Cummins Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are with FY2020 unless stated. This filing reports annual results, not standalone fourth-quarter figures. Amounts are in U.S. dollars.
Business context
Cummins designs, manufactures, distributes and services diesel, natural-gas, electric and hybrid powertrains and related components, power systems, batteries, hydrogen production and fuel-cell products. Its five segments are Engine, Distribution, Components, Power Systems and New Power. Operations span approximately 190 countries and territories. New Power remained in the development phase.
Financial performance and liquidity
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net sales | $24.021 billion | $19.811 billion | +21% |
| Gross margin | $5.695 billion; 23.7% of sales | $4.894 billion; 24.7% | +16% dollars; margin down 1.0 point |
| Operating income | $2.706 billion | $2.269 billion | +19% |
| Net income attributable to Cummins | $2.131 billion | $1.789 billion | +19% |
| Diluted EPS | $14.61 | $12.01 | +22% |
| Operating cash flow | $2.256 billion | $2.722 billion | Down $466 million |
| Capital expenditures, including internal-use software | $786 million | $575 million | Up $211 million |
| Total debt | $4.159 billion | $4.164 billion | Broadly unchanged |
Revenue and earnings improved with stronger demand across all segments and regions, higher volumes and favorable pricing. Gross-margin pressure from compensation, freight and material costs—particularly amid supply constraints—outpaced sales growth. The effective tax rate was 21.3%, versus 22.5%. FY2021 EPS benefited $0.34 from fewer weighted-average shares, primarily reflecting repurchases.
Segment sales and EBITDA were: Engine $9.954 billion and $1.411 billion; Distribution $7.772 billion and $731 million; Components $7.665 billion and $1.180 billion; Power Systems $4.415 billion and $496 million; New Power $116 million and a $223 million EBITDA loss. Segment sales include intersegment activity; consolidated sales were $24.021 billion.
At year-end, cash and marketable securities totaled $3.187 billion, working capital was $5.225 billion, and the current ratio was 1.74. Debt was 30.7% of total capital. Commercial paper outstanding was $313 million; no revolving-facility borrowings were outstanding. The company reported approximately $3.2 billion of available revolving credit capacity and $234 million of additional international and other domestic credit capacity. Operating cash flow fell mainly because of higher working-capital needs, including a $945 million inventory cash outflow.
Material changes and capital allocation
- Sales rose 21%, with growth in every segment. Components grew 27% and Engine 24%; Power Systems EBITDA rose 45%.
- Supply constraints, freight and material inflation, and higher compensation costs weighed on margins and cash generation. Inventories increased to $4.355 billion from $3.425 billion.
- Cummins repurchased $1.402 billion of stock and paid $809 million in dividends. The quarterly dividend increased 7.4% to $1.45 in July 2021, and the board authorized an additional $2 billion repurchase program upon completion of the existing authorization.
- The company announced it was exploring strategic alternatives for its filtration business, including a potential separation; no completed separation was reported.
- The Cummins Westport joint venture agreement expired December 31, 2021, and will not be renewed. Beginning in January 2022, engines previously sold through the venture were to be included in consolidated results.
Outlook, risks and unusual items
Management expected North American pickup, medium-duty and heavy-duty truck demand to remain strong or improve, along with aftermarket demand; it expected Indian truck demand to continue recovering. The company also anticipated lower truck and construction demand in China compared with FY2021. Management identified supply shortages, higher freight and conversion costs, and continued material and commodity inflation as key challenges. No specific 2022 revenue or earnings-growth guidance is provided in the supplied filing text. Management expected a 2022 effective tax rate of approximately 21.5%, excluding discrete items; capital spending guidance was $850–$900 million, excluding internal-use software, plus $70–$80 million for internal-use software.
- Emissions review: Cummins was cooperating with the EPA and CARB on an internal review of pickup-truck emissions certification and compliance, including model-year 2013–2018 RAM 2500/3500 applications. The company said it could not estimate the financial impact; remediation or regulatory outcomes could materially affect results and cash flows.
- Supply chain and demand: Component shortages and customer production constraints limited the ability to meet demand, while cost inflation and cyclical markets posed risks.
- Customer and investee concentration: PACCAR accounted for 15% of consolidated sales. A substantial portion of investee income came from China-based joint ventures that Cummins does not control.
- Product campaigns and warranty: FY2021 product-campaign provisions were $346 million, compared with $90 million in FY2020. Total product warranty liability, including extended-warranty deferred revenue, was $2.425 billion at year-end. The remaining accrual for a previously identified engine-system emissions campaign was $82 million.
- Other risks: Management cited ongoing COVID-related disruption, regulatory and environmental changes, potential diesel restrictions, foreign-exchange and geopolitical exposure, product liability and recalls, cybersecurity, and execution risks around the proposed filtration separation.
The independent auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting. The audit highlighted goodwill impairment testing for automated transmissions and the base product warranty liability as critical audit matters.
Important facts for investors to verify
- Any developments, remediation costs, penalties or other consequences from the EPA/CARB emissions review.
- Whether supply constraints and inflation ease, and whether sales growth converts into improved margins and operating cash flow.
- Progress and expected costs or benefits of the filtration strategic-alternatives review.
- The sustainability of income from China-based equity investees and the impact of the Cummins Westport transition on 2022 reported results.
- Warranty and product-campaign claims, including whether FY2021 provisions and the remaining emissions-campaign accrual prove adequate.
- Repurchases, dividends, capital spending and debt maturities relative to cash generation and liquidity.