Cummins Inc.’s second-quarter revenue dropped nearly 10 percent compared to the same period last year, mirroring a decline it reported in the first quarter. As a result, the Columbus-based global company lowered its year-end revenue projection.
In response, Cummins stock at Tuesday’s market close traded at $121.04, down 76 cents (0.62 percent) from Monday’s close of $121.80.
Local analysts said that what ended up being a minor drop in stock price is an indication that Cummins is managing its challenges well and its profit margins are solid.
In its second-quarter earnings report, the company beat Wall Street earnings-per-share expectations by more than 20 cents.
Nearly 50,000 shares of Cummins stock changed hands Tuesday, ranging from a high of $123.71 to a low of $119.16.
Lower truck production in North America and weak global demand for off-highway and power generation equipment contributed the most to declining sales. A strong U.S. dollar also negatively impacted revenue by about 1 percent compared to the prior year, Cummins reported Tuesday.
Second-quarter revenue of more than $4.5 billion decreased nearly 10 percent from more than $5 billion during the same reporting period a year earlier.
Earnings before interest and taxes in the second quarter fell to $591 million from $721 million in the prior year.
Net income of $406 million ($2.40 per diluted share) was down from $471 million ($2.62 per diluted share) in the year-ago quarter. However, analysts said Wall Street was expecting earning per share to be in a range of $2.12 to $2.16.
Revenue in North America fell 13 percent while international sales declined by 4 percent. Revenue in the Middle East, Mexico and Brazil declined the most among international sales.
In May, Cummins reported that its first-quarter revenue had decreased nearly 9 percent from the same time in 2015, falling to slightly less than $4.3 billion from a little more than $4.7 billion.
Also Tuesday, Cummins adjusted its full-year revenue forecast to be down 8 to 10 percent from 2015. The forecast is lower than the company’s previous projection of a 5 to 9 percent drop. The adjustment is primarily due to a lower outlook for North America truck production and weaker demand in global off-highway markets, Cummins said.
However, earnings before interest and taxes are expected to be in the range of 11.6 to 12.2 percent of sales, unchanged from three months ago, the company reported.
“We made strong progress in our cost-reduction initiatives in the second quarter, while continuing to invest in and launch new products that will drive profitable growth in the future,” Tom Linebarger, Cummins chairman and CEO, said in a news release.
Cummins recently unveiled three new engines intended to meet new greenhouse gas and fuel efficiency standards next year.
- X15 Efficiency Series: Adjusts to grade, vehicle weight and driver input from the throttle position to deliver greater fuel economy.
- X15 Performance Series: For heavy-haul, vocational and emergency vehicles.
- X12 Medium Bore: For regional-haul, intracity delivery and vocational trucks.
Linebarger noted that the company is continuing efforts to return value to shareholders through dividends and share repurchases. Cummins repurchased 1.8 million shares of its stock in the second quarter.
“Benefits from restructuring actions, material cost-reduction initiatives and improvements in product quality helped to mitigate the impact of weak demand in a number of our largest markets and will position the company for stronger performance when markets improve,” Linebarger said.
The restructuring Linebarger noted included combining the company’s Power Generation segment with its high-horsepower unit to create the Power Systems segment. The high-horsepower unit previously had been part of the Engine business.
“When we have a downturn we want to use it as an opportunity to improve efficiency,” Linebarger told analysts during a conference call Tuesday.
Cummins’ Power Systems product line includes:
- Power generation — generators ranging from 2 kilowatts to 3.5 megawatts.
- Industrial — diesel and natural gas engines up to 5,500 horsepower for mining, rail, marine and oil and gas equipment, for example.
- Generator technologies — A/C generator/alternator products.
Sales in the Power Systems segment fell 16 percent, from just more than $1 billion to $921 million, due to weak demand for power generation equipment and industrial engines, Cummins said.
Engine segment sales of $2 billion represented a nearly 14 percent decline from the 2015 mark of more than $2.3 billion. On-highway revenue declined 15 percent because of weaker truck production in North America, the company said.
The segment also incurred a $39 million charge to increase its estimate for fixing a wash coat quality problem in a third-party, after-treatment system dating to the fourth quarter of 2015. Initially, a software fix was believed to be the solution, but now Cummins has determined that a hardware fix will work better, Rich Freeland, president and chief operating officer, told analysts during a conference call.
The Components segment reported a sales decline of more than 8 percent, falling from nearly $1.4 billion to a little less than $1.3 billion. Downward sales in North America because of reduced truck production partially offset growth in China, Cummins said.
Distribution was the only segment to report an increase in sales. The 3.3 percent bump, from almost $1.5 billion to more than $1.54 billion, was due to previous acquisitions but mitigated by a decline in sales in North America and the Middle East and the negative impact of the strong U.S. dollar, the company said.
Analysts react
What’s important to remember is that Cummins’ stock price has been rising steadily this year, said Scott DeDomenic, senior vice president and an analyst with Hilliard Lyons in Columbus.
After October’s announcement of a global workforce reduction of 2,000 employees, the stock was trading at less than $90 in December and January. As recently as June, Cummins stock was trading around $106 per share.
Also notable is that profit margins on some products are up despite sales declines, which is because the company has reduced costs and improved efficiency, DeDomenic said.
For example, the company announced Tuesday it would close a filtration manufacturing plant in Turkey, Linebarger told analysts during a conference call. He added that plans to close three Power Systems plants in India, Mexico and the United Kingdom are on track.
Cummins is doing the right things to manage costs, and it’s notable that in tough times such as these that the company is still highly profitable because of its diversified business structure, said Mark Foster, chief investment officer of Columbus-based Kirr, Marbach and Co. Decades ago Cummins would have lost money in a quarter such as this, Foster said.
Craig Kessler, chief investment officer for Columbus-based Kessler Investment Group, said he thinks the increasing price of oil could lead to benefits for Cummins in the third quarter as customers look for more fuel-efficient engines for their vehicles.
Kessler described Cummins as “leveraged for upside” so that it can take advantage when various markets improve.
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Tuesday’s close: $121.04
Monday’s close: $121.80
Change: -76 cents (-0.62 percent)
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“We made strong progress in our cost-reduction initiatives in the second quarter, while continuing to invest in and launch new products that will drive profitable growth in the future.”
— Tom Linebarger, Cummins chairman and CEO
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