Cummins (CMI)

Gross Margin

Significant drivers of the change in gross margins for the three months ended March 29, 2009, compared to the period ended March 30, 2008, were as follows:

Gross margin decreased by $262 million, and decreased as a percentage of sales by 2.2 percentage points.  The decrease was led by lower volumes followed by increased materials costs.  These decreases in margin were partially offset by improved pricing.  The decrease in volumes was mainly due to lower sales resulting from the global economic downturn.  The increased materials costs were primarily due to increased commodity costs.  The provision for warranties issued as a percent of sales was 3.1% in both periods.

A more detailed discussion of margin by segment is presented in the Operating Segments Results section.

Gross Margin

        Significant drivers of the change in gross margins were as follows:

        Gross margin increased by $384 million, and as a percentage of sales increased by 0.9 percentage points. Benefits from increased pricing and a more favorable volume/mix of products sold were partially offset by higher material costs reflecting the increase in commodity prices during the year and higher warranty expense. Our warranty expense reflects favorable warranty experience for some engine products and our provision related to sales in 2008 was 2.9 percent of sales, down from 3.1 percent in 2007. This result was more than offset by negative trends primarily in certain mid-range engine products launched in 2007 for which we recorded additional warranty liability of approximately $117 million in the fourth quarter of 2008.

        A more detailed discussion of margin by segment is presented in the "Operating Segments Results" section.

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Table of Contents

Gross Margin

        Significant drivers of the change in gross margins were as follows:

        Gross
margin increased by $384 million, and as a percentage of sales increased by 0.9 percentage points. Benefits from increased pricing and a more favorable volume/mix of
products sold were partially offset by higher material costs reflecting the increase in commodity prices during the year and higher warranty expense. Our warranty expense reflects favorable warranty
experience for some engine products and our provision related to sales in 2008 was 2.9 percent of sales, down from 3.1 percent in 2007. This result was more than offset by negative trends
primarily in certain mid-range engine products launched in 2007 for which we recorded additional warranty liability of approximately $117 million in the fourth quarter of 2008.

        A
more detailed discussion of margin by segment is presented in the "Operating Segments Results" section.

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HREF="#bg76701a_main_toc">Table of Contents

Gross Margin

        Significant drivers of the change in gross margin were as follows:

        Gross margin as a percentage of sales declined by 2.1 percentage points as margin percentages declined in three of our segments. The provision for warranties issued for the year was 3.1 percent of consolidated sales, compared to 2.8 percent for 2006.

        A more detailed discussion of margin by segment is presented in our Operating Segment Results section.

Gross Margin

        Significant drivers of the change in gross margin were as follows:

        Gross
margin as a percentage of sales declined by 2.1 percentage points as margin percentages declined in three of our segments. The provision for warranties issued for the year
was 3.1 percent of consolidated sales, compared to 2.8 percent for 2006.

        A
more detailed discussion of margin by segment is presented in our Operating Segment Results section.

Gross Margin

Gross margins for the three and six months ended June 29, 2008, improved primarily due to increased volumes and higher price realization which were partially offset by increased costs for new products and increased warranty expenses. The following table presents the significant drivers impacting gross margins for the three and six months ended June 29, 2008, to the comparable periods of 2007:

Gross margin as a percentage of sales for the three and six month periods increased by 2.6 percentage points and 1.7 percentage points, respectively, as margin percentages increased in all four business segments. Engine segment margins increased for the three months ended June 29, 2008, primarily due to more favorable sales mix in the on-highway markets and improved engine and parts pricing which was partially offset by an increase in warranty expense. Engine segment margins increased in the first six months of 2008, compared to the same period in 2007, primarily due to higher engine volumes across most on-highway markets, the accompanying gross margin impact of higher absorption of fixed manufacturing costs, improved engine and parts pricing and more favorable sales mix in the on-highway markets. This was partially offset by an increase in warranty expense. Power Generation segment margins improved, for both the three and six month periods, primarily due to significant price realization, net of increased material costs, increased volumes and a more favorable product mix. The Components segment margins improved significantly, for both the three and six month periods, through price realization, manufacturing efficiencies and increased volumes in most of our businesses. The Distribution segment experienced improved margins, for both the three and six month periods, due to increased organic and acquisition related sales growth.  

The provision for warranties issued for the three and six months ended June 29, 2008, were 2.9 percent and 3.0 percent of consolidated sales, compared to 3.1 percent and 3.0 percent for the same periods in 2007, respectively.

Gross Margin

Gross margins improved primarily due to increased volumes and higher price realization which were partially offset by increased costs for new products and increased warranty expenses. Significant drivers impacting gross margins were as follows:

Gross margin as a percentage of sales increased by 0.8 percentage points as margin percentages increased in our Engine, Power Generation and Components segments.  In the Engine segment, margins improved as the result of volume increases and improved pricing of aftermarket parts and industrial engines. Increased sales volumes resulted from higher demand in industrial markets, an increase in our North American market share over the first quarter of 2007 and weaker demand in the first quarter of 2007, resulting from the 2006 pre-buy to replace trucks ahead of the 2007 emissions regulations change, particularly the North American heavy-duty and medium-duty truck markets. Sales increases were partially offset by higher new product costs and increased warranty costs.  The Components segment margins have improved slightly through improved manufacturing costs and benefits from exiting the Universal Silencer business in 2007.   

