Cummins Restructures, Cuts Outlook on Weak Demand

Image source: Cummins.

Economic conditions across the globe have been sluggish recently, as countries that once enjoyed red-hot growth rates have had to come to terms with the downward phase of the business cycle. Amid struggles that have slowed down levels of economic activity, especially in capital-intensive sectors like construction, natural resources, and manufacturing, engine maker Cummins has seen many of its key customers pull back on the capital expenditures that it relies on to keep growing.

Coming into Tuesday morning's third-quarter financial report, Cummins investors had hoped that the company would be able to avoid the fate that heavy-equipment maker Caterpillar and other companies in the sector have suffered, but the results failed to live up to their expectations. Moreover, Cummins took the more extreme measure of announcing restructuring plans and reducing its outlook for the rest of the year, and the stock fell sharply in response.

Let's look more closely at how Cummins did over the past quarter and what steps it's taking to try to improve its performance going forward.

Cummins stalls outCummins' third-quarter results fell well short of the optimistic views that most investors had for the company. Revenue fell 5.5% to $4.62 billion, which was far worse than the roughly breakeven sales figures that those following the stock had expected to see. Net income fell more precipitously, with a 10% decline to $380 million working out to earnings of $2.14 per share. The consensus forecast had called for a solid gain to $2.60 per share, and so the extent of Cummins' earnings miss was both clear and extreme.

Looking more closely at the numbers, Cummins once again showed relative strength in its home North American market compared to its international operations. North American sales rose 4%, which was much slower than the 12% year-over-year growth that Cummins managed in the second quarter. Internationally, sales fell 18%, which was 12 percentage points worse than its second-quarter performance, as Cummins once again blamed weak foreign currencies as well as poor conditions in key emerging markets like Brazil and China as well as in the economically challenged European region. Overall, currency impacts cut 4 percentage points of Cummins' revenue, with the company citing weaker demand in off-highway and power-generation markets.

Cummins' major segments all saw organic sales drop for the quarter, with only the distribution segment posting revenue gains based solely on acquisitions. Engine sales fell 10%, with segment operating profits falling by nearly a quarter. Power generation saw an even steeper 13% drop in sales, and operating income fell by nearly a third as declines came from nearly everywhere worldwide. Even the relatively strong components business suffered a 4% drop in sales, hitting segment profits by about 10% as poor conditions in Brazil offset higher sales in China and North America.

CEO Tom Linebarger didn't mince words in his comments. "Global off-highway and power-generation markets have been weak for some time and are worsening," Linebarger said, and "Industry orders in key end markets in Brazil and China are at multi-year lows and showing no signs of improvement in the near-term." Linebarger remained optimistic that the company can make it through tough times but emphasized that it will take extraordinary measures to do so.

How Cummins is planning for the futureIn response to the poor results, Cummins announced a set of restructuring and cost-cutting measures. It will cut up to 2,000 jobs from its workforce, with most coming by the end of 2015. The company hopes that the moves will save $160 million to $200 million annually once complete, but it also held open the possibility that further moves would be necessary in the future. Caterpillar has had to make similar moves, and has also had to go back to the well multiple times in recent years to get as much benefit as possible from cost-cutting moves.

Cummins also cut its guidance for 2015, essentially giving up on the likelihood that it can squeeze out any revenue growth from the remainder of the year. It reduced its sales guidance to a range of flat to down 2%, about 4 percentage points worse than its previous range. Pre-tax operating margins will also be weaker than previously expected, with the company setting a range of 12.75% to 13%, down from the 13.5% to 14% range it gave earlier.

Despite the upbeat picture that executives tried to paint in its restructuring announcement, Cummins investors weren't pleased with the results, sending the stock falling by 10% in the first hour of pre-market trading following the announcement and setting the tone for a poor day for the stock. Even though the company remains resolute that it can survive tough conditions worldwide, investors only now seem to understand just how bad those conditions actually are and how long it might take it to recover fully from them.

The article Cummins Restructures, Cuts Outlook on Weak Demand originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Cummins. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.