Cummins, Inc. Business Report FY2006

Business Highlights

Engine Business

Financial overview
Engine segment

in million dollars FY2006 FY2005 Rate of change Factors
Sales 7,511 6,657 12.8% See factor 1.
EBIT 733 582 25.9% See factor 2.

1. The increase in net sales for this segment was primarily due to strong demand across most markets, particularly the North American heavy-duty truck market and stationary power due to the strong performance of the Company's Power Generation segment, along with strong industrial market sales. Total on-highway-related sales were 63 percent of Engine segment net sales during 2006 and 2005.

2. The improvement in segment EBIT was primarily due to the higher engine volumes across all major markets, the accompanying gross margin benefits of higher absorption of fixed manufacturing costs, improved pricing and manufacturing efficiencies, all of which resulted in a nearly one percentage point improvement in gross margin percentage in 2006 compared to last year. Gross margin increased $221 million, or 18 percent, in 2006 compared to last year. Selling and administrative expenses increased $61 million, or 11 percent, however selling and administrative expenses as a percentage of net sales decreased slightly. Research and engineering expenses increased $24 million, or 12 percent, compared to 2005 and remained flat as a percentage of net sales compared to last year.

A summary and discussion of Engine Business by market for the year ended December 31 are given below:

Heavy-Duty Truck
The increase in sales to the heavy-duty truck market was primarily driven by the North American truck market as OEMs work to meet growing demand from truck fleets replacing trucks ahead of the 2007 change in emissions standards. Global unit shipments of heavy-duty truck engines were up 17 percent in 2006 compared to 2005, with North American shipments up 18 percent and international shipments up 11 percent.

Medium-Duty Truck and Bus
The increase in medium-duty truck and bus revenues was due to strong demand ahead of the 2007 change in emission standards and the Company's growing market share position with North American OEMs in the medium duty truck and bus markets. Shipments of medium-duty truck engines were up 36 percent to North American OEMs and down 20 percent to international OEMs compared with 2005. Shipments to North American bus OEMs increased 56 percent in 2006 compared to 2005 while international shipments were down 10 percent. The increase in medium-duty truck and bus engine shipments in North America is due to its increased penetration in this market and an overall increase in demand ahead of the emission standard changes. The decrease in shipments to international medium-duty truck OEMs is primarily due to changes in emissions standards in Brazil to Euro III effective January 1, 2006. The decrease in international bus engine shipments year-over-year is due to a large purchase made in 2005 by a customer in China

Light-Duty Automotive
Sales of light-duty automotive engines increased as a result of higher volumes. Total light-duty automotive unit shipments were approximately 196,000 in 2006, an increase of 5 percent compared to 2005. The majority of the light-duty automotive and RV volumes was driven by demand from DaimlerChrysler with shipments of approximately 162,000 units, or a 1 percent increase compared to 2005. Engine shipments to recreational vehicle OEMs increased by nearly 33 percent in 2006 compared with 2005 due to new product introductions and growing penetration at key OEMs.

Components segment

in million dollars FY2006 FY2005 Rate of change Factors
Sales 2,281 2,000 14.1% See factor 3.
EBIT 107 89 20.2% See factor 4.

3. Components net sales increased across all businesses and all geographic markets, but were primarily driven by strong demand in its turbocharger and fuel systems businesses. The Company had strong growth in North America and Europe with increases in both aftermarket volume and OEM volume.

4. Segment EBIT improved during 2006 compared to 2005, primarily due to improved volume. In addition, EBIT as a percentage of net sales increased slightly. Gross margin increased $56 million, or 17 percent, in 2006 compared to 2005, and gross margin percentage improved nearly one half of a percentage point compared to 2005, primarily due to improved volume and improved pricing. Selling and administrative expenses increased $23 million, or 12 percent, compared to 2005, but decreased slightly as a percentage of net sales. Research and engineering expenses increased due to additional investment in the development of a number of new products and critical technologies that will be launched in 2007 and beyond. Research and engineering expenses increased $12 million, or 21 percent, compared to 2005 and increased slightly as a percentage of net sales.

