SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 19992000
CUMMINS ENGINE COMPANY, INC.
Commission File Number 1-4949
Incorporated in the State of Indiana I.R.S. Employer Identification
No. 35-0257090
500 Jackson Street, Box 3005, Columbus, Indiana 47202-3005
(Principal Executive Office)
Telephone Number: (812) 377-5000
Securities registered pursuant to Section 12(b) of the Act: Common Stock,
$2.50 par value, which is registered on the New York Stock Exchange and on
the Pacific Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K are not contained herein and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates was
approximately $1.5 billion at January 28, 2000.26, 2001.
As of January 28, 2000,26, 2001, there were outstanding 41.541.4 million shares of the
only class of common stock.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement filed with the
Securities and Exchange Commission pursuant to Regulation 14A are
incorporated by reference in Part III of this Form 10-K.
2
TABLE OF CONTENTS
_________________
Part Item Description Page
____ ____ _________________________________________________ ____
I 1 Business 3
2 Properties 11
3 Legal Proceedings 1112
4 Submission of Matters to Vote of Security Holders 1112
II 5 Market for the Registrant's Common Equity and
Related Stockholder Matters 12
6 Selected Financial Data 13
7 Management's Discussion and Analysis of Results
of Operations and Financial Condition 14
8 Financial Statements and Supplemental Data 2019
9 Disagreements on Accounting and Financial
Disclosure 2019
III 10 Directors & Executive Officers of the Registrant 2120
11 Executive Compensation 2221
12 Security Ownership of Certain Beneficial Owners
and Management 2221
13 Certain Relationships and Related Transactions 2221
IV 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 2322
Index to Financial Statements 2423
Signatures 6343
Exhibit Index 6545
3
PART I
______
ITEM 1. BUSINESS
_______ ________
OVERVIEW
________
Cummins Engine Company, Inc. d/b/a Cummins Inc. ("Cummins" or "the
Company") is a leading worldwide designer and manufacturer of diesel
engines, ranging from 55 to 2,7003,500 horsepower and the largest producer
of commercial diesel engines over 200above 50 horsepower. The Company also
produces natural gas engines and engine components and subsystems.
Cummins provides power and components for a wide variety of equipment
in its key businesses: engine, power generation and filtration.
Cummins sells its products to original equipment manufacturers ("OEMs"),
distributors and other customers worldwide and conducts manufacturing,
sales, distribution and service activities in many areas of the world.
Sales of products to major international firms outside North America are
transacted by exports directly from the United States and shipments from
foreign facilities (operated through subsidiaries, affiliates, joint
ventures or licensees) which manufacture and/or assemble Cummins'
products.
In 1999,2000, approximately 6157 percent of net sales were in the United
States. Major international markets include Asia and Australia (12(14
percent of net sales); Europe and the CIS (12(13 percent of net sales);
CanadaMexico and Latin America (7 percent of net sales) and Mexico and Latin AmericaCanada (6 percent
of net sales).
BUSINESS MARKETS
________________
Engine Business
_______________
Heavy-duty Truck Market
_______________________
Cummins has a complete line of diesel engines that range from 280 to 650
horsepower serving the worldwide heavy-duty truck market. All major heavy-
duty truck manufacturers in North America offer the Company's heavy-duty
diesel engines as standard or optional power. The Company's largest
customer for heavy-duty truck engines in 19992000 was Freightliner
Corporation, a division of DaimlerChrysler. Sales to Freightliner for
this market represented seveneight percent of the Company's net sales in 1999.2000.
In 1999,2000, factory retail sales of North American heavy-duty trucks were
2015 percent higherlower than in 1998, establishing a new industry record.1999. Factory retail sales were 305,000257,000 in
2000, compared to 308,000 units in 1999, compared to 254,000260,000 in 1998 and 219,000224,000
in 1997. The Company's share of the North American heavy-duty truck
engine market was 3128 percent through November 1999,at year-end, based upon data published by
Ward's. The Company's share of the North American heavy-duty truck
engine market was 3231 percent in 1998 and 1997. The Company has
maintained the number one market share position in heavy-duty truck engine
sales for 27 consecutive years.1999.
Cummins market share in Mexico grew from 69 percent toremained stable at 73 percent, positioning
Cummins as the market share leader by a very wide margin. The market size
in 19992000 was 8,800approximately 11,000 units for domestic sales.
In South Africa and Australia, the Company also enjoys the number one market
position and is a leading supplier of diesel engines in Europe.
In 1999, the Company completed the introduction of its new heavy-duty
product line with the launch of the ISL and ISX engines. Cummins offers the ISL, ISM, ISX, N14 and Signature 600 (and Signature 650
in Australia), which compriseconstitute the most modern product line in the
industry. 4
In the heavy-duty truck market, the Company competes with independent
engine manufacturers as well as truck producers who manufacture engines
for their own products. In North America, the Company's primary
competitors in the heavy-duty truck engine market are Caterpillar, Inc.,
Detroit Diesel Corporation and Mack Trucks, Inc. The Company's principal
competitors in international markets vary from country to country, with
local manufacturers generally predominant in each geographic market.
Other diesel engine manufacturers in international markets include
Mercedes-Benz, AB Volvo, Renault Vehicles Industriels, Iveco Diesel
Engines, Hino Motors, Ltd., Mitsubishi Heavy Industries, Ltd., Isuzu
Motors, Ltd., DAF Trucks N.V. (a subsidiary of Paccar, Inc.), Scania A.B.
and Nissan Diesel.
4
Medium-duty Truck Market
________________________
The Company has a line of diesel engines ranging from 185 to 300315
horsepower serving medium-duty and inter-city delivery truck customers
worldwide. The Company has the most modernadvanced product line in the
industry, which is served by the ISB and ISC diesel engines.
The Company entered the North American medium-duty truck market in 1990.
Based upon data published by R. L. Polk,Ward's, the Company's share of the market for
diesel-powered medium-duty trucks in 19992000 was 14 percent through
October 1999.19 percent. Freightliner
was the Company's largest customer for this market in 1999,2000, representing 23
percent of the Company's net sales. The Company's market share in 19981999
was 19 percent, and the market share in 1997
was 25 percent. The decline in market share is primarily a result of the
end of exclusivity with Ford and some share decline at Freightliner.
