INDIANAPOLIS — Cummins Inc. shareholders today will hear about a financially strong 2017, but one that could have been a “blowout” year had it not been for quality charges incurred by the Columbus-based company.
Tom Linebarger, chairman and CEO of the global power and technology company, said he will explain during the annual shareholders meeting that while a vast majority of its markets improved, the cost of quality corrections for certain Cummins products restricted greater profitability.
Cummins’ fourth quarter of 2017 set a company quarterly sales record of $5.476 billion, which was then topped by $5.570 billion in sales in the first quarter of 2018, reported last week. On top of that, the company officially launched its Electrified Power business on Jan. 1 after spending 2017 ramping up.
However, the company’s stock price doesn’t reflect the same success.
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A $187 million charge to fix an aftertreatment problem for certain on-highway products was incurred in the first quarter of this year. Cummins spent more than $250 million since the fourth quarter of 2015 to fix some products.
“I’m disappointed with some of our quality costs for the year. Our financial numbers were good for the year. They would have been a blowout if we had not had the extra costs related to some of the problems we had from earlier launches,” Linebarger said.
The product-defect charges have been to fix problems to engines sold between 2010 and 2015.
Cummins stock reached a company record closing price of $192.50 on Jan. 26, but the value has dropped into the $140s since Thursday.
The company is well positioned for the future, Linebarger said, but shareholders have every right to be disappointed that the cost to fix problems with past products has taken the high point off the company’s success.
Those successes, Linebarger said, include:
- Most sector-based markets experiencing an upturn for the first time since 2012
- Cummins launching four new engine platforms in North America
- Launching new products in India
- Gaining market shares
- Investing in and launching new-growth platforms
“We’re investing in making sure we lead in our core business (diesel engines), but also doing things to make sure five or 10 years down the road we’ve got new-growth platforms,” he said.
Engine systems the company sells have become increasingly complex, but the old test cell field-test methodology the company used couldn’t adequately predict every single circumstance that might be encountered, Linebarger said.
“Some of the old tools we have been using just aren’t working well enough to catch the most complicated system issues,” Linebarger said.
Now the company is using new testing tools to simulate conditions and more accurately predict issues, he said.
“We think we’ll have this quality issue behind us relatively soon,” Linebarger said, describing a reasonable timetable as three to six months.
Electrification
Last year was an important one for the Electrified Power segment, Linebarger said, as the company bought two battery companies, began efforts to produce electrified powertrains for buses by late 2019 and unveiled a prototype heavy-duty truck with an electric powertrain.
However, Linebarger said it could be about 2025 before the business has significance comparable to the company’s other four business segments. Electrified Power had $2 million in sales in the first quarter of 2018, while the Engine, Components, Power Systems and Distribution segments each topped $1 billion.
However, the emergence of the electrified business has added jobs in southern Indiana, with about 20 employees assembling battery packs at the Columbus Engine Plant on Central Avenue in Columbus. Employees are being trained so they can eventually move from engine assembly to battery pack assembly, Linebarger said.
Mergers, acquisitions
The acquisition of the battery companies to accelerate the growth of the Electrified Power business represents a change in the company’s philosophy, Linebarger said.
“In the old days, we pretty much didn’t do that. We had so much growth ourselves that it was not sensible to go spend money acquiring, that we’d just go invest it ourselves,” he said.
Now the company is busy reviewing about a dozen possibilities for mergers or acquisitions to determine if they can help Cummins grow. One is an industrial gas-engine business that General Electric Co. wants to sell.
“If we added another large engine (business) of any kind, we’d already have a lot of investment there that we could leverage to do more,” Linebarger said.
Cummins has large-engine business investments with manufacturing, engineering, service, field capability, customers and partners. Adding another large-engine business could benefit its Power Systems business products in the oil and gas, marine, rail and mining markets, Linebarger said.
Women’s initiative
In addition to the company’s financial update, Cummins shareholders will learn more today about the Cummins Powers Women initiative, Linebarger said.
It’s a multi-million-dollar investment in programs designed to empower females during a three-year rollout, advancing its long-term company commitment to equality.
The initiative, which launched in March, will focus on areas where significant barriers exist to the advancement of females.
Cummins has invested $10 million with eight nonprofit partners worldwide to get the initiative rolling.
Women and girl empowerment is the issue of our age, Linebarger said.
“Our view is not only do we have progress to make at Cummins, in terms of including more women at all levels of the company, but our communities we work in have a lot of progress to make,” the chairman and CEO said.
Women comprise 20 to 25 percent of Cummins’ salaried workforce, and less than half of the members of the company’s leadership team are women — 6 of 17, according to the company website.
Ideally, those numbers would be about 50 percent — reflective of the general population — in the long run, Linebarger said.
The next step is to pull in more companies and organizations to join initiative, he said.
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What: Cummins Inc.’s annual shareholders meeting
When: 11 a.m. today
Where: Cummins’ global Distribution Business headquarters, 301 E. Market St., Indianapolis
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