Cummins comeback: think of it as a global technology company.

THINK OF CUMMINS as a manufacturer of noisy, soot-belching diesel engines? Think again. Remember the $35 million state bailout loan the company sought in 2001? Forget it.

The Cummins of the 21st century is very much a technology company. Yes, it still builds engines, but they're high-tech,

low-emission, quieter and more fuel-efficient. Cummins Inc. also makes a variety of filters and other engine- and auto-related products, along with a wide range of power generators. And though its headquarters, biggest center of R&D and major manufacturing operations remain in Columbus, Cummins is a truly global corporation, with manufacturing facilities in faraway places and the capability of having engineers on multiple continents cooperating on an issue 24 hours a day.

It's a transformed company, and the results of its transformation show clearly in its financials. A company that saw sales and profits shrink as the century began--with a loss of about $100 million in 2001--is enjoying an impressive rebound. Sales through the first nine months of 2004 totaled about $6.1 billion, nearly matching the 12-month total of $6.3 billion in 2003. Profits through the first three quarters totaled $231 million, leaving the $50 million net income from all of 2003 in the dust. Cummins stock has steadily climbed from about $19 per share in October 2002 to about $80 as 2005 began.

"It's amazing," says auto-industry analyst David Healy of the Wall Street firm Burnham Securities. "Over the course of 18 months they've gone from a troubled company to one that's generating huge amounts of cash and record earnings. They've gone from famine to feast."

How did the company turn itself around? "I think we are smarter about running our business," says CEO Tim Solso. For Cummins, smarter has meant cutting costs, reducing overhead, streamlining product development, seeking new markets and, in general, viewing obstacles as opportunities.

WHAT CUMMINS DOES

Cummins was founded in 1919 by Columbus banker W.G. Irwin and an inventor who had earlier been Irwin's driver and auto mechanic, Clessie Lyle Cummins. Clessie Cummins was an early believer in the commercially unproven engine technology invented in the 1890s by Rudolph Diesel.

The first Cummins engines were used for stationary power, sold to farmers through the Sears catalog. In 1929, Clessie Cummins mounted a diesel engine on a Packard limo and took Irwin for a spin in what was the first diesel-power automobile. The durability and fuel economy of diesel engines caught the attention of truckers, and the company moved into the production of heavy-duty engines for trucks and construction equipment.

Today, the company splits its operations into four key business units:

* Engine Business--This remains the company's bread-and-butter, accounting for just over half of total revenues. Cummins engines can be found in a wide variety of trucking applications, including 18-wheelers, medium-duty trucks and school buses. An especially hot piece of this business has been the Dodge Ram pickup truck. Cummins sold some 120,000 turbo-diesel engines to Dodge in 2003 and about 150,000 in 2004, Solso says.

* Power Generation--Cummins' first products were made for generating stationary power, and that's what this business unit sells today, along with such related equipment as alternators. Cummins generators come in diesel and natural-gas variations and range in size from consumer models geared for RVs, homes and boats to the backup generators that serve hospitals, airports and other critical users. During the massive blackout in August 2003, Cummins generators kept the Statue of Liberty lit when most of the Big Apple was dark. Today the company benefits from the sale and rental of power-generation equipment in Iraq. The Power Generation unit accounts for about 20 percent of Cummins sales.

* Filtration and Other Business--The filtration subsidiary is known as Fleetguard, and it makes a wide range of automotive filters, which clean air, oil, fuel, coolants and the like. This unit also includes a turbocharger business.

* International Distributor Business--This business unit doesn't make anything, but handles much of the overseas distribution of Cummins products. It includes company-owned distributorships worldwide.

SPANNING THE GLOBE

"Clearly, we are a much more global company than we were five or 10 years ago," Solso says. "Approximately half of our business--half of our employment and half of our revenues--are outside of the U.S., and international markets have been growing probably twice as fast as domestic markets. That was not the case five years ago."

The company's top customers are global, he observes. The biggest is DaimlerChrysler, which uses Cummins engines in its Dodge Ram pickups as well as in Mercedes and Freightliner truck products. Dongfeng in China is the second-biggest customer, and third in line is Tata Motors, India's largest automotive company.

The list of Cummins operations reads like a world atlas. In addition to Hoosier locations in Columbus and Seymour and American sites in the Carolinas, Texas, Minnesota and New York, the company along with

various joint ventures can boast addresses in China, India, Brazil, Singapore, England, Japan, Australia and numerous other places.

