Industry-wide company shutdowns and weak economic activity due to the coronavirus pandemic drove Cummins Inc. to the largest drop in sales in a decade and the largest quarterly revenue decline in the company’s 101-year history.

On Tuesday, the Columbus-based company reported second-quarter revenue declined 38% to $3.9 billion, down from $6.2 billion during the same quarter last year. The company saw steep drops in sales across much of the world, including a 48% decrease in sales North America and 71% decrease in shipments to North American pickup truck customers.

“Our company faced unprecedented volatility in demand this quarter,” Chairman and CEO Tom Linebarger told financial analysts on Tuesday. “In April, over 70% of (manufacturing) sites that we ship to experienced full shutdowns in their facilities. Many (sites) began the process of reopening facilities in May, with increases in build rates constrained by supply chain challenges. Production rates further increased in June. The result of the shutdowns and managed reopenings was the largest decline in revenue in the company’s history.”

Net income of $276 million was down from $675 million in the second quarter of 2019, the company reported. Demand for engines in oil and gas markets declined 88% due to a reduction in purchases of fracking equipment.

International revenues decreased 22% compared to last year except in China, where many Cummins facilities saw “record volumes” during the second quarter.

The company said four of its business segments — Engine, Distribution, Components and Power Generation — experienced sales decreases of at least 21% compared to the same period last year:

‘Record volumes’ in China

Though overall international revenue decreased during the second quarter, China was a different story, Cummins said.

Revenues in China increased a record 30% to $1.9 billion compared to a year ago and demand for medium- and heavy-duty trucks increased a record 61% driven by delayed purchases from the first quarter and government policies that increased the scrapping of old trucks, Linebarger said.

Most Cummins facilities in China, including several in Hubei Province and its capital Wuhan, experienced shutdowns of four to six weeks during the first quarter of the year as the outbreak of coronavirus spread across the country and the world.

By the end of March, all of Cummins’ manufacturing facilities in China were fully operational and the company was seeing “high levels of demand,” including in Wuhan, where the first outbreak of COVID-19 was detected, company officials said.

“Our manufacturing facilities transitioned from full shutdown in March to making a record number of engines, turbochargers and after-treatment systems in April and continued to produce at those record levels in May and June,” Linebarger said.

However, Cummins officials said they don’t expect the record levels of demand in China to continue and “just don’t understand how it sustains that level for the rest of the year,” Linebarger said.

“Demand for capital goods in China is typically seasonally weaker in the second half of the year than in the first half of the year,” said Cummins Vice President and Chief Financial Officer Mark Smith. “We have just come off of record levels, but I think there’s a reasonable expectation of some cooling going into the third quarter.”

Uncertain 2020 outlook

Cummins expects uncertain global market conditions to persist at least for the rest of the year as the full impact of COVID-19 on the world economy and the pace of recovery come more into focus.

Cummins officials, however, expect the company’s third-quarter revenue to improve from second-quarter levels across all regions except China, as many countries ease lockdowns imposed in March and April.

But the pace of economic recovery and the level of demand for Cummins products may “differ from region to region” and change based on government actions both to control the spread of COVID-19 and/or to stimulate their economies to build more business and consumer confidence” and “depends a lot on how sick everybody gets,” Linebarger said.

Earlier this year, Cummins withdrew its business outlook for 2020 because its initial forecasts were made before the coronavirus pandemic spread around the world.

“If we continue to see rises in cases in the U.S. where we have to continue to revert more and more towards economic shutdowns, you should expect demand to fall off again,” Linebarger said. “If the reverse happens and things start to get better and the COVID cases start to decrease again, we expect things to gradually keep opening and getting better. So most of us are looking at that and saying, ‘We don’t really know how to call that yet.’ ”

Cummins has taken a series of cost-saving actions this year, including temporary salary reductions and other discretionary spending cuts, Smith said.

In mid-April, Cummins temporarily reduced salaries for employees in the United States, including a 50% reduction in salary for Linebarger, a 25% reduction in director compensation and a 10% to 25% drop in salaries and reduced hours for all other employees in the United States, the company said.

The temporary reductions, which are expected to remain in place through the end of September, reduced company expenses by around $75 million in the second quarter, Smith said.

This past November, Cummins announced plans to reduce structural costs by $250 million to $300 million in 2020, including reducing its global workforce by around 2,000 employees, in anticipation for what company officials thought would be a cyclical downturn this year.

Linebarger said those reductions were based on a previous sales estimate for the year and “then COVID hit and takes the sales down significantly lower, ideally, on some temporary basis”

“We really just don’t know at this stage where we’re going to level out on sales between the lowest level we hit and where our original estimate for 2020 was and 2021,” Linebarger said. “…If the revenue trend looks right and it looks like we’re getting back to where we thought we would be, then we’ll be there or thereabouts and we’ll have to do relatively modest things. If we think we’re in a sustained lower period, then we’re going to have to do more than that. We’re prepared for both.”

Linebarger said “reducing headcount and cutting pay are the last options that we use to manage the expenses” and expressed confidence the company will weather the economic storm caused by the pandemic.

“Our company delivered reasonable profitability given the magnitude of the sales decline,” Linebarger said. “…When demand returns, which it will, Cummins will be in a strong position to deliver the products and services that will drive our customers’ success and deliver even stronger financial performance.”

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