Cummins Inc.’s (CMI) earnings per share increased 22.1% to $2.32 in the third quarter of 2014 from $1.90 in the year-ago quarter. Earnings also surpassed the Zacks Consensus Estimate of $2.28 per share. Net income came in at $423 million compared with $355 million in the third quarter of 2013.
Revenues in the quarter rose 15% year over year to $4.9 billion, mainly driven by stronger demand in on-highway markets and distributor acquisitions in North America, additional content growth for the Components business in Europe and China, and higher engine sales to commercial marine customers. Further, revenues surpassed the Zacks Consensus Estimate of $4.71 billion.
Revenues from North America improved 19% year over year in the third quarter of 2014. Additionally, revenues from international markets increased 10% year over year due to strong demand in Western Europe and China, partially offset by weak performance in Brazil.
Operating income increased to $659 million from $524 million a year ago. Earnings before interest and taxes (EBIT) improved to $684 million (14% of sales), compared with $536 million (12.6% of sales) a year ago.
Segment Performance
Sales in the Engine segment rose 13% to $2.8 billion on increased demand in on-highway markets in North America and in commercial marine markets, partially offset by weakness in the Brazilian truck market. The segment’s EBIT increased to $330 million (11.7% of sales) from $272 million (10.9% of sales) a year ago.
Sales in the Components segment grew 20% to $1.3 billion on the back of strong on-highway demand in Europe, China and North America, partly mitigated by weak demand in Brazil. This segment’s EBIT surged to $172 million (13.4% of sales) from $132 million (12.3% of sales) in the prior-year quarter.
Sales in the Power Generation segment went up 6% to $754 million due to improved sales in China, Africa and Middle East, partially mitigated by deteriorated sales in Mexico and Eastern Europe. The segment’s EBIT rose to $60 million (8% of sales) from $45 million (6.3% of sales) in the third quarter of 2013.
Sales in the Distribution segment rose 37% to $1.3 billion on the back of benefits from acquisitions and higher demand in North America, Asia and Africa. The segment’s EBIT improved to $131 million (10.1% of sales) from $86 million (9.1% of sales) a year ago.
Financial Position
Cummins’ cash and cash equivalents decreased to $2.33 billion as of Sep 28, 2014 from $2.70 billion at the end of 2013. Long-term debt decreased to $1.61 billion as of Sep 28, 2014 from $1.72 billion as of Dec 31, 2013. Consequently, the debt-to-capitalization ratio stood at 17.2% as of Sep 28, 2014 compared with 18.7% as of Dec 31, 2013.
In the first nine months of 2014, Cummins’ net operating cash flow increased to $1.39 billion from $1.33 billion in the same period a year ago. Capital expenditures declined to $409 million from $417 million in the prior-year period.
Capital Deployment
Cummins is focused on enhancing shareholder value by pursuing aggressive share repurchases and increasing dividend payouts. The company has committed to return 50% of its full-year operating cash flow to shareholders through dividends and share repurchases.
During the reported quarter, Cummins repurchased 1.2 million shares. The company also announced a 25% increase in quarterly dividend to 78 cents per share. The dividend was paid on Sep 2, 2014 to shareholders of record as of Aug 22, 2014.
Thereafter, on Oct 14, Cummins declared a quarterly cash dividend of 78 cents per share, payable on Dec 1, to shareholders of record as of Nov 20.
2014 Guidance
For 2014, Cummins increased the revenue guidance to the range of 10–12% from the previous projection of 8–11%. The upside was driven by higher demand in North America. The company also expects its 2014 EBIT margin in the 13–13.5% range, excluding the impact of cost reduction activities within the Power Generation business that will begin in the fourth quarter. Further, the cost reduction initiatives from the fourth quarter could lead to expenses in the range of $15–$40 million.
Currently, Cummins carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include Toyota Motor Corp. (TM), Tata Motors Ltd. (TTM) and Gentex Corp. (GNTX), all of which sport a Zacks Rank #1 (Strong Buy).
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