By Boris Ladwig, The Republic
bladwig@therepublic.com
Cummins Inc. said fourth-quarter earnings
were $46 million lower than originally reported
because of higher warranty costs associated with midrange engines, including the ones produced at Walesboro.
Shares fell 6.56 percent Wednesday, closing at $20.51. Broader market indexes fell about 1 percent.
Fourth-quarter net earnings were $43 million, Cummins said Wednesday, down nearly 52 percent from the $89 million in fourth-quarter earnings the company reported three weeks ago.
Mark Land, director of public relations, said that the company did not expect the higher warranty costs to result in any layoffs.
Land said the engine problems have occurred in the 9-liter ISL engine, the 8.3-liter ISC engine and the 6.7-liter ISB engine that comes available for the Dodge Ram pickup truck and is exclusively produced at Columbus Midrange Engine Plant near Walesboro.
Land said problems have occurred mostly in commercial and transit applications, such as work trucks or buses that stop and start frequently or drive at lower speeds.
He said the higher warranty costs are a result of problems associated with how the engine components work together - not a result of a manufacturing problem related to a specific part.
Cummins said in a press release that it "is aggressively addressing the product issues and has made modifications that have reduced the failure rate of these products."
No recalls have been issued.
The 6.7-liter engine was launched with much fanfare and acclaim in early 2007, shocking the industry with news that it met federal 2010 emissions standards three years early.
Land said it is not uncommon to see higher repair rates early in a product's cycle.
Engines are updated all the time, much like computer software is updated with patches, so that the engines rolling off the line today are different from the ones that rolled off the line in 2007 - although they are the same models.
Neither Cummins nor Chrysler LLC, one of the customers of the three types of engines, would disclose how many engines or vehicles have been affected.
Chrysler spokeswoman Dianna Gutierrez said a "small percentage" of vehicles was affected. She encouraged any owners who experience problems with their vehicles to take them to a dealer.
Land said that most problems occurred in engines made in 2007, and that often the problems prompted a warning from onboard diagnostics systems, but did not result in performance or safety issues.
He said that warranty liability was much higher in the fourth quarter partially because some of the engine problems that might have been resolved with a fairly inexpensive repair caused more costly damages to other components.
The number of warranty complaints from the third to the fourth quarter increased only slightly, Land said, but the cost per complaint increased significantly.
Despite the lower fourth-quarter earnings, Cummins booked a record net profit for the year of $755 million, up about 2.2 percent from 2007.
The lower fourth-quarter result also reduced by $9 million the bonuses that thousands of employees were to receive.
Land said that the company does not believe the warranty issues would cause significant damage to sales projections or market share.
Cummins reaffirmed in Wednesday's press release that it expects sales to fall about 20 percent this year and that the earnings before interest and taxes margin would be 6.5 percent of sales. Neither figure was changed from the announcement of Feb. 3.
Warranty problems caused Cummins severe headaches in the early 1990s, Jeffrey L. Cruikshank and David B. Sicilia wrote in their Cummins chronicle, "The Engine That Could."
A faulty engine line introduced in 1988 gathered huge and growing warranty costs.
By 1992, Cummins held 32 percent of the heavy-duty truck market, down from 50 percent in 1989.
And in 1998, Cummins lost $21 million, partially because of $78 million in warranty costs in the first and third quarters.