The Company sells its ISB and ISC series engines and engine components
outside North America to medium-duty truck markets in Asia, Europe and
South America.
In the medium-duty truck market, the Company competes with independent
engine manufacturers as well as truck producers who manufacture diesel
engines for their own products. Primary engine competitors in the medium-
duty truck market in North America are Navistar International Corporation
and Caterpillar, Inc. The Company's principal competitors in
international markets vary from country to country, with local
manufacturers generally predominant in each geographic market. Other
diesel engine manufacturers in international markets include Mercedes
Benz, AB Volvo, Renault Vehicles Industriels, Iveco Diesel Engines, Hino
Motors Ltd., Mitsubishi Heavy Industries, Ltd., Isuzu Motors, Ltd., DAF
Group N.V., Scania A.B., Perkins Engines Ltd., Nissan Diesel and MWM
Brazil.
Bus Market
__________
Cummins offers both diesel- and alternate-fueled engines for school buses,
transit buses and shuttle buses.
In 1999,2000, Cummins was the market share leader for transit buses, a position
it first achieved in 1998. Cummins offers the ISB, ISC, ISL and ISM
engines for the bus markets. Cummins also offers the L10, B and C series products
for natural gas applications, which are primarily focused on transit and
school bus markets. The demand for alternate-fueled products continues to
grow both domestically and internationally.
In these markets, the Company competes both with independent manufacturers
of diesel engines and with vehicle producers who manufacture diesel
engines for their own products. Primary competitors who manufacture
diesel engines for the bus and light commercial vehicle markets are
Detroit Diesel Corporation, General Motors Corporation, Navistar
International Corporation, Caterpillar, Inc., AB Volvo, DaimlerChrysler,Daimler, Scania
A.B. and MWM Brazil. 5
Light Commercial and Specialty Vehicles
_______________________________________
Cummins offers the ISB for pickup trucks, primarily in the Dodge Ram pickup truck in North America and
the 4B for Ford in Brazil. DaimlerChrysler was the Company's largest
customer for midrange engines in this market and the Company's number one
customer when all markets are considered, with 19 percent of the Company's
net sales in 1999.2000.
Cummins is the market leader in the class A recreational vehicle market with
aan overall market share of 24 percent. This represents29 percent and a 7576 percent share of the
diesel-powered recreational vehicles, and a strong growth from gasoline to
diesel power for this application.vehicle market.
5
Industrial Markets
__________________Market - Construction, Agriculture, Marine
_____________________________________________________
Cummins engines power a wide variety of equipment in the construction,
mining, agricultural marine, rail and governmentmarine markets throughout the world. The major
construction equipment manufacturers are in North America, Europe, Korea
and Japan. Construction equipment manufacturers build approximately one
million pieces of equipment per year for a diverse set of applications.
The agriculture market produces about 340,000 pieces of equipment per year
above 75 horsepower, which is the focus market segmentfocus for Cummins. The Company
has the dominanta substantial share of the four-wheel drive agricultural tractor
market. In marine markets, about 35,000 diesel-
powereddiesel-powered pleasure boats and
10,000 commercial boats are built every year. Major marine markets are
North America, Europe and Korea.
Mining market
customers are locatedIn 2000, Cummins successfully launched the QSM11 and QSX15 heavy-duty
products to meet Tier 2 requirements in North America, Europethe 302 - 602 horsepower range for
construction applications. Two additional propulsion ratings, which meet
the International Maritime Organization's emission requirements, were
introduced in the marine market.
Industrial Market - High Horsepower
___________________________________
Cummins engineers, manufactures and Japan.markets engines for mining, rail,
government and petroleum markets and also produces engines for power
generation and marine applications. The Company's engine range covers
from 19-liters to 91-liters, representing 550 horsepower to 3,500
horsepower and is the most modern high horsepower product line in the
industry.
Cummins offers a full product line for mining applications that compete in
all segments including 240- and 300-tonfrom small underground mining equipment up to 400-ton haul
trucks. Rail and government represent a small
portionThe launch of industrial markets.the QSK78 at MINExpo 2000 extends Cummins' mining
products up to 3,500 horsepower, the largest in the mining industry.
Cummins occupies the number two position in this market.
The rail market activity is primarily in Europe and Asia, with the
Company having number one market position in the worldwide railcar
market. With the Company's new products QSK60 and QSK78, Cummins will
be able to move into a larger proportion of the locomotive market
outside North America.
Government market activity represents a small portion of high horsepower
markets and the government market issales are primarily in North America.
A seriesAmerica and Europe.
Petroleum markets currently represent a small but growing part of high
horsepower business. The new product introductions was completed in 1999, including the
QSB5.9, the QSC8.3 and the QSX15 electronic engines. In addition, the B3.3
engine, developed with our joint venture partner Komatsu, was launched in
1999. For the marine market, introductions in 1999 included three ratings
of the electronic QSM11 engine,high horsepower products allow Cummins to be
a full product line of shipboard auxiliary
units and upgrades of the entire product linesupplier to meet the International
Maritime Organization's emissions requirements for January 1, 2000. The
Company completed the successful introduction of the 2,700-horsepower QSK60
to the mining markets, which extends Cummins product range to power 300-ton
haul trucks and 90-cubic-yard excavators.this industry.
Power Generation Business
_________________________
In 1999,2000, power generation sales represented 2021 percent of the Company's
net sales. The strategic mission of Cummins Power Generation is to work
in partnership with its customers to provide "powerful solutions."
Cummins will deliver products and services that generate electric power,
wherever and whenever it is needed. The Power Generation business is
vertically integrated and manufactures all of the components that make up
power generation systems, including engines, controls, alternators,
transfer switches, switchgear, air filtration and controls.exhaust systems.
Cummins Power Generation also provides a range of services including long-termlong-
term maintenance contracts and turnkey power solutions including the
complete range of maintenance and generator set rentals.services. Rental of power equipment is
also available through the Cummins Power Rent organization.
6
Cummins offers reciprocating engine-based power generation systems
worldwide with a power range of 2 kilowatts to 2 megawatts.megawatts for either
standby or prime power applications. Engines are offered with a choice of
fuels: diesel, natural gas and gasoline-fired.
