--Cummins reports lower sales in emerging markets
--Company expects bigger decline in 2012 revenue from China
--Second-quarter profit tops analysts' expectations.
(Adds details throughout on end markets and business conditions in geographic regions. Quotes from CEO and analyst.)
By Bob Tita
Cummins Inc.'s (CMI) said Tuesday demand for its engines has fallen sharply in China and other overseas markets causing the company's second-quarter profit to slip 7.1% from a year ago.
Cummins topped analysts' profit estimate after the company lowered second-quarter expectations earlier this month. Revenue from the quarter was in line with estimates, but growth was held down by weaker demand from overseas markets and unfavorable currency exchange rates caused by the rising value of the U.S. dollar against other currencies.
Cummins has aggressively expanded its sales and manufacturing operations in China, India, Brazil and other developing countries that offered the prospect of higher sales growth rates than mature markets, such as the U.S. About 35% of the Columbus, Ind., company's sales last year came from fast-growing markets, up from 27% in 2007. But these markets have turned sour lately as government policies to reel in inflation and reductions in government spending on infrastructure projects have slowed economic growth and chilled demand for trucks and machinery that use Cummins engines.
"Clearly, we are experiencing challenge conditions in a number of markets," said Chairman and Chief Executive Tom Linebarger during a conference call Tuesday with analysts. "We are confident that in time demand in Brazil, China and India will improve and these markets will continue to offer higher growth opportunities than in developed markets."
China has become particularly problematic for Cummins. The company supplies engines to a broad swath of end markets there, including the electric power industry, truck manufacturers and the construction machinery industry.
Cummins' second quarter revenue from China dropped 25% from a year ago. The company now expects 2012 revenue from China to be down 13% from 2011, compared with a 5% reduction forecast previously.
"It's a much more volatile economy than we were looking at in the first quarter of the year and it's much harder to predict," Mr. Linebarger said.
Cummins' revenue from construction machinery plunged 55% in the second quarter amid dismal demand for equipment. Like other U.S. companies, Cummins had been counting on a rebound in the equipment market during the second half of 2012. But Mr. Linebarger said the market remains bogged down by high inventories of unsold machinery that are likely to push a rebound in the market into 2013.
"We no longer expect any improvement in demand for the second half of the year," he said. The company predicted that industry-wide sales of construction excavators in China will drop 35% this year from 2011, more than double the decline previously forecast.
Second-quarter sales of engines to all markets slipped 2% from a year earlier to $2.84 billion. Pre-tax income was about flat at $376 million.
Cummins' results were helped by improved demand from North America, particularly from the commercial truck industry. Second-quarter engine sales for heavy-duty commercial trucks rose 16% from year ago to $807 million. But the company added that truck engine orders weakened significantly by the end of the second quarter. The company lowered its production forecasts for heavy-and-medium-duty trucks in North America, China, India and Brazil.
For the quarter, Cummins reported a profit of $469 million, or $2.47 a share, down from $505 million, or $2.60 a share, a year earlier. Excluding asset-sale gains, earnings rose to $2.45 a share from $2.41. Overall revenue decreased 4.1% to $4.45 billion.
Analysts polled by Thomson Reuters most recently projected earnings of $2.28 per share on revenue of $4.47 billion.
Cummins reiterated that it expects 2012 revenue to be flat with 2011 at $18 billion. The company said it expects currency exchange rates to have a negative effect of about $500 million on full-year revenue. The company revised it projected pretax profit margin to a range of 14.25% to 14.75% from 14.5% to 15%. That implies a 2012 profit of $9.25 to $9.75 a share. Analysts expect the company to earn $9.41 a share.
Investors appeared satisfied that Cummins' will be able to deliver on its revised outlook. Cummins shares are down 16% in the past three months, but the stock was recently trading up 7.2% at $97.04.
"The emerging markets stink, and that scared everybody, but it looks like the company has a handle on it now," said Lawrence De Maria, analyst for William Blair & Co.
Write to Bob Tita at firstname.lastname@example.org
--Tess Stynes contributed to this article.
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