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Cummins Misses Estimates

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Cummins Inc. (CMI - Free Report) reported a 19.1% fall in adjusted earnings per share to $1.78 in the third quarter of 2012 from $2.20 in the year-ago quarter. Net income declined 20.6% to $336.0 million from $423.0 million in the third quarter of 2011. With this, profits in the quarter missed the Zacks Consensus Estimate by 6 cents per share.

The decrease in earnings was due to uncertainty in most of the markets served by the company. The company has actively responded to this situation by canceling or delaying projects, reducing production at some of its manufacturing plants, cutting discretionary expenses. It also plans to reduce workforce by 1000 to 1500 people by the end of this year.

The company’s revenues for the quarter dipped 11% to $4.1 billion, lower than the Zacks Consensus Estimate of $4.2 billion. The decline in revenues was driven by a 21% decline in revenues in the international market, which offset the 2% rise in revenues in North America.

Earnings before interest and taxes (EBIT) were $496.0 million, or 12% of sales, in the quarter, down 22.5% from $640.0 million or 13.8% of sales in the third quarter of 2011.

Segment Accomplishments

Revenues from the Engine segment went down 14.5% to $2.5 billion. The decrease in revenues was due to sluggish demand in North American heavy and medium duty truck, oil and gas and mining markets, weak demand for trucks in Brazil and in the construction market in China.

Meanwhile, higher demand for light duty truck and construction engines in North America had favorable impacts on revenues. The segment had EBIT of $239.0 million (9.5% of sales) versus $349.0 million (11.8%) in the corresponding quarter last year.

Revenues from the Component segment declined 7.6% to $938.0 million, due to sluggish demand in on-highway markets in North America, Europe and China, which offset the higher product content in Brazil. EBIT was $89.0 million or 9.5% of sales compared with $113.0 million or 11.1%.

Revenues from the Power Generation segment decreased 6.9% to $814.0 million, driven by weak demand in Europe, China, the Middle East and Latin America, partially offset by higher revenues from North America. Segment EBIT was $73.0 million, or 9% of sales, compared with $92.0 million, or 10.5%.

Revenues from the Distribution segment rose marginally by 2% to $801.0 million, driven by growth in North America, China and the Middle East, which offset the impacts of lower sales in Africa, Europe and Asia Pacific. Segment EBIT was $99.0 million, or 12.4% of sales, compared with $104.0 million, or 13.3%.

Financial Position

Cummins had cash and cash equivalents of $1.03 billion as of September 30, 2012 compared with $1.48 billion as of December 31, 2011. Long-term debt was $670.0 million as of September 30, 2012 versus $658.0 million at the end of 2011.  

Cash flow from operating activities declined to $787.0 million in the first nine months of 2012 from $1.4 billion in the same period of 2011. Capital expenditures increased to $424.0 million from $377.0 million in the first nine months of 2011.


Cummins expects revenues of $17.0 billion for 2012, which is lower than the previous guidance of $18.0 billion. It also expects EBIT margin of 13.5%, down from the previous estimate of 14.25%–14.75% during 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.

The company faces stiff competition from Caterpillar Inc. (CAT - Free Report) and Navistar International Corporation (NAV - Free Report) . Currently, the stock retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating.

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