In January 2007, the Company and Volvo Trucks North America announced they have extended the agreement for the availability of the Cummins ISX engine in Volvo VN and Volvo VT trucks. (From a press release by the company on Jan. 25)

In March 2007, Cummins Westport announced that Russian Buses, of Moscow, Russia has ordered 278 Cummins Westport C Gas Plus natural gas (CNG) engines. The C Gas Plus CNG engines will be installed in LiAZ-5256 (250hp) and LiAZ-6212 (articulated, 280hp) buses and will exclusively transport workers to and from the AutoVAZ car manufacturing plant located in Togliatti, Samara region, 1,000 km from Moscow.

Joint ventures
In January 2006, the Company and KAMAZ announced the signing of a joint venture agreement to produce B Series engines (120-275 horsepower) under the name ZAO Cummins Kama. Among customers of the new company are KAMAZ trucks and buses, as well as trucks, buses and agricultural equipment produced by other manufacturers in Russia, Belarus and the Ukraine. The B Series engines will be manufactured at the joint venture facilities, co-located with KAMAZ in Naberezhnye Chelny, Tatarstan, about 700 miles east of Moscow. The first engines will be assembled in early 2006.(From a press release by the company on 24 Jan.)

In January 2006, Tata Motors and the Company have signed an agreement that will allow their joint venture, Tata Cummins Ltd. (TCL), to begin manufacturing the ISB engine in the near future. TCL currently produces approximately 69,000 Cummins B Series engines a year. Under the agreement, TCL will increase its total engine production to 100,000 units within two years and 120,000 units thereafter. (From a press release by the company on Jan. 27)

In March 2006, the Company and China's Beiqi Foton Motor Company announced they have signed a feasibility study plan for the formation of a 50/50 joint venture company to produce two types of light-duty diesel engines for use primarily in the commercial market. Beijing Foton Cummins Engine Company will be based in Beijing and will produce two types of engines based on Cummins designs. The feasibility study is the last step before Cummins and Beiqi Foton sign the joint venture agreement, and it outlines the parameters of the partnership. The joint venture is expected to begin operation in 2006, with production starting as early as 2008.(From a press release by the company on Feb. 07)

In November 2006, the Company and Beijing-based Beiqi Foton Motor Company (Beiqi Foton) signed an agreement to form a 50/50 joint venture company, Beijing Foton Cummins Engine Company Limited (BFCEC) to produce two types of Cummins light-duty, high-performance diesel engines in Beijing. The engines primarily will be used in light-duty commercial trucks, pickup trucks, multipurpose and sport utility vehicles. Certain types of marine, small construction equipment and industrial applications also will be served by this engine family. The joint venture plant will have an annual capacity of 400,000 units and will produce Cummins 2.8-liter and 3.8-liter clean diesel engines, which will meet stringent on-highway and off-highway emission standards worldwide, including Euro IV and above. BFCEC is scheduled to begin production in 2008. (From a press release by the company on Oct.19)

In October 2006, the Company announced that it has reached an agreement to sell its SEG GmbH subsidiary, based in Kempen, Germany, to Woodward Governor Company, subject to customary approvals. Terms of the deal, which is expected to close in the fourth quarter, were not disclosed. Cummins first invested in SEG in 2001 and became the majority owner in 2005, with a 51 percent stake in the company. Schmitz Beteiligungs GmbH (SBG) owns the remaining 49 percent of SEG. SEG is part of Cummins Power Generation Business, a fast-growing global provider of power generation systems, components and services and one of Cummins' largest business segments. Cummins Power Generation reported sales of nearly $2 billion in 2005 - a 50 percent increase from 2003. (From a press release by the company on Sep.21) 

Outlook for 2007
Engine segment

Net sales for this segment are expected to be flat in 2007 with increased shipments in the off-highway and medium-duty truck and bus markets offsetting the decrease in the North American heavy-duty truck market. While North American heavy-duty class 8 truck sales will likely be down 30 to 40 percent in 2007, the Company's year-over-year North American heavy-duty truck engine volumes could be down as much as 50 percent depending on the amount of 2006 engine inventory currently at the truck OEMs. The decline will be most severe in the first half of 2007, with industry shipments expected to improve in the second half of 2007. As a result, the Company expects its market share to drop in the first quarter, due to OEM窶冱 carrying over more competitor 2006 engines to manage their vehicle model transition, and quickly recover in the second half of the year to 2006 levels or higher as it believes its new products will quickly gain widespread acceptance versus competitive engine technologies.

