For The Tribune
Columbus-based engine maker Cummins Inc. reported third-quarter revenues of nearly $4.2 billion, a drop of $433 million — 9.4 percent — from the same July-through-September period in 2015.
All three quarters this year have experienced revenue drops of 9 to 10 percent from the same quarter of the prior year, and Cummins has reported six consecutive quarters of year-over-year revenue decline, ranging from 4 to 10 percent.
For the most recent quarter, Cummins revenues in North America decreased 13 percent while international sales declined by 3 percent. Lower truck production in North America and weak international demand for power generation equipment factored the most in the sales decline, Cummins said in a news release. Higher revenues in China partially offset declines in the Middle East and Africa, and currency also negatively impacted revenues by about 2 percent because of a stronger U.S. dollar, the company added.
Earnings before interest and taxes were $398 million in the third quarter, compared to $577 million in the same period the prior year. Net income was $289 million ($1.72 per diluted share) compared to $380 million ($2.14 per diluted share) in the third quarter of 2015.
“Due to the slow pace of growth in the global economy, we continue to face weak demand in a number of our most important markets,” Cummins Chairman and CEO Tom Linebarger said. “The restructuring actions that we initiated in the fourth quarter of 2015, combined with strong execution on material cost-reduction initiatives, productivity gains and improvements in product quality are all helping to mitigate the impact of weaker revenues.”
When Cummins Inc. announced its third-quarter earnings this time last year, the news included plans to cut its global workforce by 2,000 employees.
Cummins’ restructuring Linebarger referred to also included moving hits high-horsepower engine segment from the Engine Business to the Power Generation Business, establishing the Power Systems Business.
The cost to fix a wash-coat quality problem in a third-party, after-treatment system dating to the fourth quarter of 2015 continues to impact Cummins.
The company took a $39 million charge on it in the second quarter, and another $99 million in the third quarter addressing the problem. The third-quarter charge reduced diluted earnings per share by 30 cents, the company stated in its release.
Testing found that a second population of vehicles needed to be recalled for fixes, resulting in the additional charge, President and Chief Operating Officer Rich Freeland said during a conference call with analysts Tuesday.
Freeland previously told analysts during a conference call in August, after second-quarter earnings were released, that initially a software fix was believed to be the solution, but that Cummins had determined that a hardware fix would work better. Linebarger told analysts Tuesday the after-treatment system has been replaced.
Cummins added that it has not reached a cost-sharing agreement with the customer, and that its final cost to fix the problem could change.
All four of the company’s four businesses — Engine, Distribution, Components and Power Systems — experienced year-over-year, third-quarter sales declines. The company said:
Engine fell 11.6 percent to nearly $1.9 billion because of lower heavy- and medium-duty truck production in North America.
Distribution dropped 3 percent to $1.5 billion as an organic sales decline and the negative impact of the U.S. dollar offset increased revenue from acquisitions.
Components declined 7.8 percent to more than $1.1 billion because higher revenues in China were offset by lower medium- and heavy-duty truck production in North America.
Power Systems fell 12.8 percent to $856 million because of reduced demand for power generation and industrial engine products in Asia, the Middle East and Africa.
The declining sales has caused Cummins to adjust its projection of heavy-duty engine sales in North America to 200,000 units for the year, Linebarger said in a summary prepared for analysts. That would represent a 31 percent decline from 291,000 units in 2015.
The company projects selling 108,000 medium-duty engines this year, representing a 13 percent drop from last year’s 124,000 total, the executive said.
Full-year revenues are projected to be down 9 percent, consistent with Cummins’ prior forecast of an 8-10 percent decline, the company said in its news release.
Linebarger told analysts that the company will head into 2017 with conservative projections about its sales markets because it doesn’t see indications of turnarounds yet.
Cummins’ stock price closed Tuesday at $122.29, down $5.53 (4.33 percent) from Monday’s close of $127.82.
“The overall impression I get is revenue is falling, sales are falling, but profitability is doing well. So, in essence it’s a continuation of them managing through a sales decline,” said Scott DeDomenic, senior vice president and an analyst with the Columbus office of Hilliard Lyons.
Cummins’ stock price remains in the $120s range because the company has been managing well and reducing costs, and Wall Street expects the company to do well when international markets improve, DeDomenic said.
Without the $99 million charge for additional fixes to the wash-coat quality problem, Cummins’ earnings per diluted share would have been $2.02 and actually beaten Wall Street’s projection of $1.96, DeDomenic said.
However, if the quality problem continues and the fourth quarter includes yet another charge to fix the issue, then Wall Street will be skeptical, DeDomenic said.
Mark Foster, chief investment officer for Columbus-based Kirr, Marbach and Co., said he thinks Wall Street will likely look past the charge. The greater concern is how much longer the company’s sales markets remain a challenge.
“Most of their markets are soft, and I don’t see where that will get better in the near future,” Foster said.
Inventory of new and used trucks remains high in North America, meaning production and thus orders for Cummins engines will continue to be affected, possibly for another six to nine months until inventory is reduced, Foster said.
If current conditions continue into 2017, Foster wondered whether Cummins might pursue an acquisition of another company in an adjacent market to help its profitability.
“I don’t think it would be a bad thing,” he said.
Because Cummins continues to gain market share in key geographic areas such as China and India, that positions the company to do well when emerging markets improve, said Craig Kessler, chief investment officer for Columbus-based Kessler Investment Group.
Kessler added that he believes that infrastructure spending in the U.S. will increase after the presidential election — regardless of who wins — and that will benefit Cummins in its markets.
Tuesday’s close: $122.29
Monday’s close: $127.82
Change: $5.53 (4.33 percent)