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Cummins Inc. (CMI - Analyst Report) posted net earnings of $414 million or $2.20 per share in the second quarter of 2013, surpassing the Zacks Consensus Estimate of $1.97 per share. However, earnings fell more than 10% from $465 million or $2.45 per share (excluding gain on sale of businesses) in the comparable quarter a year ago.

Revenues in the quarter rose nearly 2% to $4.5 billion, driven mainly by strong demand in North America, particularly in the medium duty truck market. It was higher than the Zacks Consensus Estimate of $4.3 billion.

Revenues in North America improved 7% but international revenues dipped 4% in the quarter. Within the international markets, improvements in Brazil and China were offset by weaker demand in Europe, India and Mexico.

Operating income declined about 6% to $610 million from $648 million a year ago. Earnings before interest and taxes (EBIT) decreased 6.3% to $621 million or 13.7% of sales, compared with $663 million or 14.9% a year ago, excluding special items.

Segment Performance

Sales in the Engine segment fell 7% to $2.7 billion, driven by lower demand in stationary power, global mining and the heavy-duty truck market in North America. Segment EBIT declined 9.8% to $339 million, or 12.8% of sales, compared with $376 million or 13.2% a year ago.

Sales in the Components segment grew 8% to $1.1 billion due to strong on-highway demand in Brazil, China and North America. Segment EBIT improved 17% to $136 million, or 12.2% of sales, versus $116 million or 11.2% in the prior year.

Sales in the Power Generation segment went down 10% to $814 million due to weak demand in most international markets, partially offset by strong revenues in North America. Segment EBIT fell 19% to $76 million, or 9.3% of sales, compared with $94 million or 10.3% in the second quarter of 2012.

Sales in the Distribution segment rose marginally by 1% to $954 million (excluding acquisitions) as increased power generation and parts sales in North America were mostly offset by lower power generation sales in Europe and the Middle East. Segment EBIT rose 8.7% to $100 million, or 10.5% of sales, versus $92 million or 11.6% a year ago.

Financial Position

Cummins’ cash and cash equivalents remained almost flat at $1.4 billion as of Jun 30, 2013 compared with the same at the end of 2012. Long-term debt increased marginally to $797 million as of Jun 30, 2013 from $759 million as of Dec 31, 2012. Consequently, long-term debt to capitalization ratio rose marginally to 10.6% as of Jun 30, 2013 from 10.3% as of Dec 31, 2012.

In the first half of the year, Cummins’ net operating cash flow more than doubled to $960 million from $397 million in the prior year. Capital expenditures increased to $275 million from $266 million in the year-ago period. Cummins has repurchased $289 million worth of its shares during the period compared with $196 million a year ago.

Guidance Raised

Cummins expects revenues to be flat in 2013 compared with the earlier guidance of flat to down 5%. The company reiterated its EBIT margin guidance of 13%–14% for the year.

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 #4 (Sell).

Other stocks that are performing well in the industry include Visteon Corp. (VC - Snapshot Report), Denso Corp. and Gentex Corp. (GNTX - Snapshot Report). All of them are Zacks Rank #1 (Strong Buy) stocks.

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