CUMMINS OPERATES IN CYCLICAL MARKETS AROUND THE WORLD...

...inevitably the business faces periods of weak demand and reduced short-term earnings when global economic growth slows.

 

Due to the company’s financial strength, Cummins has been able to continue investing for future growth through tough economic times, emerging from the past two downturns with significantly improved financial performance and a stronger competitive position in a number of important markets.

Despite a challenging global economy in 2015, Cummins invested more than $1.6 billion in capital, acquisitions, joint ventures and research and development in 2015 to position the company for future profitable growth when markets improve.

A Cummins QSK95 generator arrives at historic Wrigley Field in Chicago, Illinois (USA) shortly after sunrise on Feb. 11, 2016. Major League Baseball's Chicago Cubs chose Cummins to provide backup power for the iconic, 102-year old ball park. 

The company, for example, acquired three more of its distributors in North America in 2015, for a total of 10 distributor acquisitions over the past two years. Owning these distributors will enable Cummins to provide better customer service regardless of product type, ultimately driving more growth in key end markets in the long run.

During the acquisition process, the company successfully integrated more than 9,000 employees from the distributors it acquired without disrupting service and support to Cummins customers.

“We made significant progress in a number of our key initiatives in 2015, including gaining market share with our new products in China, successfully acquiring and integrating our North American distributors, improving the quality of our products and reducing material costs,” said Chairman and CEO Tom Linebarger.

“However, a combination of weaker end markets and a stronger U.S. dollar presented significant challenges to our performance,” Linebarger said. “As demand slowed in the third quarter (of 2015), we moved quickly to lower costs.”
 

REPOSITIONING FOR THE FUTURE

Fourth quarter revenues of $4.8 billion were down 6 percent compared to the same quarter in 2014, leading Cummins to reduce its workforce by about 2,000 people through a combination of targeted restructuring and other staffing actions. The company also launched a number of initiatives within its manufacturing operations to reduce costs.

Cummins, for example, announced in February 2016 it would be reorganizing its manufacturing operations for power generation equipment, relocating over the next two years its generator set assembly operations from Kent in the United Kingdom, to Daventry in the U.K., Phaltan, India and Wuhan, China. The Kent site will be transformed into an important regional distribution and logistics center.

“The benefits of restructuring, material cost reduction initiatives and quality improvements combined with the launch of new and improved products in 2016 should position the company for stronger performance in the future despite the challenges of a weak macroeconomic environment,” Linebarger said.

Revenue for all of 2015 was $19.1 billion, 1 percent lower than in 2014. Sales increased 7 percent in North America, but international revenue declined 11 percent due to lower sales in Latin America, Europe and Asia Pacific.

Net income attributable to Cummins for the full year in 2015 was $1.4 billion ($7.84 per diluted share), or $1.59 billion ($8.93 per diluted share) excluding asset impairment charges and restructuring actions.

The company, however, generated operating cash flow of more than $2 billion in 2015, the third straight year above $2 billion, helping Cummins maintain an “A” credit rating from all three major credit rating agencies.

In April 2016, Cummins consolidated its high horsepower engine business with its power generation business. The two already had an interdependent relationship, with high horsepower providing many of the engines used in the company’s generators.

The new Cummins Power Systems will be more agile, streamlining the engineering process and capitalizing on the company’s scale advantage in supply chain and manufacturing to be faster to market and more cost competitive.

The company also centralized many of its customer service functions, and much of its product marketing to improve performance while finding efficiencies.
 

UP TO THE CHALLENGE

Linebarger said all the moves in 2015 and early 2016 will leave Cummins well positioned for future success. It will take time, however, for markets to improve and finding greater efficiencies will continue to be important to the company throughout 2016.

“With a leaner cost structure and strengthened product and market positions, I’m confident Cummins will emerge as a stronger company when better markets return,” Linebarger said, ”just as we have done following the last two downturns.”

Learn more about the company's financial performance by accessing Cummins' Annual 10K Report at www.investor.cummins.com

NEW JOINT VENTURE

Cummins and The Olayan Group announced the formation of Cummins Arabia, a 50:50, three-country distribution joint venture company in the Middle East.

This joint venture consolidates the distribution of Cummins products in the United Arab Emirates (UAE), Saudi Arabia and Kuwait. Those products are currently distributed by Cummins’ wholly-owned UAE distributor and Olayan-owned independent distributors – General Contracting Company (GCC) in Saudi Arabia and General Transportation and Equipment (GTE) in Kuwait.

These three countries represent some of the largest markets for Cummins in the Middle East. The partnership allows Cummins to greatly expand access to the Saudi and Kuwaiti markets and operate closer to its customer base. At the same time, it will provide a valuable platform for the training and employment of nationals in each country.

“Cummins is pleased to partner with Olayan, which is a highly respected leader in the global distribution business, ” said Tom Linebarger, Chairman and CEO, Cummins. “Olayan brings years of Middle East experience, and this partnership provides opportunities for our companies to grow and expand in this region while enhancing the service and support we provide to customers.”

Lubna Olayan, CEO of Olayan Financing Company, commented: “We view our new joint venture as a natural evolution of the close working relationship that has existed between us and Cummins for more than 60 years. We began distributing Cummins products in Saudi Arabia in 1956 and have always viewed ourselves as operating in a real spirit of partnership.”

The joint venture entity will be formed and the new operating structure implemented in the second half of 2016. It will be headquartered in Saudi Arabia. Plans are underway to build dedicated facilities there.