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Cummins Lags on Q3 Earnings, Rev in Line

Zacks Equity Research

Cummins Inc. (CMI) posted net earnings of $362 million or $1.94 per share (excluding special items) in the third quarter of 2013, lagging the Zacks Consensus Estimate of $2.10 per share. However, earnings increased from $336 million or $1.78 per share in the comparable year-ago quarter.

Revenues in the quarter rose nearly 4% year over year to $4.3 billion, mainly driven by strong demand in North America. Revenues were in line with the Zacks Consensus Estimate.

Revenues in North America improved 11% but international revenues dipped 4% in the quarter. Within the international markets, weaker demand in Europe, India and Australia offset the improvement in Brazil and China.

Operating income increased about 6.3% to $524 million from $493 million a year ago. Earnings before interest and taxes (:EBIT) increased 8.1% to $536 million or 12.6% of sales, compared with $496 million or 12% a year ago.

Segment Performance

Sales in the Engine segment fell 1% to $2.5 billion due to lower demand in stationary power, global mining and the light-duty on-highway market in the U.S., partly offset by higher demand for medium-duty truck engines in North America and Brazil. Segment’s EBIT increased 13.8% to $272 million or 10.9% of sales, compared with $239 million or 9.5% a year ago.

Sales in the Components segment grew 14% to $1.1 billion on the back of strong on-highway demand in Europe, China and North America. Segment’s EBIT surged 48.3% to $132 million, or 12.3% of sales, versus $89 million or 9.5% in the prior-year quarter.

Sales in the Power Generation segment went down 13% to $712 million due to low demand in most international markets, partially offset by higher revenues in North America. Segment’s EBIT fell 38.4% to $45 million, or 6.3% of sales, compared with $73 million or 9% in the third quarter of 2012.

Sales in the Distribution segment rose marginally by 2% to $944 million (excluding acquisitions) on increased power generation and parts sales in North America, offset by a decline in sales in South Pacific and China. Segment’s EBIT declined 13.1% to $86 million, or 9.1% of sales, versus $99 million or 12.4% a year ago.

Financial Position

Cummins’ cash and cash equivalents increased to $2.5 billion as of Sep 29, 2013 compared with $1.4 billion at the end of 2012. Long-term debt increased to $1.78 billion as of Sep 29, 2013 from $759 million as of Dec 31, 2012. Consequently, long-term debt to capitalization ratio rose to 20% as of Sep 30, 2013 from 10.3% as of Dec 31, 2012.

In the first nine months of the year, Cummins’ net operating cash flow surged to $1.33 billion from $787 million in the prior-year period. Capital expenditures declined to $417 million from $424 million in the year-ago period. Cummins has repurchased $289 million worth of its shares during the period compared with $231 million a year ago.

2013 Guidance

For 2013, Cummins expects revenues to decline 3% from the 2012 level, compared with the earlier guidance of in-line results. The company also reduced its 2013 EBIT margin guidance to 12.5%–13% from 13%–14%.

Further, Cummins expects to achieve revenues of $25–$31 billion and EBIT of 16%–18% by 2018.

Our Take

Cummins Inc. is a leading worldwide designer, manufacturer and distributor of diesel and natural gas engines, electric power generation systems, and engine-related components, fuel systems, controls and air handling systems. Currently, CMI retains a Zacks Rank #3 (Hold).

Other stocks that are performing well in the industry include Denso Corp. (DNZOY), Tower International, Inc. (TOWR) and Gentex Corp. (GNTX). All three companies carry a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on CMI
Read the Full Research Report on GNTX
Read the Full Research Report on TOWR
Read the Full Research Report on DNZOY

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