A RECORD QUARTER: Cummins reports quarterly revenue increase, tops Wall Street forecast

Cummins Inc. reported record revenue for the second consecutive quarter despite continued supply chain constraints, high inflation and growing uncertainty about the global economy.

The Columbus-based company reported $6.6 billion in revenue in the April-June period, up 8% compared to the first quarter last year. Sales were up 15% in North America, though international revenues declined 2% largely due to a slowdown in China and the indefinite suspension of the company’s operations in Russia.

Net income in the second quarter was $702 million ($4.94 per diluted share) compared to $600 million ($4.10 per diluted share) in 2021.

The company said it incurred $29 million in costs related to the separation of its filtration business.

Cummins’ second-quarter revenue topped Wall Street expectations of $6.47 billion and consensus earnings-per-share estimates of $4.35.

Overall, the company is maintaining its projection that revenues will be up 8% this year, largely fueled by stronger demand in North America and growth in most major regions except China.

Cummins is the largest employer in Bartholomew County, with about 8,000 employees in the Columbus area.

“Demand for our products remain strong across all of our key markets and regions with the notable exception of China, resulting in record revenues in the second quarter,” Cummins President and CEO Jennifer Rumsey told analysts Tuesday during an earnings conference call.

The earnings call was Rumsey’s first since taking over the chief executive role from Chairman and former CEO Tom Linebarger, who announced last month that he would step down from his CEO role but continue to serve as chairman of the board and executive chairman of the company.

“I had to start by telling you about some rough math I did before I walked in today, and I believe this is my 70th earnings call. It’s also going to be my last,” Linebarger said. “…I’m very proud to have served as the CEO for this company for 10 years (and) as a senior executive for more than 20 years. It was an honor and a privilege.”

Segment performances

Engine: Sales of $2.8 billion were up 11% compared to the same quarter last year. On-highway revenues increased 16% due to pricing actions and strong demand in the North American truck markets, strong aftermarket demand and recovery in the bus market, which was severely impacted by COVID-19 last year. Off-highway revenues decreased 8% driven by a slowdown in China construction. Sales increased 15% in North America and 1% in international markets, with higher demand in Western Europe offsetting a decline in China.

Distribution: Sales of $2.3 billion represented a 17% increase compared to a year ago. Revenues in North America rose 21% and international sales increased 10%. Higher revenues were primarily driven by increased demand for parts and service.

Components: Sales of $2 billion were down 2% compared to the April-June period last year. Revenues in North America increased 13%, but international sales fell 19% due to lower demand in China.

Power systems: Sales $1.2 billion represented a 5% increased compared to the same quarter in 2021. Power generation revenues were flat, and industrial revenues rose 7% due to stronger demand in mining and oil and gas markets. Demand for alternators increased 33% due to supply chain constraints on external customers.

New Power: Sales of $42 million were up 75% compared to a year ago. Revenues increased due to higher battery demand in the North American school bus market.

The business environment

The results come amid what Cummins officials described as an “unusual period” in the global economy as uncertainty continues to mount about the pace of economic growth.

Currently, major global economies are facing supply chain disruptions due to COVID-19, the war in Ukraine, higher fuel costs, inflation, as well as the global shortage of semiconductors. Some automakers have been forced to slow its factories since late in 2020 largely due to a global shortage of semiconductors, The Associated Press reported.

“We continue to experience an environment where (the) supply chain is limiting production in most of our markets,” Rumsey said. “As you’ve seen, the team here has worked really hard to navigate that and continue to deliver as much product as we can to our customers, who are also experiencing issues. Some of those issues have lessened. We continue, however, to experience constraints, in particular in the electronics space, microprocessors and other electronic components.”

Last week, Linebarger told President Joe Biden the company and others are facing a “supply chain crisis,” including a global shortage of semiconductors that has sent costs soaring and impacted Cummins’s ability to meet customer demand, leading to manufacturing delays.

Linebarger said Cummins is now often paying brokers 10 times the regular cost to buy the chips the company needs.

“It is an unusual period, and it has been an unusual cycle,” Linebarger said on Tuesday. “And I think our team has continued to figure out ways to adapt to it. …But make no mistake, a lot of us in the industry are trying to figure things out that we haven’t faced before — labor shortages, part shortages over extended periods and things like that.”

Analysts react

Local analysts said Cummins’ second-quarter results show that company is doing a good job of managing through a tough global economic climate.

Roger Lee, a senior research analyst with Columbus-based Kirr, Marbach and Co., pointed to the company’s gross margin during the second quarter.

Often measured as a percentage, gross margin is the difference between revenue and the cost of sales, showing how well a company has been generating revenue from the costs it incurred to produce its products. Generally, higher margins are seen as better than lower margins.

Cummins’ gross margin was 26% during the April-June period this year, compared to 24% during the same quarter last year, according to the company’s earnings report.

“What really stuck out was their gross margin,” Lee said. “We haven’t seen a gross margin at this level since the third quarter of 2020. So, even though we’re in high-inflation environment, they’re still able to retain the margins in the business.”

Craig Kessler, president and chief investment officer at Columbus-based Kessler Investment Group, said Cummins did a “fantastic job” this past quarter of adapting to a difficult global business environment.

“It’s hard not to be impressed with what they were able to deliver in a very difficult environment,” Kessler said. “We’ve got rising input costs, global supply chain stress, obviously, the war in Ukraine, any number of obstacles and hurdles, and they really did a fantastic job of clearing them this quarter and delivering something that was better than what Wall Street expected.”