Cummins beats revenue expectations, stock price rises

Cummins Inc. reported Tuesday that first-quarter revenue of nearly $4.3 billion decreased 9 percent from the same period last year, but that was good news to Wall Street as industry analysts said the revenue decline was less than expected.

Cummins’ stock closed at $118.60 Tuesday, up from its Monday close of $116.53. The price peaked at $120 at 10 a.m. during Tuesday trading.

“Our results for the first quarter reflect solid execution of our cost-reduction plans in the face of very challenging market conditions,” Chief Operating Officer Rich Freeland said in a Cummins news release. “Benefits from restructuring actions, material-cost reduction projects and lower warranty costs all helped to mitigate the impact of lower sales.”

The Columbus-based company announced in October during its 2015 third-quarter earnings report that it would reduce the global workforce by 2,000 salaried professionals largely because of ongoing declining sales in international markets. Those reductions were completed by December, and Cummins also has made organizational changes.

Cummins announced Tuesday that it has combined its Power Generation segment — which makes generators, for example — and High Horsepower engine business.

“Management is reducing costs, beating the bottom line, meeting expectations on the top line on revenue,” said Scott DeDomenic, senior vice president and analyst with Hilliard Lyons in Columbus.

It’s notable that the company’s full-year revenues projection remains unchanged, with full-year revenues forecast to be off 5 to 9 percent from 2015, DeDomenic said.

Cummins’ earnings before interest and taxes (EBIT) in the first quarter were $484 million, down from $562 million a year ago, reflecting a 14 percent drop.

Net income of $321 million ($1.87 per diluted share) was down from $387 million ($2.14 per diluted share) in the first quarter of 2015. DeDomenic said analysts had expected $1.78 per diluted share this quarter.

Revenue in North America decreased 10 percent while international sales declined by 8 percent. Revenue in Latin America and Asia declined the most in international markets, the company said in its news release.

Lower production in the North American heavy-duty truck market and weak global demand for off-highway and power generation equipment contributed to the drop in sales, the company said in the release. Also, a strong U.S. dollar negatively impacted revenues in international markets by about 3 percent compared to last year, the company said.

The company said its four business segments — Engine, Distribution, Components and Power Generation — all experienced sales declines in the first quarter compared to the same period last year:

Engine: $2.3 billion, down 10 percent due to lower production in the North American heavy-duty truck market and weak demand in power generation, oil and gas, commercial marine and mining markets. About 9,000 fewer heavy-duty engines were shipped in the first quarter. Nearly 5,000 more mid-range engines were shipped, however. Sales increased only in the light-duty automotive market.

Distribution: $1.5 billion, down 1 percent as increased revenue from acquisitions and growth in international markets was offset by lower sales in off-highway markets in North America and the negative impact of currency.

Components: $1.2 billion, down 5 percent because of lower sales in North America and the unfavorable impact of currency offset growth in China.

Power Generation: $550 million, down 19 percent because of weaker sales in most regions, with Asia and Latin America declining the most.

Cummins Chairman and CEO Tom Linebarger said in a Tuesday conference call with analysts that the company has one more distributor left to purchase to complete the process of consolidating distribution, which would occur in the second half of the year.

Linebarger said during the conference call that weakness in international markets has lasted much longer than expected, which is why the company took a series of actions to offset the sales declines.

The combined Power Generation segment and High Horsepower engine business will now be known as the Power Systems segment, the company said.

“The formation of the Power Systems segment combines two businesses that are already strongly interdependent and will allow us to streamline business and technical processes to accelerate innovation, grow market share and more efficiently manage our supply chain and manufacturing operations,” Linebarger said in the news release.

Mark Foster, chief investment officer at Columbus-based Kirr, Marbach and Co., described Cummins’ first quarter results as “a solid quarter in a difficult market.”

The company has expenses under control and is managing well in difficult conditions, Foster said.

Analysts said it was notable that Cummins returned $745 million to shareholders through dividends and share repurchases in the first quarter, which Linebarger said was consistent with the company’s plans to return 75 percent of operating cash flow to shareholders this year.

“That’s a sign of an investor-friendly company,” said Craig Kessler, chief investment officer for Columbus-based Kessler Investment Group.

Kessler said the Cummins stock price has been climbing steadily since January, when it fell to about $80.

Foster and DeDomenic said that in prior decades when Cummins’ revenue was down, the company faced losing money. Now more diversified, Cummins is better able to withstand cycles, and remains financially strong even when revenue is down, capable of returning value to stockholders, they said.

Cummins stock price

Tuesday close: $118.60

Monday close: $116.53

Change: Up $2.07 (+1.78 percent)

Pull Quote

“The formation of the Power Systems segment combines two businesses that are already strongly interdependent and will allow us to streamline business and technical processes to accelerate innovation, grow market share and more efficiently manage our supply chain and manufacturing operations.”

— Tom Linebarger, Cummins Inc. chairman and CEO

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Kirk Johannesen is assistant managing editor of The Republic. He can be reached at johannesen@therepublic.com or (812) 379-5639.