Stronger sales and demand in key markets helped Cummins Inc. increase revenues 12.1 percent in the second quarter compared to the same period a year ago, and prompted the company to upgrade its financial outlook for the rest of the year.
The Columbus-based global diesel engine maker and power company recorded revenues of nearly $5.1 billion in the April through June reporting period, up from more than $4.5 billion in the same period in 2016.
Higher demand for trucks and construction equipment in North America and China, and stronger sales to mining and oil and gas customers drove the revenue growth, the company said in a news release. North American revenues increased 13 percent, and international sales increased 11 percent because of demand in China and India, the company added.
Net income of $424 million for the second quarter ($2.53 per diluted share) was up from $406 million ($2.40 per diluted share) a year ago.
Earnings before interest and taxes reached $620 million, compared to $591 million from April through June last year. However, costs for product warranty issues and a quality campaign — about $57 million combined — tempered the second-quarter earnings before interest and taxes, the company said.
“We delivered strong revenue growth in all four operating segments in the second quarter due to improving conditions in a number of important markets where we also have leading share,” Cummins Chairman and CEO Tom Linebarger said in a news release.
“Earnings increased due to solid operational performance, partially offset by higher warranty costs that resulted in second quarter EBIT that was below our expectations. As a result of stronger-than-expected orders in truck and construction markets in North America and China, and improving demand from global mining customers, we have raised our 2017 full-year outlook,” he added.
Cummins is projecting that full-year 2017 revenues will be up 9 to 11 percent compared to 2016. Previously Cummins said it expected full-year revenues to be up 4 to 7 percent.
The updated forecast does not include the impact of the company’s new Eaton Cummins Automated Transmission Technologies joint venture, which officially began operations Tuesday, Cummins said. Cummins and power management company Eaton announced a 50-50 joint venture on April 10. Eaton Cummins Automated Transmission Technologies designs, manufactures, sells and supports medium-duty and heavy-duty automated transmissions for commercial vehicle market.
All four of the company’s core business segments — Engine, Distribution, Components and Power Systems — recorded double-digit sales increases in the second quarter. The company said:
Engine sales increased 15.2 percent, to more than $2.3 billion, because on-highway revenues increased by 14 percent and off-highway revenues increased 20 percent, primarily due to increased demand in global truck and construction markets.
Distribution sales grew 11.5 percent, to more than $1.7 billion, because organic sales increased 7 percent and revenue from the acquisition completed in the fourth quarter of 2016 added 6 percent.
Components sales increased 13.7 percent, to almost $1.5 billion, due to international revenue increasing 25 percent, primarily due to China and India. A 6 percent sales increase in North America due to higher heavy and medium-duty truck production also helped.
Power Systems sales grew 10.4 percent, to more than 1 billion, because of greater demand in mining and oil and gas markets.
Cummins has recorded two straight quarters of revenue increases following a string of six consecutive down quarters. The Fortune 200 company’s first-quarter revenues increased 6.9 percent, to nearly $4.6 billion.
Despite the good news the company reported, its stock price fell $10.42 from Monday’s company-record close of $167.90, ending Tuesday at $157.48.
Analysts react
The dip in the stock price reflected Wall Street’s high expectations and disappointment that Cummins’ earnings before interest and taxes and profit margins were not a bit higher, and that the company was dealing with warranty costs, local analysts said.
Wall Street expected Cummins to deliver $2.58 per diluted share for the quarter instead of the $2.53 that it did, said Scott DeDomenic, senior vice president and analyst with the Hilliard Lyons office in Columbus.
Cummins is introducing a lot of new products and some are having reliability issues, DeDomenic added.
“I think they need to get their arms around the warranty costs. They talked about the complexity of engines is higher and products are being used in demanding environments,” said Mark Foster, chief investment officer at Columbus-based Kirr, Marbach & Co.
Other possible contributing factors in the stock price dip are that investors are looking to the third quarter, which is typically a weaker quarter, and that the inventory levels of some auto manufacturers suggest that a slowdown in sales in the auto industry is possible, said Craig Kessler, chief investment officer at Columbus-based Kessler Investment Group.
Despite the warranty costs, local analysts said Cummins had a good quarter and the focus should be on two positives: increased sales and an improved year-end forecast.
Cummins’ stronger sales in the mining market and in China are good signs, Kessler said.
“Overall it’s good news because they took up the sales numbers. On Wall Street, sales can overcome a number of operating issues,” DeDomenic said.
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Tuesday’s close: $157.48
Monday’s close: $167.90
Change: $10.42 (-6.2 percent)
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