In the first of a series of conferences planned with investors and business analysts, Cummins Engine Co. chairman & CEO Tim Solso said he believes the company will rebound significantly in the coming year after major cuts are finalized in its engine business.
The engine business has been the roughest sector for Cummins of late. Though five out of the six segments are profitable, said Solso, the one exception – the heavy-duty truck market – has hurt Cummins’ bottom line.
Cummins hopes the high-horsepower segment in both mining and rail markets, along with new growth in the oil and gas industry, will pull the company out of its engine slump since that segment grew 27% last year. Also, the company’s light-duty automotive group last month finalized a long-term relationship with DaimlerChrysler, and Solso said he expects that over the next six years, the relationship will result in the shipment of 800,000 to 1-million engines worth more than $5 billion in revenue.
The heavy-duty truck group is undergoing a severe restructuring, said Solso. Cummins terminated the development of a new engine platform and will instead rely on the ISX and Signature product lines and build off existing product platforms to meet its customers’ needs.
Solso added that the company will take a special pre-tax charge in the second quarter of $100- to $120-million relating to the termination of the development of the new engine platform and people reductions. Solso said eliminating a new engine design will save the company $200 million in additional expenditures from planned platform investments over the next two years.
Other areas, however, are doing better. Solso said power generation is a $1.4-billion business that has doubled its profitability in each of the last two years – a market he expects to grow from 10% to 15% per year for the foreseeable future. The oil filtration business – served by Cummins subsidiary Fleetguard – is more than $1.2 billion in size and is expected to grow 10% annually. Since the first of this year, new OEM and aftermarket contracts in excess of $60 million per year have been awarded to Fleetguard for production either this year or in 2002, Solso said.
Solso also said Cummins’ restructuring efforts are key to helping the company survive in the current poor economic climate.
“We are a global company with 43% of our revenues coming from outside the United States, but we are also subject to impact from economic cycles,” he said. “The breadth and severity of the downturn is unprecedented."
Solso plans to speak with investors and analysts at similar meetings in Los Angeles, Boston, and New York later this month.