Cummins Earnings: Weak Mining Demand Takes Toll

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Wall Street Journal / July 30, 2013

Cummins Inc.'s second-quarter earnings fell 12%, but the engine maker raised its sales outlook on rising demand for exhaust-treatment systems from truck maker Navistar International Corp.

Cummins, the world's largest engine manufacturer by sales, expects 2013 revenue will be flat with last year's $17.3 billion, an improvement from its April forecast for flat to 5% lower.

Cummins left its pretax margin projection unchanged at 13% to 14% of sales, implying earnings per share of $8 to $8.60. Analysts had been expecting a profit of $7.90 a share on sales of $16.9 billion.

Cummins has been hurt by falling engine demand from heavy-duty truck makers and manufacturers of mining and construction machinery. Cummins is the largest supplier of heavy-duty truck engines in North America, accounting for about 40% of the market. Shipment volume of such engines in North America dropped 19% in the second quarter.

"It's a tough business," said Richard Freeland, president of Cummins's engine business, during conference call Tuesday with analysts, "There are a lot of people fighting in a flat market."

Engine sales for off-road equipment slipped 11% during the quarter because of lower demand from mining and construction machinery makers. Cummins said engine sales to the global mining industry fell 38% as mine operators pulled back on equipment spending in response to lower prices for commodities.

China's construction machinery market remains weak. Industrywide sales of excavators were down 12% in the first quarter from an already dismal year-earlier level. "China is the most perplexing," said Tom Linebarger, Cummins's chief executive. "It's not getting a lot worse, but it's not getting a lot better either."

Cummins's strongest business during the quarter was its parts segment, where sales increased 8%. That business has been helped by rising demand for replacement parts and Navistar's orders for exhaust-treatment systems. Navistar is installing Cummins systems on its heavy and medium-duty trucks since last year when the truck maker abandoned efforts to develop its own treatment system for complying with a federal mandate to reduce nitrogen oxide in diesel-engine exhaust.

Overall for the quarter, Cummins reported a profit of $414 million, or $2.20 a share, down from $469 million, or $2.47 a share, a year earlier. Sales edged up 1.6% to $4.53 billion.