Profits at Industry Suppliers Slip as They Report Lower Demand

This story appears in the Nov. 5 print edition of Transport Topics.

A number of trucking industry suppliers, led by engine maker Cummins Inc., all reported lower earnings in the third quarter due to falling demand for their products.

Cummins said its net income fell to $352 million, or $1.86 a share, from $452 million, or $2.35, a year earlier. It also confirmed it planned to slow production and cut jobs.

Third-quarter revenue decreased 11% to $4.1 billion, with 2% revenue growth in North America more than offset by a 21% drop from international markets.

“Demand has dropped sharply over the last three months, reflecting a high degree of uncertainty among customers in most geographic markets,” Tom Linebarger, the company’s chairman and CEO, said in an Oct. 31 earnings report.

Eaton Corp., Dana Holding Corp. and Allison Transmission Holdings Inc. also reported lower quarterly profits, while American Axle & Manufacturing Holdings Inc. posted a loss.

Companies are reporting lower profits, even though U.S. retail sales of Class 8 trucks totaled 47,409 during the third quarter, up 8% from the same period in 2011, according to data from WardsAuto.com. However, the quarter ended with a 9.1% monthly sales decline in September, the first year-over-year downturn since December 2009.

Vehicle parts maker Eaton, which is based in Cleveland, said earnings declined to $345 million, or $1.02 a share, from $365 million, or $1.07, a year ago.

Total sales declined 4% to $3.95 billion, while Eaton’s truck segment posted sales of $549 million, down 23% from 2011. Operating profit for the unit was $103 million, down 26%.

The company lowered its full-year 2012 forecast for total North American Class 8 production to 270,000 units, down from its forecast of 285,000 in July.

The lowered projection was “largely driven by the uncertain economic outlook in the U.S.,” Chairman and CEO Alexander Cutler said in the company’s Oct. 31 earnings report.

Dana, headquartered in Mau-mee, Ohio, said its net income fellto $56 million, or 26 cents a share, from $110 million, or 51 cents.

Sales for the quarter were $1.7 billion, a 12% decrease.

Dana CEO Roger Wood cited “choppy demand patterns and rapid softening in certain of our end markets, notably North America Class 8 commercial vehicle production.”

Allison Transmission, Indianapolis, said net income slipped to $32.2 million, or 17 cents a share, from $38.8 million, or 21 cents, in the same quarter last year.

Total sales for the quarter fell 14% from a year ago to $494 million, Allison said, with North American on-highway sales falling 5% to $189 million.

American Axle & Manufacturing, Detroit, posted a third-quarter loss of $8.1 million, or 11 cents, compared with a profit of $24.8 million, or 33 cents, a year earlier.

However, sales rose 8.5% from a year ago to $702.9 million, the company said.

AAM said its results reflect $10.1 million in debt refinancing and redemption costs and $3.2 million in restructuring costs related to the factory closures.

With demand falling, Cummins is freezing hiring, delaying or canceling capital projects and reducing production levels at some manufacturing plants through reduced workweeks and plant shutdowns, Linebarger said.

Earlier in October, Cummins announced plans to cut its workforce by 1,000 to 1,500 jobs by the end of the year (10-29, p. 16).

Linebarger said quarterly engine shipments in the North American heavy-duty truck market decreased 26% from a year ago.

“Although an industrywide cut in production rates was anticipated in the third quarter, the reduction was larger than expected, and the industry is experiencing slower than expected new order rates,” he said. “End-users are reluctant to proceed with new purchases, apparently due to uncertainty about the U.S. economy and concerns about possible impacts from the fiscal cliff.”

Cummins’ engine segment sales fell 14% to $2.5 billion in the quarter, with sales of heavy-duty truck engines falling 12% to $656 million.

Cummins confirmed its full-year revenue forecast of $17 billion, which it previously lowered from $18 billion on Oct. 9.

Cummins expects to invest between $650 million and $700 million in capital expenditures for the year, down from its previous guidance of between $750 million and $800 million.

Looking ahead, Linebarger said the market has “latent demand.”

“I think there are people out there who, if they had more confidence in the future of the U.S. economy, would buy more trucks and buy a significant number. So there is no question in my mind that when it turns up, it will turn up significantly,” he said.