The Company expects the Brazilian medium-duty truck market to remain flat in 2007, while its European medium-duty truck engine shipments will benefit from its new supply relationship with Nissan. These markets, together with significant market share gains in North America, are forecasted to drive global medium-duty truck and bus shipments up approximately 25 percent in 2007.

The Company expects shipments to the global light-duty automotive and RV markets to increase nearly 5 percent in 2007 through new product offerings and increased availability of its product at key OEMs.

Components segment
Net sales for this segment are forecasted to grow approximately 18 to 22 percent in 2007, primarily due to growth in the Company's emission solutions and turbocharger businesses. The manufacturing improvements that the Company began to implement in the second half of 2006 are expected to correct operational issues in the emission solutions business in 2007. The material cost and operational issues in the turbocharger business are expected to yield a slower margin improvement as they ramp up new products. The Company expects to see sequential improvement in earnings from this segment after the first quarter and to achieve the lower end of the targeted range of 7 to 9 percent of net sales by the end of 2007.


R&D Structure
In 2003, the Company established Cummins Research and Technology India Private Ltd. (CRTI). This partially owned subsidiary provides analytical services such as structural dynamics, computational fluid dynamics, and design to all Cummins entities. CRTI is located in Pune, India.
In August 2006, the Company's first technical center in China was opened in Wuhan City. The East Asia Technical Center, a 55-45 joint venture between the Company and Dongfeng Cummins Engine Company Limited (DCEC), provides engineering and technical development services for the full range of the Company's products built in China, including diesel and natural gas engines, power generators, turbochargers and filtration products. A series of projects has already started in the technical center, including the development of a new 13-liter engine platform for the heavy-duty truck market served by DCEC.

R&D Expenditure
(in million dollars)


FY2005 FY2004 FY2003


278 241 200

The Company's research and engineering program is focused on product improvements, innovations and cost reductions for its customers. In 2006, the Company's research and engineering expenditures were $321 million compared to $278 million in 2005. Of this amount, approximately 19 percent, or $62 million, was directly related to the development of heavy-duty and medium-duty engines that are designed to comply with the 2007 emissions standards with approximately $10 million directly related to compliance with 2010 emissions standards.
In the Engine segment, the Company continues to invest in system integration and in technologies to meet increasingly more stringent emissions standards. The Company has focused its engine technology development on four critical subsystems: combustion, air handling, electronic controls and exhaust aftertreatment. The Company was able to meet the EPA窶冱 2007 heavy-duty on-highway emissions standards that went into effect on January 1, 2007 and announced in January 2007 that its 6.7-liter Dodge Ram Turbo Diesel engine meets the EPA窶冱 2010 emissions standards a full three years ahead of the requirements. In addition, the Company was the first company to demonstrate a prototype vehicle that meets EPA 2007 gasoline-equivalent 窶弋ier II Bin 5窶 emission levels.

In Components, the Company is building on its strengths in design integration to develop modules that integrate multiple filtration functions into a single engine subsystem component. The Company is developing new filter media and technologies that support low-emission engines, including exhaust after-treatment, closed crankcase ventilation, fuel systems and centrifugal soot removal.

Product Development
In January 2006, Cummins Westport Inc. (CWI) and Cummins India Limited (CIL) announced the successful limited production launch of CWI's B Gas International (BGI) natural gas engine in India. Manufacturing takes place at CIL's modern Daman facility in Western India. The locally-manufactured BGI natural gas engine will be supplied to OEM's in India such as Tata Motors.

In January 2006, the Company unveiled the 2007 ISL engine that delivers increased performance and fuel efficiency. The 2007 ISL combines the lightest weight of any engine in its class and the highest power-to-weight ratio, with a peak horsepower of 365 hp and peak torque of 1250 lb-ft. Best-in-class low life cycle costs and long-life durability will be retained. Maintenance intervals will be unchanged and a new option allows mixer operators to monitor the engine oil level from inside the cab. The 2007 ISL will also feature a Cummins High Pressure Common Rail (HPCR) fuel system, which delivers higher injection pressures for lower emissions.

