Cummins counts on century-long survival skills to weather pandemic

Cummins signage

Across its 100-year history, Cummins Inc. (NYSE: CMI) has weathered numerous economic downturns, showing survival skills that could again allow it to thrive as global economies inch back to life.

“I’m confident that we will successfully navigate [the coronavirus pandemic] and emerge stronger than ever,” Tom Linebarger, CEO of the leading maker of diesel engines for medium- and heavy-duty trucks, told analysts on Tuesday’s first-quarter earnings call.

“Our leadership team is spending a lot of time planning ahead, running a number of scenarios and responses, including identifying opportunities to strengthen our competitive position during this time,” he said.

Cummins emerged from the first three months of the year with far better financials than expected, mostly due to significant cuts made before the global health crisis hit. Cummins eliminated 2,000 jobs worldwide in the first quarter, saving $250 million to $300 million.

The pullback mostly addressed what Cummins saw as an inevitable cyclical downturn among its major truck-making customers. Orders for new equipment dropped in 11 of 12 months in 2019 after fleets in North America purchased nearly 600,000 new trucks in 2018 and 2019.

Once the coronavirus pandemic struck, Cummins made more cuts, including temporary salary reductions expected to save approximately $30 million per month and a 25% cut in capital spending compared to 2019. Following closures by its major customer, Cummins idled four engine plants in southern Indiana from April 6 until at least May 4.

“We are unable to project the full impact that the pandemic and the secondary effects will have on our demand for the remainder of the year, but we are planning for weak levels of demand for some time,” Linebarger said, adding that more cuts are planned depending on the timing and strength of the economy recovery.

At the end of March, Cummins had $2 billion of cash and marketable securities and $1.9 billion of committed credit facilities available.

First-quarter resilience

Cummins blew through analysts’ estimates for revenue and profits in the first quarter, beating sales estimates by $13 million and fully diluted earnings per share by $1.23. Cummins’ shares closed Tuesday up $9.69, or 6.4%, at $161.13.

The leading maker of diesel engines for on- and off-highway trucks reported net income of $511 million, or $3.41 per fully diluted share, down 17% from $663 million in the same quarter of 2019.

Earnings before interest, taxes, depreciation and amortization (EBITDA) were 16.9% of sales compared with 17.2% in the first quarter of 2019.

In North America, first-quarter revenues declined 16% to $3.1 billion, driven by lower industry build rates of medium- and heavy-duty trucks. Weakness in engine sales to the construction sector, down 39% from a strong year-ago first quarter, was compounded by oil and gas markets, down 81% because of the crude oil glut has hit the fracking industry disproportionately hard.  

Product advances vs. slowing production

Industry-wide, heavy-duty truck production dropped 32% in the quarter and was 10% below the fourth quarter, where the squeeze on sales and profits began in earnest. Despite the quarter-over-quarter decline, Cummins’ engine deliveries in the first quarter were flat. 

The company’s new X15 Efficiency Series engine, which meets 2021 greenhouse gas standards with improved fuel economy, is being well received by customers, Linebarger said. Cummins is testing a cylinder-deactivation technology called diesel Dynamic Skip Fire on the X15 that could result in dramatic reductions in oxides from nitrites (NOx).

The X15 Efficiency Series will be followed by deliveries later this year of the low-weight X12 platform on the Freightliner Cascadia day and sleeper cab chassis.

Medium-duty truck production dropped 38% in the first quarter, impacted by manufacturer plant closings at the end of March that continue this month. Cummins leads the engine market for medium-duties and will begin supplying first-time customer Mack Trucks with its B6.7 in-line six-cylinder engine for its new MD Series models.

China’s Recovery

Cummins has a significant joint-venture presence in China. After four-to-six weeks of shutdowns, its plants are operating at higher than pre-crisis levels. First-quarter revenue in China was down 17%.

“What we don’t understand is whether end-use demand is matching production rates today,” Linebarger said. “China is, like all the other economies, interlinked, with other economies. We’re cautious about whether or not this level of production can be supported by end-use demand in China.”

Part of the answer to that question is how much economic stimulus the Chinese government injects into its economy. The more money China provides to businesses, the longer higher production could continue. 

“The less they provide, the more it seems like it can’t be sustained for the entire year,” Linebarger said. “We remain cautious about whether it can be sustained at this level.”