(The following statement was released by the rating agency)
Oct 12 - Fitch Ratings has upgraded Cummins, Inc.'s (CMI)Issuer Default Rating (IDR) and long-term debt ratings to 'A' from 'A-'. TheRating Outlook is Stable. A full rating list follows at the end of this release.
The upgrade of CMI's ratings incorporates the company's strong operatingprofile, consistently low leverage, financial flexibility, and long termimprovement in operating margins. The company recently announced that financialresults would be weaker in 2012 than originally anticipated due to a slowingglobal economy. Fitch's ratings take into consideration cyclicality in CMI's endmarkets and the company's demonstrated ability to generate positive free cashflow through a downturn.
Fitch expects that in the event of an economic downturn, CMI's credit metricscould deteriorate modestly but remain at solid levels. Debt to EBITDA at July 1,2012 was 0.31 times (x), which is lower than many other 'A' rated peers, and hasbeen well below 1.0x during the past several years. Leverage would be lower whenconsidering the impact of earnings from joint ventures which are excluded fromFitch's calculation of EBITDA. Fitch anticipates CMI will continue to followconservative financial policies which are important to its ability to cope withcyclicality in its capital goods markets.
Other credit strengths include the company's leading positions in its coreengine and power generation markets, geographic diversification, globaldistribution network, and technological capabilities. CMI's engine business hasmaterial exposure to the heavy duty truck and medium duty truck and bus markets,but the company also provides engines and power generation equipment to a widevariety of industrial customers. CMI has effectively developed and implementednew engine technology that is increasingly important due to stricter emissionsand fuel economy regulations. As a result, it is well positioned to meetchanging global emissions requirements, demand for fuel efficiency, and agrowing need for systems integration.
Joint ventures represent a material portion of CMI's overall profitability.Investments in joint ventures are concentrated in CMI's international andemerging-market engine businesses and in domestic distributors. Growth inemerging regions is driven by long-term infrastructure investment and demand forcommodities. Economic weakness in these regions may affect joint venture resultsin the near term. Joint venture sales and income typically tend to be morestable than CMI's fully-owned operations which have a more concentrated exposureto industrial and power generation markets in developed regions and to cyclicalNorth American heavy-duty truck production.
Rating concerns include cyclicality in CMI's truck and industrial end markets,as highlighted by the company's recent reduction to its revenue and earningsforecast for 2012, and the risk of in-sourcing by CMI's truck engine customers.Truck production has been higher in North America through much of 2012, butorders have declined steadily due to uncertainty about the economy and the U.S.budget. In addition, some industrial markets such as mining equipment and oil &gas and are experiencing lower activity, and demand is weak in Europe andcertain emerging regions including Brazil and China. In the near term, thesetrends are likely to offset positive considerations including an aging truckfleet, stricter emissions regulations, and significant infrastructure investmentin emerging regions which can be expected to support long term demand.
Fitch estimates free cash flow after dividends will decline compared to 2011 andcould approach $600 million in 2012, before considering incremental investmentsin joint ventures. The decline compared to 2011 reflects higher working capitalrequirements, dividends, and capital expenditures which are being directedtoward new product development and capacity expansion. CMI is also deployingcash for investments in joint ventures and acquisitions. Acquisitions totaledapproximately $200 through the third quarter of 2012, including the purchase ofemissions technology assets from Hilite International. CMI has increased itsdividend payout materially in recent years to roughly $380 million on anannualized basis.
Pension plans are relatively well funded which supports CMI's financialflexibility. At the end of 2011, U.S. plans, including unfunded plans, wereunderfunded by $152 million (more than 90% funded) while non-U.S. plans wereslightly overfunded. CMI estimates it will contribute at least $130 million in2012, of which $84 million ($73 million voluntary) had been contributed throughthe first six months.
Liquidity at July 1, 2012 included cash and marketable securities totaling $1.4billion. A majority of CMI's cash and securities are held outside the U.S.;Fitch believes a portion of overseas cash could be available with minimal taxliabilities or other constraints. Liquidity also included availability under a$1.24 billion four-year revolver which matures in 2014, most of which wasavailable. Liquidity was offset by $58 million of loans payable within one year.Debt maturities are spread out, with no significant maturities scheduled before2028.
Prospects for future positive rating actions are limited over the near to mediumhorizon due to CMI's exposure to cyclical markets and uncertainty about theglobal economy. Fitch could take a negative rating action if the company'soperating performance deteriorates due to fundamental changes in the company'soperating profile. The ratings would not likely be affected solely by lowerrevenue and margins which would normally occur during a downturn in CMI'smarkets. However, the ratings or Outlook could be lowered if CMI loses marketshare due to increased competition or outsourcing by customers, the company'scost base increases materially, joint ventures require significant investmentthat impairs CMI's cash flow or liquidity, or CMI encounters unforeseendifficulties introducing new technology. In addition, the ratings could benegatively affected if the company's financial policies and cash deployment aremore aggressive than in the past.
Fitch has upgraded the ratings for CMI as follows: --IDR to 'A' from 'A-'; --Senior unsecured credit facility to 'A' from 'A-'; --Senior unsecured debt to 'A' from 'A-'.