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Cummins records second best sales, profits

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A weakening global economy lowered Cummins Inc.’s sales by 4 percent last year, and the company projects a similar sales trajectory for this year because of continued worldwide economic difficulties.

Nonetheless, the Columbus-based company Wednesday announced its second-best year in terms of sales and profit — and shares rose 2.6 percent as Cummins said it has seen recovery in some markets, including Brazil and North America.

Local analysts said the company remains well-poised to take advantage of sales opportunities when the global economy returns to more solid growth.

Cummins’ profits in 2012, at nearly $1.66 billion, fell 10.3 percent, from the record $1.85 billion profit the company generated in 2011.

Sales for the year, at $17.3 billion, were down 4 percent from a year earlier. A sales gain of 9 percent in North America was offset by an international sales drop of 15 percent, primarily because of weakness in Europe, Brazil and China.

Fourth-quarter revenues fell 13 percent from a year earlier, while fourth-quarter profit fell 30 percent, dragged down in part by costs related to global job reductions.

“After a strong start to the year, demand declined across most geographies and end markets in the second half of 2012 as the global economy slowed,” Tom Linebarger, chairman and chief executive officer, said in a news release.

Mark Foster, chief investment officer of Columbus-based Kirr, Marbach & Co., said solid orders in the North American heavy-duty truck market could bode well for employment in Columbus — although he warned that company management probably would hesitate to add employees to make sure the higher number of orders was continuing.

In the fourth quarter, three of four business units posted sales declines compared to the fourth quarter of 2011.

  • The Engine segment generated sales of $2.5 billion, down 18 percent, as weaker demand for heavy-duty trucks in North America and global construction markets more that offset higher demand for bus and light-duty engines in North America. The segment recorded earnings before interest and taxes of $252 million, down from $368 million a year earlier.
  • The Components unit posted sales of $939 million, down 14 percent from a year earlier as lower demand in North America and Europe more than offset higher sales for after-treatment systems in Brazil. The segment’s earnings before interest and taxes, at $78 million, were down from $132 million in the fourth quarter of 2011.
  • The Power Generation segment recorded sales of $765 million, down 17 percent from a year earlier. Sales declines in international markets outweighed higher demand in North America. The segment’s earnings before interest and taxes fell to $42 million, down $45 million from a year earlier.
  • The Distribution unit posted sales of $907 million, up 9 percent from a year earlier — though flat excluding the impact of acquisitions. The unit’s earnings before interest and taxes were $84 million, down from $87 million a year earlier.

Based on current conditions, Cummins said it expects revenues for 2013 to be flat or down 5 percent.

Craig Kessler, president and chief investment officer of Columbus-based Kessler Investment Group, said Cummins’ forecast keeps in mind Europe’s continuing struggles and the cloud hanging over the U.S. economy because of the upcoming debt-ceiling negotiations.

Cummins’ forecast is based on an honest look at current conditions, Kessler said. But he emphasized that as some of those issues get resolved, Cummins could see an unexpected boost in sales and profits.

“There’s a real possibility that we’ll get an uptick in business,” Kessler said.

The company’s shares on Wednesday rose $2.99, or 2.55 percent, closing at $120.38. Volume was more than double the three-month average. The Dow Jones industrial average and the Standard and Poor’s 500 stock indices were virtually unchanged Wednesday.

Despite global economic uncertainties, analysts are seeing that Cummins has reduced costs, gained market share and is preparing for growth, Kessler said.

Analysts also have appreciated that Cummins’ leadership responded to the weaker demand in the second half of last year very quickly and let analysts know about the weaknesses the company was seeing.

“This is how the market rewards them,” Kessler said.

Foster said markets reacted favorably to Cummins’ report in part because its margins, meaning the difference between sales and the cost of those sales, improved from the third to the fourth quarters.

Cummins management moved quickly to the weakening global economy by reducing costs, Foster said.

That means once markets, especially overseas, generate significant growth again, the company should be able to take advantage of sales opportunities.

“I think there’s reason for optimism,” Foster said.

Kessler agreed: “They’re positioning themselves to grow .. and to do it in an effective way.”

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