Cummins Announces Increase in Quarterly Revenue, Raises Guidance
Cummins Inc. posted record revenue in the first three months of the year despite continued supply chain constraints, rising inflation and coronavirus outbreaks in China, as the company raised its revenue forecast for the year.
The Columbus-based company posted revenue of $6.4 billion in the January-March period, up 5% from the first quarter of last year. Sales increased by 12% in North America, although international revenues decreased by 3%, mainly due to a marked slowdown in China.
On a per share basis, Cummins reported net income of $2.92, compared to $4.07 a year ago. The company said it incurred $158 million in costs related to the indefinite shutdown of operations in Russia, resulting in a $1.03 drop in earnings per share last quarter.
Cummins’ first-quarter revenue beat Wall Street expectations of $6.03 billion, although earnings per share beat expectations of $3.55. However, earnings per share would have been $3.95 without the one-time costs of suspending operations in Russia, the company said.
Overall, the company expects revenue to grow 8% this year, largely fueled by stronger demand in North America and growth in most major regions except China. Cummins’ previous revenue forecast was 6%.
“We expect to deliver this strong profitability despite the supply chain constraints and rising inflationary costs that we are experiencing,” Cummins Chairman and CEO Tom Linebarger told financial analysts on Tuesday. “…Continued supply chain constraints in the industry, ongoing impacts related to COVID-19 and the effect of (conflict) in Ukraine all present challenges to normally operate our business.”
Engine: Sales of $2.8 billion represented a 12% increase. Highway revenues increased 14% on the back of pricing actions and strong demand in North American truck markets, as well as the recovery of the bus market, which was severely impacted by COVID-19, a said the company. Off-road revenue increased 5%. Sales increased 15% in North America and 4% in international markets.
Distribution: Sales of $2.1 billion were up 15% from the January-March period last year. Revenues in North America increased by 17% and international sales increased by 13%. The increase in revenues is mainly attributable to the increased demand for parts and whole products.
Components: Sales of $2 billion were down 8% from a year ago. Revenue in North America rose 8%, but international sales fell 21% due to lower demand in India and China, the company said.
Feeding systems: Sales of $1.2 billion represented a 14% increase over the first quarter of last year. Power generation revenue increased 9% due to strong demand in China. Industrial revenues increased 21% on stronger demand in the mining, oil and gas markets.
New Power: Sales of $31 million were down 11% from a year ago. Revenue declined due to the timing of commissioning of electrolyser projects and shipments of fuel cell systems to the rail market in 2021, the company said.
“A lot of challenges”
Cummins officials say they continue to face “numerous challenges” around the world as concerns grow that Russia’s war in Ukraine could further tighten the supply of materials needed to make computer chips and other key auto parts, while a new virus wave in China threatens to disrupt global trade and manufacturing.
Over the past month, Shanghai – a city of 26 million people – and other cities across China have shut down to fight coronavirus outbreaks, the Associated Press reported.
The flow of industrial goods has been disrupted by the suspension of access to Shanghai, home to the world’s busiest port, and other industrial cities in China, according to news reports. Several global automakers and other manufacturers have reduced or halted production at Chinese factories.
Cummins, for its part, reported a 31% drop in revenue in China in the first three months of the year, compared to record revenues in the country a year ago and forecast a weaker outlook in China. this year, with officials predicting a 10% decline in revenue this year.
“There’s a lot of uncertainty in supply chains,” Linebarger said. “…We are still very concerned about the impacts on the supply chain in the second half (of the year). …In our initial forecast for the year, we expected things to improve in the second half. We’re still expecting that, but our concerns are growing, especially with chips and electronics, and then with some of the shutdowns in China.
“We have a lot of challenges to run the business as normal,” Linebarger said.
At the same time, Russia’s invasion of Ukraine has created additional obstacles.
Ukraine is the world’s largest exporter of neon, a gas used in lasers that etch circuits onto computer chips, according to news reports. Most chipmakers have a six-month supply; later in the year, they might run out. This would aggravate the shortage of chips, which before the war was delaying production even more than automakers anticipated.
In addition, Russia is a key supplier of raw materials, including platinum and palladium, used in emission catalytic converters. Russia also produces 10% of the world’s nickel, an essential ingredient in electric vehicle batteries.
Industry analysts say they have no clear idea when parts, raw materials and auto production will flow normally.
Cummins officials are “monitoring what’s happening” with the sourcing of certain materials, including palladium and neon, but do not expect the company’s suppliers to be significantly affected at this stage.
“At this point, we don’t anticipate any significant impacts, but it’s something we’re paying attention to,” Jennifer Rumsey, president and chief operating officer of Cummins, said Tuesday.
Local analysts called Cummins’ first quarter performance “generally positive,” especially given the global economic climate.
“Overall, it was a generally positive quarter, and in a very challenging environment,” said Craig Kessler, president and chief investment officer at Columbus-based Kessler Investment Group. “I think the environment will continue to be difficult for them, but I think they’ve done a really good job of managing their costs and pricing in that environment.”
Roger Lee, senior research analyst at Columbus-based Kirr, Marbach and Co., said Cummins’ first-quarter performance is further evidence that the company has “become very good at adapting its supply chain to shocks. macroeconomics”.
“My biggest takeaway is that business in North America is very strong and able to keep pace with this demand,” Lee said. “They are flexible with their supply chain, so they are able to keep supply in line with demand.”
“They maintain profitability (forecast) and also increase sales to 2% more than the previous outlook,” added Lee. “…That really says a lot.”
Overall, the increased revenue forecast “should boost everyone’s confidence here in Columbus that things are on the right track at Cummins,” Kessler said.