Cummins Beats EPS, Misses Sales

Cummins Inc. ( CMI - Analyst Report ) reported a 2% rise in adjusted earnings per share to $2.45 in the second quarter of 2012 from $2.41 in the year-ago quarter despite a fall in net income to $465 million from $468 million in the second quarter of 2011.

With this, it surpassed the Zacks Consensus Estimate by 18 cents. The rise in EPS was attributable to a fall in average shares outstanding to 190.1 million in the quarter from 194.4 million shares in the year-ago quarter.

The company’s revenues for the quarter went down 4% to $4.45 billion, slightly lower than the Zacks Consensus Estimate of $4.47 billion. The decline in revenues was driven by weak international markets of Brazil and China.

Earnings before interest and taxes (EBIT) were $663 million, or 14.9% of sales, in the quarter, down 6% from $707 million or 15.2% in the second quarter of 2011.

Segment Accomplishments

Revenues from the Engine segment went down 2% to $2.8 billion. The decrease in revenues was attributable to lower sales in the Chinese construction market, Brazilian truck markets and North American oil and gas markets.

Meanwhile, higher demand for heavy-medium-and light-duty trucks in North America as well as increased demand in construction markets had favorable impacts on revenues. The segment had EBIT of $376 million compared to $377 million in the corresponding quarter last year.

Revenues from the Component segment remained flat at $1.0 billion compared with the year-ago level. Higher demand in North America and better product content in Brazil offset the weaker demand in Europe and China. EBIT was $116 million or 11.2% of sales compared with $120 million or 11.6%.

Revenues from the Power Generation segment also remained flat at $909 million compared with the 2011-quarter. The positive effect of higher revenues in North America was offset by the negative impact from lower demand in Europe, China and Latin America. Segment EBIT was $94 million, or 10.3% of sales, compared with $105 million, or 11.6%.

Revenues from the Distribution segment rose marginally by 1% to $794 million, driven by strong parts and service growth, which offset the impacts of weaker demand in the North American oil and gas market, and the power generation market in the Middle East. Segment EBIT was $92 million, or 11.6% of sales, compared with $106 million, or 13.5%.

Financial Position

Cummins had cash and cash equivalents of $1.15 billion as of July 1, 2012 compared with $1.48 billion as of December 31, 2011. Long-term debt was $653 million as of July 1, 2012 versus $658 million at the end of 2011.

Cash flow from operating activities declined to $397 million in the first two quarters of 2012 from $744 million in the same period of 2011. Capital expenditures increased to $266 million from $215 million in the first half of 2011.

Guidance

Cummins expects revenues of $18 billion for 2012. It also expects EBIT margin in the range of 14.25% to 14.75% during the year.

Share Repurchase

In February 2011, the Board of Directors of Cummins authorized a share repurchase up to $1 billion shares. As of April 1, 2012, the company had $474 million worth of shares remaining under its repurchase program. In the second quarter of 2012, the company repurchased 1.8 million shares for $196 million, leaving $278 million worth of shares remaining to be repurchased under its present authorization.

Dividend

The Board of Directors approved a 25% hike in quarterly cash dividend of common stock to 50 cents per share from 40 cents. The increased dividend is payable on September 1, 2012 to shareholders of record as of August 22, 2012.

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.

The company faces stiff competition from Caterpillar Inc. ( CAT - Analyst Report ) and Navistar International Corporation ( NAV - Analyst Report ) . Currently, the stock retains a Zacks #4 Rank, which translates into a short-term Sell rating.