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Rating Action:

Moody's raises Cummins rating to Baa1; outlook is positive

18 Nov 2011

Approximtely $500 milion of debt affected

New York, November 18, 2011 -- Moody's Investors Service raised the senior unsecured rating of Cummins, Inc. to Baa1 from Baa2; the outlook is positive.

RATINGS RATIONALE

The upgrade reflects Cummins' highly competitive position in the global engine market, its broad product and geographic diversification, and the company's prudent financial policies. These strengths should enable Cummins to maintain metrics that are solidly supportive of the Baa1 rating despite the ongoing cyclicality of its key markets.

Cummins has successfully implemented a long-term strategy to reduce earnings and cash generation volatility by focusing on the following areas: reducing the fixed cost structure of the truck engine operations, growing the power generation, components and distribution businesses, and significantly expanding joint-venture operations that produce truck engines in emerging markets. The success of this strategy enabled Cummins to maintain solid debt protection measures despite the severe 2008/2009 downturn in the North American medium and heavy-duty truck industry, and the broader weakening in the global economy. Since the downturn the company's performance has continued to strengthen. For the LTM period through September 2011 Cummins generated EBIT/interest of 19.1x, debt/EBITDA of 0.8x, and free cash flow approximating $850 million (all metrics reflect Moody's standard adjustments).

The positive outlook reflects the potential for further improvement in the rating during the coming twelve to eighteen months. Cummins' operating model and competitive position are capable of sustaining metrics that support a higher rating. However, the debt crisis in Europe and the possible impact on the global financial system and various regional economies could constrain the company's performance. Cummins' markets are inherently cyclical and the purchase of its products are often tied to large capital outlays. Consequently, the prospect of European contagion negatively impacting regional economies and global financial markets poses a risk to near-term improvement in Cummins' rating. If conditions in Europe become less uncertain, and Cummins maintains its operating performance and financial disciplines, the company's rating could improve.

Cummins' long-term prospects should benefit from the global trend of more stringent emissions regulations for on- and off-road commercial vehicles, and the increasing need for fuel-efficiency in these vehicle classes. The company is well-positioned to capitalize on these trends due to its strong position with the world's leading truck manufacturers and its global footprint.

The diversification of Cummins $17.3 billion in revenues (LTM September 2011) is as follows: Geographic revenue is split approximately 50/50 between the US & Canada and the rest of the world; Product mix is split approximately 53% engines, 16% power generation, 18% components, and 14% distribution.

A key element in Cummins' effort to expand its geographic presence has been a highly successful joint-venture strategy. Through joint ventures, the company has significantly expands its position in North American distributors and in truck engines in the emerging markets, particularly in India and China. During the LTM September 2011 these joint venture operations generated over $8.5 billion in unconsolidated revenues, with Cummins' share of earnings amounting to $405 million. We view Cummins's joint-venture strategy (which represents a total investment of $830 million at year end 2010) as financially successful and strategically beneficial. Revenue growth and earning levels have been strong; the operations are largely self funding, without reliance on material guarantees or advances from Cummins; the interests of Cummins and its partners have remained highly aligned; and, the dividends Cummins receives from these operations have closely paralleled the share of earnings recognized. Importantly, these investments should continue to provide Cummins with an opportunity to capitalize on the strong growth prospects for truck engine demand in emerging markets.

Cummins strong liquidity position at September 2011 included cash and securities of $1.4 billion and free cash flow that exceeds $850 million. The company also has a $1.24 billion committed credit facility that matures in June of 2014. The company's potential liquidity requirements are modest with no commercial paper outstandings or material maturities of long-term debt.

Cummins is well positioned at the Baa1 rating level and the principal risk to the rating would likely result only from a radical shift in the company's financial strategy that entailed much greater financial risk. We believe that such a shift is highly unlikely. We note that the company has recently increased its share repurchase activity, its share repurchase authorization and its dividend payout ratio. During 2011, the company repurchased the remaining $111 million of shares remaining under its $500 million authorization program, initiated a new $1.0 billion authorization program and repurchased $435 million under this new program (for a total YTD 2011 share repurchase of $546 million). As well, the company has significantly increased its dividend payout over 52% from 0.2625 to 0.40 cents per share, which represents an increase of approximately $106 million annually.

The increases in dividends and share repurchases have been funded through the generation of free cash flow and consequently have not resulted in any erosion in Cummins' debt protection measures. Although Cummins might pursue further increases in shareholder distributions, and could also undertake strategic acquisition, we expect that such actions will be managed so that debt protections measures remain solidly supportive of the Baa1 rating and a strong liquidity position.

Cummins' strong market positions and broad global foot print, combined with favorable long-term demand fundamentals in the global high-horsepower engine market, should enable it to generate credit metrics that support a higher rating. To the extent that the European debt crisis does not result in a significant disruption in Cummins' markets, the company's rating could improve. There could be upward rating movement if the company remains on track to sustain metrics of the following levels: EBIT/interest approximating 8x, and debt/EBITDA below 2x.

Downward pressure on the rating could result if operating stress or a change in financial policy results in metrics sustained at the flowing levels: EBIT/interest below 5x, and debt/EBITDA above 2.5x.

The principal methodology used in rating Cummins, Inc. was the Global Heavy Manufacturing Rating Industry Methodology published in November 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Cummins, Inc., headquartered in Columbus, Indiana, is a global power leader that designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration and emission solutions, fuel systems, controls and air-handling systems.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are considered EU Qualified by Extension and therefore available for regulatory use in the EU. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

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Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's raises Cummins rating to Baa1; outlook is positive
No Related Data.
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