Cummins Inc. (CMI): Profit Up, Cash Down — Power Systems Momentum Masks FCF Squeeze

Opening: Profitability rebound collides with a cash‑flow shock#

Cummins [CMI] closed FY2024 with net income of $3.95 billion while free cash flow collapsed to $279 million, a nearly -89.9% decline from FY2023 levels — the clearest and most consequential development for investors today. That divergence creates a paradox: the company is showing materially stronger earnings and margin recovery even as operating cash and free cash flow deteriorated sharply, driven largely by a -$2.17 billion change in working capital and sustained investment in capacity and New Power initiatives. At the same time, the company’s Power Systems business is registering high‑margin, double‑digit growth — a strategic signal that management is shifting the mix toward mission‑critical energy infrastructure for data centers and other applications. (FY2024 filings and quarterly releases.)

This article connects the two forces: the operational execution fueling margin expansion and the cash dynamics that will determine how quickly Cummins can fund New Power and sustain shareholder returns without stressing balance‑sheet flexibility. The contrast between earnings strength and cash weakness is the primary investment story for [CMI] today.

Financial performance — revenue flat, margins inflect, net income spikes#

Cummins’ top line was essentially flat in FY2024 at $34.10 billion versus $34.06 billion in FY2023, a change of +0.11%. The value for investors is beneath the headline revenue number: gross profit expanded to $8.44 billion (gross margin 24.75%), and operating income rose to $3.75 billion (operating margin 11.00%), up from an operating margin of 5.17% in FY2023. The company’s operating leverage and favorable mix contributed to a large swing in net income, which jumped from $735 million in FY2023 to $3.95 billion in FY2024 — an increase of roughly +437%.

Two interlocking dynamics drove the margin story. First, higher‑margin Power Systems and services sales reduced the relative contribution of lower‑margin legacy engine volumes. Second, cost and product mix improvements and pricing in select aftermarket and mission‑critical markets supported the operating margin recovery. Those effects show up in both the operating income line and the company’s segment commentary over the past year on stronger Power Systems demand. (FY2024 financial statements, filed 2025‑02‑11.)

At the same time, several technical differences between reported metrics introduce reconciliation issues that matter for analysts. For example, the dataset shows a TTM return on equity of 27.17%, whereas a straight calculation using FY2024 net income divided by year‑end shareholders’ equity (net income $3.95B / equity $10.27B) gives ~38.5%. The difference is likely driven by methodology (TTM averages for equity, adjustments for non‑recurring items and minority interests). Where methodology is unspecified, we note the discrepancy and rely on the company’s normalized TTM metrics for cross‑company comparisons while reporting our direct calculations for transparency.

Table: Income statement trend (2021–2024)

The table shows the inflection in operating and net margins for FY2024 relative to FY2023, driven by higher operating income and a material increase in reported net income.

Cash flow and balance sheet: working‑capital swing tightens liquidity#

While reported earnings improved, cash flow is the constraint. Net cash provided by operating activities fell from $3.97 billion in FY2023 to $1.49 billion in FY2024 (a -62.5% decline). Free cash flow collapsed from $2.75 billion in FY2023 to $279 million in FY2024 (a -89.9% decline). The dominant driver was a negative change in working capital of -$2.17 billion in FY2024, versus a positive working capital contribution of +$2.48 billion in FY2023. The working‑capital swing reflects inventory and receivables builds tied to higher backlog and supply‑chain timing for Power Systems deliveries.

Capex in FY2024 was $1.21 billion, roughly flat with FY2023, indicating the free cash–flow compression was not driven by a step‑up in capex but rather by the operational cash conversion cycle. The company also paid $969 million in dividends in FY2024 while reporting no share repurchases, consistent with management’s priority to maintain dividend continuity.

Table: Cash flow & selected balance sheet items (2021–2024)

*Note: cash‑flow schedule reports a netIncome of $4.07B in cash flow tables for FY2024 which differs slightly from the income statement net income of $3.95B; small timing and non‑cash adjustments explain this variance in consolidated reporting.

A second balance‑sheet nuance: the dataset shows cash and cash equivalents = $1.67B and cash and short‑term investments = $2.26B. Depending on the cash definition used, net debt (total debt minus cash) varies by roughly $590 million. The company reports net debt of $5.93 billion (using cash and cash equivalents), but a narrower definition that includes short‑term investments would lower net debt to ~$5.34 billion. We flag this classification difference because it matters when monitoring covenant headroom and incremental funding capacity for New Power investments.

Where the profits came from: Power Systems and New Power dynamics#

Management has highlighted Power Systems as the most visible source of margin improvement and growth. Quarterly commentary and the draft strategic analysis provided indicate Power Systems grew strongly in 2024–2025 — for example, Q2 2025 Power Systems revenue was reported up +19% year‑over‑year to $1.9 billion, with an EBITDA margin of 22.8%. Those segment metrics are consistent with the consolidated margin rebound and explain why operating income recovered sharply in FY2024.

The company’s New Power initiatives — hydrogen fuel cells, battery systems and electrified power solutions — are consuming R&D and scale investment. R&D spending in FY2024 was $1.46 billion, or roughly 4.3% of revenue, consistent with the company’s stated emphasis on next‑generation power platforms. New Power is a strategic long‑lead investment: it enhances Cummins’ access to customers prioritizing low‑carbon solutions, but it also delays full cash payback compared with legacy products. The cash‑flow implications are visible in the near term and underline the trade‑off management is making between growth and cash conversion.

