Cummins Inc. posted a quarterly sales record for the third consecutive three-month period, set a quarterly record for profits and again increased its full-year revenue forecast.
The Columbus-based global power company Tuesday announced second-quarter revenues of $6.132 billion, an increase of nearly 21 percent from the same quarter in 2017.
Cummins previously set quarterly sales records of $5.476 billion in the fourth quarter of 2017, and $5.570 billion in the first quarter of this year.
Net income in the second quarter was $545 million ($3.32 per diluted share), an increase of more than 28 percent compared to $424 million ($2.53 per diluted share) in the second quarter of 2017, the company said.
Second-quarter growth occurred in most major markets as demand for trucks, construction, mining and power generation equipment improved. Sales in North America improved by 22 percent while international revenues increased by 18 percent, led by growth in China, Europe and Latin America, the company said.
Cummins said its expects full-year revenues to be up 15 to 17 percent compared to last year, a bump from its prior guidance of a 10 to 14 percent increase.
“As a result of strong customer demand for our products, solid execution from our global manufacturing and supply chain teams and continued focus on cost reduction, the company delivered record quarterly sales and earnings per share in the second quarter. We are on track to deliver record full-year sales, earnings and cash flow,” Cummins Chairman and CEO Tom Linebarger said.
Earnings before interest, taxes, depreciation and amortization (EBITDA) in the second quarter were $897 million, up from $764 million a year ago, the company said.
Full-year EBITDA is projected to be in the range of 14.8 to 15.2 percent of sales, down from 15.4 to 15.8 percent of sales, and reflects about $100 million of expense associated with trade tariffs and increased commodity costs in the second half of the year, the company said.
Cummins, which makes diesel and natural gas engines, fuel systems, emissions solutions and electrical power generation systems, among other products, plans to return 75 percent of operating cash flow to shareholders in the form of dividends and share repurchases in 2018, up from the previous plan to return 50 percent, Linebarger said.
The company has no imminent needs for the cash, such as an acquisition, so it wants to return it to shareholders, the chairman and CEO said. Cummins stock is undervalued and a good investment, he said.
Cummins stock closed at $142.81 Tuesday, up $5.60 (4 percent) from Monday’s close of $137.21.
Segment sales strong
Four of the company’s five business segments drove the record quarterly sales with double-digit sales increases compared to the April-to-June period of last year. The fifth business segment was formed since then, preventing year-over-year performance comparisons.
Engine: Sales of nearly $2.7 billion, up almost 17 percent, reflected revenue increases of 12 percent in North America and 32 percent in international markets.
Distribution: North American sales jumped 22 percent and international sales increased 8 percent, fueling nearly $2 billion in sales, an increase of nearly 16 percent from last year.
Components: Sales increased 30 percent compared to last year, reaching nearly $1.9 billion. A 36-percent spike in North American sales and 22-percent growth internationally drove the quarter revenue mark. The Eaton Cummins Automated Transmission joint venture recorded sales of $141 million.
Power Systems: Increased demand in power generation, mining and oil and gas markets drove sales, which increased 23 percent from last year and exceeded $1.2 billion. Revenues in North America jumped 30 percent and international sales grew 18 percent.
Electrified Power: The new segment, which officially formed Jan. 1, had sales of $1 million.
Costly repairs
In addition to about $100 million in costs associated with trade tariffs, Cummins also incurred another substantial charge related to fixing a problem with an aftertreatment component.
The California Air Resources Board (CARB) and the U.S. Environmental Protection Agency (EPA) selected certain Cummins pre-2013 model year engine systems for additional emissions testing in 2017. Some of them failed the tests because of degradation of an aftertreatment component. Cummins paid $36 million at the time for repairs.
However, after additional emission testing and discussions with CARB and the EPA in the first quarter this year, repairs were expanded to a larger portion of Cummins engine systems, to include models years 2010 to 2015. That cost the company $187 million.
In the second quarter, Cummins reached an agreement with CARB and the EPA about its plans to fix the problem, which included a greater number of engine systems to be repaired through hardware replacement. This led to a $181 million charge in the quarter, bringing Cummins’ total cost to fixing the problem to $404 million, the company said.
The second-quarter charge was divided between the Engine business ($91 million) and Components business ($90 million).
Linebarger said he is confident this is the end of costs necessary to fix the problem.
“We believe we have now fully provided for the cost of this campaign,” he said.
He added that the problem has not affected any of its newer engines.
Analysts react
Local analysts said the earnings report was great news for Cummins considering the first-quarter report had some negative tones related to the costs to fix the aftertreatment component problem.
While Cummins reported earnings per share of $3.32, the implied earnings per share of its stock was $4.17, excluding the costs to fix the aftertreatment problem, said Scott DeDomenic, senior vice president and analyst with Hilliard Lyons’ Columbus office. Wall Street expected $3.63 per share, he said.
Getting those costs behind them is huge for Cummins moving forward, DeDomenic said. Continued growth in markets, he said, will help the company overcome challenges, such as tariffs, he added.
Upticks in the mining and construction businesses are reflective of the overall economy, which is a positive for Cummins sales, said Craig Kessler, chief investment officer for Columbus-based Kessler Investment Group.
A report last week showed the country’s gross domestic product — the market value of products and services — increased 4.1 percent in the second quarter, Kessler said.
It’s notable that demand for Cummins’ Class 8 engines for heavy-duty trucks in North America is so great that the company has a backlog of 235,000 orders — its largest backlog since July 1999, said Roger Lee, a senior research analyst for Columbus-based Kirr, Marbach & Co.
The backlog reflects what Linebarger said during a conference call with analysts, Lee said, that trucking companies are so busy they are rapidly buying trucks for their fleets and hiring drivers as quickly as possible.
Lee also noted that despite the great news about sales and profits, the company’s stock price increased only a little, into the $140s. Investors likely want greater assurances about the impact of trade tariffs and the costs of the company’s campaign to fix the aftertreatment problem, he said.
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Cummins Inc. released its 2018 second-quarter financial report on Tuesday. The results are compared to the Columbus-based company’s report for the second quarter of 2017. (Figures in millions, except earnings per share)
—;2017;2018;Variance
Net income;$424;$545;28.5%
Earnings per share;$2.53;$3.32;31.2%
Earnings before interest,taxes,depreciation,amortization;$764;$897;17.4%
Net sales;$5,078;$6,132;20.8%
Engine;$2,307;$2,696;16.9%
Power Systems;$1,017;$1,246;22.5%
Components;$1,454;$1,887;29.8%
Distribution;$1,722;$1,994;15.8%
Electrified Power;NA;$1;NA
Intersegment eliminations;-$1,422;-$1,692;-19%
–Source: Cummins Inc.
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“As a result of strong customer demand for our products, solid execution from our global manufacturing and supply chain teams and continued focus on cost reduction, the company delivered record quarterly sales and earnings per share in the second quarter. We are on track to deliver record full-year sales, earnings and cash flow.”
— Cummins Chairman and CEO Tom Linebarger
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Cummins’ stock price closed at $142.81 Tuesday, an increase of $5.60 (4 percent) from Monday’s close of $137.21.
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