Many of these facilities are manufacturing operations, and Cummins maintains a global Rolodex of distributor operations as well. But the company is spreading its R&D across the globe, too. Among others, Solso says, "we have opened a facility in Pune, India, for technology, and in Wuhan, China. We have the ability to do engineering work around the world 24 hours a day, and at the same time at the lowest cost."

Siting these kinds of operations in such places as China is a key to cracking the competitive global marketplace. The Wuhan technical center, for example, will engage in product development, emissions testing and customer application engineering, giving it the best access for tailoring products specifically toward the Chinese market. It's a joint venture between Cummins and Dongfeng Cummins Engine Co., which in turn is a joint venture between Cummins and Dongfeng Automobile Co.

THE TECHNOLOGICAL EDGE

Besides being in the right places, it's critical to have the right products in order to succeed. Solso feels Cummins has been able to deliver through technology advantages. In the engine business these days, one technological area stands above all others: "The stop of the last 15 years in the diesel engine industry has been about developing emissions capabilities," says John Wall, the company's chief technology officer.

"The emissions regulations around the world are much tougher. They now apply to every geographic area in which we operate," Solso says. What a hassle, right? Not exactly. "We used to view that as an expense that had to be charged for in the marketplace. That now is a magnet for opportunity."

It's an opportunity because Cummins has become a leader in emissions R&D, keeping the bulk of its emissions-related technology in-house rather than relying on other companies to develop and produce it. Cummins boasts a range of expertise that is attractive to a lot of potential customers. "For an OEM that produces 30,000 or 50,000 pieces of equipment, they don't make enough to justify their own R&D, so they will come to us," Solso observes. "We bring technology and are viewed as a technology leader."

What's more, as these key technologies become increasingly critical and complex, it becomes harder for others in the business to catch up. For some players, says Solso, "the emissions challenge has really been a barrier of entry."

What Cummins has achieved with regard to emissions is impressive. By the time new Environmental Protection Agency standards for heavy-duty engines take effect in 2007, the exhaust coming from the company's engines will contain some 90 percent less particulate matter, according to Wall. The new rules, which Cummins has said it will meet, also toughen the standard for nitrogen oxides by as much as 95 percent compared with what they were in 2000.

Much of this reduction comes from the use of after-treatment devices to clean the exhaust. While cars have used catalytic converters for this purpose for some time now, the use of after-treatment for heavy-duty engines has been much less common until now, when the new EPA regulations are making after-treatment a necessity. "That is the least expensive technology," Solso says, "and we are a world leader in exhaust after-treatment."

Cummins handles its own after-treatment research and development. It also controls the other key elements of automotive design that play a role in reducing emissions, including combustion research, fuel systems, electronic controls and air-handling systems. "If you look at other companies, no one else has all five of these technologies in-house," Wall says.

If you're surprised that diesel engines can be made to burn so cleanly, it's understandable, says Wall. That's because there are so many diesel engines on the roads that are still belching clouds of sooty exhaust. "One of the issues that we confront is that diesel engines are extremely durable," he says. "We've got engines produced 20 or 30 years ago still out on the road."

Those older engines also tend to be noisy, but that, too, is changing, Wall says. "Electronic fuel systems make them a lot quieter than in the past." And diesel engines are typically more fuel-efficient than their gasoline counterparts.

LEANER AND MEANER

Cummins approached its financial challenges in the same way a lot of companies do: by making cuts. "We've closed or restructured 14 plants in the last five years," Solso says, noting that the worldwide employee head count dropped by about 25 percent. "We have taken out the excess capacity and are much more careful about increasing capacity. That has allowed us to become much more efficient in how we produce products."

But that was just the beginning of its effort to work smarter. The company found some $300 million in cost savings through smarter procurement of materials, employing commodity teams to source globally. "They had to take costs out and structurally change the business, and they did take a lot of costs out," notes Mark Foster, chief investment officer at Kirr Marbach in Columbus. The firm has invested in Cummins stock in the past and recently decided some profit-taking was in order, given the company's successes.

While engineering is clearly a major key to ongoing success, Cummins also has been able to streamline its R&D to make it more efficient. Costs a few years ago were about 5 percent of sales but have dropped to about 3 percent, according to Solso.

"One of the big things is 'analysis-led design,'" Wall says. That means making much better use of computers in the design process. Many design tweaks that had been done on prototypes in engine test bays now are done on the computer. "It's faster and lets us do a better job."

