Cummins, Inc. Business Report FY2007

Business Highlights

Financial overview
(in million dollars) FY2007 FY2006 Rate of change Factors
Engine 8,182 7,511 8.9% See factor 1.
Component 2,932 2,281 28.5% See factor 2

Factor 1
Heavy-Duty Truck
-The decrease in heavy-duty truck market sales was primarily driven by the North American truck market as OEMs experienced reduced demand from truck fleets, following increased purchases in 2006 to replace trucks ahead of the 2007 change in emissions standards, the softer U.S. economy, and the weak freight environment. The decline in the North American truck market sales was partially offset by strong growth in the Company's international sales and North American market share gains.

Medium-Duty Truck and Bus
-The increase in medium-duty truck and bus sales was due to increased demand for medium-duty truck engines internationally and increased shipments of bus engines in North America and internationally compared to 2006. International medium-duty truck sales improved due to continued growth in Latin America and Europe, while international bus sales have continued to grow in Chinese and Eastern European markets. The increase in overall North American bus sales is being driven by market share gains within the school bus market. Significant market share gains in the North American medium-duty truck market resulted in a sales increase despite a 28 percent decline in the market itself.

Light-Duty Automotive
-The increase in light-duty automotive sales was primarily due to higher pricing for the 2007 emissions compliant product which was partially offset by decreased demand from Chrysler due to the softening of the U.S. economy in the fourth quarter of 2007. The 2007 total Chrysler unit shipments decreased over last year by approximately 19,800 units, or 12 percent. Global engine shipments to recreational vehicle OEMs decreased compared with 2006 as a result of increased engine purchases in 2006 ahead of the 2007 change in emissions standards.


Factors 2
-Components segment net sales increased over 2006, primarily due to increased demand across all businesses and all geographic markets, but were primarily driven by strong demand in the Company's emission solutions and turbocharger businesses. The Company also experienced increased sales in its filtration and fuel systems businesses. All of its businesses benefited from OEM sales of new products to allow their customers to meet new on-highway emissions standards in North America and Europe as well as from increases in aftermarket volume. The Company also experienced favorable impacts from foreign currency translation.


Joint ventures

-The Company announced that it has signed a Memorandum of Understanding (MOU) with Vietnam Motors Industry Corp. (Vinamotor) to create a 50-50 joint venture to produce on-highway diesel engines in Vietnam. Vinamotor, a government-owned company, is the largest commercial vehicle producer in Vietnam, which currently has no local engine production. The MOU outlines the parameters of the joint venture, which is contingent on the satisfactory results of a feasibility study, which Cummins expects to be completed in January 2008. Under the terms of the MOU, the joint venture would take a phased approach to producing Cummins-designed engines in Vietnam: Initially, engine kits will be imported for assembly and distribution in Vietnam with local components ultimately being used in production as the supply base in Vietnam develops. (From a press release on Sep. 28, 2007)


Acquisition

-In March 2007, the Company announced that it has acquired the remaining equity ownership in Tata Holset Limited from the Tata Group of Companies. Cummins' subsidiary, Cummins Turbo Technologies, and the Tata Group have manufactured turbochargers through a 50/50 joint venture agreement since 1994. Tata Holset will be renamed and rebranded as Cummins Turbo Technologies. Cummins Turbo Technologies will continue to market turbochargers and other products under the Holset brand. Along with Tata Motors, Cummins Turbo Technologies' other key Indian customers include, Cummins India, Eicher Motors, Mahindra & Mahindra and Tata Cummins - a joint venture partnership between Cummins Inc. and the Tata Group. (From a press release on Mar. 1, 2007)


Launching production
-Xi'an Cummins Engine Company Limited (XCEC), a 50/50 joint venture between Cummins Inc. and China's Shaanxi Automobile Group Company Limited (Shaanqi Group) officially began production of the Cummins ISM 11-liter heavy-duty engine on August 8, 2007.

