Cummins (CMI)

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Since most of Cummins' engines are used in trucks, it has been hurt by high gas prices and the decline in demand for larger vehicles, especially in North America.^[3] Cummins supplies Dodge Ram truck engines for Chrysler, the company's largest customer, which accounted for 8% of Cummins' consolidated sales in 2007. ^[4] The company's six largest customers (Chrysler, PACCAR, Volvo Trucks North America, International Truck and Engine, Daimler Trucks and Ford) account for almost one-third of the company's sales. ^[4] Cummins sells engine systems to other Original Equipment Manufacturers (OEMs), but also often competes with them. Major competitors include Caterpillar Inc., Detriot Diesel and Navistar International Corporation.

[edit] Company Overview

[edit] Business and Financial Metrics

Cummins' revenues grew 14.8% to $13.0 billion in 2007,^[5] for a fourth straight year of record-high net sales and net income. All of Cummins segments reported an overall increase in earnings during the year. ^[6]

Cummins Revenue and Income

In the second quarter of 2008, Cummins reported its best quarterly sales and net income in the company's 89-year history. ^[7]. Consolidated net sales were at $3.9 billion compared to $3.3 billion in 2007, ^[7] despite a pullback in consumer markets in the US. The company's diverse geographical markets significantly boosted performance; in fact, sales from non-US markets increased from 54% in 2007 to 61% as of June 2008. ^[7] In addition, earnings before interest and taxes (EBIT) are growing faster than sales - 32% growth in EBIT, compared to a 16% growth in sales. ^[8]

Statement of Operations Data (in Millions of $)

[edit] Business Segments

[edit] Engine Segment (52% of sales, 47% of net income)

Cummins' Engine Segment manufactures diesel and natural gas engines. Cummins brands and sells supply parts, re-manufactured parts, and services through its distribution channels. This segment competes mainly with OEMs and independent engine manufacturers.

Cummins Sales by Business Segment

• Heavy-Duty Trucks include diesel engines, including ISM, ISX and Signature 620 heavy-duty truck series. In 2007, Cummins held 38% of the market share in heavy-duty truck engines in North America, ^[11] and was the market leader in Mexico and South Africa. ^[11] PACCAR is Cummins' largest customer, accounting for approximately 5% of consolidated net sales. ^[11] Cummins is also the sole supplier of Volvo Trucks North America . ^[11]

• Medium-Duty Trucks manufacture diesel engines for medium-duty and inter-city trucks. In 2007, Cummins' market share for medium-duty truck engines in North America was at 37%. ^[12] The company is the largest provider of natural gas and hybrid buses in the US ^[12] and is also the exclusive supplier of medium-duty engines for PACCAR and Ford Brazil. ^[12]

• The Light-Duty Automotive and RV sub-segment is the exclusive provider of diesel engines for Chrysler's Dodge Ram pick-up trucks and supplied over 142,000 engines to Chrysler in 2007. ^[13] However, in 2008, US engine sales to Chrysler dropped 60% and RV sales dropped 40% due to high gas prices during the year. ^[14] Meanwhile, Cummins held approximately 70% market share of high-class motorhomes in 2007. ^[13] The demand for diesel-based motorhomes grew to 50% over the year. ^[13]

• The Industrial sub-segment provides engines to several markets, including construction, agricultural, mining, rail, and marine application markets.

Cummins Sales by Region

[edit] Power Generation Segment (19% of sales, 26% of net income)

Cummins' Power Generation Segment is a fully-integrated provider of power generation systems, power engine components and services -- designing and manufacturing most of the components used in these systems. This segment caters to customers requiring standby power (for uninterrupted power supply), distributed generation power (less reliable power infrastructure typically for developing countries) and auxiliary power for mobile applications (as a second power source after drive power). ^[15] It's largest geographic markets outside of North America are the UK, India, Europe and the Middle East. ^[15] MAK Americas Inc, a Caterpillar subsidiary, is Cummins' biggest competitor. ^[15]

[edit] Components Segment (19% of sales, 12% of net income)

