Cummins Inc. and Manufacturers and Manufacturing & Technology

Cummins learned lessons after getting battered by recession

September 11, 2006

Many times, CEOs who take over a company's top spot after a peaceful, orderly transition enjoy a honeymoon period of sorts.

For Theodore M. "Tim" Solso, however, the honeymoon at Columbus, Ind.-based Cummins Inc. was short-lived. Little more than six months after taking the reins from James Henderson in January 2000, Solso said, Cummins was slammed by "the deepest and longest recession in the history of the company."

Those dark days now seem like a century ago. Not only did the diesel-engine maker weather the downturn; it roared back. Sales since 2000 have risen 50 percent, to $9.9 billion, and annual profit has swelled from $14 million to $550 million.

Meanwhile, the company's stock has defied naysayers on Wall Street. Cummins shares have risen 422 percent since October 2002, swelling the company's market value to nearly $6 billion.

How Cummins stormed back isn't a simple story. It involves careful, disciplined management. Executives whacked costs while pushing into fast-growing overseas markets, in part to make the company less vulnerable to swings in the U.S. economy. They also entered niche markets by negotiating a flurry of joint ventures.

The strategy has paid off royally--and earned Cummins IBJ's 2006 Enterprise Award, which honors risk-taking and achievement among central Indiana companies.

Cummins now ranks 238th on Fortune's list of 500 largest companies, up 24 slots since 2000. It remains an economic powerhouse in its hometown and the rest of south-central Indiana, where it employs 5,500 people.

"They've really done a solid job," Mark Foster, managing director of Columbus-based investment manager Kirr Marbach & Co., said of Cummins' management team.

"They have competing interests of Wall Street, the community, their employees--it's not always easy to balance those interests. They made the difficult decisions when they needed to be made."

Staying afloat

After the recession hit, Solso had no grandiose plans. He just wanted Cummins to survive.

Acquisitions the company had made were weighing down other, suddenly struggling parts of the company, and a debt-heavy balance sheet afforded little cushion.

"The timing and the depth of the recession were a surprise," said Solso, now 59. "The plans I'd made changed drastically in my first six months [as CEO]."

Cummins' managers took swift action. They closed or modified more than a dozen plants, eliminating one-quarter of the 28,000 workers it then employed.

Even the original Cummins plant in Columbus took a hit when the company shifted production of heavy-duty truck engines to a more modern plant in Jamestown, N.Y.

The recession lasted until 2003. At the company's darkest moment in the fall of 2002, Cummins was nearly out of cash and faced default on its loan covenants.

It went to the bond market in November of that year, raising $250 million that allowed it to refinance its debt and stay above water.

"There were serious issues on several fronts," said Solso, a Harvard MBA who joined the engine maker in 1971. "In some ways, it didn't require a lot of judgment, because there weren't a lot of choices."

Solso credits the turnaround to a committed management team, open communication with employees, and extensive cost-cutting.

By 2004, the efforts were paying off. Cummins posted record profit that year, the following year and is on track to do so again in 2006.

Hoosier focus

Cummins traces its roots to the garage of Columbus business titan W.G. Irwin, whose chauffeur, Chessie Cummins, took an interest in diesel engines.

The men set up Cummins Engine Co. in 1919 in Columbus, where the company's roots remain deep. In addition to its headquarters, Cummins operates three plants in the area.

These days, the company also has a notable presence in Indianapolis. In 2004, Cummins opened a downtown office at One American Square.

One of the goals of the then-sparse office was to give the company a physical presence in the state's capital. Company officials also thought that giving some professionals the opportunity to work in Indianapolis would help with recruitment and retention, said Cummins spokesman Mark Land, one of the first people to work out of the office here.

Initially, it was mostly filled with people whose jobs--such as communications and legal services for the entire company--didn't tie them to the Columbus area full time.

In the past two years, the office has evolved into a full-fledged northern outpost for Cummins headquarters. About 50 employees work out of the office here. Solso, who estimates he spends 80 percent of his time traveling to company facilities worldwide, splits his remaining time evenly between Indianapolis and Columbus.

He and his wife 18 months ago sold their seven-acre spread outside Columbus and traded it for a condominium within walking distance of the One American Square office tower. Cummins Chief Financial Officer Jean S. Blackwell also maintains an Indianapolis office.

