Strong sales in North America and internationally drove record fourth-quarter and year-end revenues for Cummins Inc. in 2017, but company profits took a hit because of changes in federal tax laws.
The Columbus-based global diesel engine maker and power company Tuesday announced fourth-quarter revenues of nearly $5.5 billion, representing a nearly 22 percent increase from 2016. That sales total broke the previous quarterly revenue record of $5.3 billion set three months earlier in the third quarter of 2017.
Strong demand for trucks, construction and mining equipment drove the majority of the October-December 2017 revenue increase, and sales in North America and international markets both increased by 22 percent, the Fortune 200 company said in a news release.
Full-year revenues for 2017 were slightly more than $20.4 billion, almost 17 percent higher than 2016. Revenues in North America increased 15 percent and international sales increased 19 percent, the company said.
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Cummins’ previous year-end revenue record of more than $19.2 billion was set in 2014.
“The company delivered strong growth, solid profitability and record operating cash flow in 2017,” Cummins Chairman and CEO Tom Linebarger said. “We expect demand to remain strong in many of our core markets in 2018 and profitability to improve as a result of higher sales and continued execution of our cost-reduction initiatives.”
Cummins cost-saving initiatives have included the restructuring of businesses, as well as reducing costs of materials.
Cummins said it is forecasting full-year 2018 revenues to increase 4 to 8 percent.
Despite the sales success, the Tax Cuts and Jobs Acts of 2017, enacted Dec. 22, affected the company’s earnings before interest and taxes (EBIT) and net income (profits).
Fourth-quarter earnings before interest and taxes were $620 million, up from $526 million last year. They would have been $659 million, but were reduced by $39 million because of charges incurred by unconsolidated joint ventures related to U.S. tax reform.
EBIT for the year of more than $2.4 billion increased from the nearly $2 billion posted in 2016.
Cummins recorded a fourth-quarter net income loss of $274 million (a loss of $1.65 per diluted share), compared to net income of $378 million ($2.25 per diluted share) in 2016. Fourth quarter net income included $777 million in one-time charges related to tax reform, the company said.
Full-year net income of $999 million ($5.97 per diluted share) was down from $1.4 billion ($8.23 per diluted share) in 2016. Without the tax-reform charges, the company’s full-year net income would have been $1.8 billion.
Analysts said it’s important to understand that the hit to profits and EBIT are a one-time occurrence, and that Cummins is a healthy company with strong sales, and the reduced corporate tax rate will have greater long-term benefits.
Cummins said in its earnings release that the new tax laws prompted three things:
Remeasurment of deferred taxes
A one-time transitional tax on unrepatriated earnings
Withholding taxes on foreign earnings
“Companies are repatriating money abroad and bringing it back and paying the tax now,” said Scott DeDomenic, senior vice president and analyst with Hilliard Lyons’ office in Columbus.
The lower corporate tax rate made Cummins’ deferred tax assets less valuable, said Roger Lee, senior research analyst with Columbus-based Kirr, Marbach & Co.
The benefit of the tax cut, analysts said, is companies keep more of the money they earn, which in Cummins’ case can be used for mergers and acquisitions or returned to shareholders in the form of greater dividends or stock repurchases.
The company again plans to return at least 50 percent of operating cash flow to shareholders this year, Linebarger said.
All four of Cummins’ business segments experienced fourth-quarter and year-end sales increases compared to 2016. Here’s how the segments performed:
Engine: Fourth-quarter sales of nearly $2.3 billion were up more than 16 percent, and year-end sales of nearly $9 billion increased nearly 15 percent. Increased global demand in truck and construction markets led to on-highway revenues increasing 14 percent, and off-highway revenues increasing 27 percent, the company said. The number of engines sold for heavy-duty, medium-duty and light-duty usage increased for the quarter and year. Changes in tax laws decreased EBIT by $23 million.
Distribution: Sales of more than $1.9 billion in the fourth quarter were up 16 percent. Revenues in North American increased 21 percent, and international markets increased 7 percent, Cummins said. Tax changes negatively impacted EBIT by $4 million. Year-end sales of more than $7 billion increased more than 14 percent.
Components: Fourth-quarter sales of nearly $1.6 billion represented an increase of more than 32 percent, and year-end sales increased nearly 22 percent, to nearly $5.9 billion. Revenues in North America increased 35 percent and international sales rose 30 percent due largely to higher commercial truck production in North American and China. The Eaton Cummins Automated Transmission joint venture posted sales of $95 million. Tax changes negatively impacted EBIT by $12 million.
Power Systems: Sales of $1.1 billion in the fourth quarter rose more than 18 percent, and year-end sales of more than $4 billion represented an increase of more than 15 percent. Demand in the mining, oil and gas, and power generation markets drove the sales increases, the company said.
Cummins launched a fifth core business, electrification, in 2017, and spent the year getting pieces in place to begin producing products.
Cummins last year announced that it would offer a fully electric powertrain — the main components that generate power, such as the engine, transmission and drive shafts — by 2019, and an extended-range powertrain, electrified but with an engine to power the battery, by 2020. The initial focus would be on the bus market, particularly in urban areas, the company said.
Since then, Cummins has made several deals to bolster its electrification efforts:
Oct. 9: An electrified power partnership with GILLIG. The collaboration involves integrating and optimizing new battery electric technology offered by Cummins to power GILLIG zero-emissions transit buses.
Oct. 16: Purchase of Oregon-based Brammo Inc., an energy storage technology company, to help accelerate Cummins’ electrification platform. Brammo designs and develops low-voltage battery packs for mobile and stationary applications.
Jan. 31: Acquisition of Johnson Matthey’s United Kingdom-based automotive battery systems business. The company’s high-voltage battery expertise gives Cummins capability across the entire range of energy storage options, the Columbus company said.
Linebarger said the company expects to invest about $500 million over three years in the Electrification Business as it ramps up for production.
Cummins projects that the Electrification Business will record sales of $10 million to $30 million in 2018.
“The focus is on growth, whether organic or inorganic,” said Pat Ward, vice president and chief financial officer, during a conference call with analysts after the earnings release.
Cummins leaders were asked during the analysts call if the expected increase in cash on the company’s balance sheet meant more mergers or acquisitions could be expected this year.
“We’re not in a hurry to spend money. When we find something out there that adds value and growth, we’ll do it to return value to shareholders,” Linebarger said.
Local analysts said that despite the short-term negative impact of the new tax laws, Tuesday’s financial reports reflected well on Cummins because of its strong sales and continued evolution as a company.
“We are seeing a major company in transition. They have reminded us that they are in the business of selling propulsion. If that’s diesel engines, so be it. If that’s natural gas, so be it. If that’s electrical, so be it,” said Craig Kessler, chief investment officer for Columbus-based Kessler Investment Group.
Local analysts also liked that the company and Linebarger were being prudent in their outlook for 2018, along with their approach to merger and acquisitions.
The U.S. economy saw significant recovery to normal levels last year, and large truck orders are already high for this year, so similar expectations of growth this year are unrealistic, Lee said. Forecasting 4 to 8 percent full-year growth is conservative, but also good, he said.
“The company delivered strong growth, solid profitability and record operating cash flow in 2017. We expect demand to remain strong in many of our core markets in 2018 and profitability to improve as a result of higher sales and continued execution of our cost-reduction initiatives.”
— Cummins Chairman and CEO Tom Linebarger
Cummins Inc.’s stock closed at $174.83 on Tuesday, a $4.18 (2.34 percent) decrease from Monday’s close of $179.01.
Those prices compare to the company’s Jan. 29 all-time high of $194.18 and its Jan. 26 record close of $192.50.