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Cummins ships record number of engines in Q1, but EPA has questions for Cummins over Ram engines

A Cummins 6.7L turbo diesel engine in a 2019 Ram chassis. Cummins is reviewing is emissions certification and compliance process following questions from EPA and CARB. ( Photo: Ram Trucks )

Cummins Inc. (NYSE: CMI) continued to benefit from strong truck production in the U.S. and increasing demand in global construction markets as the Columbus, Indiana-based engine maker posted an 8 percent increase in first quarter revenues over the comparable quarter in 2018. Revenues for the quarter were $6 billion as North American sales increased 13 percent.

Earnings were announced before the markets opened on April 30, 2019.

However, Cummins faces emissions-related questions over the diesel engines it manufactures for Dodge Ram pick-up trucks.

“The company shipped a record number of truck engines in North America during the first quarter,” said Chairman and CEO Tom Linebarger. “Our market-leading position in this region reflects our close partnerships with our customers, who rely on us to provide a broad range of power solutions for their needs.”

For the second time in less than one year, though, Cummins is facing questions about one of its engines. The company announced on April 29, that it is reviewing its “emissions certification and compliance process for its pickup truck applications” after questions from the U.S. Environmental Protection Agency and the California Air Resources Board (CARB) over the Cummins diesel engine that powers the 2019 Ram 2500 and 3500 trucks.

The engine is a newly designed 6.7-liter turbo diesel offering up to 1,000 pound-feet of torque and up to 400 horsepower. At an unveiling of the redesigned Ram 2500 and 3500 models at the Detroit Auto Show in January, Ram (NYSE: FCAU) touted the Cummins engine’s power and towing capabilities.

“This is a voluntary action,” Linebarger emphasized, noting that the company holds “conditional certification” for those engines from both EPA and CARB.

“Because they are conditional, they have the right to make us stop if we don’t meet the conditions of these certifications,” Linebarger said.

An FCA spokesperson told FreightWaves that sales of the Ram models are not affected.

“FCA appreciates the efforts Cummins is taking to conduct its review,” the spokesperson said. “While the issues that are being discussed are between Cummins and other stakeholders, we will cooperate fully as necessary. FCA will advise customers if any action is required.”

 Cummins (NYSE: CMI) stock performance over the past year, displayed on  SONAR . ( Photo: FreightWaves/SONAR )
Cummins (NYSE: CMI) stock performance over the past year, displayed on SONAR . ( Photo: FreightWaves/SONAR )

Linebarger noted that Cummins does its own compliance testing that is submitted to both EPA and CARB for approval. The agencies have come back with questions.

“We got a lot of questions from the EPA, questions that we take very seriously,” Linebarger said. “Cummins remains committed to ensuring its products meet current and future EPA [regulations]. It is too early in our review to determine what and if there are any actions that we must take, and what impact it will [have on our financials].”

In July 2018, Cummins announced record second quarter earnings, but also a recall of 500,000 engines due to emissions problems. Those engines first impacted 230,000 heavy-duty Ram pickups and grew to include an additional 500,000 heavy-duty truck models. The recall was related to a catalyst that degrades faster than expected, allowing Cummins engines to exceed emissions control limits.

On the earnings call today, Linebarger dismissed any connection to previous engine problems, but declined to say what questions EPA and CARB had on the 2019 Ram engines.

“Right now we don’t have a way to quantify it or put a timeframe around it and it doesn’t make much sense to compare it to previous ones,” he said. “We will work with urgency to get to the bottom of the questions we got and to examine our certification and compliance processes.”

First-quarter earnings before interest, taxes, depreciation and amortization (EBITDA) were a record $1 billion, or 17.2 percent of sales, compared to $700 million or 12.6 percent of sales a year ago. First quarter results include a non-segment and non-taxable gain of $37 million ($0.23 per diluted share) related to the mark to market impact on assets related to a non-qualified benefit plans.

Net income in the first quarter was $663 million ($4.20 per diluted share), compared to net income of $325 million ($1.96 per diluted share), or $403 million ($2.43 per diluted share) excluding the impact of tax legislation in the first quarter of 2018.

“We achieved record EBITDA in the first quarter while also celebrating our 100th anniversary,” Linebarger said. “We are on track to deliver record results for the year and return significant capital to investors and will continue to invest across our broad portfolio to power a strong future for our stakeholders.”

Linebarger said Cummins is maintaining its 2019 revenue guidance of flat to up 4 percent. He attributed this to continued demand in the North American on-highway markets. EBITDA is expected to be in the range of 16.25 percent to 16.75 percent of sales, an increase from the prior range of 15.75 percent to 16.25 percent of sales, primarily due to lower projected material costs.

Linebarger said Cummins was increasing its heavy-duty NAFTA truck forecast to 300,000 units for 2019, up from prior guidance of 292,000 units. He expects market share to finish between 32 percent and 34 percent this year. Medium-duty (Class 6-7) engines will be up 6 percent to 140,000 units in 2019, Linebarger said. It held a 79 percent market share in the first quarter of 2019, down slightly from the first quarter of 2018’s 81 percent. Brazil is also expected to be up 13 percent this year. China, down 10 percent, and India, down 5 percent, will not fare as well in 2019.

The company expects to return 75 percent of Operating Cash Flow to shareholders in 2019 in the form of dividends and share repurchases.

In its various segments, Cummins reported 8 percent growth for its engine segment with sales of $2.7 billion and EBITDA of $438 million, compared to $286 million in 2018. On-highway revenues jumped 9 percent, led by North America, while off-highway revenues improved 6 percent as the global construction markets picked up.

In the Distribution segment, North American revenues again powered a gain of 8 percent on sales of $2 billion. EBITDA was $171 million compared to $123 million in 2018. The company said that data center sales were particularly strong in North America, but a stronger U.S. dollar impacted overall sales by 2 percent.

A 17 percent increase in North American revenues from higher heavy- and medium-duty truck production helped offset an international sales decline to lead the components segment up 6 percent to sales of $1.9 billion. International sales fell 8 percent, but the segment managed an EBITDA of $325 million, compared to $227 million in 2018.

Neither the Power Systems segment nor the Electrified Power segment fared as well as other segments. In Electrified, Cummins reported sales of $3 million and a loss of $29 million as it seeks to build up its electrification strategy and made several investments in these efforts, the company said. The Power Systems segment recorded sales of $1.1 billion, but that was flat compared to 2018, with industrial revenues up 1 percent and power generation revenues down 1 percent. EBITDA for the segment was $138 million, compared to $142 million in 2018.

Cummins 2019 Q1 financial statements:


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Brian Straight

Brian Straight leads FreightWaves' Modern Shipper brand as Managing Editor. A journalism graduate of the University of Rhode Island, he has covered everything from a presidential election, to professional sports and Little League baseball, and for more than 10 years has covered trucking and logistics. Before joining FreightWaves, he was previously responsible for the editorial quality and production of Fleet Owner magazine and Brian lives in Connecticut with his wife and two kids and spends his time coaching his son’s baseball team, golfing with his daughter, and pursuing his never-ending quest to become a professional bowler. You can reach him at [email protected].