Cummins’ Revenue Hit by Truck Industry Headwinds

North America revenues fell 13% while international sales declined by 4%

C1Cummins Inc. (NYSE: CMI) announced its Q2 FY16 financial results on August 2nd, 2016. The Columbus, Indiana-based company designs, manufactures, distributes, and services diesel and natural gas engines, and engine-related component products. It operates through four segments: Engine, Distribution, Components, and Power Systems. The Engine segment offers various diesel and natural gas powered engines under the Cummins and other brand names for the automotive, agricultural, and construction markets. The Distribution segment distributes parts and filtration products, engines, and power generation products, as well as offers service solutions. The Components segment provides emission solutions and engineered components. The Power Systems segment designs and manufactures components that make up power generation systems. Cummins earned $1.4 billion on sales of $19.1 billion in FY15. Read more about Cummins’ financial results below.

Q2 FY16 financial highlights

During Q2 FY16, Cummins reported a 10% fall in revenues to $4.5 billion as compared to the year-ago period. Revenue declined due to lower truck production in North America and weak global demand for off-highway and power generation equipment. To add to its woes, currency negatively impacted revenues by about 1% during the reporting quarter due to a strengthening U.S. dollar.

Source: Cummins
Source: Cummins

During the reporting quarter, the Company’s revenues in North America fell 13% while international sales declined by 4%. Within international markets, revenues in the Middle East, Mexico and Brazil declined the most. As a result, Q2 FY16 EBIT was at $591 million, or 13.1% of sales, down from $721 million, or 14.4% of sales in the year-ago quarter.

Consequently, Cummins’ net income fell to $406 million in Q2 FY16, or $2.40 per diluted share, compared to $471 million, or $2.62 per diluted share, in the year-ago period.

Source: Cummins
Source: Cummins

 

Segmental highlights

C4Engine Segment: This segment’s sales declined 14% to $2 billion in Q2 FY16 as compared to the year-ago period. The Company’s EBIT in this segment was $206 million, or 10.3% of sales, compared to $278 million, or 12% of sales, in the year-ago period, due to a $39-million charge to increase the estimate for the loss contingency recorded in Q4 FY15. On-highway revenues declined 15% due to weaker truck production in North America during the reporting quarter. Another cause for concern for Cummins is that its major customers, including PACCAR Inc. (NASDAQ: PCAR), and Daimler AG, continue to replace Cummins’ engines with that of their own.

C5Distribution Segment: This segment’s sales grew 3% to $1.5 billion in Q2 FY16 as compared to the year-ago period. The Company’s EBIT in this segment was lower at $87 million, or 5.6% of sales, compared to $113 million, or 7.6% of sales in the year-ago period. This was mainly because higher revenue from acquisitions was partially offset by a decline in organic sales in North America and the Middle East and the negative impact from a stronger U.S. dollar.

C6Components Segment: This segment’s sales fell 8% to $1.3 billion in Q2 FY16 as compared to the year-ago period. The Company’s EBIT in this segment was lower at $190 million, or 14.9% of sales, compared to $223 million, or 16% of sales, in the year-ago period. This was mainly because revenues declined in North America due to lower industry truck production, partially offset by growth in China.

Power Systems Segment: This segment’s sales fell 16% to $921 million in Q2 FY16 as C7compared to the year-ago period. The Company’s EBIT in this segment was lower at $90 million, or 9.8% of sales, compared to $127 million, or 11.6% of sales, in the year-ago period. Revenues declined in most major markets due to weak demand for power generation equipment and industrial engines.

Other highlights

Cummins won the 2016 Award of Excellence in Energy Management from the Clean Energy Ministerial (CEM), a high-level global forum that promotes policies and programs to advance clean energy.

Stock repurchases & Dividend

During Q2 FY16, Cummins repurchased 1.8 million shares, and has already returned more than $1 billion to shareholders in the form of dividends and repurchases so far in FY16. As part of its goal to return 75% of operating cash flow to shareholders in FY16, Cummins’ board approved a 5.1% increase in quarterly cash dividend to $1.025 per share.

Guidance for full year FY16

Source: Cummins
Source: Cummins

Based on the current forecast, Cummins expects full year FY16 revenues to decline by 8-10%, more than its previous guidance of a 5-9% decline, primarily due to a lower outlook for North America truck production and weaker demand in global off-highway markets. Cummins anticipates EBIT margin of between 11.6% and 12.2% of sales for full year FY16, unchanged from the last quarter.

The company now expects full-year FY16 consolidated revenue to decline between 8% and 10% from FY15, a reduction from the previous guidance that predicted a decline of 5% to 9%. The downward revision of the previous guidance is mainly due to a decline in production in the North American truck markets and weak demand worldwide for off-highway and power generation equipment.

Even so, Cummins’ cost reduction initiatives are on track and benefits from restructuring actions, material cost reduction initiatives, and improvements in product quality are expected to mitigate the impact of weak demand in a number of its largest markets.

Stock Performance

C9Cummins’ stock ended the day at $127.11, gaining 0.82%, at the close on Thursday, August 11th, 2016, having vacillated between an intraday high of $127.37 and a low of $126.08 during the session. The stock’s trading volume was at 803,382 for the day. The Company’s market cap was at $21.27 billion as of Thursday’s close.

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