"It's important that they would [open an office here], because we suffer from a loss of corporate headquarters," said Mike Wells, president of locally based REI Investments and longtime business and civic leader.

"Cummins has always been an active business partner here, but [the downtown office] makes it easier to participate."

Beyond the heartland

As Cummins executives fought through the last recession, they also had their minds on something else--how to prevent such near disasters from striking again.

That meant reducing the company's reliance on its mainstay, heavy-duty diesel truck engines, whose sales typically surge in a hot economy but slide in a cool one.

Company-owned research centers raced to introduce new technology to the wide array of products Cummins makes and sells worldwide, from after-market exhaust systems to electric-power generators.

Cummins also began forming joint ventures--more than 25 new partnerships in five years--to capitalize on fast-growing niche markets in established economies like the United States as well as in emerging markets such as China, India and South America.

Global operations are nothing new for Cummins. One of Solso's predecessors, J. Irwin Miller, in fact, was among the first U.S. businessmen to visit China after the country's economy opened to foreign investment in the mid-1970s. Cummins followed with its first plant in China in 1979.

Thanks to joint ventures and growth at company-owned facilities, Cummins' sales from China nearly tripled from 2000 to 2005, climbing from $350 million to $1 billion.

In the same span, sales from India more than doubled, to $800 million.

Both markets are expected to produce double-digit sales growth for Cummins in the future, Solso said.

And by using joint ventures, Cummins is taking on less risk than it otherwise would be, Solso said. The partnerships allow equipment manufacturers, such as China's Dongfeng, to gain access to Cummins' research and reputation. In return, the Columbus company benefits from the partners' strong market shares.

Solso noted that Cummins already has a worldwide distribution, sales and service network in place to support existing and future customers. It's a global footprint that he believes would be difficult, if not impossible, for another company to replicate.

Silencing skeptics

Still, this is no time for complacency.

Cummins plans to introduce a stream of new products across its business lines in the next year to 18 months. How well it manages those rollouts will determine the company's market share in those businesses for years to come, Solso said.

The company also still needs to keep a tight rein on costs, while at the same time making its customer service top-notch, Solso said.

And like many companies, Cummins faces the daunting task of training and recruiting workers to fill the jobs that will open up as the baby boomer generation reaches retirement age.

Solso and other Cummins executives don't mention breaking the boom-bust cycle as a remaining challenge. They think they've fixed that problem, but much of the investment community remains unconvinced.

That's one reason Cummins shares have retreated in recent weeks, amid growing concern the U.S. economy is slowing.

Shares now trade for around $113.50 each, down from an all-time high of $123.15 in mid-August. They dropped nearly 4 percent in a single trading day in late August after New York-based UBS analyst David A. Bleustein downgraded the stock of Cummins and one of its competitors to the equivalent of a "sell."

"Our downgrades reflect our view that [heavy-duty] truck orders will continue to decline for the remainder of this year. Additionally, we believe the stocks of both companies are currently somewhat overvalued relative to historical valuations in prior 'peak' earnings years."

Bleustein isn't alone in his assessment--only one major firm rates Cummins' stock a "buy."

The topic clearly rankles Solso, who has watched analysts over the past five years dismiss Cummins' prospects, even as the company continued to meet or exceed performance targets.

Major shareholder groups, such as mutual funds, have largely stood behind the company, he noted.

"Our strategy is that we tell investors who we are and what we do," Solso said. "They've held us accountable, and that's what we've done. Sooner or later, it will be reflected in our stock price."

Next year may bring the real test for Cummins, said Patrick Barkey, an economist at Ball State University. That's when stricter U.S. Environmental Protection Agency emissions regulations on heavy-duty trucks go into effect. Cummins, as well as its competitors, are reaping sales from customers stocking up on less-efficient, less-expensive engines before the EPA clamps down.

Even though Cummins has reduced its reliance on the heavy-duty truck market, those engines still account for 18 percent of the company's overall revenue.

"It's still a cyclical market," said Kirr Marbach's Foster, who noted his firm doesn't own Cummins shares. "You're going to see a test of that in '07. What [Cummins] has done will enable that to even out a little bit, instead of losing a significant amount off the bottom line."

Solso is taking a "you'll see" approach.

"Cummins has never had more opportunities in our history than we have right now," he said. "All our businesses are now profitable, and we're much less cyclical."

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