Cummins Inc. (CMI)

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Cummins (CMI)

Q4 2011 Earnings Call

February 02, 2012 10:00 am ET

Executives

Mark Smith -

N. Thomas Linebarger - Chairman and Chief Executive Officer

Patrick J. Ward - Chief Financial Officer and Vice President

Analysts

Henry Kirn - UBS Investment Bank, Research Division

Andy Kaplowitz - Barclays Capital, Research Division

Michael Shlisky - JP Morgan Chase & Co, Research Division

Robert Wertheimer - Vertical Research Partners Inc.

Jerry Revich - Goldman Sachs Group Inc., Research Division

David Raso - ISI Group Inc., Research Division

Andrew M. Casey - Wells Fargo Securities, LLC, Research Division

Timothy J. Denoyer - Wolfe Trahan & Co.

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Eli S. Lustgarten - Longbow Research LLC

Jamie L. Cook - Crédit Suisse AG, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Cummins Inc. Earnings Conference Call. My name is Jasmine, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, to Mr. Mark Smith, Executive Director, Investor Relations. You may proceed.

Mark Smith

Thank you, Jasmine. Good morning, everyone, and welcome to our teleconference today to discuss Cummins' results for the fourth quarter and full year 2011. Participating with me today are our Chairman and Chief Executive Officer, Tom Linebarger; and our Chief Financial Officer, Pat Ward. We will all be available for your questions at the end of the teleconference.

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 there are 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 the 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.

With that out of the way, we'll begin with our Chairman and CEO, Tom Linebarger.

N. Thomas Linebarger

Thank you, Mark, and good morning, everyone. Well, as my first teleconference as Chief Executive, I'm conscious of my now retired boss' parting piece of advice which is, don't screw it up.

I'll start with a summary of our fourth quarter and full year results, and then I'll also talk about our outlook for 2012. Pat will then take you through more details of the fourth quarter financial performance and our current forecast for the year.

We delivered strong performance in the fourth quarter, finishing off an outstanding year for the company. Revenues for the fourth quarter were $4.9 billion, an increase of 19% over the fourth quarter of 2010 and a new quarterly record. Fourth quarter EBIT, excluding onetime items, was $677 million, an increase of 25% over the same quarter last year, continuing our trend of increasing profits faster than sales. Including onetime items, EBIT was $768 million.

All 4 businesses reported higher sales than Q4 2010, and the Engines, Components and Distribution businesses all reported record sales in the fourth quarter. Our fourth quarter EBIT percent was 13.8% with the Engine and Components businesses delivering significant improvement from a year ago. The Distribution and Power Gen businesses had declines in EBIT percent from a year ago due to currency, commodity costs and a number of onetime items that we do not expect to repeat. As a result, we expect to see margins improve in both businesses in the first half of 2012.

For the full year, Cummins sales topped $18 billion, an increase of 36% year-over-year, which is terrific performance given the economic uncertainty in a number of regions in 2011. Our revenues have grown a total of the 67% over the last 2 years, and we ended 2011 with revenues 26% above our pre-recession peak. Full year EBIT margin, excluding special items, reached 14.2% in 2011 and was also a new annual record. All 4 businesses delivered double-digit EBIT margins for the year, with the Engine and Components businesses delivering record EBIT percent. In addition to strong revenues and profits, we also had a solid cash flow performance in 2011. Cash from operations totaled $2.1 billion, driven by both our strong earnings results and improvement in our working capital efficiency.

Our strong cash flow performance has allowed us to continue to fund our investments in future growth, while increasing returns to shareholders. We increased our dividend by 52% in the third quarter and repurchased 6.4 million shares during 2011. Our strong performance was also recognized by all 3 major credit rating agencies, with all 3 upgrading our rating during the year.

Before I turn to our outlook for 2012, I'd like to make a few comments about some of our key markets in 2011. Let me start with North America.

Our revenues in North America grew 50% in 2011. The North American heavy-duty truck market reached approximately 230,000 units in 2011, an increase of 77% over 2010 levels. Working very closely with our key OEMs and supply chain partners, we were able to quickly ramp up shipments of our heavy-duty engines while increasing our full year market share to 38%. Fourth quarter shipments of 15-liter engines to the U.S. and Canada were just 14 engines short of our all-time record. Total 15-liter shipments to all markets globally did reach a new record.

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