The provision for warranties issued was 3.1 percent of consolidated sales in the first quarter compared to 2.8 percent for the same period in 2007.  The increase was expected and was driven by the mix of sales which includes a higher percentage of new products for which accrual rates are typically higher in the first eight quarters after product launch.  The first quarter of 2008 includes $33 million of unfavorable change in estimates, approximately half of which is related to pre-2007 products.  The majority of the remaining charge related to claims experience on early 2007 shipments that management does not expect to continue at the same rate due to actions taken to address the issues. 

Gross Margin

        Gross margin improved primarily due to increased sales, the related absorption benefits on fixed manufacturing costs, and changes in sales mix. Significant drivers impacting gross margins were as follows:

        Gross margin as a percentage of sales increased by 1.1 percentage points as margin percentages increased in the Engine, Power Generation and Components segments. The increased margins in these segments were primarily the result of higher absorption of fixed manufacturing costs that resulted from higher demand, improved pricing, and manufacturing efficiencies.

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        Warranty expense as a percent of sales increased slightly to 2.8 percent in 2006 compared to 2.7 percent in 2005.

Gross Margin

        Gross margin improved primarily due to increased sales, the related absorption benefits on fixed manufacturing costs, and changes in sales mix. Significant
drivers impacting gross margins were as follows:

        Gross margin as a percentage of sales increased by 1.1 percentage points as margin percentages increased in the Engine, Power Generation and Components
segments. The increased margins in these segments were primarily the result of higher absorption of fixed manufacturing costs that resulted from higher demand, improved pricing, and manufacturing
efficiencies.

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        Warranty
expense as a percent of sales increased slightly to 2.8 percent in 2006 compared to 2.7 percent in 2005.

Gross Margin

For the three and nine months ended September 30, 2007, gross margins increased over the same periods in 2006 primarily due to new pricing and increased volumes which were partially offset by increased costs for new products, increased warranty expenses and the deconsolidation of one of our North American joint ventures. Significant drivers impacting quarterly and year-to-date margins, as compared to the same period in 2006 were as follows:

Gross margin as a percentage of sales declined by 2.7 percentage points and 2.3 percentage points for the three and nine months ended, September 30, 2007, as compared to the same periods in 2006, as margin percentages declined in three of our segments primarily driven by the Engine and Components segments.  In the Engine segment, price increases for new products were offset by higher new product costs, increased warranty costs and the decreased heavy-duty engine volumes.  In the Components segment two of our businesses are experiencing low margins as the result of costs associated with meeting extremely strong demand.

Warranty expense as a percent of sales increased to 3.4 percent in the third quarter of 2007 from 2.9 percent in 2006 and remained flat at 3.0 percent for the nine month periods in both years.   The increase in warranty expense was expected as the mix of 2007 emissions compliant engines and components increase. As has been our practice and as described in our Critical Accounting Estimates in our 2006 Annual Report on Form 10-K, new product launches require a greater use of judgment in developing estimates until historical experience becomes available.  Product specific experience is typically available four or five quarters after product launch, with a clear experience trend evident eight quarters after launch.  We generally record warranty expense for new products upon shipment using a factor based upon historical experience only in the first year, a blend of actual product and historical experience in the second year and product specific experience thereafter

Gross Margin

For the three and nine months ended September 30, 2007, gross margins increased over the same periods in 2006 primarily due to new pricing and increased volumes which were partially offset by increased costs for new products, increased warranty expenses and the deconsolidation of one of our North American joint ventures. Significant drivers impacting quarterly and year-to-date margins, as compared to the same period in 2006 were as follows:

Gross margin as a percentage of sales declined by 2.7 percentage points and 2.3 percentage points for the three and nine months ended, September 30, 2007, as compared to the same periods in 2006, as margin percentages declined in three of our segments primarily driven by the Engine and Components segments.  In the Engine segment, price increases for new products were offset by higher new product costs, increased warranty costs and the decreased heavy-duty engine volumes.  In the Components segment two of our businesses are experiencing low margins as the result of costs associated with meeting extremely strong demand.

Warranty expense as a percent of sales increased to 3.4 percent in the third quarter of 2007 from 2.9 percent in 2006 and remained flat at 3.0 percent for the nine month periods in both years.   The increase in warranty expense was expected as the mix of 2007 emissions compliant engines and components increase. As has been our practice and as described in our Critical Accounting Estimates in our 2006 Annual Report on Form 10-K, new product launches require a greater use of judgment in developing estimates until historical experience becomes available.  Product specific experience is typically available four or five quarters after product launch, with a clear experience trend evident eight quarters after launch.  We generally record warranty expense for new products upon shipment using a factor based upon historical experience only in the first year, a blend of actual product and historical experience in the second year and product specific experience thereafter