Capital allocation: steady dividends, no buybacks, and leverage to watch#

Cummins returned cash to shareholders with $969 million of dividends in FY2024. On a per‑share basis the company paid $7.46 in dividends and the dataset shows a dividend payout ratio near 34% of earnings when measured using EPS figures (dividend / EPS). That payout both reflects a commitment to income returns and creates a base cash obligation while Free Cash Flow is volatile.

The company did not report repurchases in FY2024, and balance‑sheet leverage increased modestly: total debt climbed to $7.60 billion while shareholders’ equity rose to $10.27 billion. Reported net debt (company definition) is $5.93 billion, and net‑debt‑to‑EBITDA sits at about 1.16x, which is conservative by industrial capital‑goods standards but sensitive to a continued FCF squeeze if working capital does not normalize.

Earnings quality and seasonal drivers: how much is recurring?#

The quality of FY2024 earnings deserves careful parsing. Net income benefited from higher operating income and a favorable tax/other items profile, but cash conversion weakened because of inventory builds and receivables timing related to Power Systems orders. A healthy portion of the margin lift appears tied to recurring segment economics (services, aftermarket, mission‑critical installations) rather than one‑off items, which supports sustainability. However, the sharp swing in working capital — and the associated compression of operating cash flow — indicates that earnings are not yet fully converted into free cash.

Consistent quarterly earnings beats in 2025 (several recent quarters where reported EPS exceeded consensus estimates) point to underlying operational improvement and pricing power in certain end markets. The dataset shows multiple earnings beats in 2025, for example an actual EPS of 6.43 vs estimate 5.23 in the quarter ending 2025‑08‑05. Those beats corroborate the narrative of improving profitability at the segment level but do not negate the immediate cash‑flow constraint.

Competitive and strategic context: repositioning around AI infrastructure and low‑carbon power#

Cummins is executing a strategic pivot: expanding its role from traditional engine and powertrain supplier into mission‑critical energy systems for data centers, edge deployments and other high‑availability customers. That push — described in management commentary and the company’s New Power roadmap — leverages Cummins’ core strengths in high‑power modular systems, aftermarket service networks, and industrial manufacturing scale. The Power Systems segment’s higher margins and the company’s investments in hydrogen and battery systems align with the industry transition toward diversified, lower‑carbon energy stacks.

Competition is intensifying, however. Established generator manufacturers, systems integrators and new entrants in stationary fuel cells and battery systems are targeting the same data‑center and microgrid opportunities. Cummins’ competitive edge will hinge on integration (hardware + analytics + service contracts), scale manufacturing for New Power, and the ability to secure long‑term offtake or service agreements with hyperscalers and large enterprise customers. The balance sheet and cash conversion profile will influence how quickly Cummins can scale manufacturing and move from pilots to higher‑volume production.

What this means for investors — the tradeoffs to watch#

Investors should focus on a small set of measurable items that will determine whether the FY2024 earnings improvement translates into durable enterprise value creation. First, watch working capital normalization: the company needs to convert the Power Systems backlog into cash without recurring large inventory builds. Second, monitor Free Cash Flow and operating cash — if FCF recovers toward the FY2023 cadence, management will have room to both invest in New Power scale‑up and maintain the dividend. Third, track New Power commercialization milestones (production ramps, customer signings and offtake agreements) and segment EBITDA margins — these will determine whether higher margins are structural.

Key short‑term indicators: quarterly operating cash flow, change in inventories and receivables, Power Systems backlog and EBITDA margin, capex guidance and R&D cadence. Longer‑term indicators: hydrogen supply contracts, manufacturing scale metrics for New Power, and secular demand from data centers and critical infrastructure.

Key takeaways#

• Earnings vs cash paradox: FY2024 delivered $3.95B in net income but only $279M in free cash flow — a near -90% YoY swing that centers the risk discussion on cash conversion.

• Power Systems is the margin engine: management commentary and segment results show mission‑critical energy solutions are growing faster and at higher margins, with recent quarterly Power Systems growth reported at +19% YoY and segment EBITDA north of 22% in Q2 2025.

• Balance‑sheet flexibility is intact but sensitive: net debt is reported at $5.93B with net‑debt/EBITDA ~1.16x, a conservative leverage profile that could tighten if FCF does not recover.

• Capital allocation choices matter: Cummins prioritized dividends ($969M in FY2024) over repurchases in a year of cash compression, underscoring management’s focus on a steady payout while New Power investments continue.

• Execution risk on New Power commercialization: hydrogen and electrified systems are strategic but capital‑intensive with multi‑year payback profiles; their success will determine whether Cummins’ re‑rating from cyclical engine maker to diversified energy‑infrastructure provider is realized.

Conclusion: a bifurcated story that demands active monitoring#

Cummins [CMI] presents a classic industrial inflection: improving margins and earnings driven by higher‑value segments, paired with near‑term cash‑flow volatility driven by working‑capital dynamics and strategic investment. The immediate investor task is not a valuation call but a monitoring exercise: verify working capital normalization, track recurring Cash Flow from Ops improvements, and watch concrete scaling signals from New Power (customer contracts and manufacturing milestones). If operating cash converts and segment margins prove durable, the narrative of structural repositioning gains credibility; until then, the company carries both the promise of a higher‑margin future and the risk of cash tightness while it builds it.

(Company financial statements: FY2024 filings and subsequent quarterly releases cited throughout.)