Cummins Inc.’s second-quarter sales set a record, but that good news was tempered by decreased demand for its products in international markets, prompting the company to lower its year-end revenue estimate.
The Columbus-based global diesel engine maker and power systems company reported Tuesday revenues of $6.2 billion for April through June, representing a 1-percent increase from the same period in 2018.
Second-quarter sales in North America, which set a new record and increased by 7 percent to $3.9 billion, grew in all segments except Power Systems, which was negatively impacted by lower demand in oil and gas markets, Cummins said.
Increased truck production in North America and stronger demand in North American power generation markets was partially offset by lower demand in oil and gas and international truck markets, the company said.
International revenues decreased by 6 percent, primarily due to lower truck demand in China, Europe, Brazil and India, Cummins said.
Second-quarter earnings before interest, taxes, depreciation and amortization (EBITDA) were almost $1.1 billion, a record and increase from $897 million last year.
Cummins reported second-quarter net income (profits) of $675 million ($4.27 per diluted share), compared to $545 million ($3.32 per diluted share) in 2018.
“We achieved record revenues, EBITDA, and operating cash flow in the first half of 2019, extending our track record of raising performance cycle over cycle,” said Chairman and CEO Tom Linebarger.
“While we do expect to see a moderation in demand in the second half of the year, our financial strength combined with our diversified geographic and end market exposure will enable us to generate strong profits, continue to invest in future growth, and return cash to shareholders,” he added.
The quarter included Cummins’ June 28 announcement that it had reached an agreement to buy hydrogen fuel cell provider Hydrogenics Corporation for $290 million. Cummins has been expanding its platform of power systems, including the creation of an electrification business segment last year.
“We will continue to invest in technology,” Linebarger said.
Cummins adjusted its year-end revenue estimate to be flat, a downgrade from its previous estimate of flat or up to a 4-percent increase. The blunted outlook is the result of reduced truck demand in international markets, moderating parts demand in North America and the impact of a stronger U.S. dollar, Cummins said.
Cummins is projecting year-end sales of medium-duty trucks in North American to increase 6 percent compared to last year, and heavy-duty sales to increase 5 percent. However, it’s projecting year-end sales of medium- and heavy-duty trucks to decrease 10 percent in China compared to last year, and fall 17 percent in India.
Cummins leaders said the company’s future guidance reflects projected cyclical downturns in truck markets.
“It’s hard to find a truck market that doesn’t feel peakish or already on the decline,” Linebarger said.
The Fortune 200 company said it still plans to return 75 percent of operating cash flow to shareholders in the form of dividends and share repurchases.
Segment performances
Cummins experienced mixed success with the results of its business segments. Here’s a look:
Engine: Sales of $2.703 billion were essentially flat from 2018. On-highway revenues increased 2 percent but off-highway revenues decreased 7 percent. North America revenues increased 7 percent due to higher demand in on-highway markets, but international revenues declined 15 percent primarily due to lower demand in China, Cummins said.
Distribution: Sales of $2.28 billion increased 1.7 percent. Revenues in North America increased by 2 percent but international sales were flat. Strong demand for power generation equipment in North America, particularly data centers, was partially offset by lower demand in oil and gas markets and the negative impact of a stronger U.S. dollar, the latter impacting sales 2 percent, Cummins said.
Components: Sales of $1.846 billion declined 2 percent. Revenues in North America increased 5 percent due to higher heavy and medium-duty truck production. However, international sales declined 12 percent due to lower demand in Europe, China, and India, the company said.
Power Systems: Sales of 1.203 billion fell 3 percent. Industrial revenues decreased 11 percent due to lower demand in North American oil and gas and global mining markets, while power generation revenues were flat, Cummins said.
Electrified Power: The segment, which started at the beginning of 2017, saw sales increase from $1 million to $8 million compared to the second quarter last year.
Analysts react
Wall Street’s reaction to Cummins’ second-quarter earnings and year-end guidance resulted in the company’s stock price dipping Tuesday. It closed at $165.15,a decrease of $8.82 (5.3 percent) from Monday’s close of $173.97.
Cummins’ earnings per share of $4.27 for the quarter fell short of Wall Street’s expectation of $4.41. Also, the company’s revenue of $6.221 billion fell shy of Wall Street’s expectation of $6.359 billion, said Scott DeDomenic, senior vice president and wealth adviser for the Columbus branch of Hilliard Lyons, a Baird company.
However, Wall Street’s expectations reflected those set high for a company whose stock price has increased from about $130 per share in early January to more than $170 in July, DeDomenic said.
Second-quarter EBITDA was “pretty much on the money,” said Roger Lee, a senior research analyst with Columbus-based Kirr, Marbach and Co., noting that Wall Street expected $1.06 billion and Cummins reported $1.058 billion.
The slight misses are not surprised given that the economy has hit a soft patch, said Craig Kessler, president and chief investment officer for Columbus-based Kessler Investment Group. Nonetheless, Tuesday’s drop in Cummins’ stock price still leaves it within 15% of an all-time high, and over 30% higher than where it began 2019, he added.
The analysts said Cummins is performing well but that the lowered year-end projections are to be expected considering cyclical changes in markets.
“What Cummins is saying isn’t anything different than what Caterpillar said last week, about what they’re seeing internationally,” DeDomenic said.
Second-half weakness could be offset by a Chinese trade deal and positive effects from an expected drop in interest rates by the Federal Reserve, Kessler said.
Cummins is just trying to navigate a slowing global economy, and what’s good about the quarter is that the issues facing the company are not specific to Cummins but related to the global economy, DeDomenic added.
“The boom period is finally over,” Lee said.
While the North American markets have fueled success despite international market declines, fewer parts ordered by North American customers indicates a cyclical downturn is coming, Lee added.
“They knew the expansion period would not last forever,” Lee 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 first quarter of 2018. (Figures in millions, except earnings per share)
—;2018;2019;Variance
Net income;$545;$675;23.9%
Earnings per share;$3.32;$4.27;28.6%
Earnings before interest,taxes,depreciation,amortization;$897;$1,058;17.9%
Net sales;$6,132;$6221;1%
Engine;$2,696;$2,703;0%
Power Systems;$1,246;$1,203;-3%
Components;$1,887;$1,846;-2%
Distribution;$1,994;$2,028;1.7%
Electrified Power;$1;$8;700%
Intersegment eliminations;-$1,692;-$1,567;-7.4%
–Source: Cummins Inc.
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Cummins Inc.’s stock price closed at $165.15 Tuesday, down $8.82 (5.3 percent) from Monday’s close of $173.97.
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"We achieved record revenues, EBITDA and operating cash flow in the first half of 2019, extending our track record of raising performance cycle over cycle. While we do expect to see a moderation in demand in the second half of the year, our financial strength combined with our diversified geographic and end market exposure will enable us to generate strong profits, continue to invest in future growth, and return cash to shareholders."
— Cummins Chairman and CEO Tom Linebarger
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