4 Important Things Cummins Inc.’s CEO Wants You to Know

Slowdown in China not a concern

#1

“In China, we expect domestic revenues, including joint ventures, to be flat again in 2016, with market share gains in heavy and light-duty truck markets helping to offset weaker market demand.”

Tom Linebarger, Chairman and CEO

Growing despite headwindsChina accounts for roughly 7% of Cummins’ total sales, and is among its top target

growth markets.Cummins’ share in China’s heavy-and medium-duty truck markets climbed to 16% in

2015 from 11.4% in 2014.Cummins projects its share to exceed 18% in 2016 despite a slump in industry sales.

Growth catalysts in ChinaEnforcement of stricter emission standards.Increased penetration through Cummins’ joint ventures with leading vehicle

manufacturers like Beiqi Foton and Dongfeng Automotive. Foton, for instance, is replacing local engines in its trucks with those made under the venture.

Source: Foton

Light-duty market no more lucrative#2

“As market conditions weakened in the fourth quarter, we made a decision to scale back the range of light-duty engines that we plan to manufacture in North America.”

Tom Linebarger

A Nissan TITAN XD powered by Cummins 5.0-liter Turbo Diesel engine

Source: Cummins

Nissan: The one and only customer

The background2006: Cummins’ plans to develop a light-duty

diesel (LDD) engine for the North American market failed to take off because of a global meltdown.

2013: Nissan Motor decided to power its next-generation Titan pickups with Cummins LDD engine. Cummins started commercial supply of its 5.0-liter V8 Turbo Diesel in 2015.

Q4 2015: Cummins failed to win additional customers for V8.

The impact Cummins will “scale back” its

light-duty range for the North American market. Simply put, it will not expand its line as previously planned.

In Q4, Cummins marked down the value of its LDD assets and recorded a non-cash pre-tax impairment charge of $211 million. Cummins V8 engine. Source:

Company website

Focus on margins intact#3

“Strong performance in cost reduction initiatives drove gross margin improvement in 2015 despite weaker sales. Through our restructuring actions and ongoing initiatives to reduce material cost and improve quality, we expect to deliver even more savings in 2016.”

Tom Linebarger

What you need to knowCummins generated a healthy gross profit margin of

26% in 2015 despite lower sales.Cummins’ operating margin is well above 10%.

Comparatively, Caterpillar’s margin currently stands at around 7%.

Aggressive restructuring is paying off: Cummins lowered its selling, general, and administrative expenses by 11% in Q4.

In a better position than Caterpillar

Shareholders can expect strong returns#4

“[…] as discussed at our Investor Day, we plan to return 50% of operating cash flow to shareholders over time, but that we may return more or less in any given year depending on business needs and market conditions.”

Tom Linebarger

Key statistics for 2015Operating cash flow: $2.1 billion, of which 74%

was returned to shareholders. Caterpillar returned about half its operating cash flow to shareholders last year.

Dividend increase: 25%Share buybacks: worth $1.5 billionCapital expenditures: $744 million

Projections for 2016

Operating cash flow: 10%-15% of sales. Revenue expected to decline 5%-9%

Returns to shareholders: 75% of the operating cash flow

Capital expenditures: $600 million-$650 million

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