During 1999, Cummins and Wartsila agreed to divide the operations of their
joint venture, Cummins Wartsila. While the products have excellent
potential in the marketplace, future growth can best be achieved by
integrating the products into the parent companies' sales and distribution
networks. Cummins will take over the manufacture and global sales and
service of the CW 170/180 product line under the designation QSV engine
series.
6
Newage, a subsidiary of Cummins Power Generation, is a leader in the
alternator industry, supplying alternators with a range up to 4 megawatts.
Cummins Power Generation competes on a global scale with a variety of
engine manufacturers and generator set assemblers. Caterpillar, Inc.
remains the primary competition, with its acquisition of MAK, Perkins
and FG Wilson. DaimlerChrysler, through its acquisition of Detroit
Diesel Corporation and AB Volvo, are otheris another major engine manufacturersmanufacturer
with a presence in the high-speed generation segment of the market.
Onan brand sets compete in the mobileconsumer business segment and have a
leading market share exceeding 80 percent. Newage competes globally
with Emerson Electric, Marathon and Meccalte, among others.
Filtration Business and Other
______________________________
Fleetguard, Cummins' Filtration Business, is a leading designer and
manufacturer of filtration systems for heavy-duty equipment. Its products
are produced and sold in global markets, including Europe, North America,
South America, India, China, Australia Africa and Asia.the Far East. Nelson,
purchased in 1998, designs and manufactures air filtration and exhaust
systems and distributes in the same markets. Together, Fleetguard and NelsonThe two companies provide a
complete filtration business solution for their customers. Other markets include small engine
filtration and exhaust systems for small equipment. The Filtration
Business also produces products for the automotive specialty filtration
market and the industrial filtration market through its two subsidiaries,
Kuss, located in Findley, Ohio, and Universal Silencer, located in
Stoughton, Wisconsin.
Cummins owns 1617 distributorships, covering over 25 countries, with
most of them located outside of the United States. Distributors sellCummins also
participates in three joint venture entities that serve the role of
Cummins' distributors. Most distributors engage in the selling of
loose engines, generator sets and service parts, as well as perform
service and repair activities on Cummins products. Cummins'
distributors serve the dealers and end users in the territory. Some
distributors also work with Original Equipment Manufacturers.
Holset's turbochargers are sold worldwide. Holset's joint venture
with TELCO assembled and shipped its first turbochargers in 1996. A
joint venture with Wuxi in China also began production in 1996. During 1997, the
vibration attenuation business was sold to Simpson Industries. The Company
continues an alliance with Mitsubishi Heavy Industries of Japan for
production of jointly developed turbochargers. In
1999, Holset began full production in the United Kingdom of a variable
geometry turbocharger designed for truck powertrains. In 2000, Holset
completed consolidation of its U.S. manufacturing facilities onto one
site in Charleston, South Carolina.
BUSINESS OPERATIONS
___________________
International
_____________
The Company has manufacturing facilities worldwide, including major
operations in Europe, India, Mexico and Brazil. Parts distribution
centers in Brazil, Mexico, Australia, Singapore, China, India and Belgium
are strategically located to supply service parts to maintain and repair
Cummins engines.
The Company has entered into alliances with business partners in various
areas of the world.
In 1997, the Company acquired an additional 1 percent of the outstanding
shares of Kirloskar Cummins Limited, becoming the majority owner, and
changed the name to Cummins India Limited. This business is now
consolidated into Cummins financial statements.
7
In 1996, a joint venture was formed with two of the Fiat Group companies -
Iveco (trucks and buses) and New Holland (agricultural equipment) - to
design and manufacture the next generation of 4-,5-, 5- and 6-liter engines
based on Cummins 4- and 6-liter B series engines. Operations of Dong Feng
in China were expanded to form a joint venture for production of a C
series engine in addition to the license for B seriesSeries engines. 7
In 1995, the Company formed a joint venture with China National Heavy Duty
Truck Corporation in Chongqing, previously a CumminsCummins' licensee, to
manufacture a broad line of diesel engines in China.
Cummins and Scania have a joint venture to produce a fuel system for heavy-
duty diesel engines. Cummins also has a joint venture with TELCO to
manufacture the Cummins B seriesSeries engines in India for TELCO trucks.
Cummins and Komatsu have formed joint ventures to manufacture the B seriesSeries
engines in Japan and high-horsepower Komatsu designed engines in the
United States. In 1997, a third joint venture with Komatsu to design next-next
generation industrial engines was announced.
Cummins has entered into license agreements that provide for the
manufacture and sale of the Company's products in Turkey, China, Pakistan,
South Korea, Indonesia and other countries.
Several of the Company's subsidiaries have operations throughout the
world.
Because of the Company's global business activities, its operations are
subject to risks, such as currency controls and fluctuations, import
restrictions and changes in national governments and policies.
Research and Development
________________________
Cummins conducts an extensive research and engineering program to achieve
product improvements, innovations and cost reductions for its customers,
as well as to satisfy legislated emissions requirements. The Company is
nearing completion of a program to refurbishrenew and extend its engine range.
Cummins has introduced a variety of concepts in the diesel industry that
combine electronic controls, computing capability and information
technology. The Company also offers alternate fueled engines for certain
of its markets. As disclosed in Note 1 to the Consolidated Financial
Statements, research and development expenditures approximated $220
million in 2000, $220 million in 1999 and $230 million in 1998, and $250 million in 1997.1998. The
Company continues to invest in technologies to meet increasingly more
stringent emissions standards.
Sales and Distribution
______________________
While the Company has supply agreements with some customers for Cummins
engines in both on- and off-highway markets, most of the Company's
business is done on open purchase orders. These purchase orders usually
may be canceled on reasonable notice without cancellation charges.
Therefore, while incoming orders generally are indicative of anticipated
future demand, the actual demand for the Company's products may change at
any time. While the Company typically does not measure backlog, customers
provide information about future demand, which is used by the Company for
production planning. Lead times for the Company's engines are dependent
upon the customer, market and application.
While individual product lines may experience modest seasonal declines in
production, there is no material effect on the demand for the majority of
Cummins' products on a quarterly basis. The power generation business,
however, normally encounters seasonal declines in the first quarter of the
year.
The Company's products compete on a number of factors, including
performance, price, delivery, quality and customer support. Cummins
believes that its continued focus on cost, quality and delivery, extensive
technical investment, full product line and customer-led support programs
are key elements of its competitive position.
