Cummins revenue flat in fourth quarter, up 21% for year


Cummins Inc.’s fourth-quarter profits fell below expectations due to increased costs associated with supply chain constraints, but the continued economic recovery from the pandemic and strong demand drove the company to record full-year revenues.

The Columbus-based company reported Thursday that fourth-quarter 2021 revenues were $5.85 billion, up 0.3% from the same quarter in 2020 and slightly higher than the Bloomberg estimate of $5.81 billion.

However, global supply chain constraints increased manufacturing, logistics and material costs during the fourth quarter and chipped away at the company’s margins, Cummins officials said. Earnings per share came in at $2.73 for the fourth quarter, which was below the Wall Street consensus of $3.17 per share.

Full-year revenues were $24 billion last year, a 21% increase compared to 2020 — when the COVID-19 pandemic swept across the planet and abruptly upended the global economy. International revenues jumped 27% in 2021, while sales in North American increased 17%, the company said.

Cummins Chairman and CEO Tom Linebarger told financial analysts the company has taken “a number of actions” to improve its margins this year, including increased pricing, surcharges and cost-reduction initiatives in its supply chain and operations.

“Strong economic recovery, combined with high demand for our products, resulted in record full-year revenues in 2021,” Linebarger said. “On the other hand, our industry continues to experience significant supply chain constraints, driving elevated manufacturing logistics and material costs and resulting in margins below our expectations, particularly in the fourth quarter.”

Segment performances:

Engine: Sales of $2.4 billion represented a 4% increase from the same quarter a year ago, the company said. On-highway revenues increased 5%, and off-highway revenues were up 2%. Sales in North America decreased 4%, while international sales rose 26% driven by demand in Australia, Europe and Latin America.

Distribution: Sales of $2.1 billion were up 3% compared to the October-to-December quarter last year. Revenues in North America were down 1%, while international sales increased 10% driven by strong demand in Russia.

Components: Sales of $1.7 billion were down 6% compared to the fourth quarter 2021. Revenues in North America increased 1%, and international sales dropped 12% due to lower demand in China.

Power Systems: Sales of $1.1 billion increased 10% compared to the same quarter last year. Power generation revenues declined 6%, while industrial revenues increased 37% due to strong mining demand.

New Power: Sales of $34 million were flat with the same quarter last year.

Supply chain woes

Cummins officials said the company is continuing to contend with supply chain constraints that have been rippling through markets for over a year, including a global shortage of chips that are widely used in automotive electronics.

The constraints, which also include labor challenges, inflation and difficulty getting enough parts to support demand, resulted in elevated manufacturing, freight, logistics and other costs during the fourth quarter and “drove inefficiencies in our operations, negatively impacting margins.”

On top of that, the spread of the highly contagious omicron variant of COVID-19 exacerbated labor and other challenges. “There’s no question, omicron has driven up our own absenteeism, as well as that of our suppliers,” Linebarger said.

Linebarger said the company expects the constraints to continue but ease over the course of the next year.

“Supply chain constraints are still terrible, I mean, just to call it like it is,” Linebarger said. “…There are labor shortages, suppliers are struggling, freight is struggling. …It’s not better in January than it was in December. It’s bad. Our plants are getting better at operating in those environments. That doesn’t mean it’s great.”

However, “we do expect things to just ease across the year” but “not get overwhelmingly better in the first months (of 2022) or to be fixed,” Linebarger added.

Last year, Cummins officials said they had been wrestling with a range of supply-chain challenges, including the ongoing global semiconductor shortage. Chip shortages have driven up prices and disrupted production and the supply chains of several automakers over the past year.

“Chip supply is still a disaster,” Linebarger said. “I mean, it just moves around. Lately, the biggest thing I’m hearing about is anti-lock brakes, which as you know, don’t affect us, but, essentially, every one of our customers and car companies are all suffering from anti-lock brake chip shortages. There just aren’t enough chips, and so that’s why I predict continued challenges. …So I just think we’ll just continue to work through these challenges.”

2022 outlook

Cummins officials are projecting full-year revenues to increase in 2022.

Overall, Cummins expects year-end 2022 total company revenues to be up 6% compared to last year driven by expected increases in heavy-duty and medium-duty truck production in North America, Europe and India.

The company is also projecting higher demand in global mining, oil and gas and power generation markets this year and expects aftermarket revenues to increase 10% compared to last year.

However, the company expects demand in China to temper after a record year in 2021.

Linebarger said the company expects a 30% reduction in industry demand for heavy-demand and medium-duty trucks in China this year, as well as a 30% decrease in industry sales of excavators from record levels in 2021 and a 5% drop in demand in the light-duty truck market.

Despite the projected decline in China, Linebarger said Cummins is “well positioned for continued outgrowth across our end markets in the region.”

Cummins officials said they are expecting stronger headwinds from supply chain constraints during the first half of the year than in the latter half of the year.

“We anticipate profitability will be that the low end of our guidance range in the first half of 2022 as the industry continues to manage through supply constraints that are limiting production and adding incremental costs,” Linebarger said. “We anticipate these costs will ease throughout the year, driving stronger performance in the second half of the year.”

Analysts react

Local analysts agreed that Cummins appears to have at least a “reasonably good” outlook for the year.

Roger Lee, a senior research analyst with Columbus-based Kirr, Marbach and Co., said “there are a lot of reasons to be optimistic” about Cummins in the near future and in the long run despite the ongoing supply chain issues.

“They’re still investing heavily in all these new growth opportunities around clean energy, but at the same time, they’re still very focused on the profitability of the business,” Lee said. “So unlike a lot of their peers, where they’re just burning a lot of cash trying to figure out new technologies, Cummins is still running a profitable business while they’re still able to take excess capital to invest in these new ventures, which are seeing a lot of success already.”

“They’re basically making sure that they’re relevant a decade from now, two decades from now, three decades from now,” Lee added.

Craig Kessler, president and chief investment officer at Columbus-based Kessler Investment Group, said he suspects that the outlook for Cummins in China this year may be better than what company officials portrayed during the conference call on Thursday.

“I think with the infrastructure bill that is still out there, with the continuing recovery from COVID and the potential upswing in China, I think it bodes well for the company,” Kessler said.

Kessler said he expects to continue seeing the supply chain constrains gradually improve, but “a significant drop-off in the constraints in the supply chain is too much to ask.”

“The supply chain is like a battleship,” Kessler said. “It just simply doesn’t turn around in a bathtub. And we’re seeing gains. We’re seeing improvements. We’re seeing some of the stress points alleviated in the supply chain, generally. And I think that we’ll continue to see that.”

However, a gradually improving supply chain will likely be “a wind in the sails” for Cummins, Kessler said.

“The fact that they’re doing as well as they are with the constraints in place speaks well of management,” Kessler said.

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