Cummins Inc. took a hit to third-quarter earnings from its $3.7 billion acquisition of Meritor Inc., but the purchase will help at least two divisions of the engine maker and power distribution in coming years, the company said Thursday.
“The integration of Meritor’s people, products and capabilities in axle and brake technology will position Cummins as a leading provider of integrated powertrain solutions across the internal combustion and electric power applications,” Cummins CEO Jennifer Rumsey said on an earnings call with analysts.
It may take awhile. Cummins projects $130 million before taxes in synergies from merging the businesses after three years.
“On a percentage basis, it’s clearly going to be dilutive in the early part of the ownership, and the goal is to keep working that up over time,” CFO Mark Smith said.
Expensive integration of Meritor
Q3 net income was $400 million, or $2.82 per diluted share Excluding the costs of acquiring and integrating Meritor, net income was $456 million, or $3.21. Net income a year ago was $534 million, or $3.69.
Cummins lowered its full-year projection of earnings before interest, taxes, depreciation and amortization to 15% from 15.5%, not counting Meritor. Costs from the acquisition will taper in Q4, Smith said. Cummins will report its results including Meritor beginning in 2023.
Russia, China also problematic
Other issues affecting the 19% quarter over quarter to $884 million:
- Costs from indefinitely suspending Russia operations. That retreat led to a $158 million charge in Q2.
- A $16 million, or 9 cents per share, charge to prepare for the expected separation of the filtration business.
- A softer-than-expected China market, where COVID-19 lockdowns prevented engine production.
- Paying a one-time employee bonus to help retain employees.
Cummins charged about 4% more for its products in the quarter, nearly twice the 2.3% it paid in higher costs. That helped revenue grow 22% from a year ago to $7.3 billion, beating estimates by $170 million. Not counting Meritor, revenue was $6.6 billion, up 11%.
North America revenue grew 19% to $4 billion though better pricing, higher volumes and higher aftermarket demand, maintaining a projected 15% to 20% improvement. Cummins projects Q3 industry production of heavy-duty trucks of 64,000 units, up 23% year over year. The Columbus, Indiana-based company sees full-year North America heavy-duty production of 260,000 units.
Supply chain improving but not fixed
“We continue to see some supply chain disruption,” Rumsey said. “From where I sit, quarter over quarter it’s been improving and we’ve been taking build rates up and driving some operational improvement.”
But she said lingering supply chain issues, led by electronic components, make her dour on the prospects for a better Q4 and into next year even though Cummins forecasts EBITDA rebounding to 15.5%.
China remains a concern. The country that led the globe in rebounding from COVID in late 2020 is constricting business by companies with a large presence there like Cummins.
“That’s certainly not part of the improvement from Q3 to Q4,” Smith said.