8
Cummins warrants its engines, subject to proper use and maintenance,
against defects in factory workmanship or materials for either a specified
time period or mileage or hours of use. Warranty periods vary by engine
family and market segment.
There are approximately 8,900 locations in North America, primarily owned
and operated by OEMs or their dealers, at which Cummins-trained service
personnel and parts are available to maintain and repair Cummins engines.
The Company's parts distribution centers are located strategically
throughout the world. 8
Cummins also sells engines, parts and related products through
distributorships worldwide. The Company believes its distribution system
is an important part of its marketing strategy and competitive position.
Most of its North American distributors are independently owned and
operated. The Company has agreements with each of these distributors,
which typically are for a term of three years, subject to certain
termination provisions. Upon termination or expiration of the agreement,
the Company is obligated to purchase various assets of the
distributorship. The purchase obligation of the Company relates primarily
to inventory of the Company's products, which can be resold by the Company
over a reasonable period of time. In the event the Company had been
required to fulfill its obligations to purchase assets from all
distributors simultaneously at December 31, 1998,2000, the aggregate cost would
have been approximately $333$362 million. Management believes it is unlikely
that a significant number of distributors would terminate their agreements
at the same time, requiring the Company to fulfill its purchase
obligation.
Supply
______
The Company manufactures many of the components used in its engines,
including blocks, heads, rods, turbochargers, crankshafts and fuel
systems. Cummins has adequate sources of supply of raw materials and
components required for its operations. The Company has arrangements with
certain suppliers who are the sole sources for specific products. While
the Company believes it has adequate assurances of continued supply, the
inability of a supplier to deliver could have an adverse effect on
production at certain of the Company's manufacturing locations.
Employment
__________
At December 31, 1999,2000, Cummins employed 28,50028,000 persons worldwide,
approximately 10,30010,700 of whom are represented by various unions.
The Diesel Workers' Union (DWU) represents employees at several Southern
Indiana plants, under two contracts. In 1993, members of the DWU working
in a majority of the Company's Southern Indiana manufacturing facilities
ratified an agreement that extends until the year 2004. In 1995,2000, members
of the DWU at the Company's midrange engine plant ratified a five-yearfour-year
agreement. The Company plans to enter into negotiations with the DWU at
the Southern Indiana midrange plant prior to the expiration of the contract
in 2000.
The Office Committee Union (OCU) represents technical and administrative
employees at the Company`s Southern Indiana facilities, including its
Technical Center, under two contracts. In 1995,2000, members of the OCU at the
Company's midrange engine plant in Southern Indiana ratified a five-yearfour-year
agreement. The Company plans to enter negotiations with the OCU prior to
the expiration of the contract in 2000. In 1999, members of the OCU ratified a five-year agreement for
offices and other plants in Southern Indiana and the Company's Technical
Center.
The International Association of Machinists (IAM) represents employees at the
Company's remanufacturing plant in Memphis, Tennessee, under a three-
yearfour-year
agreement which was ratified in 1997. The Company plans to enter
negotiations with the IAM before the expiration of its current contract in 2000.
The Union of Needletrades, Industrial and Textile Employees represents
employees at the Company's filtration product plan in Findlay, Ohio, under
a five-year agreement which was ratified in 1997.
9
The United Auto Workers represents employees at the Company's filtration
products plant in Cookeville, Tennessee, under a three-year agreement
ratified in 1999. 9
The Company has other labor agreements covering employees in North
America, South America, the United Kingdom and India.
ENVIRONMENTAL COMPLIANCE
________________________
Product Environmental Compliance
________________________________
Cummins engines are subject to extensive statutory and regulatory
requirements that directly or indirectly impose standards with respect to
emissions and noise. Cummins' products comply with emissions standards
that the US Environmental Protection Agency ("EPA") and California Air
Resources Board ("CARB"), as well as other regulatory agencies around the
world, have established for heavy-duty on-highway diesel and gas engines
and off-highway engines produced through 2000.2001. Cummins' ability to comply
with these and future emissions standards is an essential element in
maintaining its leadership position in regulated markets. The Company
will make significant capital and research expenditures to comply with
these standards. Failure to comply could result in adverse effects on
future financial results.
Cummins has successfully completed the certification of its 2000 on-highway2001 on-
highway products, which include both midrange and heavy-duty engines. All
of these products underwent extensive laboratory and field testing prior
to their release.
In October 1998, Cummins and other manufacturers of heavy-duty diesel
engines entered into a Consent Decree with the EPA, the U. S. Department
of Justice and the CARB related to concerns they had raised regarding the
level of Nitrogen Oxide (NOx) emissions from diesel engines under certain
driving conditions. The terms of that Consent Decree are a matter of
public record. Cummins has developed extensive corporate action plans to
comply with all aspects of the Consent Decree. Additionally, four
separate court actions have been filed as a result of allegations of the
diesel emissions matter. The New York Supreme Court ruled in favor of the
Company. This
matter is now on appeal.An appeal was filed and the Appellate Division ruled in favor of
the Company and other defendants. Two courts in California ruled in favor
of the Company. A fourth action was filed in U.S. District Court, for the
District of Columbia. A decision on Defendants' MotionThis case was dismissed in September 2000.
The company is taking steps to Dismissreview the timing of the introduction of
the 2.5 gram NOx + NMHC (non-methane hydrocarbon) engines under the
Consent Decree. Analysis conducted through the company's Value Package
Introduction system indicates that significant field testing at this point
is currently pending.still needed. Without this important testing there will be
reliability and durability risks to consider if the products were released
by the Consent Decree date of October 2002. This delay in field testing
of a stable and mature product design has been caused by significant
component development issues in the exhaust gas recirculation system and
because EPA has failed, until recently, to provide confirmation of the
auxiliary emissions control structure for the product. Discussions are on-
going with appropriate EPA and CARB technical and policy offices to
explore later dates for introduction.
Model year 1998 marked the latest major change in promulgated emissions
requirements for heavy-duty on-highway diesel engines when the oxides of
nitrogen standard was lowered from 5.0 to 4.0 g/bhp-hr.
