Cummins Inc. reported third-quarter revenue declined 11% compared to the same quarter last year but saw a “dramatic increase” in sales compared to the second quarter this year.
The Columbus-based company announced Tuesday that it had pulled in $5.1 billion in revenues during the July-to-September quarter, down from nearly $5.8 billion from the same quarter last year.
The company said it saw high demand volatility across its end markets during the third quarter as the global economic recovery from the COVID-19 pandemic continues to vary by market and region.
In July, Cummins reported second quarter results that included what company officials said was the largest quarterly sales decline in the company’s 101-year history due industry-wide company shutdowns and weak economic activity related to the pandemic.
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However, on Tuesday, Cummins Chairman and CEO Tom Linebarger said the company saw a “dramatic increase” in sales in the third quarter compared to the second quarter, which he characterized as “the largest sequential increase in sales” in the company’s history.
“Even with the dramatic increase, our sales remain below last year’s level,” Linebarger told financial analysts on Tuesday. “While we have seen increased demand on most of our end markets in the last three months, we continue to see differences in recovery rates, both by market and by region, and we expect these differences to continue.”
Net income of $501 million was down from $622 million in the third quarter of 2019, the company reported.
Sales in North America declined 18%, while international revenues were flat.
The company, however, also reported a “record” quarterly operating cash flow of $1.2 billion.
Segment performance
Cummins reported that four of its business segments saw a third-quarter decrease in sales compared to the same quarter in 2019.
Engine: Sales of $2.1 billion represented a decrease of 13%. On-highway revenues decreased 13% and off-highway revenues declined 9%, the company said. Sales declined by 18% in North America, but increased 8% in international markets largely due to increased demand in China.
Distribution: Sales of $1.7 billion represented a 14% decline. Revenues in North America were down 18%, and international sales dropped by 5%, the company said. Demand declined in all lines of business.
Components: Sales of $1.5 billion were down 7%. Revenues in North America declined 24%, and international sales increased by 26% due to higher demand in China and India, the company said.
Power Systems: Sales of $981 million represented a decrease of 13%. Power generation revenues decreased 7%, while industrial revenues declined 21% due to lower demand in mining and oil and gas markets, the company said.
New power: Sales of $18 million, costs associated with the development of fuel cells and electrolyzers, as well as products to support battery electric vehicles, are contributing to losses in earnings before interest, taxes and amortization, or “EBITA,” which is a measure of company profitability used by investors.
China market
Though overall international revenues were flat compared to a year ago, Cummins saw increases in demand and revenue in China compared to the July-to-September quarter last year.
The increases in demand were driven by strong demand in truck and construction markets, though demand declined slightly compared to the second quarter, Linebarger said.
However, Cummins typically sees some seasonal weakness in the China market going into the fourth quarter each year.
Third-quarter revenues in China, including joint ventures, were $1.7 billion, up 46% compared to a year ago, Linebarger said.
Additionally, demand for medium- and heavy-duty trucks in China increased 74% compared to the same quarter last year. Demand for light-duty trucks in China climbed 49% in the third quarter.
Efforts by the Chinese central government to boost investment in infrastructure and housing projects throughout the country drove demand for excavators up 57% compared to a year ago, company officials said.
“Anything that touched China was pretty much up year over year,” said Cummins Vice President and Chief Financial Officer Mark Smith.
2020 outlook
The company said it expects fourth quarter revenues to be similar to third quarter levels and anticipates higher demand in North America truck markets.
On Oct. 1, the company ended temporary salary reductions that began in April, which is projected to increase expenses by about $90 million in the fourth quarter, Smith said.
Cummins also expects to see some seasonal declines in China in the fourth quarter after “record levels” of demand over the past six months, Smith said. The company. however, still projects “relatively strong levels” of demand in China through the end of the year.
“We are encouraged by the recovery in demand across our markets in the third quarter,” Linebarger said. “We will continue to manage cautiously through the remainder of the year as visibility on future orders remains low and the impact of the virus on economies around the world remains difficult to predict.”
Analysts react
Cummins’ third-quarter results were viewed as good news on Wall Street as industry analysts said the company beat earnings and profitability estimates.
Cummins’ stock closed at $219.78 Tuesday, down from its Monday close of $220.68, though the stock traded above its previous close for much of the day, according to Yahoo Finance. The stock has steadily increased since March 18, when the stock was trading at $124.49.
The company exceeded Wall Street’s estimate for quarterly revenue by about $600 million, earnings per share by $1.03 and EBITDA by $229 million, according to figures provided by Roger Lee, senior research analyst with Columbus-based Kirr, Marbach and Co.
EBITDA, or earnings before interest, taxes and amortization, is a measure of company profitability used by investors.
Lee said Cummins has been “prudent” in reducing costs ahead of the economic downturn and, as a result, the pace of recovery has been “faster than expected” so far.
“I think it was comforting to hear that it seems like fourth quarter is going to be a continuation (of the third quarter),” Lee said. “…It wasn’t just a slingshot effect of, ‘Hey, we had a great catch up and then things are going to taper off.’ It was more like, ‘Hey, we think things were really good last quarter, and this quarter was better than expected and next quarter we don’t just expect things to drop off.”
“If you read between the lines, the company is very optimistic,” Lee said.
Craig Kessler, president and chief investment officer with Columbus-based Kessler Investment Group, said the company “continues to do a fantastic job of managing during the pandemic.”
“Their market share is growing at a time when there is a huge question mark over the economy,” Kessler said. “This company is increasing its profitability, it’s increasing its liquidity and increasing market share. That is the best thing they could hope for during a normal economic environment and they’re pulling it off in the middle of the first pandemic we’ve seen in a hundred years.”
Kessler said he doesn’t anticipate broad layoffs related to a slowdown of Cummins’ overall business, though that could change if the spread of COVID-19 forces another economic shutdown like what was seen during the spring.
“I don’t think that there’s going to be a reduction in headcount directly related to a slowdown in their overall business or the health of the company itself,” Kessler said. “…I don’t think that there’s going to be broad layoffs or anything that’s going to be broad-based related to manufacturing or their core business.”
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Cummins’ stock closed at $219.78 Tuesday, down from its Monday close of $220.68.
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For more information, visit cummins.com.
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Cummins plans to share more about how the company expects its hydrogen production and fuel cell business to develop on Nov. 16 in an event called Cummins Hydrogen Day.
To RSVP for the event or learn more, visit investor.cummins.com/events-presentations/ir-calendar/detail/7195/cummins-hydrogen-day.
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