Cummins Inc. has increased its revenue projections for 2018 on the heels of stronger first-quarter sales compared to last year.
The Columbus-based power company and diesel engine maker made the rosier forecast Tuesday despite a drop in net income, a large tax charge and millions in costs to address the performance of an aftertreatment component in some of its on-highway products.
Cummins reported first quarter revenues of $5.6 billion, a 21.4 percent increase from the same quarter in 2017. Strong demand for trucks, construction and mining equipment drove the majority of the revenue increase, the company said in a news release.
Sales in North America improved by 22 percent, while international revenues increased by 20 percent led by strong growth in Europe, Latin America, China and India, the Fortune 200 company said.
“Improving demand in a number of the company’s core markets, combined with our strong global market share and the success of new products aimed at lowering emissions, resulted in sales growth of 21 percent in the first quarter,” Cummins Chairman and CEO Tom Linebarger said.
Cummins said it expects full-year revenues to increase 10 to 14 percent, up from its prior projection of a 4 to 8 percent increase. The improved forecast is a result of rising demand and continued benefits from cost-reduction initiatives, Linebarger said.
“Cummins delivered solid operating performance in the first quarter led by strong incremental margins in the Power Systems segment,” Linebarger said.
Cummins reported first-quarter net income of $325 million ($1.96 per diluted share), a nearly 18 percent decrease from $396 million ($2.36 per diluted share) the same period last year. The first-quarter results included $78 million in charges primarily related to U.S. tax reform. Excluding the charges, net income was $403 million ($2.43 per diluted share), the company said.
Earnings before interest, taxes, depreciation and amortization (EBITDA) in the first quarter were $700 million, down from $705 million a year ago. The company recorded a pre-tax charge of $187 million for the expected costs of a voluntary product campaign. Excluding the impact of the campaign charge, EBITDA was $887 million, Cummins said.
Product issues
In 2017, the California Air Resources Board (CARB) and U.S. Environmental Protection Agency (EPA) selected some of Cummins’ pre-2013 model year engine systems for additional emissions testing. Some of these engine systems failed CARB and EPA tests as a result of degradation of an aftertreatment component, the company said in a news release.
Cummins is working with the agencies to develop a resolve these problems. It also is developing and testing a variety of solutions to address the technical issues, which could include a combination of calibration changes, additional service practices and hardware changes, the company said. Cummins does not currently expect any fines or penalties from the EPA or CARB related to the matter.
Cummins said it concluded, based upon additional emission testing performed and further discussions with the regulatory agencies in the first quarter, that the field campaigns should be expanded to include a larger population of its engine systems that are subject to the aftertreatment component degradation, including its model years 2010 through 2015. That resulted in the $187 million charge.
The component is on an aftertreatment system only in North America, predominantly on model years 2010-2012 and later in the product’s lifespan, Rich Freeland, Cummins president and chief operating officer, said.
“We’ve looked at the entire population and what we’ve proposed to the agencies is a combination of in some cases no action, some cases a software fix and some cases a hardware fix,” Freeland said.
Both regulatory agencies must approve Cummins’ proposed solutions.
The problem doesn’t affect any other current products, Freeland and Linebarger said.
Determining whether additional charges will be accrued to fix the problems depends on whether internal testing of proposed solutions reveals more extensive repairs are needed, or if the regulatory agencies do not accept Cummins’ proposed solutions, Linebarger said.
If the proposed solutions are effective and approved, no additional charges could be incurred. If not, up to $400 million more could be incurred for fixes, Linebarger said.
“We have tried to make sure investors could at least put a box around the size of what this could be,” the company’s chairman and CEO said.
Cummins is driven to fix the problem over the next two quarters, and is committed to customers and the environment, Linebarger added.
Linebarger said the company’s leaders are disappointed by the aftertreatment problem, are the ones accountable for it and that their compensation would reflect the negative impact.
