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Cummins Inc. (CMI)
Q42012 Earnings Call
February 06, 2013 10:00 am ET
Mark Smith - Executive Director of Investor Relations
Tom Linebarger - Chairman of the Board, Chief Executive Officer
Patrick Ward - Chief Financial Officer, Vice President
Richard Harris - Vice President, Chief Investment Officer
Richard Freeland - Vice President, President of Engine Business
Stephen Volkmann - Jeffries
Tim Denoyer - Wolfe Research
Jamie Cook - Credit Suisse Securities
Robert Wertheimer - Vertical Research Partners
David Raso - ISI Group
Jerry Revich - Goldman Sachs
Mike Shlisky - JPMorgan
Andrew Kaplowitz - Barclays Capital
Previous Statements by CMI
» Cummins Management Discusses Q3 2012 Results - Earnings Call Transcript
» Cummins Management Discusses Q2 2012 Results - Earnings Call Transcript
» Cummins' CEO Discusses Q1 2012 Results - Earnings Call Transcript
» Cummins' CEO Discusses Q4 2011 Results - Earnings Call Transcript
I would now like to turn the conference over to your host for today, Mr. Mark Smith, Executive Director of Investor Relations. Please proceed.
Thank you, and good morning, everyone. Welcome to our teleconference today to discuss Cummins' results for the fourth quarter of 2012. Participating with me today are our Chairman and Chief Executive Officer, Tom Linebarger, our Chief Financial Officer, Pat Ward, and the President of our Engine Business, Rich Freeland. We will all be available for your questions at the end of the conference.
Before we start, please note that some of the information that you will hear or be given today will consist of forward-looking statements within the meaning of the Securities Exchange Act of 1934. Such statements express our forecasts, expectations, hopes, beliefs and intentions on strategies regarding the future. Our actual results could differ materially from those projected in such forward-looking statements because of a number of risks and uncertainties.
More information regarding such risks and uncertainties is available in the forward-looking disclosure statement, in the slide deck and our filings with the Securities and Exchange Commission, particularly the risk factors section of our most recently filed annual report on Form 10-K and any subsequently filed quarterly reports on Form 10-Q.
During the course of this call, we will be discussing certain non-GAAP financial measures and we refer you to our website for the reconciliation of those measures to GAAP financial measures. Our press release with a copy of the financial statements and a copy of today's webcast presentation are available on our website at www.cummins.com under the heading of Investors and Media.
Now, I would like to turn it over to our Chairman and CEO, Tom Linebarger.
Thank you, Mark. Good morning, everyone. I will start with a summary of our fourth quarter and full year results, and then I will also talk about our outlook for 2013. Pat will then take you through more details of our fourth quarter financial performance and our forecast for this year. In the fourth quarter we made good progress in reducing inventory throughout the supply chain and largely completed our restructuring actions.
During our second quarter earnings call we targeted $200 million in inventory reductions in the second half of the year. As demand continues to weaken, we made more of the cuts to production in the fourth quarter. Excluding the impact of acquisitions and currency movements, we reduced inventory by $355 million in the fourth quarter for a total reduction of $428 million in the second half of the year. We expect to make further improvements in working capital efficiency this year.
Revenues for the fourth quarter were $4.3 billion, a decrease of 13% compared to the fourth quarter of 2011. Fourth quarter EBIT, excluding one-time items, was $552 million compared to $677 million in the same quarter last year, resulting in a decremental EBIT margin of just under 20%. Revenues in the engine business, components and power generation all declined year-over-year, as we experienced weak demand in most major markets. Revenues in the distribution business were essentially flat year-over-year excluding acquisitions.
Reviewing 2012 overall, demand in the U.S. Start out strong but weakened as the year progressed. In Brazil and China, we expected a difficult start to the year but the anticipated and improvement in the second half did not materialize with the economies of both countries continuing to slow. After a solid first quarter of 2012, the Indian economy also faltered with the third quarter GDP the lowest in a decade. Europe remained weak all year as expected and markets in the Middle East and North Africa were negatively impacted by events surrounding the Europe's spring.
For the full year Cummins sales were $17.3 billion, a decrease of 4% year-over-year. Despite lower revenues, we were able to deliver record gross margins in 2012 due to lower product coverage costs, lower material cost and supply chain improvement. Full year EBIT margin, excluding special items, reached 13.7% in 2012, a decrease from 14.2% in 2011. EBIT decreased as a percent of sales due to lower joint venture earnings and continued investments in selling, admin and research activity to support the future growth of the company, which offset improvement in gross margins.
Before I turn to our outlook, I would like to make a few comments about some of our key markets in 2012. Our revenues in North America grew 9%, but this simple statistic does reflect the changes we experienced as the year progressed. After seeing year-over-year growth of 40% in the first quarter, growth slowed to 12% in the second quarter, 2% in the third and fourth quarter revenues actually dropped by 8% as the slowing U.S. economy and decline in business confidence impacted demand across multiple end markets.
The North American heavy duty truck market reached approximately 250 units in 2012, the increase of 9% over 2011 levels. Our full year market share was 39%, up from 38% the year before and we delivered a record number of ISX 15-liter engines in 2012. The U.S. medium-duty truck market reached approximately 107,000 units in 2012, an increase of 9%. We continue to be the market leader in medium-duty truck engines with a market share of 52%.