Cummins Inc. (NYSE: CMI) Q3 earnings rebounded from the biggest decline in quarterly sales in its 100-year history to the largest sequential increase. The diesel and alternative powertrain manufacturer blew through revenue and profit estimates for the July-September quarter.
Third-quarter revenues of $5.1 billion fell 11% from the same quarter in 2019. Sales in North America declined by 18%. International revenues were flat, the company said Tuesday.
Earnings before interest, taxes, depreciation and amortization (EBITDA) in the quarter were $876 million (17.1% of sales), compared to $958 million (16.6% of sales) a year ago.
Third-quarter net income was $501 million, or $3.36 per diluted share, compared to $622 million, or $3.97 per diluted share, in 2019.
Revenue exceeded analyst estimates by $640 million, EBITDA by $235.1 million and earnings per share by $0.88.
Cummins shares traded at $223.34, up $2.66 or 1.21%, at 11:25 a.m. EDT Tuesday.
11 straight years of dividend increases
Cummins earlier raised its quarterly dividend to shareholders to $1.35 from $1.31 a share. The 3% increase marks the 11th consecutive year of dividend increases.
“Over the last six months we have faced both the most severe decline in quarterly sales in our history as well as the largest sequential increase,” Cummins Chairman and CEO Tom Linebarger said in a press release. “Cummins successfully translated increased sales into strong profits and produced record operating cash flow during the third quarter.”
Cummins expects fourth-quarter revenues to be similar to third-quarter levels. It sees higher demand in North America truck markets and continued improvement in aftermarket sales but lower demand in China.
Salary cuts rescinded
The company on Oct. 1 rescinded temporary salary reductions that began in April. Compensation is expected to rise by approximately $90 million in the fourth quarter. Cummins saved $165 million from the cuts from mid-April through September, Chief Financial Officer Mark Smith said on the company’s conference call with analysts.
Linebarger said, “We are encouraged by the recovery in demand across our markets in the third quarter. We will continue to manage cautiously through the remainder of the year as visibility on future orders remains low and the impact of the virus on economies around the world remains difficult to predict.”
Linebarger said that after pausing merger and acquisition activity in the second quarter because of the coronavirus, Cummins is again looking for companies that meet its goal of growing its New Power segment. Cummins purchased Candian fuel cell maker Hydrogenics in September 2019 and has made other investments since to build out a hydrogen business.
“We’re continuing to look in those same areas,” Linebarger said on the earnings call. “I expected given the [pandemic] disruptions for valuations to be lower. That has not happened so much. It doesn’t mean it won’t happen. We’ll continue to talk to people and if we find the right thing at the right price, we’ll act.”
Growing the diesel engine business
Earlier this month, Cummins revealed its 2021 heavy-duty X12 and X15 series engines compliant with U.S. Environmental Protection Agency. Production begins Jan. 1.
Cummins is the leading independent engine maker and supplies all major truck manufacturers. It had a 27.8% share of Class 8 truck engines through the first half of 2020, trailing only Detroit Diesel, a brand of Daimler Trucks North America, according to WardAuto.com.
Linebarger said some truck makers are trying to figure out what engine lines to continue making themselves and what to purchase.
“There’s no deal until there’s a deal,” he said. “These are very difficult decisions for them to figure out what they want to continue and what they don’t. I feel very optimistic that we’ll play an increasing role with our major customers in selling them more diesel engines, providing them more components technology. I expect market share increases in the future.”
In the third quarter, Cummins’ primary engine business saw sales decline to $2.1 billion, down 13%. EBITDA was $382 million, or 18.1% of sales, compared to $341 million or 14.1% of sales.
On-highway revenues decreased 13%. Off-highway revenues declined 9%. North American sales declined by 18% but increased 8% in international markets.
Most of the increase reflected demand in China, which was true across all of Cummins’ business segments, Smith said.
Shoring up the balance sheet
Cummins leveraged its A+ long-term credit rating to sell $2 billion debt that will mature in five, 10 and 30 years. Ratings agencies Standard & Poor’s and Moody’s have stable outlooks for Cummins.
The company in collaboration with the U.S. Department of Energy’s Oak Ridge National Laboratory is producing enough filter media to supply more than a million face masks and respirators per day to U.S. healthcare facilities.
The U.S. Department of Energy made five awards exceeding $12 million to Cummins for projects related to Proton Exchange Membrane (PEM) and Solid Oxide fuel cell and electrolyzer technologies.