Cummins reports weak Q4 results amid uncertainty over coronavirus

Cummins headquarters building

Engine maker Cummins Inc. (NYSE: CMI) reported lower fourth-quarter 2019 sales and earnings, partially due to a $119 million pretax charge related to the layoff of 2,000 employees in January.

The company expects to realize most of $250 million to $300 million in savings from the restructuring this year, but it still issued soft guidance for 2020. Full-year revenues are expected to be down 8-12%, with the biggest hit in the first quarter.

Coronavirus uncertainty

That does not count the impact of the coronavirus epidemic. Cummins has several manufacturing operations near Wuhan, China, the epicenter of the outbreak.

“Right now, we don’t know what the exposure is going to be,” Tom Linebarger, Cummins chairman and CEO, told analysts Tuesday on a conference call.

The company has three concerns: protecting its employees in China; preventing customer impacts; and getting its Chinese business up and running after the extended shutdown following the Chinese New Year, Linebarger said.

“We are planning to open our facilities somewhere between Feb. 10 and Feb. 14,” he said. “Right now, there’s no backup date being given by the government. We are worried about shipments in China as well as shipments to markets outside of China.”

Tough quarter

Columbus, Indiana-based Cummins reported fourth-quarter revenues of $5.6 billion, down 9% from the same October-December period in 2018. Lower truck production in North America and weaker demand in global construction, mining and power generation drove the majority of the revenue decrease.

Fourth-quarter earnings before interest, taxes, depreciation and amortization (EBITDA) were $563 million, or 10.1% of sales. Not counting the restructuring charge, EBITDA were $682 million, or 12.2% of sales, compared to $896 million, or 14.6% of sales, a year ago.

Net income in the quarter was $300 million, or $1.97 per share, compared to $579 million, or $3.63 per share a year earlier.

Full-year revenues were $23.6 billion, 1% below 2018. EBITDA for the year was a record $3.6 billion, or 15.3% of sales. Excluding restructuring, EBITDA was $3.7 billion, or 15.8% of sales. That compares to $3.5 billion or 14.6% of sales in 2018.

Trucking slowdown

Cummins reported its Class 8 truck engine market share at 32% for 2019, down two percentage points from 2018. Truck builders tend to prioritize their own engines when the market declines, Cummins President Tony Satterthwaite said on the call.

The current Class 8 truck backlog of 123,000 is less than half of the orders that were waiting to be built a year ago. If new orders continue to trickle in as they have for the past year, Cummins may have to make more cuts.

“We’re just calling it like we see it,” Linebarger said. “All we can do is react to the schedules [the manufacturers] are sending us. We have tended [to be] on the conservative side of this downturn.”

Merger impact

Cummins could gain or lose if the proposed merger of TRATON SE, the truck holding company of Volkswagen AG, and Navistar International Corp. goes forward. TRATON last Thursday offered $2.9 billion cash for the 83% of  Navistar it does not already own. TRATON worked with Navistar on its popular International A26 engine.

“We have been having conversations with both TRATON as well as with Navistar,” Linebarger said, adding that Cummins has a joint venture with TRATON’s Scania brand. “We believe we’re building strong relationships with both.

“We have as many opportunities from this merger as there are threats,” he added. “I think both companies see Cummins as a potential asset to them in terms of how they approach their future business.”

By the numbers

Other highlights of the earnings report and conference call commentary:

  • Medium-duty engine share in 2019 was 80%. It is projected to be 75-80% in 2020.
  • Heavy- and medium-duty engine production is projected at 303,000 in 2020, with heavy duties down 40% from 2019.
  • Cummins launched its X15 Efficiency Series engine in 2019. It meets the 2021 Phase 2 federal Greenhouse Gas (GHG) standards a year early and offers 5% better fuel efficiency.
  • The company returned a record $2 billion in cash to shareholders through dividends and share repurchases in 2019.