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Rating Action:

MOODY'S CONFIRMS CUMMINS' Baa3 RATING, ASSIGNS "ba1" RATING TO PREFERRED ISSUE

05 Jun 2001
MOODY'S CONFIRMS CUMMINS' Baa3 RATING, ASSIGNS "ba1" RATING TO PREFERRED ISSUE

Approximately $200 Million of Debt Securities Rated.

New York, June 05, 2001 -- Moody's Investors Service confirmed the Baa3 long-term, and Prime-3 short-terms of Cummins Inc. The rating agency also assigned a "ba1" rating to the $200 million of Convertible Preferred Securities due 2031 issued by Cummins Capital Trust I (the Trust). The preferred securities are guaranteed on a junior subordinated basis by Cummins, and benefit from a beneficial interest in $200 million of junior subordinated debentures issued by Cummins and held by the Trust. The debentures are assigned a rating of Ba1. These actions follow Cummins' announcement that it will take a special pre-tax charge of $100 million to $120 million relating to the termination of the development of a new engine platform, and to the implementation of further employment reduction initiatives. The confirmation reflects Moody's expectations that the benefits associated with this charge, in combination with various long-term engine supply agreements, will enable Cummins to better cope with the longer-term structural changes and the ongoing cyclicality in the North American truck sector. We also anticipate that Cummins will continue to benefit from the competitive and profitable performance of its power generation and filtration businesses. These strengths should enable the company to maintain adequate liquidity during the current downturn in the U.S. truck market, and to begin reducing debt and strengthening its financial flexibility during 2002. The rating outlook is stable.

Cummins' truck engine business is facing significant cyclical and structural challenges that are adversely affecting the company's operating results. The demand for heavy duty trucks in North America is falling sharply. Shipments will likely decline to about 120,000 units during 2001, down from over 200,000 units in 2000. While recent restructuring initiatives designed to reduce costs should help the company address the operating losses being experienced in this business, the segment continues to face broader structural challenges. As an independent engine maker, Cummins has been exposed to higher business risk as the North American truck industry consolidates. Under the current business model Cummins independently markets its engines to truck OEMs, and to end users who often specify the use of specific engine brands when making truck orders. This model is becoming increasingly inefficient. A new model, more similar to the European truck industry, is emerging in which truck makers have dedicated engine supply arrangements. Cummins recognizes the structural inefficiencies in the current business model for heavy-duty truck engines in North America. The company's recently completed long-term engine supply arrangements with Volvo, PACCAR, and International Truck are an important component of its strategy to adjust to these structural inefficiencies.

Cummins' decision to discontinue the development of a new family of heavy truck engines is a initiative to further improve the efficiency of its truck engine operations. A significant portion of the $100 million to $120 million charge will cover non-cash write-offs of past investments in developing the new engine. The balance of the charge will relate largely to cash expenditures associated with close-down of the development program and further employment reduction initiatives. Cummins estimates that these actions will reduce the cost structure of its engine operations by about $150 million over the next two years. Moreover, termination of the development program will result in investment and launch expenditures over the next two years being approximately $200 million lower than originally planned.

Moody's noted that the initiatives pursued by Cummins over the past decade to diversify its business into the filtration and power generation areas have been beneficial. Today, these business lines account for 38% of consolidated revenue. While the filtration business, which supplies air and fluid systems used on engines, is subject to many of the same cyclical pressures as Cummins' core engine segment, it is expected to remain solidly profitable. The power generation business is experiencing improved demand and should also contribute solid performance. Combined, these business segments generated about $225 million of operating profit during 2000, and will mitigate some of the ongoing softness in the primary engine business.

Moody's anticipates that Cummins' overall earnings and cash flow will remain weak during the intermediate term, and because of the company's debt burden, debt protection measurements will be at levels more consistent with a low investment grade rating due to the continuing weakness in the North American heavy-duty truck market. EBIT interest coverage, which has been in the range of 4 times during 1998 and 1999 has fallen below 3 times for 2000 and will decline further during 2001; and the ratio of debt-to-EBITDA which had been a relatively low 2.3 times in 1999, rose to over 4.0 times in 2000 and will likely remain above 3 times through 2001. Moody's does not anticipate that current business conditions will facilitate any meaningful debt reduction during the coming year. In addition, financial leverage, which is currently over 50%, will remain elevated. Cummins' decision to terminate the development of the new engine and to further reduce employment levels will represent a modest additional outflow of cash during 2001. During 2002 and beyond, however, it should enhance the company's ability to reduce debt. The rating agency noted that Cummins' debt structure, which incorporates a modest amount of short-term obligations poses only a modest degree of refinancing risk. Cummins maintains strong alternate liquidity in the form of over $750 million of committed term facilities. Proceeds for the current preferred offering will be used to repay outstandings under this facility.

The stable rating outlook anticipates that Cummins' current family of heavy truck engines will be able to adequately meet the needs of its customers despite the termination of the new-engine program. It also anticipates that the company will preserve its strong position in the power generation and filtration sectors.

Cummins, Inc., headquartered in Columbus, Indiana, is the world's largest producer of diesel engines and related products.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

New York
J. Bruce Clark
Senior Vice President
Corporate Finance
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

No Related Data.
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