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2000 was a distinctly different year from the first to the second half. In the first half of the year, we posted profit after taxes of $103 million and earned $2.70 per share; in the second half, profit after taxes was $8 million and earnings per share fell to 21 cents, excluding a pre-tax charge of $160 million in the fourth quarter. The erosion in profit was due to a sudden and pronounced downturn in a number of markets, reflecting the overall uncertainty of today's economy.

Heavy-duty engine shipments in North America fell 39 percent from the first to the second half of the year. In the fourth quarter, shipments of our mid-range engine to DaimlerChrysler were 25,000 units, down from an average of 31,000 units for the first three-quarters of the year, as DaimlerChrysler cut production of its Dodge Ram pickup truck. In North America, shipments of midrange truck engines declined 24 percent from the first to the second half of the year. During that same period, shipments of engines to the North American construction market declined 28 percent, and sales of engines to the recreational vehicle market were down 18 percent. The decline in the heavy-duty engine business also affected exhaust systems sales in our Filtration business, which fell 13 percent from the first to the second half.

In past years, this kind of downturn would have meant large losses for the Company. The fact is that we broke even in the fourth quarter on an operating basis. We are a much different company than we were even a year ago, and are now seeing the benefits of the diversification and cost reduction strategies we have pursued. The businesses and markets which account for over 80 percent of our revenues are profitable and growing, and we are working to ensure that the remaining 20 percent will be profitable in the future. Let me review our businesses with you.

Business Overview

Power Generation (21 percent of revenue, 41 percent of EBIT) has moved from a break-even business just 3 years ago to one that was able to nearly double its profits over 1999. We project 10 to 15 percent growth in Power Generation over the next few years, fueled by rising global demand for power from ready sources. The energy issues in the American West highlight even more the need for reliable power and full service support.

Filtration and Other Business (18 percent of revenue, 49 percent of EBIT) remained solidly profitable, despite being affected by the depressed heavy-duty engine market. We are gaining market share as original equipment manufacturers (OEMs) respond favorably to the natural synergy among our engine, filtration, and exhaust products.

  • The "other' in this category refers to our 19 company-owned distributors across the globe, which represent strategic growth opportunities for Cummins. This year, we added three new distributors, two in Latin America and one in South Africa. As a group, we expect them to continue to grow at 10 percent each year over the next several years.

  • Also included in this category is our turbocharger business, Holset. It grew 26 percent in sales and doubled in profits over the year. Holset continues to play a critical role in our emissions technology research and development.

  • Together, these two businesses provide the best return on assets of all of our businesses.

The Engine Business (61 percent of revenue, 10 percent of EBIT) posted operating earnings of $24 million for the full year, reflecting strong segments in the group:

  • High-horsepower engine sales for mining, rail equipment, and government applications are 18 percent higher than a year ago, and growing.

  • Despite the recent slump in the light-duty automotive business, our 13-year relationship with DaimlerChrysler has never been better. DaimlerChrysler acknowledges that Cummins is one of its best suppliers. We have also continued to improve our performance in quality and in reducing costs.

  • Although down in the second half, shipments to construction, agriculture and marine markets were still 4 percent higher than a year ago.

  • Shipments of heavy-duty and midrange truck engines in international markets increased 18 percent.

  • This brings us to the heavy-duty truck engine market in North America, which fell 39 percent in 2000. The Engine Business worked diligently throughout the year to mitigate the effects of the downturn in that market, consolidating facilities, reducing its workforce, and continuing to reduce costs.

Top Of Page

2001 and Beyond

As I write this letter, we've had only a few weeks to view our performance for 2001. We expect the first quarter of 2001 to be worse than the fourth quarter of 2000. The truck market will likely be down another 20 percent, and other consumer markets are also softening. To address this immediate issue, we will continue to reduce our costs through streamlining and consolidating production, and reducing our workforce.

Over the next several years, our focus will be on improving cash flow, restructuring the way we participate in the heavy-duty truck market, and growing our profitable businesses. This focus will position us for strong financial performance as we emerge from the economic slump.

To improve our cash flow, we continue to reduce our direct and indirect material costs, and have already delivered approximately $275 million worth of improvements in our gross purchase costs since our work began in 1998. Reducing the amount we pay for quality issues associated with some of our new products is also a focus, and we have implemented a quality improvement program called Six Sigma. Led by project leaders called Black Belts and Green Belts, Six Sigma uses statistical tools and a disciplined, logical approach to drive rapid process improvement. We now have more than 100 Black Belts and 170 Green Belts working on improvement projects. The completed projects have already resulted in an additional $27 million to the bottom line, exceeding our first-year goal by $2 million.

Throughout 2000, I have highlighted the need to change the way we participate in the North American heavy-duty truck engine market. The problems in the business are inherent in the structure, and are not only the result of the current downturn. For more than a decade, we have been caught between discounts in pursuit of market share and the need for significant investment in technology over shorter and shorter product cycles driven by increasingly stringent emissions standards. This cycle means that neither Cummins nor other participants in that market, including truck manufacturers and component suppliers, can earn a reasonable return on this investment, even in a strong year. This is why we are all considering new relationships, so that we can remove these redundant costs and restore profitability over the long term. Cummins is working hard to establish the kind of relationships that will enable us to earn a return on our investment, and I am optimistic about our ability to do so.

I am confident of our future as we move into 2001, despite the challenges of 2000. Our strengths remain. We are a diversified company. We continue to lead the industry in emissions technology, with expertise in fuel systems, filtration, exhaust systems, turbochargers, electronics, and combustion research. We have manufacturing, engineering, and marketing alliances that not only cross our organizational structure, but which cross the globe, including ten businesses in India and eight in China. We have the strongest distribution system among any of our competitors, which enables us to be first to market with the best products. We intend to capitalize and build upon these strengths.

The year 2000 was an important year for Cummins. We took action to address the short-term financial issues facing us, worked to strengthen our growth businesses, and established a new Vision and Mission which resulted in changing our name to Cummins Inc. to reflect the true nature of the company. These actions, combined with our focus on our strengths over the long term, mean that we are well poised to deliver on our promise to perform for all our stakeholders in 2001 and beyond.

Tim Solso

Chairman and Chief Executive Officer

Cummins Engine Company, Inc.

February 28, 2001

 

 

Members of the Policy Committee: (from left to right) Christine Vujovich, John Wall, Rick Mills, Jack Edwards, Tim Solso, Jean Blackwell, Joe Loughrey, Tom Linebarger, Mark Gerstle, Frank McDonald