Taken together, the moves put Cummins in a position to benefit when the recent recession began to loosen its grip on the economy. "As the market started to rebound 15 months ago, it allowed us to get more leverage," Solso says. "If we hadn't taken these actions, we wouldn't be doing as well as we are right now. I think we are positioned much better than we've ever been before."

Cummins, he says, is more diversified and, as such, better able to weather the pain of the next economic downturn. "We've grown some of the less cyclical businesses," he says. Filtration products and other parts, for example, continue to sell no matter how the economy is doing.

THE FUTURE

"I believe Cummins is going to be strong, looking ahead for quite some time," observes Healy of Burnham Securities. "The economy is strong and freight carried around by trucks continues to creep higher. A lot of 18-wheelers weren't replaced by companies during the recession," but will be in the coming years, he believes.

How will sky-high fuel prices impact a company whose products run on fossil fuels? Solso has an optimistic outlook. "It's an opportunity in the sense that we have the most fuel-efficient product," he says. "I con see people moving more toward diesel-power vehicles."

Europeans already are well aware of the fuel-economy virtues of diesel engines. The trick will be to build acceptance in this country. When it comes to cars, Wall says, "the U.S. has hot demonstrated a willingness to embrace diesel."

On the other hand, that acceptance already is there among buyers of Dodge Ram pickups, Solso notes. "We feel that the diesel option helps them sell that truck versus other diesel trucks," he says. "There is almost a cult-like loyalty of Dodge Ram pickup turbo-diesel engine owners. They post their own newsletters. They have rallies around the country. They love the truck and they love the engine."

Wall anticipates a day when sport-utility-vehicle buyers will be given the option of a diesel engine. "If a diesel engine were used in an SUV, you might get a 50 percent increase in fuel economy," he says.

Meanwhile, Cummins stands ready to more in other directions if the market dictates, Solso says. "We have a modest research effort in fuel cells and microturbines and a fairly significant investment in natural-gas engines. If technology requires a change, we're prepared to go there."

INDIANA ROOTS

One place Cummins has no intention of going is away from its Hoosier home. It may be a global company these days, but Cummins maintains its desire to stay an independent, Indiana-based company, according to Solso. Its Columbus headquarters houses corporate operations and much of the sales and marketing for the Engine Business Unit. Its flagship technical center with some 700 engineers plus hundreds of other technicians is in Columbus, as is a fuel-systems plant. In nearby Walesboro is the engine plant that supplies the Dodge Ram pickup. Seymour is home to the Cummins Industrial Center and a joint venture with Komatsu. Both make high-horsepower engines for mining machines, military vehicles and other large equipment. "Most of our R&D work is still done in the U.S., and most of that is done in Columbus," Wall says. "More than half of our total R&D is spent in Columbus."

"I think Indiana is a good place to do business," Solso says. "When we've recruited in the U.S., we have tended to attract engineers and people from the Midwest as opposed to the coasts. There is clearly a Midwest lifestyle that is very attractive to people."

Solso also lauds the state's higher education. "There are a lot of Purdue graduates here. We also have a really strong relationship with Rose-Hulman."

The 57-year-old CEO himself is a product of Indiana higher education, having earned his bachelor's degree at DePauw University in Greencastle. He's worked his entire career for Cummins, joining the company in 1971 after earning a Harvard MBA. Solso took over as chairman and CEO in 2000.

The father of three adult children, Solso says he spends as much time with family as a Fortune 500 CEO can. He also likes to fish--deep-sea fishing, fly fishing, Oust about any kind--and finds himself on the golf course for business from time to time. "If you spend four hours in a golf cart or spend a day in a boat with a customer, you really get to know them as a person and what their issues are, and they get to know you."

For him, that kind of relationship is a critical part of business success. "I believe very strongly that relationships are important. People want to do business with people that they like and trust."

Making relationships is also one of the personally rewarding aspects of leading a global company, he adds. "I have deep friendships with people all over the world--it's one of the benefits of my job."

Headquarters: Columbus

Founded: 1919

Products: Diesel engines, power generators, filters and related products

Worldwide employees: 24,000+

Indiana employees: 4,800

Revenues (2003): $6.3 billion

Revenues (first three quarters of 2004): $6.1 billion

Profits (2003): $50 million

Profits (first three quarters of 2004): $231 million