Contained in the environmental regulations are several means for the EPA
to ensure and verify compliance with emissions standards. Two of the
principal means are tests of new engines as they come off the assembly
line, referred to as selective enforcement audits ("SEA"), and tests of
field engines, commonly called in-use compliance tests. The SEA
provisions have been used by the EPA to verify the compliance of heavy-dutyheavy-
duty engines for several years. In 1999,2000, no such audit test was performed
on Cummins engines. The failure of ana SEA could result in cessation of
production of the noncompliantnon-compliant engines and the recall of engines produced
prior to the audit. In the product development process, Cummins
anticipates SEA requirements when it sets emissions design targets.
10
No Cummins engines were chosen for in-use compliance testing in 1999.2000. It
is anticipated that the EPA will increase the in-use test rate in future
years, raising the probability that one or more of the Company's engines
will be selected.
In 1988, CARB promulgated a rule that necessitates the reporting of
failures of emissions-related components when the failure rate reaches a
specified level (25 component failures or one percent of build, whichever
is greater). At somewhat higher failure rates (50 components or four
percent of build), a recall may be required. In October 1999, the Company
communicated to CARB that a failure of the oxidation catalyst used with
certain urban bus engines had experienced failures at a level that
necessitates a report. This failure has now reached the level that could
require a recall. Cummins has initiated activities to correct these
failures on all affected engines in California as well as those in other
states.
10
Heavy-duty engines used in construction, agricultural and certain mining
applications are also subject to emission regulations. In the United
States such standards were phased in beginningbegan phasing-in in 1996. In other parts of the
world similar standards are applied. Cummins has successfully completed
certification of its engines used in these nonroadnon-road applications. All of
these products have undergone extensive laboratory and field tests prior
to their release.
EPA's audit provisions cover certified, nonroadnon-road engines. In 1999,2000, no
Cummins engines were selected for such audit testing.
Emissions standards in international markets, including Europe and Japan,
are becoming more stringent. Given the Company's experience in meeting US
emissions standards, it believes that it is well positioned to take
advantage of opportunities in these markets as the need for emissions-
control capability grows.
There are several Federal and state regulations which encourage and, in
some cases, mandate the use of alternate fueled heavy-duty engines. The
Company currently offers natural gas fueled versions of its C8.3B5.9 and B5.9C8.3
engines, ranging from 150 to 280 horsepower, as well as a propane-fueled
version of its B5.9 engine rated at 195 horsepower.
Vehicles and certain industrial equipment in which diesel engines are
installed must meet Federal noise standards. The Company believes that
applications in which its engines are now installed meet those noise
standards and that future installations also will be in compliance.
Other Environmental Statutes and Regulations
____________________________________________
Cummins believes it is in compliance in all material respects with laws
and regulations applicable to the plants and operations of the Company and
its subsidiaries. During the past five years, expenditures for
environmental control activities and environmental remediation projects at
the Company's operating facilities in the United States have not been a
major portion of annual capital outlays and are not expected to be
material in 2000.
Pursuant to notices received from Federal and state agencies and/or
defendant parties in site environmental contribution actions, the Company
and its subsidiaries have been identified as potentially responsible
parties ("PRPs") under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, or similar state laws,
at a number of waste disposal sites. Under such laws, PRPs typically are
jointly and severally liable for any investigation and remediation costs
incurred with respect to the sites. Therefore, the Company's ultimate
responsibility for such costs could be a percentage greater than the
percentage of waste actually contributed to the site by the Company.
The sites at which the Company or its subsidiaries are currently named as
a PRP are the following: Old City Landfill, Columbus, Indiana; White House
Waste Oil Pits, Jacksonville, Florida; Seaboard Chemical, Jamestown, North
Carolina; Double Eagle Refinery, Oklahoma City, Oklahoma; Wastex Research,
East St. Louis, Illinois; North Hollywood Dump, Memphis, Tennessee;
Commercial Oil, Oregon, Ohio; Berliner & Ferro, Swartz Creek, Michigan;
Schnitzer Iron & Metal, St. Paul, Minnesota; Four County Landfill, Culver,
Indiana; Schumann Site, South Bend, Indiana; Great Lakes Asphalt,
Zionsville, Indiana; Third Site, Zionsville, Indiana; Auto-Ion, Kalamazoo,
Michigan; PCB Treatment Inc., Kansas City, Kansas; ENRx, Buffalo, New
York; Uniontown Landfill, Uniontown, Indiana; Sand Springs, Oklahoma;
United Steel Drum, East St. Louis, Illinois; Putnam County Landfill,
Cookeville, Tennessee; Enterprise Oil, Detroit, Michigan; Wayne
Reclamation & Recycling, Ft. Wayne, Indiana; and Casmalia Disposal Site,
Santa Barbara, California. The Company presently is contesting its status
as a PRP at several of these sites. At some of these sites, the Company
will be released from liability at the site as a de minimis PRP for a
nominal amount.
11
While the Company is unable at this time to determine the aggregate cost
of remediation at these sites, it has attempted to analyze its
proportionate and actual liability by analyzing the amounts of waste
contributed to the sites by the Company, the estimated costs for total
remediation at the sites, the number and identities of other PRPs and the
level of insurance coverage. With respect to other sites at which the
Company or its subsidiaries have been named as PRPs, the Company cannot
accurately estimate the future remediation costs. At several sites, the
remedial action to be implemented has not been determined for the site.
In other cases, the Company or its subsidiary has only recently been named
as a PRP and is collecting information on the site. Finally, in some
cases, the Company believes it has no liability at the site and is
actively contesting designation as a PRP.
Based upon the Company's prior experiences at similar sites, however, the
aggregate future cost to all PRPs to remediate these sites is not likely
to be significant. In each of these cases, the Company believes that it
has good defenses at several of the sites, that its percentage
contribution at other sites is likely to be de minimis or that other PRPs
will bear most of the future remediation costs. However, the
environmental laws impose joint and several liability and, consequently,
the Company's ultimate responsibility may be based upon many factors
outside the Company's control and could be material in the event that the
Company becomes obligated to pay a significant portion of these expenses.
Based upon information presently available, the Company believes that such
an outcome is unlikely and that its actual and proportionate costs of
participating in the remediation of these sites will not be material.