In February 2006, the Company announced the readiness of its on-highway engine product line to meet the U.S. Environmental Protection Agency (EPA) and California Air Resources Board (CARB) emissions standards for 2007. The product line for 2007 features a highly successful emissions reduction approach. The engine line will be certified and compliant for 2007 with only incremental improvements. This technology is consistent on all the Company's on-highway diesel engines for North America. (From a press release by the company on Feb. 13)

In June 2006, the Company announced the production launch of its 1.1-megawatt SCR Drill Module. With the KTA50, Cummins brings world-leading experience in the design and manufacture of power modules and high-horsepower diesel engines to the drilling market with a turnkey power solution for SCR Power Modules. The Company's product offers low total cost of ownership (TCO) with a low initial investment, low operating costs and reduced maintenance costs. The 1571-kVA / 600-volt Power Unit consists of a Cummins KTA50 engine, rated 1470 hp (1096 kW) at 1200 rpm, which is fully integrated with a Cummins AVK DSG86L1-6 generator and is ideal for the durability, reliability and power density requirements of SCR Power Modules. The KTA50 fuel costs are expected to be 3%-5% lower than competitive products, and with a track record of over 50,000 industrial applications worldwide, proven reliability is assured every time. (From a press release by the company on 16.Jun)

In October 2006, the Company announced the availability of its Dodge Ram Turbo Diesel engine for the 2007 Dodge Ram 2500 and 3500 models beginning January 2007, providing increased performance for outstanding towing capability and drivability. The Cummins Turbo Diesel will feature increased displacement of 6.7 liters, with increased horsepower and torque. The all-new 6.7-liter Cummins Turbo Diesel engine, producing 650 lb-ft of torque, has a life-to-overhaul interval of 350,000 miles, providing more than a 100,000-mile advantage over the competition. (From a press release by the company on Sep.28)

In November 2006, the Company announced that the new ComfortGuard APU from Cummins was the engine manufacturer's first complete auxiliary power unit system for over-the-road trucks. The system combines the generator expertise of the company's Onan brand with tailored HVAC components to power all hotel loads for comfort and convenience. The quiet, compact and reliable system offers an effective solution to anti-idling regulations and the high cost of diesel fuel and will be available beginning in January 2007. (From a press release by the company on Nov.1)

In November 2006, Cummins Emission Solutions (CES) announced that its North American exhaust aftertreatment manufacturing facility has begun producing the diesel particulate filters that will play a key role in enabling engine manufacturers to meet the 2007 U.S. EPA emissions standards. This Diesel Particulate Filter (DPF) uses a diesel oxidation catalyst (DOC) and a diesel particulate filter to trap diesel particulate matter (PM) in the exhaust system, reducing PM emissions by 90 percent while also reducing hydrocarbons and carbon monoxide. The DOC optimizes the regeneration capability of the particulate filter, a critical aspect for maintaining fuel economy comparable to today's engines. (From a press release by the company on Nov.9)

Investment Activities

Overseas investment
-In July 2006, Cummins Turbo Technologies, formerly known as Holset Turbochargers, officially opened its newest manufacturing plant in Charleston. The business, a division of Columbus, Ind.-based Cummins Inc. (NYSE:CMI - News) is headquartered in Huddersfield, England, and is one of the world's largest manufacturers of turbochargers for diesel engines. (From a press release by the company on Jul.21)

-In October 2006, the Company announced that it has selected the Columbus Engine Plant (CEP) here as the production facility for its new family of light-duty, clean-diesel engines, which the Company plans to begin manufacturing by no later than 2010. Preparations for the manufacturing lines are scheduled to begin in mid-2007 and are expected to create 200 additional jobs by the end of next year. Cummins expects the new line to employ at least 600 to 800 people within two years of the product launch. DaimlerChrysler will be the major customer for the engine, which will be designed to power vehicles below 8,500 pounds gross vehicle weight for a number of automotive applications. (From a press release by the company on Oct.11)