Cummins Books Record 2Q Profit
Cummins Inc. sailed through the second quarter of 2018 financially even as company officials are figuring out how to mitigate the possible effect of changes in federal tariffs.
Cummins officials recently released the company’s second quarter financial results, with second quarter revenues of $6.1 billion showing a 21 percent increase from the second quarter of 2017 and setting a new quarterly record. The company reported growth in most major markets as demand for trucks, construction, mining and power generation equipment all improved.
Engine segment revenues were $2.7 billion in the second quarter, an increase of 17 percent from 2017, with a 16 percent growth in on-highway sales and a 20 percent increase in off-highway revenues. Full-year engine segment revenues are expected to increase 17 to 19 percent, much more than the previous guidance of 10 to 14 percent.
“As a result of strong customer demand for our products, solid execution from our global manufacturing and supply chain teams and continued focus on cost reduction, the company delivered record quarterly sales and earnings per share in the second quarter,” said Tom Linebarger, Cummins Inc. president and CEO. “We are on track to deliver record full-year sales, earnings and cash flow. The company now plans to return 75 percent of operating cash flow to shareholders in the form of dividends and share repurchases in 2018, up from our previous plan to return 50 percent.”
Based on the current forecast, Cummins officials expect full-year 2018 revenues to increase 15 to 17 percent, compared to prior guidance of a 10 to 14 percent increase. The company has downgraded its projected Earnings Before Interest, Taxes, Depreciation and Amortization to the range of 14.8 to 15.2 percent of sales, down from 15.4 to 15.8 percent of sales. Company officials said that change $100 million of expense associated with trade tariffs and increased commodity costs in the second half of the year.
In response to a question from a research analyst on the company’s earnings conference call last week, Linebarger discussed the effect tariffs have on a company like Cummins that does business around the world and has a global supply chain.
“The frustrating thing about the tariffs and steel and aluminum tariffs as well, they just drive inflation. So what’s happening is, we’re just adding taxes and inflation to our cost structure, which was already inflating, given how strong the economy was,” Linebarger said. “So that’s just going to drive more cost into the business. We’ll do our best to pass that on to other people, and of course, readjusting our supply chain to deal with tariffs is frustrating, because it’s a really cost-effective and efficient supply chain. It is what it is. We’ll have to do it, but it’s a frustrating situation to be in, considering how well we’re positioned today as the manufacturer with our global supply chain.”
Linebarger also discussed the progress company officials have made since November, when they discussed several ideas to drive the company’s future growth. Cummins is acquiring Efficient Drivetrains Inc. of Milpitas, Calif. EDI develops and produces hybrid and fully electric power for commercial vehicles. Linebarger said the acquisition complements Cummins’ existing electric power train work. The acquisition is expected to be completed later this year.
Cummins is also forming a joint venture with JAC Motors in China, building on a 20-year relationship between the companies. Linebarger said the joint venture will focus on light commercial vehicles in China and global export markets. The JAC Motors venture also includes Cummins’ acquisition of Navistar’s interest in the joint venture with JAC Motors. The change in ownership will go into effect upon completion of regulatory reviews.
“We had a strong quarter and are on track for a record full-year results, extending our track record of improving performance over prior cycles and continuing to return cash to shareholders,”Linebarger said. “We are also making significant strides in executing our strategy to drive more profitable growth in the future.”