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Rating Action:

MOODY'S CONFIRMS RATINGS OF CUMMINS, INC. (SR. IMPLIED AT Ba1 AND SR. UNSECURED AT Ba2); OUTLOOK CHANGED TO STABLE.

27 Oct 2004
MOODY'S CONFIRMS RATINGS OF CUMMINS, INC. (SR. IMPLIED AT Ba1 AND SR. UNSECURED AT Ba2); OUTLOOK CHANGED TO STABLE.

Approximately $1.3 billion of Debt Affected.

New York, October 27, 2004 -- Moody's Investors Service confirmed the long-term ratings of Cummins, Inc. (senior implied Ba1 and senior unsecured Ba2) and Cummins Capital Trust I (subordinate Ba3), and changed the outlook to Stable from Negative. Moody's also assigned an SGL-1 speculative grade liquidity rating to the company. The confirmation and change in outlook to Stable reflect the significant rebound in all of Cummins' markets, the solid competitive position the company has been able to maintain in each of its business sectors, and Moody's expectation that these factors will enable Cummins to continue strengthening its credit metrics through 2005. The SGL-1 reflects Moody's expectation that Cummins key sources of liquidity (annual free cash generation of approximately $300 million, availability under a $385 million credit facility and a $200 million receivable sale facility, and a cash and securities position of $507 million) will provide strong coverage for the company's $324 million in debt maturing over the next twelve months.

During 2004, there has been a robust cyclical recovery in all of Cummins' key markets. Revenue increases through the nine months to September 2004 have been the following: engines up 50%; power generation up 43%; filtration up 40%; and international distribution up 26%. This recovery has occurred following a number of initiatives undertaken by Cummins to strengthen its competitive position. These have included restructuring programs that entailed $91 million in cash outlays that are expected to yield $97 million in annual savings, the establishment of long-term contracts and supply relationships with major heavy truck OEMs, and the introduction of EPA emissions-compliant engines during 2002. These initiatives, in combination with the broad-based market recovery, have resulted in a significant improvement in Cummins' operating performance and debt protection measures. Improvement in key metrics for the LTM to September 2004 vs FYE December 2003 include the following: operating income to $355 million from $93 million; free cash flow (after capex, working capital, dividends, and pension contributions) to $288 million from a negative $27 million; fixed charge coverage to 2.9x from 0.8x, and free-cash-flow-to-debt to 12% from negative 0.1%. These metrics provide ample support for the current rating level. Although the year-over-year pace of improvement in Cummins' markets will slow significantly during 2005, demand should remain healthy. Consequently, Cummins credit metrics have the potential to continue improving from the very weak levels of 2003.

Despite the dramatic strengthening in Cummins' operating performance and financial flexibility during the past nine months, the company's markets, particularly the North American truck engine sector (Cummins' largest and most profitable), remain vulnerable to cyclical downturns. However, Moody's also recognizes that Cummins has made steady progress in expanding businesses that are much less vulnerable to cyclical downturns -- particularly its international distribution business. This helps to moderate the company's historic level of vulnerability to cycles.

Moody's believes that the continuing recovery in Cummins' markets combined with further strengthening of the company's operating performance have the potential to favorably impact the outlook or rating over the intermediate term. The following factors could contribute to an outlook or rating improvement. First, Cummins would have to demonstrate continued strong operating and cash generating performance into 2005; free cash generation in the area of $300 million would be viewed favorably. Second, the cash flow likely to be generated during 2005 would have to be used to further strengthen the company's balance sheet through a combination of reducing debt and maintaining a sizable cash position. Based on the expected level of free cash generation, Cummins should be able to reduce debt by $250 million to $300 million while maintaining a cash position of about $400 million. Next, the company would need to present compelling evidence that the operating model being established and the performance it supports, are significantly less vulnerable to cyclical downturns than has been the case in the past. Finally, we would expect Cummins to maintain ample committed and available borrowing facilities to ensure sufficient liquidity in the event of a downturn.

Factors that could contribute to pressure on the rating or outlook include an unexpected but material slowdown in Cummins' end markets during 2005, a large acquisition, significant special distributions to shareholders, or an inability to maintain the levels of operating efficiency that have been achieved during the past three years of restructuring initiatives. To the extent that such events cause fixed charge coverage to drop below 2.25x, or free cash flow to debt to fall below the 5% to 10% range, there could be some pressure on the rating or outlook.

The Speculative Grade Liquidity rating is an opinion of a company's liquidity profile for the next twelve months. The SGL-1 reflects Moody's expectation that Cummins' liquidity profile is strong. Based on healthy demand fundamentals and the company's performance through the twelve months to September 2004, Cummins should be able to generate approximately $300 million in net income and $600 million in gross cash flow during the next twelve months. The principal operating draw on this cash generation will include working capital requirements, capital expenditures and dividends. During the most recent twelve month period, these requirements approximated $250 million. Over the coming twelve months these requirements will increase as the more robust business environment continues. Nevertheless, the company's gross cash generation should cover these requirements by a wide margin, and resulting free cash generation could be in the range of $250 million to $300 million. The principal remaining cash requirement would be $324 million in maturing debt. The company's free cash flow, in combination with current cash balances of $507 million, provide a high degree of assurance that these maturities will be easily covered. This already-solid liquidity position is further enhanced by availability under the company's exist borrowing facilities. This includes approximately $250 million available under a $385 million revolving credit facility maturing in November 2005, and $200 million that is fully available under a receivable sale facility that matures in 2007. Cummins has adequate head room under the covenants contained in these two programs, and the improving operating performance should further expand this cushion. An additional factor in Moody's assessment of Cummins' liquidity is its ability to raise cash through non-operating methods such as the sale of assets. However, the company's ability to pursue such options is considerably limited by the provisions of the revolving credit facility. The obligations under this facility are collateralized by security interests in substantially all of Cummins' assets and the assets of its domestic subsidiaries that guarantee obligations under the facility. In addition, covenats restrict the company's ability to incur liens, enter into sale and leaseback transactions, sell asset, or dispose of the capital stock of subsidiaries.

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

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

No Related Data.
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