Segment sales up
Cummins’ new Electrified Power segment, officially formed Jan. 1, posted $2 million in sales, and its Engine, Distribution, Components and Power Systems business segments all posted sales increases from the first quarter last year:
- Engine: More than $2.4 billion in sales, a 21 percent increase, driven by a 20 percent increase in on-highway revenues and a 23 percent increase in off-highway revenues due to increased global demand in truck and construction markets, the company said. The segment incurred a $93 million charge related to the costs of fixing the aftertreatment component problem.
- Distribution: Sales of nearly $1.9 billion, nearly a 13 percent increase, due largely to a 15 percent increase in North American sales and 8 percent increase in international markets.
- Components: Sales of nearly $1.8 billion, up about 30 percent, because North American sales increased 35 percent, due to higher commercial truck production, and international sales increased 25 percent, the company said. The Eaton Cummins Automated Transmission joint venture posted sales of $117 million. The segment incurred a $94 million charge related to the costs of fixing the aftertreatment component problem.
- Power Systems: Sales of nearly $1.1 billion, up almost 22 percent, because of increased demand in power generation, mining, oil and gas markets.
Cummins returned $341 million to shareholders in the form of dividends and share repurchases in the first quarter, consistent with its plan to return at least 50 percent of operating cash flow this year, the company said.
Wall Street reacted unfavorably to Cummins’ financial report.
The company’s stock price, after trading between a low of $149.10 and a high of $155, closed at $153.28 Tuesday, down from Monday’s close of $159.86, a 4.1 percent one-day change. Tuesday’s closing stock price of Cummins stock was the lowest since Aug. 28, 2017, when it closed at $152.71.
Analysts react
Financial analysts said the stock price dip doesn’t reflect the performance of the company and is more a short-term market reaction.
“When you see double-digit guidance numbers (for the year) that tells you business is good,” said Roger Lee, a senior research analyst for Columbus-based Kirr, Marbach & Co.
The consensus among analysts was that Cummins would raise its full-year forecast to an 8 percent increase. Instead, it is projecting a 10 to 14 percent revenue bump for 2018, Lee said.
In addition to the company’s strong sales, investors should like the clarity the company provided on the scope of the aftertreatment problem, Lee said.
A closer look at the numbers shows that Cummins performed better than Wall Street expected for earnings per share, said Scott DeDomenic, senior vice president and analyst with Hilliard Lyons’ Columbus office.
By taking out the impact of the charges, Cummins’ true earnings per share was $3.30, which beat Wall Street’s expectations of $2.93, DeDomenic said.
“In my opinion, if it was not for the (aftertreatment problem) the stock would be back toward its high. The company is executing across the board,” DeDomenic said.
With Cummins trying to stay on the leading edge of technology for complex products that it tries to get to market before competitors, problems will arise from time to time, said Craig Kessler, chief investment officer for Columbus-based Kessler Investment Group.
Another explanation for the stock’s dip, Kessler said, is that investors also have a concern about rising costs of raw materials for some of Cummins customers in the markets they serve, and worry about the costs negatively impacting Cummins.
“Increased revenues might come at the cost of increased expenses,” Kessler said.
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“Improving demand in a number of the company’s core markets, combined with our strong global market share and the success of new products aimed at lowering emissions, resulted in sales growth of 21 percent in the first quarter.”
— Tom Linebarger, Cummins chairman and CEO
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Cummins’ stock price closed at $153.28 Tuesday, a decrease of $6.58 (4.1 percent) from Monday’s close of $159.86.
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Cummins Inc. releases its 2018 first-quarter financial report on Tuesday. The results are compared to the Columbus-based company’s report for the first quarter of 2017. (Figures in millions, except earnings per share)
—;2017;2018;Variance
Net income;$396;$325;-17.9%
Earnings per share;$2.36;$1.96;-16.9%
Earnings before interest,taxes,depreciation,amortization;$705;$700;-1%
Net sales;$4,589;$5,570;21.4%
Engine;$2,023;$2,446;21%
Power Systems;$882;$1,074;21.8%
Components;$1,344;$1,753;30.4%
Distribution;$1,645;$1,853;12.6%
Electrified Power;NA;$2;NA
Intersegment eliminations;-$1,305;-$1,558;-19.4%
–Source: Cummins Inc.
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