10-KPeriod: FY2004

CUMMINS INC Annual Report, Year Ended Dec 31, 2004

Filed March 16, 2005For Securities:CMI

Summary

Cummins Inc. (CMI) reported a strong financial year for 2004, demonstrating significant recovery and growth across its business segments. Net sales reached a record $8.4 billion, a substantial increase from $6.3 billion in 2003, driven primarily by robust demand in the Engine Business and record sales in the Power Generation segment. This surge was fueled by a recovery in automotive and industrial markets, particularly the North American heavy-duty truck sector, where engine sales saw a significant increase. The company also reported improved profitability, with net earnings of $350 million ($7.39 per diluted share) compared to $50 million ($1.27 per diluted share) in the prior year. This improvement is attributed to higher sales volumes, favorable absorption of fixed manufacturing costs, and effective cost management initiatives, including Six Sigma. Cummins' strategic focus on cost leadership, expansion into related markets, and maximizing return on capital appears to be yielding positive results, positioning the company for continued growth in 2005.

Key Highlights

  • 1Record Net Sales: Cummins achieved a record $8.4 billion in net sales for 2004, a 34% increase year-over-year.
  • 2Significant Profitability Improvement: Net earnings more than quadrupled to $350 million in 2004, up from $50 million in 2003.
  • 3Strong Engine Business Performance: The Engine segment, representing 57% of total sales, saw significant demand from heavy- and medium-duty truck markets and the light-duty automotive sector.
  • 4Power Generation Segment Recovery: The Power Generation business returned to profitability with strong demand in international commercial markets and record sales of Onan generator sets.
  • 5Global Expansion Continues: International sales represented 48% of total net sales in 2004, up from 47% in 2003, indicating ongoing global reach.
  • 6Commitment to Emissions Technology: The company continues to invest significantly in research and engineering, particularly in developing engines that meet increasingly stringent emissions standards.
  • 7Strategic Partnerships: Cummins maintains strong relationships with key OEMs such as DaimlerChrysler, PACCAR, and Volvo, including long-term supply agreements.

Frequently Asked Questions

The strong performance in 2004 was driven by a significant increase in net sales across all business segments, particularly the Engine and Power Generation businesses. This was fueled by the overall economic recovery, robust demand in automotive and industrial markets (especially the North American heavy-duty truck market), and successful cost management strategies like Six Sigma. Improved profitability also benefited from favorable absorption of fixed manufacturing costs.

Cummins is actively investing in research and engineering to meet stringent emissions standards. They have developed technologies such as cooled Exhaust Gas Recirculation (EGR) and particulate matter (PM) filters for 2007 U.S. EPA heavy-duty on-highway emissions standards, and are exploring Selective Catalytic Reduction (SCR) for other markets. The company highlights its leadership in meeting these standards, positioning itself to comply with global regulations.

DaimlerChrysler was Cummins' largest customer in 2004, accounting for approximately 13% of consolidated net sales. This business is primarily related to the sale of ISB engines for Dodge Ram trucks and medium-duty engines for DaimlerChrysler's Freightliner division. While a significant portion of sales is under long-term agreements, these agreements specify engine requirements for particular models rather than guaranteed volumes, making the loss of this customer or a decline in their vehicle production a notable risk factor.

Cummins sources materials and components from a global base of suppliers. While a high percentage (75-85% in 2004) of their raw material and component purchases were from sole-source suppliers, the company states that the majority of these items can be sourced from alternate suppliers with an appropriate plan. They also maintain dual sourcing at a commodity level. Supply agreements typically include terms for cost, quality, and delivery, with durations of three to five years. The company periodically reviews single-source suppliers to ensure alternative sources exist to mitigate dependency risks.