In 2000, various plants and facilities of the Company will commencecommenced
development and implementation of ISO 14001 standards for an environmental
management system. This activity will continue in 2001. The Company
anticipates that four of its Central Area plants and five of its North
American plants will be certified to ISO 14001 within the next two years.
ITEM 2. PROPERTIES
_______ __________
Cummins' worldwide manufacturing facilities occupy approximately 15
million square feet, including approximately 6 million square feet outside
the United States. Principal manufacturing facilities in the United
States include the Company's plants in Southern Indiana; Wisconsin;
Jamestown, New York; Lake Mills, Iowa; Cookeville, Tennessee; and Fridley,
Minnesota;Minnesota, as well as an engine plant in Rocky Mount, North Carolina,
which is operated in partnership with Case Corporation.
Countries of manufacture outside of the United States include England,
Brazil, Mexico, Canada, France and Australia. In addition, engines and
engine components are manufactured by joint ventures or independent
licensees at plants in England, France, China, India, Japan, Pakistan,
South Korea, Turkey and Indonesia.
Cummins believes that all of its plants have been maintained adequately,
are in good operating condition and are suitable for its current needs
through productive utilization of the facilities.
12
ITEM 3. LEGAL PROCEEDINGS
_______ _________________
The information appearing in Note 17 to the Consolidated Financial
Statements is incorporated herein by reference. The material in Item 1
"Other Environmental Statutes and Regulations" also is incorporated herein
by reference.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
_______ _________________________________________________
None.
12
PART II
_______
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
_______ _____________________________________________________
The Company's common stock is listed on the New York Stock Exchange and
the Pacific Stock Exchange under the symbol "CUM". The following table
sets forth, for the calendar quarters shown, the range of high and low composite
prices of the common stock and the cash dividends declared on the common
stock.
High Low Dividends Declared
______ _______ __________________
2000
____
First quarter $49 5/8 $31 1/16 $.30
Second quarter 38 5/8 29 15/16 .30
Third quarter 36 7/8 27 1/4 .30
Fourth quarter 37 15/16 29 1/16 .30
1999
____
First quarter $42 1/4 $35 $.275
Second quarter 58 1/8 36 1/8 .275
Third quarter 64 9/16 49 .275
Fourth quarter 52 9/16 39 1/16 .30
1998
____
First quarter $62 3/4 $51 $.275
Second quarter 57 5/16 49 3/16 .275
Third quarter 56 29 5/8 .275
Fourth quarter 40 7/8 28 5/16 .275
At December 31, 1999,2000, the approximate number of holders of record of
the Company's common stock was 4,800.
The Company has repurchased 5.05.4 million shares of its common stock
since 1994. The Company repurchased .4 million shares on the open
market at an aggregate price of $16 million in 2000, .7 million shares
on the open market at an aggregate purchase price of $34 million in
1999 and .4 million shares on the open market at an aggregate purchase
price of $14 million in 1998. In 1997, the Company repurchased 1.3
million shares from Ford Motor Company and another .2 million shares
on the open market at an aggregate purchase price of $75 million. The
Company repurchased .8 million shares of stock in the open market at
an aggregate purchase price of $34 million in 1996 and 1.6 million
shares at an aggregate purchase price of $69 million in 1995. All of
the acquired shares are held as common stock in treasury.
In 1997, the Company issued 3.75 million shares of its common stock to
an employee benefits trust to fund obligations of employee benefit and
compensation plans, principally retirement savings plans. Shares of
the common stock held by this trust are not used in the calculation of
the Company's earnings per share until distributed from the trust and
allocated to a benefit plan.
Certain of the Company's loan indentures and agreements contain
provisions which permit the holders to require the Company to
repurchase the obligations upon a change of control of the Company, as
defined in the applicable debt instruments.
13
The Company has a Shareholders' Rights Plan which it first adopted in
1986. The Rights Plan provides that each share of the Company's
common stock has associated with it a stock purchase right. The
Rights Plan becomes operative when a person or entity acquires 15
percent of the Company's common stock or commences a tender offer to
purchase 20 percent or more of the Company's common stock without the
approval of the Board of Directors. In the event a person or entity
acquires 15 percent of the Company's common stock, each right, except
for the acquiring person's rights, can be exercised to purchase $400
worth of common stock for $200. In addition, for a period of 10 days
after such acquisition, the Board of Directors can exchange such right
for a new right which permits the holders to purchase one share of the
Company's common stock for $1 per share. If a person or entity
commences a tender offer to purchase 20 percent or more of the
Company's common stock, unless the Board of Directors redeems the
rights within 10 days of the event, each right can be exercised to
13
purchase one share for $200. The plan also allows holders of the
rights to purchase shares of the acquiring person's stock at a
discount if the Company is acquired or 50 percent of the assets or
earnings power of the Company is transferred to an acquiring person.
The Company's bylaws provide that Cummins is not subject to the
provisions of the Indiana Control Share Act. However, Cummins is
governed by certain other laws of the State of Indiana applicable to
transactions involving a potential change of control of the Company.
ITEM 6. SELECTED FINANCIAL DATA
_______ _______________________
$ Millions, except
per share amounts 2000 1999 1998 1997 1996 1995
_____________________ ______ ______ ______ ______ ______
Net sales $6,597 $6,639 $6,266 $5,625 $5,257
$5,245
Net earnings (loss) 8 160 (21) 212 160 224
Earnings (loss) per share:
Basic .20 4.16 (.55) 5.55 4.02
5.53
Diluted .20 4.13 (.55) 5.48 4.01
5.52
Cash dividends per share 1.20 1.125 1.10 1.075 1.00
1.00
Total assets 4,500 4,697 4,542 3,765 3,369
3,056
Long-term debt 1,032 1,092 1,137 522 283
117
Earnings per share for 1995-19961996 have been restated to reflect the adoption
of SFAS No. 128.
In 2000, the Company's results included charges of $160 million ($103
million after tax, or $2.71 per share) reflecting restructuring
actions, impairment of assets and other activities largely focused in
the Engine Business. These actions were taken in response to the
downturn in the North American heavy-duty truck market and related
conditions. The charges included $42 million attributable to employee
severance actions, $72 million for impairment of equipment and other
assets, $30 million for impairment of software developed for internal
use where the programs were cancelled prior to implementation and $16
million associated with exit costs to close or consolidate a number of
smaller business operations.
