Cummins Inc. reported first-quarter revenue fell 17% compared to the same period last year as company officials prepare for a challenging second quarter and weak levels of demand until global economies start to recover from the COVID-19 pandemic.
The Columbus-based company pulled in around $5 billion in revenue during the January-to-March quarter, compared to just over $6 billion during the first quarter last year. Lower truck production in North America and weaker demand in global construction, mining and power generation markets drove the majority of the revenue decrease, the company said.
“As you know, the headlines today are filled with negative reports about economic activity and rising unemployment in many countries,” Cummins Chairman and CEO Tom Linebarger told financial analysts Tuesday. “Data more specific to many of our end markets is not encouraging, and we are prepared for weak levels of demand until global economies stabilize and start to recover. Our leadership team is spending a lot of time planning ahead, running a number of scenarios and responses, including identifying opportunities to strengthen our competitive position during this time.”
Net income of $511 million was down from $663 million in the first quarter of 2019, the company reported.
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Sales in North America dropped 16%, while international revenues decreased 17% compared to the same period last year, with declines in Europe, Asia Pacific, Latin America, India and China.
The company said four of its business segments — Engine, Distribution, Components and Power Generation — experienced sales decreases compared to the same period last year:
Engine: Sales of $2.2 billion represented a 19% decrease compared to the first quarter last year. On-highway revenues decreased 17% and off-highway revenues decreased 23% mainly due to weaker global demand in truck and construction markets, the company said.
Distribution: Sales of $1.8 billion were down 9% compared to a year ago. Revenues in North America declined 11% and international sales dropped by 6%. Demand weakened in all lines of business, and a stronger U.S. dollar unfavorably impacted revenues by 1%, the company said.
Components: Sales of $1.5 billion represented a 19% decrease compared to the first quarter of 2019. Revenues in North America dropped 24% and international sales decreased 12% due to weaker global truck demand, including in Europe and India.
Power systems: Sales of $884 million were down 18% from the January-to-March quarter last year. Power generation revenues slid 8% with lower revenues in North America and international markets, with particular weakness in India, where the economy has slowed in recent quarters, the company said. Industrial revenues fell 30% driven by continued weakness in oil and gas and mining markets.
New power: Sales of $10 million. Earnings before interest, taxes and amortization, or “EBITA,” which is a measure of company profitability used by investors, was a loss of $43 million in the first quarter. Costs associated with the development of new products and expected slow pace of technology adoption were the two primary contributors to EBITA losses, Linebarger said.
2020 outlook
Cummins officials said the company will not provide any revenue or profitability projections for 2020 due to the uncertainty of the coronavirus pandemic, which company officials said they anticipate will have an “unprecedented impact on the economy.”
While some customer operations have started to resume, the company expects a “significant impact” on its second quarter results due to disruptions across customer and supplier operations and lower demand, which they project could “persist for some time.”
Mark Smith, Cummins vice president and chief financial officer, said the company is focusing on employee safety during the pandemic and has taken actions to reduce costs, protect profitability and remain committed to investing in new technologies that company officials believe will drive future company growth.
Many of the coronavirus-related shutdowns — besides China — occurred in the latter half of the first quarter, and Cummins officials told analysts that they were uncertain to what extent business will be impacted during the second quarter, which runs from April through June.
“April is completely unprecedented, I think, in my career at Cummins in the sense of such a high proportion of our customers and suppliers have caused some of our own operations to shut down,” Smith said. “…The reason why we’ve taken these temporary costs actions is because we’re not sure how long we’re going to go through this difficult period.”
In China, however, Cummins is experiencing “high levels of demand” as the Chinese government attempts to jump start its economy after weeks of lockdowns and restrictions aimed at curbing the spread of the coronavirus.
The majority of Cummins’ facilities experienced shutdowns of four to six weeks in length, but were all fully operational by the end of the first quarter, Linebarger said.
Cummins has 10 facilities in Hubei Province, where COVID-19 was first detected.
“We are seeing a little bit of an improving trend, said Cummins President and Chief Operating Officer Tony Satterthwaite. “…The vast majority of our facilities, outside of Mexico and India, are operating. They are operating, though, at fairly low production levels, which is completely consistent with where are customers are. Things look like they are getting a little bit better, but I think that’s better from a pretty low bar if I look at where we’ve been from a customer activity perspective over the last four to six weeks.”
“We are looking to restart our facilities in Mexico and India, which has had the most aggressive shutdown. We are hopeful that we will get some level of production started there in the next couple of weeks. But the markets are very quiet,” Satterthwaite said.
Cummins officials said they feel confident that the company is in a strong position to rebound as economies around world start to rebound.
“When demand returns, which it will, Cummins will be in a strong position to deliver the products and services that will drive our customers’ success and deliver an even strong financial performance for shareholders,” Linebarger said.
Analysts react
Cummins first-quarter results, however, were viewed as good news on Wall Street as industry analysts said the company’s profitability was better than expected.
Cummins’ stock closed at $161.08 Tuesday, up from its Monday close of $151.44. The price peaked at $166.25 at 9:50 a.m. during Tuesday trading.
The decline in revenue was largely in line with what much of Wall Street was anticipated, but the profitability of the company “was much better than expected,” said Roger Lee, senior research analyst with Columbus-based Kirr, Marbach and Co.
“I think everyone was caught off guard in a good way. Even the numbers were shockingly good,” Lee said.
“If you think about their earnings, it’s basically $0.17 on the dollar is what they earned,” Lee said. “The market was expecting something in the low teens.”
Lee said the company’s balance sheet is very strong compared to most other manufacturing businesses, and as a whole, the company “has managed the crisis better than expected.”
“It shows in their cash flows and how profitable the company was, even in this period,” he said.
Craig Kessler, president and chief investment officer with Columbus-based Kessler Investment Group, said Cummins appears to have managed its expenses well and its profit margin remains “very, very solid.”
Lee and Kessler, however, said they are confident that Cummins’ second-quarter results will likely be worse than the first-quarter results.
“Not only anticipate, but I can guarantee that will be the case,” Kessler said. “…A lot of what we’re hearing about is what happened up until the virus took root.”
Kessler said the first-quarter results signal that Columbus residents shouldn’t expect any “dramatic changes” to Cummins’ presence in the city. “I think any changes or effects are going to be felt more at the margin and not really at the heart of Columbus, and I think that is a really positive thing.”
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Cummins’ stock closed at $161.08 Tuesday, up from its Monday close of $151.44. The price peaked at $166.25 at 9:50 a.m. during Tuesday trading.
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For more information, visit cummins.com.
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Cummins Inc. has announced that it will conduct its May 12 Annual Meeting "virtually" to protect the health and safety of its employees and shareholders amid the ongoing global COVID-19 pandemic.
A proxy supplement was being filed Tuesday with the Securities Exchange Commission with additional information regarding the virtual meeting. Though Cummins shareholders will not be able to attend the annual meeting in person, virtual attendance capabilities will provide shareholders the ability to participate and submit questions during the meeting.
Additionally, the Company’s shareholders will be deemed to be “present” if they access the annual meeting through the virtual platform and they will be able to vote their shares at the annual meeting, or revoke or change a previously submitted vote, through the virtual platform.
The virtual meeting will be held at 11 a.m. May 12. The company’s shareholders are entitled to participate in the annual meeting if they were a shareholder of record as of the close of business on March 10, or they hold a legal proxy for the meeting provided by their bank, broker, or nominee.
Shareholders will be able to attend the meeting online, vote their shares electronically, and submit their questions during the meeting by visiting, virtualshareholdermeeting.com/CMI2020.
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