Cummins Inc. on Tuesday, Feb. 4, reported its fifth consecutive year of record sales and profits, despite significant global economic challenges that negatively affected fourth-quarter performance.
For the year, sales increased 10 percent to $14.34 billion from $13.05 billion in 2007. Net income rose 8 percent to $801 million compared to $739 million; net income included a $37 million pre-tax charge to cover the costs associated with job reductions in the fourth quarter that included reducing its professional work force by nearly 650 people. Excluding this charge, EBIT was $1.33 billion or 9.3 percent of sales.
As the company stated in mid-December when it revised its sales and EBIT guidance downward for 2008, market conditions around the world began to deteriorate rapidly and sharply in the fourth quarter as the global recession continued to spread. Fourth-quarter sales fell 6 percent to $3.29 billion compared to $3.52 billion during the same period in 2007. Net income dropped to $89 million from $198 million, while EBIT was $129 million or 3.9 percent of sales, down from $324 million or 9.2 percent of sales; excluding the restructuring charge, EBIT was $166 million or 5.0 percent of sales.
Sales declines in the company’s Engine and Components segments, driven by sharp demand drops in the global truck and construction markets, more than offset gains in Power Generation and Distribution; all four segments, however, experienced weakening demand during the course of the quarter. The company’s financial performance in the quarter also was affected negatively by lower joint venture income and the impact of a strengthening U.S. dollar.
“Given our record-setting performance during the first nine months of the year, the rapid drop in demand in the fourth quarter as a result of the global recession was a major disappointment,” said Tim Solso, chairman and chief executive officer of Columbus, Ind.-based Cummins. “At the same time, we moved quickly to lower our costs and tightly manage our capital spending, and already have taken further action in early 2009.”
Cummins said 2009 sales are forecast to drop across all business segments, with the largest decline expected to come from the Components and Engine segments. All business segments, however, are expected to be profitable in 2009, and the company will continue to reduce costs aggressively while investing in key growth opportunities.
In January, Cummins announced that it will reduce its worldwide professional work force by at least an additional 800 people by March 1 and freeze pay for most salaried workers; in addition, the company’s officers had their pay reduced by 10 percent for 2009. By the end of March, the company will have reduced its global work force by more than 1,400 salaried professionals and more than 1,300 hourly manufacturing plant employees – or about 6 percent of its total work force – since the beginning of the fourth quarter 2008.
During that time, Cummins has taken a number of other steps to align its costs with the current and expected future demand for its products, including cutting 2,500 contract and temporary workers; freezing hiring, except in rare cases; reducing the number of corporate officers by 10 percent by March 31; temporarily closing or shortening work weeks at a number of manufacturing facilities; cutting discretionary spending; reducing IT spending; and reducing planned capital expenditures in 2009 significantly from originally planned levels, while continuing to focus on critical needs such as the necessary development work to meet new emissions standards in the United States in 2010.
Despite the difficult economic climate, the company said its balance sheet remains strong with low debt, healthy cash reserves and access to a $1.1 billion credit revolver; cash generation and investment in future products, such as those to meet new U.S. emissions standards in 2010, and to support customer requirements will be a priority in 2009. In light of the current economic conditions, the company said it also has suspended its stock repurchase program but remains committed to maintaining its current dividend.
“We are in an extraordinarily challenging period, and while we don’t expect overall economic conditions to improve in 2009, we entered this recession in the strongest financial position in the company’s history,” Solso said. “Our experienced management team understands what it takes for Cummins to be successful in difficult times, and I am confident that we will do the hard work and make the difficult decisions necessary to emerge from this downturn well positioned to resume our recent history of profitable growth.”