Cummins Profits Fall on Lower Sales - Analyst Blog

By Zacks | February 06, 2013 AAA

Cummins Inc. (CMI) revealed a 21.9% fall in earnings per share to $2.00 in the fourth quarter of 2012 from $2.56 per share in the fourth quarter of 2011 owing to lower revenues (all excluding special items). Net income dipped 23.2% to $377 million from $491 million a year ago. However, EPS exceeded the Zacks Consensus Estimate by a considerable margin of 26 cents.

Revenues in the quarter ebbed 13% to $4.3 billion driven by weaker demand in truck, construction, and oil and gas markets in North America as well as in international markets for power generation equipments, and construction, truck and mining engines. Revenues were higher than the Zacks Consensus Estimate of $4.1 billion.

Earnings before interest and taxes (EBIT) (excluding special items) were $552 million, down 18.5% from $677 million in the fourth quarter of 2011. EBIT margin was 12.9% versus 13.8% a year ago.

Segment Accomplishments

Sales in the Engine segment shrank 18% to $2.5 billion as strong demand for bus and light-duty engines in North America was more than offset by weaker demand in the truck market in Brazil, the North American heavy-duty truck, global construction, as well as in North American oil and gas and international mining markets. Segment EBIT was $272 million, or 10.9% of sales, versus $368 million, or 12.0%, a year ago.

Sales in the Components segment sagged 14% to $939 million driven by lower demand in the North American heavy-duty truck market as well as in Europe, which was partially offset by higher demand for aftertreatment systems in Brazil. Segment EBIT was $84 million, or 8.9% of sales, compared with $132 million, or 12.1% last year.

Sales in the Power Generation segment abated 17% to $765 million. The decline was driven by lower revenues in several international markets including Europe, Middle East, Latin America and China, partially offset by strong demand in North America. Segment EBIT was $54 million, or 7.1% of sales, versus $87 million or 9.5% in the fourth quarter of 2011.

Sales in the Distribution segment scaled up 9% to $907 million. The improvement was attributable to increased demand for power generation equipment in the U.S. and Africa, partially offset by weaker demand in North American oil and gas markets and in Europe. Segment EBIT was $98 million, or 10.8% of sales, compared with $87 million or 10.4% in the 2011 quarter.

Annual Results

For full-year 2012, Cummins reported a 6.9% fall in net income to $1.6 billion or a 5.1% decrease to $8.61 per share, beating the Zacks Consensus Estimate of $8.43 (excluding special items).

Revenues in the year slid 4% to $17.3 billion as increased revenues in North America (9%) were offset by decrease in international sales (15%), with significant declines in Brazil, China and Europe. It was higher than the Zacks Consensus Estimate of $17.1 billion. EBIT for the year was $2.4 billion or 13.7% of sales, compared with $2.6 billion or 14.2% in 2011, all excluding special items.

Financial Position

Cummins had cash and cash equivalents of $1.4 billion as of Dec 31, 2012, down from $1.5 billion as of Dec 31, 2011. Long-term debt at the end of 2012 was almost flat at $698 million compared with $658 million at the end of 2011.  

Cash flow from operating activities deteriorated to $1.5 billion in 2012 from $2.1 billion in the prior year, primarily due to lower profits. Capital expenditures were almost flat at $690 million compared with $622 million in 2011.

Guidance

Cummins anticipates revenues in full-year 2013 to be flat to down 5%. EBIT margin is expected between 13% and 14% for the year.

Our Take

Cummins is well positioned to benefit from several trends, such as new emission standards, fuel economy improvement and favorable trends for its Power Generation business. New emission regulations provide lucrative opportunities for the company. The company currently retains a Zacks Rank #3 (Hold). Cummins, which is a leading engine manufacturer along with Power Solutions International, Inc. (PSIX), Weichai Power Co. Ltd (WEICY) and Westport Innovations Inc. (WPRT), is well positioned to benefit from several trends, such as new emission standards, fuel economy improvement and favorable trends for its Power Generation business. New emission regulations provide lucrative opportunities for the company. The company currently retains a Zacks Rank #3 (Hold).

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