The Components Segment primarily provides engine-system components, including filtration and emissions solutions, fuel systems, controls, and air handling systems. This segment is also the largest worldwide supplier of turbochargers for commercial applications. ^[16]

[edit] Distribution Segment (10% of sales, 15% of net income)

Cummins' Distribution Segment distributes the company's line of engine and power systems, components and services. It includes 15 company-owned and 17 joint-venture distributors in about 300 locations in over 70 countries. ^[17] However, Cummins' network - including locations and dealers that the company has no direct control over - is more widespread. Their products are marketed by 5,200 dealers and 500 co-owned and independent distributors in 190 countries. ^[18] 47% of the Distribution Segment's revenues come from engine and power generation equipment, while parts and service repairs comprise the rest. ^[17] Among Cummins' key markets are India, China, Japan, Australia, Europe and the Middle East.

[edit] Trends and Forces

[edit] Laws regarding engine emissions are becoming more stringent

Cummins keeps up with increasingly strict environmental laws by providing environmental-friendly and technologically advanced engine systems. The company has more advanced technology compared to competitors, allowing it to maintain its market position in some engine markets and gain market share in others. In particular, Cummins was able to meet EPA's 2007 on-highway heavy duty requirements, and announced during the year that its technology approach will comply even with 2010 standards.^[19] In addition, the 2007 Dodge Ram engines made by Cummins have exceeded minimum emission requirements and are also compliant with 2010 standards. ^[19] Cummins spent $329 million on its Research and Engineering department to meet new demands. ^[20] Approximately $55 million was related to compliance with 2010 emission standards in North America. ^[20]

Having met US environmental regulation provides Cummins with the experience to comply with increasingly strict laws in other countries such as Europe and Japan. ^[21] International diversification also allows the company to compensate for losses in North American sales because of strict emission standards. Cummins estimates that new engine emission laws in the region caused a 50% decline in demand for heavy-duty trucks in 2007; ^[22] however, earnings still increased 14.8% over the year due to non-North American sales. ^[23]

[edit] High fuel prices have significantly lowered demand for trucks in North America

Cummins performance depends largely on the fluctuating economic conditions in its various markets. Its consumer-driven markets, such as the light-duty automotive and RV market, are particularly more subject to risk. Since 2007, gas prices and the housing slump in the US have caused a steep decline in North American demand for pick-ups. ^[3] As of May 2008, market share of pick-ups in the US was at 9%, the first time in 15 years that a pick-up truck wasn’t the country’s top-selling vehicle. ^[3]

Cummins has countered this risk by diversifying its markets internationally. Aside from increasing market penetration, the company's joint ventures and alliances have reduced the risk of declining sales in North America. Among its joint-ventures are with Dongfeng Motor Company in China, the largest medium-duty truck manufacturer in the country, ^[24] and with Tata Motors, the largest automotive company in India. ^[24] In 2008, despite softening markets in the US, Cummins net sales still increased; the share of non-US revenues continued to increase as well. ^[25]

[edit] There is a small but growing shift from gasoline to diesel

Diesel, a close substitute for gasoline, is an emerging vehicle fuel source in North America. ^[26] Twenty years ago, diesel performance, emissions and noise were unacceptable; however, government regulation and consumers demanded fuel efficiency, leading a shift to the use of diesel engines. According to UBS, diesel consumption by passenger cars should increase 11 percent a year until 2015. ^[27] As a diesel-based engine company, Cummins has seen revenue increases as a result of this increased demand. According to Cummins, demand for high-class motorhomes using diesel increased to 50% in 2007, a sign of growing preference for the application. ^[28]

[edit] Competition

Cummins' products compete with other OEMs on the basis of price, performance, fuel economy, speed of delivery, and customer support.

