Cummins: Analysts say emissions penalty not an issue

Local financial analysts say that Cummins, Inc. is in a strong enough financial position that a $2 billion penalty for alleged emissions violations is unlikely to disrupt the company’s operations — and expect Columbus’ largest employer to continue being profitable.

Earlier this week, the Justice Department released new details of a settlement between Cummins and federal and California authorities to resolve allegations that the Columbus-based company installed software on certain RAM pickup truck engines that thwarted emissions rules in violation of the Clean Air Act.

As part of the settlement, Cummins has agreed to pay a $1.675 billion civil penalty — which the government said is the largest civil penalty ever under the Clean Air Act — recall 600,000 RAM trucks and fund emission mitigation projects. The cost of the projects and recall are estimated at more than $325 million, bringing the total penalty to around $2 billion.

The engines in question were made at the Cummins Mid-Range Engine Plant in Walesboro, Cummins officials told The Republic previously. Cummins, which did not admit wrongdoing in the settlement, has said that it fully cooperated with regulators and “has seen no evidence that anyone acted in bad faith.”

Craig Kessler, president and chief investment officer at Columbus-based Kessler Investment Group, said he does not anticipate that the settlement will have any material impact on Cummins’ business or the community.

“They have enough cash to just write a check for the penalty as it is,” Kessler said. “I’m not saying that’s how they will handle it, but the fact is that they can cover the cost of this with just the cash that’s on the balance sheet.”

“I think Cummins has handled this professionally and to the benefit of the community and investors,” Kessler added. “…We don’t think it will have a material impact on the community. This should be something that is in their rear-view mirror relatively quickly.”

To put the civil penalty in perspective, Cummins reported about $25.5 billion in revenue over the first nine months of 2023, according to filings with the U.S. Securities and Exchange Commission. The company also reported about $2.2 billion in net income over the same period. Net income is often seen as a company’s final measure of profitability.

Cummins has not yet released its fourth quarter and full-year results for 2023.

Roger Lee, director of research at Columbus-based Kirr, Marbach and Co., said he still expects the company “to be profitable even with the effects of the settlement.”

“(The penalty) is not going to wreak havoc,” Lee said. “It’s just probably going to delay stock buybacks and things of that nature. I think it’s just more of a change in how they’re going to allocate capital for the next year or two. It’s not like it’s going to fundamentally reshape the business.”

“The company is in such a good financial position where it stands currently that this isn’t like a death blow,” Lee added. “It’s more just like a scarlet letter for a little bit.”

The civil penalty has not prompted a steep decline in Cummins stock. On Friday, Cummins stock opened at $239.98 per share, down 1.6% from a closing price of $244 on Dec. 21, the day before the penalty was publicly announced, according to Yahoo Finance. However, the company’s stock opened about 2.3% higher on Friday than its closing price of $234.67 a month earlier.

Cummins has said it expects to record a $2.04 billion charge during the fourth quarter of 2023 due to the settlement and “other related matters” involving approximately 1 million pick-up truck applications in the United States. Of that amount, approximately $1.93 billion relates to payments that are expected to be made in the first half of 2024, the company said.

“The company is in a strong financial position with existing liquidity and access to capital to satisfy obligations associated with the settlements, support ongoing operations and execute its growth strategy,” Cummins said in a statement last month.


Earlier this week, a 23-page complaint filed in U.S. District Court in Washington, D.C., shed some additional light on the allegations announced by the Justice Department last month.

The complaint alleges that certain “software functions and calibrations” that Cummins installed on 630,000 model year 2013 to 2019 RAM pickup trucks affected the vehicles’ emissions controls differently when being tested in a laboratory versus “during other kinds of normal operation.”

During federal emissions, the software and calibrations activated full emission controls and were “compliant with emission standards.” However, the software and calibrations reduced the effectiveness of the vehicles’ emission control system “during normal vehicle operation outside of the parameters of some of the federal emission tests,” leading to elevated nitrogen oxide emissions.

The end result, the government alleges, is that the vehicles emit nitrogen oxides “at a much higher level than emission standards allow.” Preliminary estimates from the Justice Department suggest that the software and calibrations “have caused (the engines) to produce thousands of tons of excess emissions of nitrogen oxides,” U.S. Attorney General Merrick B. Garland said in a statement last month.

The Environmental Protection Agency says nitrogen oxide pollution damages the human respiratory system and contributes to acid rain, among other things.

Cummins told The Wall Street Journal that it did not install specific hardware devices to circumvent emissions regulations. Instead, the company attributed the problem to software that was not “properly calibrated” to meet emission standards “at all times.”

The company said it conducted an extensive internal review and “worked collaboratively” with regulators on the matter for more than four years and has already addressed many of the issues.

Cummins spokesman Jon Mills told The Republic last month that the company is looking forward to concluding the agreement with regulators and is planning to “focus on the future” and decarbonizing its industry.

“We’ve been working collaboratively with the agencies on this for more than four years, almost four-and-a-half years,” Mills said. “We’re pleased to be reaching an agreement and looking forward to concluding it. We have a strong reputation for meeting emissions standards, and we have a strong reputation as a great company, and we’re going to continue to focus on the future. We’re a leader in the decarbonization of our industry, and we’re going to continue to do our part to really help our customers seamlessly and successfully transition and continue to lead.”


Experts say that meeting increasingly stringent emissions standards can be “a little tricky” for engine makers, with some regulations having “some room for interpretation.”

“Certainly, there is sophistication required in software and in hardware in passenger car vehicles, commercial vehicles, off-highway vehicles, in order to meet increasingly stringent emissions regulations,” said Greg Shaver, a mechanical engineering professor at director of Ray W. Herrick Laboratories at Purdue University.

“But the other part is some of these regulations are fairly complex, and there are parts of the regulations that require some interpretation,” he added.

Ray W. Herrick Laboratories conducts engineering research and receives funding from several companies, including Cummins.

Shaver pointed to language in some of the regulations that stipulate requirements on software or hardware that can reduce the effectiveness of an engine’s emission control system “under conditions which may reasonably be expected to be encountered in normal vehicle operation and use.” While the regulations provide a description of what is allowed, “there’s still some room for interpretation.”

“How do you determine that?” Shaver said. “How do you determine what is normal operation and whether or not it’s already captured in test cycles that are used to evaluate whether or not an engine meets the requirements and intent of the regulation?”

“(The vehicle) either meets emissions or it doesn’t meet emissions, but how you determine whether or not a vehicle is compliant, that assessment is done through specific tests that are well defined but also potentially testing that is not as well defined,” Shaver added.

The EPA, for its part, regularly takes action against companies for alleged violations of the Clean Air Act violations related to engine emissions. The regulatory agency reported 33 such cases last year, according to its website.