For The Tribune
Record truck engine sales in North America from January through March fueled an increase in first-quarter sales for Cummins Inc., prompting the company to increase its full-year profits forecast.
However, Cummins said its forecast does not include any potential impact of the company’s review of its emission certification process and compliance with emissions standards, which was announced in a news release Monday night ahead of the Tuesday morning earnings release.
The Columbus-based maker of diesel engines and global power solutions company recorded first-quarter revenues of slightly more than $6 billion, an increase of nearly 8 percent from the same quarter in 2018.
Increased truck production in North America and stronger demand in global construction and North American power generation markets drove most of the revenue increase, Cummins said. First-quarter sales in North America improved by 13 percent while international revenues increased by 1 percent, the company said.
“Our market-leading position in this region reflects our close partnerships with our customers who rely on us to provide a broad range of power solutions for their needs,” Chairman and CEO Tom Linebarger said.
Earnings before interest, taxes, depreciation and amortization (EBITDA) in the first quarter were a record $1 billion, compared to $700 million a year ago. First-quarter results include a favorable tax impact of $37 million related to the mark-to-market impact on assets related to Cummins’ nonqualified benefit plans, the company said.
First-quarter profits were $663 million ($4.20 per diluted share), compared to $325 million ($1.96 per diluted share) a year ago — or $403 million ($2.43 per diluted share) excluding the impact of tax legislation in the first quarter of 2018, the company said.
“We are on track to deliver record results for the year and return significant capital to investors and will continue to invest across our broad portfolio to power a strong future for our stakeholders,” Linebarger said.
Cummins is maintaining its current 2019 revenue forecast of flat to up 4 percent, based primarily on increased demand in North America on-highway markets. The company is forecasting a 5 percent increase in sales of heavy-duty truck engines and a 6 percent increase increase for medium-duty truck engine sales.
It also is expecting revenue from North American truck markets to increase $175 million from last year and global construction revenue to increase $120 million.
Because of lower projected material costs, the company has increased its EBITDA forecast from 16.25 percent to 16.75 percent of sales, an increase from the prior forecast of 15.75 percent to 16.25 percent of sales, Cummins said.
Cummins also expects to return 75 percent of operating cash flow to shareholders this year through dividends and share repurchases, the company said.
Segment performances
Most of Cummins business segments saw noticeable sales increases during the first three months of this year compared to 2018. Here’s how they performed:
Engine: Sales of nearly $2.7 billion represented an increase of more than 8 percent. On-highway revenues increased 9 percent and off-highway revenues grew 6 percent, mainly because of increased demand in North American truck and global construction markets, the company said.
Distribution: Sales increased 8 percent to slightly more than $2 billion. Revenues increased 10 percent in North America and 4 percent internationally. Strong demand was seen across all product lines in North America, especially data centers, Cummins said.
Components: Sales grew more than 6 percent to nearly $1.9 billion. Revenues in North American increased 17 percent due to higher heavy- and medium-duty truck production, although international sales declined 8 percent, Cummins said.
Power Systems: Sales of nearly $1.1 billion were essentially flat from last year. Industrial revenues increased 1 percent, but power generation revenues dropped 1 percent, the company said.
Electrified Power: Sales of $3 million reflected a 50 percent increase from the first quarter last year when the new segment launched.
Emissions review
Following conversations with the U.S. Environmental Protection Agency and California Air Resources Board regarding certification for the engines in the 2019 RAM 2500 and 3500 trucks, Cummins made the decision to review its certification process and compliance with emissions standards, the company said in a news release.
The review is being conducted with external advisers, and Cummins has voluntarily disclosed the review with regulators and other agencies, the company said.
Linebarger said Cummins applied for certification for the Ram 2500 and 3500 engines and received conditional certification but also received a lot of questions from the EPA that the company is taking seriously. The review is to see if anything needs to be changed in the company’s compliance and review process. Cummins conducts its own testing and evaluation of its engines to make sure they meet emissions standards and send the results to the EPA and CARB so they can do their own review, Linebarger said.
“It’s too early to know what, if any, actions we’ll take and if there will be any financial impact,” Linebarger said.
Cummins Inc.’s stock price closed at $166.29 Tuesday, up $2.15 (1 percent) from Monday’s close of $164.14.
Analysts react
Local analysts agreed that Cummins delivered a strong quarter, especially considering that it has been dealing with the impact of tariffs placed on materials used in its products, and geopolitical issues such as China’s slowing economy and the Brexit turmoil.
Scott DeDomenic, a senior vice president and wealth adviser with the Columbus branch of Hilliard Lyons — a Baird company, said that Cummins enjoyed a clean quarter with no special charges affecting it, such as warranty issues on products that have affected earnings in past quarters.
He said the company’s reported earnings per share of $4.20 beat Wall Street’s expectation of $3.57 and still would have beat the expectation subtracting a favorable tax gain of 23 cents from the earnings per share.
DeDomenic also noted that Cummins’ $6 billion in revenue for the quarter beat Wall Street’s estimate of $5.845 billion, and the company’s first-quarter EBITDA of $1 billion topped Wall Street’s expectation of $905 million.
“Their performance in a difficult quarter, they executed and are staged to take full advantage of a a post-tariff war global economy,” said Craig Kessler, chief investment officer of Columbus-based Kessler Investment Group.
Roger Lee, a senior research analyst with Columbus-based Kirr, Marbach and Co., said he doesn’t think the emissions review will turn into a big issue for Cummins. The fact that the company is working with the EPA and using a third-party to help evaluate its process shows that it isn’t playing games and is being transparent to avoid any appearance of another “dieselgate” when Volkswagen rigged their vehicles to meet standards for EPA testing.
“They just want to make sure they are covering their bases,” Lee said.
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Cummins Inc. released its 2019 first-quarter financial report on Tuesday. The results are compared to the Columbus-based company’s report for the first quarter of 2018. (Figures in millions, except earnings per share)
—;2018;2019;Variance
Net income;$325;$663;104%
Earnings per share;$1.96;$4.20;114%
Earnings before interest,taxes,depreciation,amortization;$700;$1,000;42.8%
Net sales;$5,570;$6,004;7.8%
Engine;$2,446;$2,653;8.5%
Power Systems;$1,074;$1,077;0.3%
Components;$1,753;$1,861;6.2%
Distribution;$1,853;$2,001;8%
Electrified Power;$2;$3;50%
Intersegment eliminations;-$1,558;-$1591;-2.1%
Source: Cummins Inc.
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"We are on track to deliver record results for the year and return significant capital to investors."
Cummins Chairman and CEO Tom Linebarger
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Cummins Inc.’s stock price closed at $166.29 Tuesday, up $2.15 (1 percent) from Monday’s close of $164.14.
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