Q1 2013 Earnings Call
April 30, 2013 10:00 am ET
N. Thomas Linebarger - Chairman, Chief Executive Officer and Chairman of Executive Committee
Patrick J. Ward - Chief Financial Officer and Vice President
Richard J. Freeland - Vice President and President of Engine Business
David Leiker - Robert W. Baird & Co. Incorporated, Research Division
Jerry Revich - Goldman Sachs Group Inc., Research Division
Andy Kaplowitz - Barclays Capital, Research Division
David Raso - ISI Group Inc., Research Division
Ann P. Duignan - JP Morgan Chase & Co, Research Division
Timothy J. Denoyer - Wolfe Trahan & Co.
Robert Wertheimer - Vertical Research Partners, LLC
Previous Statements by CMI
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Thank you, Ian. Good morning, everyone, and welcome to our teleconference today to discuss Cummins' results for the first quarter of 2013. Participating with me today are our Chairman and Chief Executive Officer, Tom Linebarger; our Chief Financial Officer, Pat Ward; President of our Engine business, Rich Freeland. We'll all be available for your questions at the end of our prepared remarks.
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 future 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 the website at www.cummins.com under the heading of Investors And Media.
With that out of the way, we'll begin with our Chairman and CEO, Tom Linebarger.
N. Thomas Linebarger
Thank you, Mark. Good morning. I will start with a summary of our first quarter, including comments on the performance of our businesses, then I will talk about our outlook for the full year. Pat will then take you through more details of our first quarter financial performance and our full year forecast. As anticipated, we experienced weak demand in a number of our end markets and geographies in the first quarter.
Revenues were $3.9 billion, a decline of 12% year-over-year. EBIT for the quarter was 11.1% of sales compared to 14.7% a year ago. Excluding the impact of acquisitions, all 4 businesses delivered reductions in SG&A costs for both year-over-year and sequentially, due in part to the restructuring actions we implemented last quarter. The Component segment delivered very strong results this quarter, delivering record gross margins despite revenues being down 7% year-over-year. EBIT was 11.7%, down from 13% a year ago due to lower volumes and higher research and development spending to support future growth. However, EBIT percent improved 280 basis points from the fourth quarter due to higher volumes and overall cost improvement. We expect that the component segment will continue its strong performance this year, as demand in on-highway markets in North America improved from first quarter levels. We have raised our full year EBIT guidance for the component segment, as Pat will cover in more detail.
First quarter revenues for the Distribution business were flat year-over-year. EBIT margins at 12.2% increased 10 basis points compared to a year ago and improved 140 basis points sequentially, due to a strong mix of aftermarket revenues. Our full year EBIT guidance for Distribution is unchanged.
The Engine business experienced the most significant decline in demand with unit volumes down 18% year-over-year and revenues lower by 19%. Unit shipments of High Horsepower engines declined by 24%, due to weakness in mining, oil and gas and power generation markets. EBIT margin for the quarter was 8.5% compared to 13.3% a year ago. Engine business margins were negatively impacted by the lower volumes, especially the sharp decline in shipments of High Horsepower units, as well as higher warranty costs. Performance in our Power Generation business fell short of our expectations in the first quarter. EBIT margin was 6.8%, down from 9.7% year ago and the lowest level since the first quarter of 2010. As a result of the weak performance in the first quarter, we have lowered our guidance for Power Generation for the full year. However, we have not changed our expectations for the business for the rest of the year, as we believe Q1 was a low point.
In total, while we have adjusted our guidance up for Components and down for Power Generation, we are not changing our overall guidance for the company. We still expect revenues to be flat to down 5% for the year, and we still expect to deliver EBIT in the range of 13% to 14% of sales.
Now I want to talk in more detail about our sales and our key markets. As I said, overall company revenues declined by 12% in the first quarter, with revenues in North America declining 15%, international revenues declining 10%. In North America, our revenues were most heavily influenced by a decline in on-highway markets. Our shipment of engines for North American heavy-duty trucks were 19,000 units in the quarter, a decrease of 37%. Demand declined as our industry continued to run at lower production levels following a period of overproduction in the first half of 2012. Retail sales for the industry have exceeded industry production for the last 6 months and OEM backlogs are increasing. We do expect to see sequential improvement through the year, driven largely by replacement demand. For the full year, we are adjusting our forecast for the market size to 233,000 units, down from our previous forecast of 240,000. Our market share for the quarter was 41.6% through February, and we are maintaining our full year market share forecast of 40%. We shipped 11,000 units to the U.S. medium-duty truck market this quarter, a decrease of 23% year-over-year. Demand is expected to increase in Q2 and beyond, as OEMs continue to ramp up their production of 2013 models. We continue to expect a full year market size of approximately 109,000 units in 2013, an increase of 2%, and our market share to be approximately 52%.