Cummins Inc.‘s (CMI) adjusted net income for the third quarter of 2010 was $251 million or $1.28 per share, rising significantly from the year-ago net income of $95 million or 48 cents per share.

Net income of $251 million excluded a pre-tax benefit of $32 million obtained from a favorable legal ruling in Brazil on the tax treatment of imports during the period of 2004-2008. However, earnings per share of $1.28 failed to live up to the Zacks Consensus Estimate of $1.40.

Besides, Cummins had Earnings before Interest and Taxes (EBIT) of $449 million (13.2% of sales), up from $177 million (7% of sales) in the third quarter of 2009. Reported EBIT in 2009 third quarter excluded the restructuring costs of $22 million.

Sales for the company amounted to $3.40 billion in the third quarter, up 34% from $2.53 billion in the same quarter last year mainly driven by improved activities in the international markets. Cummins missed the Zacks Consensus Estimate by nearly $79 million. Each of its four reportable segments experienced sufficient growth during the quarter.

Segment Sales Details

The Engine segment contributed $2.1 billion in sales, up 44% from $1.4 billion, a year ago. Total on-highway sales increased 17%, industrial sales increased 72% and stationary power engine sales increased 144% led by improved power generation demand for high horsepower engines. Segment EBIT was $223 million (10.8% of sales) versus last year’s $61 million (4.2% of sales).

Sales from Power Generation totaled $791 million, again up 44% from $549 million during the corresponding period in 2009. The primary growth facilitating factors in this segment are the 64% rise in commercial products sales followed by consumer sales, which increased by 32% and commercial projects which grew by 26%.

Sales from countries like India, Latin America, South Pacific and the U.K. increased 68% offsetting the 3% decline experienced in North American sales. Segment EBIT was $97 million (12.3% of sales) versus last year’s $23 million (4.2% of sales).

Sales from Component division were $769 million, up 30% sequentially from $591 million in 2009. Improvements were evident in Emission Solutions sales (up 47%), Turbo Technologies sales (up 38%), Filtration sales (up 18%) as well as in sales from Fuel Systems (up 17%). Segment EBIT was $63 million (8.2% of sales) versus last year’s $31 million (5.2% of sales).

Distribution sales amounted to $573 million, up 36% from $422 million during the prior-year quarter driven by improved sales across all regions and all segments. EBIT for the segment was $74 million (12.9% of sales) versus last year’s $55 million (13.0% of sales).

Financial Position

Cummins had cash and cash equivalents of $937 million at the end of third quarter 2010 compared with $686 million at the end of third quarter 2009.  Besides, total long-term debt as of the same period in 2010 was $732 million versus $621 million as of the corresponding period in 2009. 

Cash flow from operating activities was $619 million in the first nine months of 2010 as compared with $730 million during the same period last year. During the quarter, Cummins repurchased shares worth $79 million, taking the total to $389 million of share repurchases under the current $500 million authorization.

Cummins also announced 26.25 cents per share of quarterly cash dividend on its common stock, allowing a 50% increment from 17.5 cents.

Guidance

Cummins raised its full-year financial guidance to an EBIT of 12.5% of sales on revenues of $13 billion given its previous performances along with its next quarter expectations.

The company exhibited a strong third quarter with great success in international markets. Moreover, the company has ample scope to expand and improve its manufacturing operations.

Cummins has a strong cash position that can enable it to make sufficient investments to meet the growing demand for its products. Thus, given these possibilities, Cummins Inc. has a Zacks #2 Rank (Buy) in the short term and Outperform recommendation in the long term.

 
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