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To Our Shareholders
Thanks to the work of our employees around the world, 2012 proved to be a solid year in terms of financial performance despite challenging global economic conditions, especially in the second half of the year. Even in difficult times, our employees’ agility, dedication and ability to work in global collaborative teams ensured that the Company had our second best year for financial performance in the face of weakening demand in most major geographies and end markets.
2012 financial performance
In 2012, sales of $17.3 billion were down 4 percent from 2011. Earnings before interest and taxes (EBIT), excluding special items, was $2.35 billion or 13.6 percent of sales, compared to $2.56 billion, or 14.2 percent of sales, in 2011. Net income attributable to Cummins Inc. was $1.65 billion, compared to $1.85 billion in 2011. Cash from operations totaled $1.53 billion compared to $2.1 billion in 2011.
Providing shareholder value
The Company continued its focus on providing shareholder value by increasing our investments in projects that will produce profitable growth in the future by maintaining strong profit margins even in difficult market conditions and by raising the dividend by 25 percent. In addition, the Company continued to execute the share repurchase program authorized in February 2011 and has completed $774 million of the existing $1 billion share repurchase program as of December 31, 2012. The Board of Directors authorized an additional repurchase program of $1 billion to commence upon completion of the existing program. These actions are indicative of the Company’s strong balance sheet, financial discipline and management’s confidence in the Company’s future growth prospects. In recognition of the Company’s financial strength, Fitch’s Rating Agency upgraded Cummins’ long-term debt ratings from “A-” to “A” with a stable outlook.
Responding to conditions while ensuring our long term success
We responded to the declining market conditions in 2012 with a number of actions that reduced costs and ensured that we delivered strong profit margins and cash flow, including:
- reducing discretionary spending;
- completing enterprise-wide restructuring actions;
- reducing inventory where appropriate; and
delivering supply chain improvements, which will help our Company realize cost savings, improve efficiency and ultimately best serve our customers.
Investing in future growth
To secure our long term success, we continued in 2012 to invest at record levels in key growth programs that we expect will contribute significantly to our profitable growth in the future, such as:
- a number of new engine and component products to meet future emission standards and drive greater fuel efficiency;
- an expanded distribution footprint to drive growth and better serve customers in key markets like China, Africa and Latin America; and
- important global partnerships and relationships including a new engine joint venture in South Korea in our Engine Business, the acquisition of the emissions control assets of Hilite International in our Components Business, and the ground breaking at our Guangxi Cummins Industrial Power joint venture partnership facility in China.
We also continued to lead in innovation last year to make us better, faster and first when:
- We announced that our U.S. on-highway products would meet greenhouse gas regulations one year ahead of the EPA deadline;
- Our Power Generation products received EPA Tier 4 interim certification for the North American market three years ahead of deadline; and
- We launched new fuel filtration systems with Cummins proprietary Nanotechnology media allowing our engines and generator sets to operate effectively in harsh environments.
Living our corporate values
At Cummins, even during difficult times, we continued to live our corporate values every day including our corporate responsibility work where we seek to serve and improve the communities in which we live, as well as other corporate values such as diversity. Specifically in 2012:
- Cummins employees logged more than 221,000 Every Employee, Every Community volunteer hours globally, the highest number on record and a 69 percent increase year-over-year;
- We continued strategic initiatives such as TEC: Technical Education for Communities, which aims to increase access to good jobs through industry-relevant skills training, leading to a stronger and growing employment
base in our communities;
- We have grown our rural electrification program, known as Power to Prosper. Power to Prosper is helping to bring income-generating power to underserved rural communities in India; and
- We have expanded the Cummins Environmental Challenge to further harness the skills and interests of our employees to benefit the environment. In 2012, more than 12,000 employees from 19 countries worked on a total of 109 Environmental Challenge projects. Through 80,000 hours volunteered, these projects resulted in the reduction of more than 4,300 tons of greenhouse gas, the planting of more than 5,000 trees and the removal of more than 25,000 tons of trash.
- Newsweek acknowledged our deep commitment to the environment and sustainability by ranking us first among industrial companies in their 2012 Green Rankings. More information about how we are working
to improve the environments in which we live is available in the Cummins Sustainability Report or online at www.cummins.com/sustainability.
- For the fifth consecutive year, Cummins was named one of the world’s most ethical companies by The Ethisphere Institute.
- For the sixth consecutive year, Cummins was ranked as one of the Top Companies for Diversity by Diversity, Inc.
Our Company has a lot to be proud of in 2012. Even during difficult times, our employees worked to meet customer commitments, executed on our key initiatives and projects and remained true to our company values, putting us in a terrific position for future success and growth. It is an honor and privilege to lead the team at Cummins and I am thankful to all the employees, customers, shareholders and partners who make our Company’s success possible.
CEO and Chairman