Fitch Revises Cummins Outlook to Positive; Affirmed at 'BBB-'.

NEW YORK -- Fitch Ratings has revised the Outlook on Cummins, Inc. (CMI) to Positive from Stable, and has affirmed the Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. The ratings reflect continued improvement in CMI's strong balance sheet, growing geographic and product diversification, and the company's improved competitive profile heading into the downturn in the heavy duty truck cycle in 2007. The ratings may be reviewed for an upgrade based on CMI's operating performance in North America during 2007, continued customer acceptance of CMI's emissions-compliant technology, performance across CMI's other segments and geographies, and continued financial discipline.

Sales and profitability continued to show very strong growth in 2006, reflecting CMI's product position and peak cyclical conditions in its markets. CMI's four operating segments have all posted double digit sales gains year-to-date with total sales up 16.2% or $1.1 billion to $8.3 billion for the period. Total segment EBIT is up 37.3% or $238mm year-to-date, and operating cash flow has increased 59.2% or $228 million through the first nine months of the year. Growth in the company's international markets (particularly in emerging markets) and power generation segment have aided in diversifying the company's end market exposures. The company's joint-venture operations provide further asset value to CMI's consolidated profile.

Free cash flow has been utilized primarily to strengthen the balance sheet, which is now stronger than previously expected. Debt has been reduced by $550 million this year through the conversion of $300 million in junior subordinated debt into common stock (June) and the repayment of $250 million in senior unsecured notes this month. Year-end pro-forma 2006 debt and EBITDA calculations for CMI indicate that leverage will be reduced from 1.2 to 0.6 for the year. Liquidity remains high, with cash and marketable securities totaling $1.1 billion at the end of the third quarter versus approximately $840 million in the prior year period, despite heavy working capital requirements and pension contributions in 2006. CMI expects to contribute $250 million to its underfunded pension plans by yearend 2006, reducing the potential for accelerated required contributions in the future. CMI has also repurchased $76 million of common stock year-to-date, and share repurchases are expected to be ongoing.

Cummins has indicated that their North American heavy duty engine volumes could be off as much as 50% next year, with revenue pressure most pronounced in the first half. This should be partially offset by growth in CMI's other engine families, especially medium-duty truck, growth in CMI's Distribution, Power Generation, and Components segments, and expanding international sales. Despite the significant downturn in the heavy duty market in 2007, CMI's growth, diversification, operating profile, product positions and contract wins provide support that the company will continue to produce healthy free cash flow in 2007. In particular, the company's technology and customer acceptance have perpetuated a strong brand image that has resulted in increased market share at the OEM and retail level. Results in 2007 should also benefit from working capital runoff and lower interest expense. Fitch also views positively CMI's technology and capital resources, and the company's capacity to keep up the heavy spending necessary to bring products to market that are compliant with ever-more-stringent global emissions requirements. Although capital expenditures are likely to expand, Cummins appears to have been disciplined in not expanding its capacity and cost structure during the current market peak.

CMI designs, manufacturers, distributes and services diesel and natural gas engines, electric power generations systems and engine-related component products, including filtration and emissions equipment, fuel systems, controls and air handling systems. Cummins sells its products to Original Equipment Manufacturers, distributors and other customers worldwide. Slightly over half their sales are outside the U.S.

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