Cummins employees walk into the Cummins Corporate Office building in Columbus in July 2019. The company on Thursday announced greater-than-expected revenues in the third quarter and lower-than-forecast earnings.
Republic file photo
Cummins Inc. on Thursday reported third-quarter revenue that beat analyst expectations, though the company’s earnings fell short of forecasts.
Strong global demand except in China helped the Columbus-based company generate $7.3 billion in revenue during the July-September period, up from $5.97 billion during the same period last year and above the Bloomberg estimate of around $6.84 billion.
Net income during the third quarter was $400 million, or $2.82 per share, down from $534 million, or $3.69 per share, a year ago and lower than the Wall Street consensus of around $4.83 per share.
Excluding results from the newly acquired Meritor Inc., Cummins’s third-quarter revenue was $6.6 billion and net income was $456 million, or $3.21 per share.
Sales in North America increased 19% and international revenues dropped 1% compared to the same quarter in 2021, as a market slowdown in China and the indefinite suspension of operations in Russia offset otherwise strong global demand, the company said.
Meritor, which Cummins acquired for $3.7 billion earlier this year, had $737 million in revenue during the third quarter, Cummins said.
Overall, Cummins said it is maintaining its projection that revenue will be up 8% this year, largely fueled by stronger demand in North America and growth in most major regions except China.
Segment performances
Engine: Sales of $2.8 billion were up 8% compared to the same quarter last year. On-highway revenues increased 10%, driven by strong demand in the North American truck market, pricing actions and strong aftermarket demand. Off-highway revenues decreased 3% due to a slowdown in China construction. Sales increased 14% in North America and decreased 8% in international markets due to a decline in demand in China and the indefinite suspension of operations in Russia.
Distribution: Sales of $2.2 billion were up 14% compared to the July-September quarter last year. Revenues in North America increased 22%, and international sales rose 1% primarily driven by increased demand for parts and service.
Components: Total sales were $2.7 billion. Excluding contributions from Meritor, sales were $2 billion, a 10% increase compared to the third quarter last year. Revenues in North America increased 19% and international sales dropped 1%, lowered by slumping demand in China.
Power Systems: Sales of $1.3 billion represented a 16% increase compared to the third quarter last year. Power generation revenues increased 11% due to pricing actions and increased global demand. Industrial revenues rose 17% driven by strong demand for aftermarket products and increased demand in oil and gas markets.
New Power: Total sales were $50 million. Excluding contributions from Meritor, sales were $45 million, up 96% compared the same quarter in 2021. Revenues increased due to higher battery demand in the North American school bus market, as well as shipments of fuel cell systems to the China bus market.
Acquisition and separation
Cummins President and CEO Jennifer Rumsey told analysts on Thursday that “upfront costs” associated with the acquisition of Meritor and Cummins’ plans to separate its filtration business into a standalone company “heavily influenced” Cummins’ third-quarter results.
Cummins finalized the acquisition of Meritor in August for $36.50 in cash per share, a 48% premium on Meritor’s closing price on Feb. 18. The deal was bankrolled through a combination of cash and debt.
In September, Cummins announced plans to showcase for the first time an electric powertrain that integrates technology and parts from Meritor at a tradeshow in Germany, though Rumsey told analysts on Thursday that Cummins is still in the “early days of integrating the Meritor business.”
Cummins also announced in April that it had taken a step toward what analysts say indicates the company plans to separate its filtration business into a standalone company, announcing that its its filtration business has confidentially filed paperwork for a proposed initial public offering with the U.S. Securities and Exchange Commission. This is a step that companies take before publicly filing IPO paperwork with regulators.
Cummins said Thursday that it incurred $16 million in costs related to the separation of the filtration business during the third quarter. The company previous reported $29 million in costs related to the separation of its filtration business during the second quarter of this year.
“We expect that the most significant costs associated with both transactions are behind us,” Rumsey said on Thursday. She added that she views the two transactions as “positive moves for our future.”
In addition, Cummins reported that a one-time bonus totaling $56 million to employees to recognize their commitment to meeting customer demand during challenging conditions also impacted its third-quarter results.
China and global economy
Cummins also reported a decrease in revenue in China, one of the company’s largest markets.
Third-quarter revenue in China, including joint ventures, was $1.2 billion, down 18% compared to a year ago due to lower sales in the on-highway and construction markets, Rumsey said. Industry demand for medium- and heavy-duty trucks in China also was down 25% from 2021.
“Weaker new vehicle demand, contracted property investment and economic impacts from the shutdowns as the country continues to respond to the COVID-19 outbreaks have pushed the market to the lowest level in a decade, instead of our projected recovery of the market in the second half of the year,” Rumsey said.
Cummins officials also said they continue to see improvement with global supply constraints, but “still have issues,” including shortages of electronic components, COVID-19 lockdowns in China and congestion at certain ports.
However, “the fundamentals of our business remain strong,” Cummins Vice President and Chief Financial Officer Mark Smith told analysts on Thursday.
Analysts react
Local analysts agreed that “global turmoil” played a role in Cummins’ third-quarter results and expressed confidence in the company’s leadership to navigate through a tough business environment.
Roger Lee, a senior research analyst with Columbus-based Kirr, Marbach and Co., said there are currenly “a crazy amount of moving pieces” in the global economy that are impacting Cummins, including a “major slowdown” in China while the company works to integrate Meritor into its business, separate its filtration business and grow its clean energy initiatives.
“The biggest takeaway for me is that the company is still doing very well domestically,” Lee said. “The demand is there, and I think you’re seeing a new leader take over at a time when you’re integrating a new company, you’re separating a business, you’re dealing with, in one of your large markets (China) … incredible turmoil.”
“You literally have a crazy amount of moving pieces, and all the while, (Cummins is) still seeing strong demand in their core domestic market, and they’re still capturing value where demand is growing,” Lee added.
Craig Kessler, president and chief investment officer at Columbus-based Kessler Investment Group, said Cummins is doing a good job of managing through what he characterized as a “tough quarter.” Kessler also said he sees signs of a potential shallow slowdown in the broader economy in the coming quarters.
“I still think overall, (Cummins is) managing through this well,” Kessler said. “…I think it’s just a tough quarter that they did their best to manage, and I think they’re setting up for a slowdown that’s coming in the broader economy, and historically, they’ve shown an ability to manage through those downturns. So I don’t expect anything different this time.”
“I think the stage is being set for maybe a little bit of a slowdown that could impact Cummins’ employment numbers,” Kessler added later in the interview. “… I think the recession that’s coming, and I do believe there is one, is going to be more shallow and not so much a widespread unemployment-characterized recession this time.”
