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Global Credit Research - 13 Jul 2010
Approximately $500 million of debt affected
New York, July 13, 2010 -- Moody's Investors Service raised the senior unsecured debt rating
of Cummins, Inc. to Baa2 from Baa3. The rating outlook
The upgrade reflects the considerable progress that Cummins has made in
reducing its vulnerability to cyclical downturns in the North American
medium and heavy-duty truck market. This reduced vulnerability
is the result of the successful implementation of a long-term strategy
that focused on: 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. As a
result of this strategy Cummins was able to maintain solid debt protection
measures despite the most severe downturn in the North American medium
and heavy-duty truck industry, and the broader weakening
in the global economy. For the LTM period through March 2010 Cummins
generated EBIT/interest of 6.7x, debt/EBITDA of 1.8x,
and free cash flow approximating $800 million. The upgrade
is also supported by the company's prudent financial policies and
With the exception of the distribution business (14% of global
sales), Cummins' markets remain highly cyclical. However,
the stable outlook reflects Moody's view that the company's
highly competitive market positions, its increasing global diversification,
and its broad product line afford ample operating flexibility to contend
with future downturns. These operating strengths, combined
with a sound financial policies, position the company very strongly
at the Baa2 rating level.
The medium and heavy truck markets continue to account for a significant
portion of Cummins' business. Globally this sector generated
approximately 30% of the company's consolidated revenues
during 2009, with most of this coming from North America.
Between 2006 (the peak of the truck cycle) and 2009 industry-wide
shipments of class 6 to class 8 trucks fell 65% from 444,827
units to 155,886 units. Despite this unprecedented decline,
Cummins' performance remained much stronger than during any previous
downturn and continued to support solidly investment-grade credit
Supporting this more robust performance was a long-term strategy
that was adopted by Cummins following the 2000-2003 downturn in
the truck sector, which was intended to aggressively expand its
businesses outside of the North American truck engine sector, and
reduce its vulnerability to future cycles. The implementation of
this strategy coincided with a rapid recovery in the North American truck
sector, and resulted in a significant improvement in overall operating
performance and credit metrics. The most recent downturn reflects
both the continuing cyclicality of Cummins' business and the success
of its strategy to significantly limit the negative impact of such down
cycles on its financial performance. Credit metrics fell markedly
from the peak levels reached during 2006/2007, but remained strongly
supportive of a Baa2 rating level.
The diversification of Cummins $10.8 billion in revenues
includes the following. The geographic revenue mix is: US
and Canada -- 51%, and international markets --
49%. The product mix is: engines - 49%;
power generation -- 19%; components -- 18%;
and distribution -- 14%.
Beyond this consolidated performance, Cummins has a highly successful
joint-venture strategy that significantly expands it position into
truck engine markets outside of North America, with particular focus
on the emerging markets of Asian and Latin America. During 2009
these joint venture operations generated approximately $5.5
billion in unconsolidated revenues, with Cummins' share of
earnings amounting to $214 million. We view Cummins's
joint-venture strategy (which represents a total investment of
$638 million) as highly successful. 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
Cummins long-term prospects should also 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.
Cummins strong liquidity position at March 2010 included cash and securities
of $1.1 billion and free cash flow that exceeds $500
million. The company also has a $1.1 billion committed
credit facility that matures in June of 2011. Although the facility's
current maturity is less than the twelve month horizon that Moody's
believes is necessary to provide adequate liquidity support, we
expect that this facility will be renewed so that the remaining term will
continued to exceed twelve month time frame. The company's
potential liquidity requirements are modest with no commercial paper outstandings
or material maturities of long-term debt, and are readily
supported by the company's existing cash liquidity and free cash
Cummins is well positioned at the Baa2 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.
As Cummins' key markets continue to recover during 2010 its credit
metrics have the potential to strengthen further. However,
as this occurs there is the possibility that share repurchases,
dividend increases, or acquisitions could play a larger role in
the company's operating and financial strategy. To the extent
that these strategies allow credit metrics to remain at or above current
levels (EBIT/interest of 6.7x and debt/EBITDA of 1.8x) the
rating could improve.
The last rating action on Cummins was an upgrade of the company's
long-term rating to Baa3 on May 9th, 2006.
The principal methodology used in rating Cummins was Moody's Heavy Manufacturing
Methodology, published in November, 2009 and available on
www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Rating Methodologies sub-directory on Moody's
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.
Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's raises Cummins rating to Baa2
No Related Data.
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