In 1999, the Company's results included a charge of $60 million in
connection with the dissolution of the Cummins Wartsila joint venture.
In 1998, the Company's results included charges totaling $217 million,
comprised of $78 million for revised estimates of additional product
coverage liability for both base and extended warranty programs, $114
million of costs associated with the Company's plan to restructure,
consolidate and exit certain business activities and $25 million for a
civil penalty resulting from an agreement reached with the U.S.
Environmental Protection Agency, the Department of Justice and the
California Air Resources Board regarding diesel engine emissions.
In 1995, the Company's results included restructuring charges of $118
million ($77 million after taxes) to reduce the worldwide work force and to
close or restructure selected operations in Europe, Brazil and North
America. Net earnings in 1995 also included release of the tax valuation
allowance of $68 million.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
_______ _____________________________________________________________
OVERVIEW
________
Net sales were a record $6.6 billion in 2000, essentially flat with $6.6 billion
reported in 1999 6and 5 percent higher than in 1998, and 18 percent higher than in 1997.1998. Earnings before
interest and taxes in 2000 were $249 million, or 3.8 percent of sales,
excluding a $160 million pretax charge in connection with certain
restructuring actions and asset impairment write-downs. This compares
to $356 million in 1999, or 5.4 percentexcluding charges of sales, were also a record,
excluding a $60 million pretax charge in
connection with the dissolution of the Cummins Wartsila joint venture.
This compares to $282 million in 1998,
excluding charges of $217 million pretax for product coverage costs,
restructuring and exit activities and a settlement with the U.S.
Environmental Protection Agency. As reported, earnings before interest and taxes were $89 million in
2000, $296 million in 1999 and $65 million in 1998 and $312 million in
1997.1998. Net earnings in
19992000 were $8 million or $.20 per share compared to $160 million or $4.13
per share compared
toin 1999 and a net loss of $21 million or $(.55) per share in
1998 and net earnings
of $212 million or $5.48 per share in 1997.1998.
RESULTS OF OPERATIONS
_____________________
Net Sales:
__________
In 1999,2000, the Company attained its eighth consecutive year of recordCompany's sales totalingtotaled $6.6 billion. Revenues from sales
of engines were 5552 percent of the Company's net sales in 1999,2000, with
engine revenues 65 percent higherlower than in 19981999 and 15 percent above 1997.flat compared to 1998.
The Company shipped a record421,800 engines in 2000, compared to 426,100 engines
in 1999 compared toand 403,300 in 1998 and 369,800 in 1997 as follows:
Unit shipments 2000 1999 1998 1997
________________ _______ _______ _______
Midrange engines 318,200 298,400 287,400
264,300
Heavy-duty engines 91,900 117,900 106,100
94,900
High-horsepower engines 11,700 9,800 9,800 10,600
_______ _______ _______
421,800 426,100 403,300 369,800
_______ _______ _______
_______ _______ _______
Revenues from non-engine products, which were 4548 percent of net sales in
2000, were 5 percent higher than in 1999 were 6and 11 percent higher than in
1998. The major increases within non-
enginenon-engine revenues were achieved in
parts sales, of generator setscompany-owned distributors and PowerCare
sales (which include new parts and remanufactured engines and parts).the Holset turbocharger
operations. Sales of the remaining non-engine products, in the
aggregate, were essentially level with 1998.1999.
The Company's net sales for each of its key segments during the last three
years were:
$ Millions 2000 1999 1998 1997
__________ ______ ______ ______
Automotive markets $2,936 $3,203 $2,928
$2,622
Industrial markets 1,114 1,022 1,054 1,044
_____ _____ _____
Engine Business 4,050 4,225 3,982 3,666
Power Generation Business 1,395 1,356 1,230 1,205
Filtration Business & Other 1,152 1,058 1,054 754
______ ______ ______
$6,597 $6,639 $6,266 $5,625
______ ______ ______
______ ______ ______
Cummins' Engine Business, the Company's largest business segment,
produces engines and parts for sale to customers in both automotive
and industrial markets. Engine Business customers are each serviced
through the Company's worldwide distributor network. The engines are
used in trucks of all sizes, buses and recreational vehicles, as well
as a variety of industrial applications including construction,
mining, agriculture, marine, rail and military. Engine Business
revenues were $4.2$4.0 billion in 2000, a 4 percent decrease from 1999 and
a 62 percent increase over 19981998. The 2000 discussion and 15 percent over 1997.analysis of
results has been aligned to reflect the organization structure of the
Engine Business in addressing its markets.
Sales of $3.2$2.1 billion in 1999 for automotivethe bus and truck markets were 913 percent
lower than in 1999 and 5 percent lower than in 1998. In 2000, heavy-
duty truck engine revenues of $1.4 billion were 19 percent lower than
1999 and 7 percent lower than 1998, reflecting the downturn in the
North American heavy-duty truck market, where shipments were down 35
percent from 1999. This was partially offset by increases in
international heavy-duty markets, where shipments increased 34 percent
from 1999.
15
Medium-duty truck and bus engine revenues of $662 million were 4
percent higher than in 19981999 and 22flat compared to 1998. In 2000,
medium-duty truck engine volumes were 5 percent lower than in 1999 and
reflect a 29 percent decline in North American volumes. This decline
was partially offset by a 14 percent shipment increase in
international medium-duty truck markets. Bus engine shipments were 41
percent higher than in 1997. In 1999, heavy-duty truck
engine revenues were 18 percent higher than1999.
Sales of $830 million in 1998 due to the strong
market in North America, partially offset by reduced demand in
international heavy-duty truck markets. Within the North
15
American heavy-duty truck market, unit shipments were up 21 percent over
1998, and Cummins continued to be the market leader. International unit
shipments for the heavy-duty market in 1999 were 7 percent lower than in
1998 due primarily to reduced demand in Mexico.
Revenues from the sales of engines for medium-duty trucks in 1999 were 1
percent lower than in 1998 on an 8 percent increase in units. This
variance reflected a mix shift towards smaller 4 cylinder engines, which
have a lower selling price and margin as well as the impact of the
devaluation of the Brazilian real, which reduced revenues in this market.