-With $24 million initial investment from both sides, XCEC's projected production capacity is 50,000 units by 2010. (From a press release on August 9, 2007)


Divestiture
-In October 2007, the Company announced that it has reached an agreement to sell Universal Silencer Inc. (USI) to the Stirling Group, led by current USI general manager Randy Eppli. The newly formed Stirling Group includes other key members of Universal Silencer's management team. Universal Silencer, currently part of the Cummins Filtration business, provides unique solutions in industrial noise control. The business is headquartered in Stoughton, Wisc., and employs 230 people. USI provides custom-engineered solutions to noise and emissions issues for industrial applications of large diesel and turbine engines, compressors, blowers and other air movement equipment. The transition process has begun and the sale expected to be completed during the fourth quarter of 2007. (From a press release on Oct. 11, 2007)


Plant closure
-In May 2007, Cummins Filtration, a division of Cummins Inc. announced that it plans to exit the manufacturing facility in Waynesboro, Ga., by June. (From a press release on May 4, 2007)

R&D

R&D Expenditure
(in million dollars)

FY2007

FY2006

FY2005
Total

329

321

278

-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ツ《 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ツ《 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ツ・ emission levels.

-In Components, the Company is building on the Company's strengths in emission control technologies and in design integration to develop filters, turbochargers, fuel systems and aftertreatment systems.  In Cummins Filtration, the Company is developing modules that combine multiple filtration functions into a single engine subsystem component. The Company is developing new filter media and technologies that support low-emission engines, including closed crankcase ventilation, high efficiency filters for high pressure fuel systems and centrifugal soot removal. More than 80 percent of its filtration products are sold to customers outside the Company. In Cummins Emission Solutions, the Company has developed exhaust aftertreatment systems for Europe and North America. Its Selective Catalytic Reduction (SCR) NOx aftertreatment system is first in market share in Europe. Its Diesel Particulate Filter is first in market share in North America. Cummins Turbo Technologies Variable Geometry Turbocharger (VGT), a critical component for advanced emission control, is the top selling Heavy Duty VGT in North America. Cummins Fuel Systems is introducing the Company's second fuel system with its partner Scania, the XPI high pressure common rail fuel system.


R&D Structure

-The Company operates 17 technical centers around the world.


Product Development

-In January 2007, the Company unveiled the strongest, cleanest, quietest best-in-class 2007 Cummins Turbo Diesel. The Cummins 6.7-liter Turbo Diesel engine, used exclusively in Dodge Ram 2500 and 3500 Heavy Duty pickup trucks, has increased displacement providing increased horsepower and torque while achieving the world's lowest 2010 Environmental Protection Agency (EPA) NOx standard a full three years ahead of the requirements. (From a press release by the company on Jan. 23, 2007)

-In March 2007, the Company announced that their GTA8.3SLB gas compression driver  met the Environmental Protection Agency's proposed New Source Performance Standards (NSPS) for stationary spark-ignited engines. The new GTA8.3SLB meets the NSPS standard more than six months ahead of the target promulgation date of Jan. 1, 2008 for engines in 25-500 hp (19-373 kW) power bands. Cummins GTA8.3SLB is rated at 175 hp (130 kW) and features a Simple Lean Burn configuration that meets the 2-gram Nitrogen Oxide (NOx), 4.0-gram Carbon Monoxide (CO) and 1.0-gram Non-Methane Hydrocarbon (NMHC) output-per-horsepower-hour EPA proposal while providing great performance and unsurpassed reliability. (From a press release on Mar 6, 2007)

Investment Activities

Overseas investment
-In June 2007, the Company broke ground on its first fuel systems plant outside North America. Cummins Fuel Systems - Wuhan will be the Company's 13th production facility in China and is expected to begin production early 2008. Wuhan also is home to a regional Cummins service center and a technical center joint venture owned by Cummins and Dongfeng Motor Company. Cummins plans to invest approximately $10 million in the plant, which will assemble Cummins Common Rail (CCR) fuel pumps and CELECT injectors/fuel pumps primarily for the China market. The Wuhan facility will help Cummins meet the growing demand for its products in China and other emerging markets. (From a press release on June 8, 2007)