning of the year		611		108
Cash and cash equivalents at end of the period	$	261	$	131
Cash payments during the quarter for:
Interest		38		33
Income taxes		20		13
The accompanying notes are an integral part of the consolidated financial statements.

Cummins Inc. (“Cummins,” “the Company,” “Registrant,” “we,” “our,” or “us”) is a global power leader that designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related products, including filtration and emissions solutions, fuel systems, controls and air handling systems.

The unaudited Consolidated Financial Statements reflect all adjustments which, in the opinion of management, are necessary for the fair statement of the Consolidated Statements of Earnings, Consolidated Balance Sheets and the Consolidated Statements of Cash Flows for the three month interim periods ended March 27, 2005 and March 28, 2004. All such adjustments are of a normal recurring nature. The Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations. Each interim period contains 12 weeks. Certain reclassifications have been made to prior period amounts to conform to the presentation of the current period financial statements.

The preparation of financial statements in conformity with GAAP, requires management to make estimates and assumptions that affect reported amounts based upon currently available information and management's judgment of current conditions and circumstances. GAAP requires management to make certain estimates and judgments that are reflected in the reported amounts of assets, liabilities, revenues and expenses and also in the disclosure of contingent liabilities. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates. Significant estimates and assumptions in these Consolidated Financial Statements require the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, estimates of future cash flows and other assumptions associated with goodwill and long-lived asset impairment tests, useful lives for depreciation and amortization, product coverage programs, determination of discount and other rate assumptions for pension and other postretirement benefit expenses, income taxes and deferred tax valuation allowances, and contingencies. Management reviews these estimates on a systematic basis and, if necessary, any material adjustments are reflected in the Consolidated Financial Statements.

You should read these interim financial statements in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2004. Our interim period financial results for the three month interim periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year.

Our shipping and handling costs are expensed as incurred. Those shipping and handling costs associated with operations of our inventory distribution centers and warehouse facilities are classified as "Selling and administrative expenses" in our Consolidated Statements of Earnings. For the three months ended March 27, 2005 and March 28, 2004, these costs were approximately $27 million and $26 million, respectively.

On March 28, 2004, we adopted certain provisions of FASB Interpretation No. 46 (FIN 46R), for certain North American distributors in which we have variable interests and are deemed to be the primary beneficiary. The adoption of those provisions required us to consolidate three variable interest entities (VIEs) that were previously included in our Consolidated Balance Sheets as “Investments in and advances to equity investees.” First quarter 2004 results for these entities were not material and were reflected as “Equity, royalty and other income from investees” in our Consolidated Statements of Earnings. A more complete discussion of the impact of adopting FIN 46R is included in Note 2 to the Consolidated Financial Statements in our 2004 Annual Report on Form 10-K.

Indiana (State of Incorporation)	35‑0257090 (IRS Employer Identification No.)
500 Jackson Street Box 3005 Columbus, Indiana 47202-3005 (Address of principal executive offices)

Telephone (812) 377-5000 (Registrant's telephone number, including area code)

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	PART I. FINANCIAL INFORMATION


ITEM 1.	Financial Statements (unaudited))

	Consolidated Statements of Earnings for the three months ended March 27, 2005 and March 28, 2004	3

	Consolidated Balance Sheets at March 27, 2005, December 31, 2004 and March 28, 2004	4

	Consolidated Statements of Cash Flows for the three months ended March 27, 2005 and March 28, 2004	5

	Notes to Consolidated Financial Statements	6

ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	27

ITEM 4.	Controls and Procedures	28

	PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings	28

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

ITEM 6.	Exhibits	29

	Signatures	30