• Caterpillar Inc. is a manufacturer of heavy-duty vehicles and engine systems for building construction and mining. Although Cummins and Caterpillar compete in most business segments, their largest operating segments differ. 57% of Caterpillar's revenues are from machinery (including heavy-duty, forestry, paving and mining equipment) and 31% are from engine systems. ^[29] On the other hand, 52% of Cummins revenues come from manufacturing engine systems. However, Caterpillar's engine system revenues totaled $13.6 billion in 2007, ^[29] while Cummins' revenues totaled $8.1 billion. ^[30]

• Detroit Diesel Corporation, a subsidiary of Daimler Trucks North America is a manufacturer of diesel engines for on-highway heavy-duty and medium-duty trucks. Similar to Cummins, Detroit Diesel is involved with the design, manufacturing and marketing of its engines. ^[31] Although Cummins and Detroit Diesel compete in some markets, Cummins is also an engine system supplier for a few Detroit Diesel products. ^[32] In 2008, Detroit Diesel announced that it will offer Cummins heavy- and medium-duty engines in its vehicle range. ^[32] This establishes Cummins as a vendor engine partner for Detroit Diesel. ^[32]

• Navistar International Corporation manufactures and distributes medium- and heavy-duty trucks (primarily in North America and Mexico), diesel engines, and sells parts and services for its products. ^[33] Revenues for Navistar's truck and engine segment net sales were at $11.0 billion, ^[34] while Cummins' engine segment was at $8.1 billion.

[edit] References

1. ↑ Cummins 2007 10-K: Item 7, page 29
2. ↑ ^{2.0 2.1} Cummins 2007 10-K: Item 7, page 40
3. ↑ ^{3.0 3.1 3.2} Detroit automakers vie for diminishing truck market
4. ↑ ^{4.0 4.1} Cummins 2007 10-K: Item 1, page 14
5. ↑ ^{5.0 5.1 5.2} Cummins 2007 10-K: Item 6, page 29
6. ↑ Cummins 2007 10-K: Item 1, page 30
7. ↑ ^{7.0 7.1 7.2} www.seekingalpha.com: Cummins, Inc. Q2 2008 Earnings Call
8. ↑ 2Q 2008 Earnings Teleconference Presentation (pdf)
9. ↑ Cummins 2007 10-K: Item 6, page 29
10. ↑ Cummins 2007 10-K: Item 7, page 40
11. ↑ ^{11.0 11.1 11.2 11.3} Cummins 2007 10-K: Item 1, page 9
12. ↑ ^{12.0 12.1 12.2} Cummins 2007 10-K: Item 1, page 10
13. ↑ ^{13.0 13.1 13.2} Cummins 2007 10-K: Item 1, page 10
14. ↑ Cummins: 2008 Second Quarterly Report
15. ↑ ^{15.0 15.1 15.2} Cummins 2007 10-K: Item 1, page 11
16. ↑ Cummins 2007 10-K: Item 1, page 12
17. ↑ ^{17.0 17.1} Cummins 2007 10-K: Item 1, page 13
18. ↑ Cummins 2007 10-K: Item 1, page 4
19. ↑ ^{19.0 19.1} www.dieselnet.com:Cummins announces technology for 2010
20. ↑ ^{20.0 20.1} Cummins 2007 10-K: Item 1, page 4
21. ↑ Cummins 2007 10-K: Item 1, page 20
22. ↑ Cummins 2007 10-K: Item 1, page 4
23. ↑ Cummins 2007 10-K: Item 1, page 29
24. ↑ ^{24.0 24.1} Cummins 2007 10-K: Item 1, page 16
25. ↑ www.seekingalpha.com: Cummins, Inc. Q2 2008 Earnings Call
26. ↑ Report shows small US shift to diesel
27. ↑ Shift to diesel in US helping the refiners Saras and Valero, International Herald Tribune
28. ↑ Cummins 2007 10-K: Item 1, page 10
29. ↑ ^{29.0 29.1} www.wikinvest.com Caterpillar (CAT)
30. ↑ Cummins 2007 10-K: Item 1, page 10
31. ↑ www.detroitdiesel.com About Us
32. ↑ ^{32.0 32.1 32.2} www.daimler-trucksnorthamerica.com Daimler Trucks North America Expands Engine Offerings
33. ↑ Navistar International Corporation 2007 10-K: Item 1, page 2
34. ↑ Navistar International Corporation 2007 10-K: Item 7, page 24