Cummins Profit Up 7.7% as Strong U.S. Sales Lift Results

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The Wall Street Journal / July 28, 2014

Cummins's second-quarter earnings rose 7.7%, as strong revenue growth from North America bailed out the engine maker's weakening overseas businesses.

Cummins raised its sales outlook for the year, but left its profit-margin forecast unchanged, underscoring the company's cautious approach to the remainder of the year.

Cummins's solid domestic performance in the face of sluggish international demand is consistent with the patterns reported by Caterpillar and other durable-goods manufacturers.

Cummins stock was recently trading down 3.8% at $144.51.

Cummins’ second-quarter revenue from the U.S. and Canada rose 14% from a year earlier on rising sales of commercial truck engines and components, and additional revenue from the purchase of independent distributors of Cummins's products. But revenue from the rest of the world slipped 1%, causing Cummins to scale back forecasts for certain emerging economies.

The Columbus, Indiana, company now expects revenue from Brazil to fall by as much as 20% this year after second-quarter sales in Brazil dropped 16% to $194 million. The company had previously forecast a 15% decrease in sales, but plunging demand for commercial trucks in Brazil prompted the company to further scale back its forecast.

Cummins expects its sales in China this year to rise 10% after earlier forecasting a 15% increase. Its second-quarter revenue from China rose 10% from a year earlier to $865 million, as demand for its engines increased ahead of stricter pollution standards that are expected to increase prices for engines.

But Cummins described major end-markets in China as deteriorating. Commercial truck sales in China fell 10% industrywide during the second quarter. Meanwhile, Cummins said it expects industrywide sales of construction excavators to drop 14% this year from 2013.

"Demand in the construction market has softened from already weak levels," said Chairman and Chief Executive Tom Linebarger during a conference call Monday with analysts. "The pace of investment in infrastructure has not rebounded in China." Mr. Linebarger said China's dependence on construction projects to drive economic growth is lessening in the wake of more consumer-driven economic growth.

Improving sales from North America allowed Cummins to offset the international weakness. Sales of heavy-duty truck engines rose 10% from a year earlier, while medium-duty engine sales rose 9% on rising orders from U.S. truck manufacturers.

Meanwhile, sales of components rose 15% to $1.28 billion and profit from the unit rose 36% to $185 million, reflecting increased demand from truck maker Navistar International Corp.for Cummins's exhaust-treatment systems.

Engine sales overall rose 3.3% to $2.74 billion, but higher-than-expected warranty costs on 2013 truck engines trimmed pretax profit from engines by 8% to $311 million. Cummins expects engine sales this year to increase by 6% to 8%, primarily from higher demand from the truck industry.

Revenue from Cummins's distribution business rose 30% to $1.2 billion and profit from the unit increased 26% to $126 million. The company has been purchasing independent dealer/distributors of Cummins products and predicted the acquisitions will add $500 million to revenue this year and contribute 30 cents to the company's per-share earnings this year.

Cummins raised its overall sales growth outlook for 2014 to a range of 8% to 11% from 6% to 10% previously. The company expects the margin on income before taxes and interest expenses at 12.75% to 13.25%, implying earnings per share of about $9 this year, roughly in line with analysts' estimates.

For the quarter ended June 29, Cummins reported a profit of $446 million, or $2.43 a share, compared with $414 million or $2.20 a share, a year earlier. Revenue rose 6.9% to $4.84 billion.