For the bus and light commercial vehicle market engine revenues in 1999 were 7
percent higher than in 1999 and 16 percent higher than in 1998,
on a 7 percentreflecting an increase in unit
shipments.engine shipments from 1999. Record unit
shipments in 2000 to DaimlerChryslerDaimler-Chrysler for the Dodge Ram pickup, while
including a sharp downturn in the fourth quarter, were 16 percent
higher than in 1999 for the full year.
Sales of $873 million to the construction, agriculture and marine
markets were 4 percent higher than in 1999 and 3 percent higher than
in 1998. In 2000, shipments were 4 percent higher than in 1999,
driven by increases in the construction and marine markets. Shipment
declines in North America were more than offset by increases in
international markets.
Sales of $241 million to the high horsepower/mining market were 32
percent higher than in 1999 and 16 percent higher than in 1998.
Engine shipments were 36 percent higher than in 1999, with higher
demand in international markets accounting for much of the increase.
Revenues of $1.4 billion in 2000 for the Power Generation Business
were 3 percent higher than in 1998 and 30 percent higher than in
1997. The Company also had record shipments to the North American bus and
recreational vehicle market, where volumes were 30 percent higher than in
1998 and 39 percent higher than in 1997. Shipments for international bus
markets declined 10 percent from 1998, due to lower sales into Mexico.
In 1999 revenues of $1.0 billion from industrial markets were 3 percent
lower than in 1998 and 2 percent lower than in 1997, due to decreased
volume and a shift in product mix. Engine revenues for this market were
down 6 percent on a 6 percent decrease in units. Construction equipment
business was 2 percent higher than the year-ago level, while agricultural
equipment demand decreased 46 percent from 1998 as a result of very weak
markets. Sales to marine markets increased 24 percent from 1998, with
strength in both North American and international markets. Mining market
sales declined 8 percent as compared to last year.
Revenues of $1.3 billion in 1999 for the Power Generation Business were 10
percent higher than in 1998 and 13 percent higher than in 1997.
Approximately $40 million of the sales increase in 1999 related to demand
for stand-by power in case of Year 2000 problems; however, the Company
expects that nearly half of this increase is sustainable with revenues from
new markets, including the rental and home stand-by power businesses.1998.
Sales of the Company's generator sets in 1999 increased 21 percent from
1998, continuing2000 were flat compared to
reflect growth in North America, which more than offset
declines in demand for generator sets in Asia and Latin America.1999. Engine sales to generator set assemblers were down 8up 17 percent from
the prior year,
due primarily to lower demand in Asia.year. Alternator sales decreased 27 percent as compared to
1998.1999. Sales of small generator sets for recreational vehicles and
other consumer markets remained strong in North
America, increasing 12 percent from 1998.applications were flat compared to last year.
Sales of $1.1$1.2 billion in 19992000 for the Filtration Business and Other were essentially flat with 1998 and 409
percent higher than in 1997, with 1999 and 1998. In 2000, Fleetguard/Nelson Industries, acquiredrevenues
increased 2 percent, but reflected a drop in January 1998, accountingdemand for the majority of the
increase from 1997. In 1999, new business at small equipment,OEM truck and
agriculturalconstruction equipment manufacturers offset a decrease inproducts as well as reduced sales resulting
from the end of a specific catalyst business, which totaled $35 million.to consumer-
oriented small engine and equipment manufacturers. International
distributor sales included in this segment decreased 1increased 13 percent from 1998,1999,
while sales of Holset turbochargers increased 1326 percent as compared to a
year ago.
Net sales by marketing territory for each of the last three years were:
$ Millions 2000 1999 1998 1997
__________ ______ ______ ______
United States $3,775 $4,064 $3,595
$3,123
Asia/Australia 905 818 806
898
Europe/CIS 860 800 791 796
Canada 473 459 318
Mexico/Latin America 451 375 468
364Canada 418 473 459
Africa/Middle East 188 109 147 126
______ ______ ______
$6,597 $6,639 $6,266 $5,625
______ ______ ______
______ ______ ______
16
In total, international markets accounted for 3943 percent of the
Company's revenues in 1999.2000. Europe and the CIS, representing 1213
percent of the Company's sales in 1999,2000, were 18 percent higher than in
19981999 and 1997.9 percent higher than in 1998. Sales to Canada, representing
76 percent of sales in 1999,2000, were 312 percent higherlower than in 1998.1999. Asian
and Australian markets, in total, represented 1214 percent of the
Company's sales in 1999,2000, with increases in sales to Asia more than offsetting a decline in sales to Australia.from 1999.
In Asia, sales to Southeast Asia increased 2814 percent, sales to Korea
wereincreased 23 percent, sales to China increased 25 percent higher and sales to
Japan were 9 percent above 1998 levels, while sales to China
decreased 6 percent and India was essentially flat compared to 1998.were slightly higher than 1999 levels. Business in
Mexico and Latin America, representing 67 percent of sales in 1999,2000, was
20 percent lowerhigher than in 1998. This decrease was due,1999. Sales to Africa/Middle East,
representing 3 percent of sales in part,
to the devaluation of the Brazilian real.2000, increased 72 percent from
1999.
Gross Margin:
_____________
As disclosed in Note 3 to the Consolidated Financial Statements, the
Company recorded special charges of $92 million in 1998 for product
coverage costs and inventory write-downs. The product coverage special
charges of $78 million include $43 million primarily attributable to base
warranty costs and $35 million for extended warranty programs. The special
charges recorded in 1998 also included $14 million for inventory write-
downs associated with the Company's restructuring and exit activities.
These write-downs reflected amounts of inventory rendered excess or
unusable due to the closing or consolidation of facilities.
The Company's gross margin percentage was 19.1 percent in 2000, 21.4
percent in 1999 and 21.4 percent in 1998, excluding the special
charges recorded for product coverage and inventory write-downs and 22.8in
1998. The gross margin percent in 1997. Gross margin
percentage in 1998 including the special charges
was 19.9 percent. Gross margins in 1999 benefited from higher volumes2000 were impacted by lower cost
absorption in the Company's heavy-duty plants, changes in product mix,
foreign exchange and product cost
improvements, offset by higher product coverage costs. Product coverage
costs were 3.74.2 percent of net sales in 1999,2000, compared to 3.7 percent
in 1999, and 3.3 percent in 1998, excluding the special charges.
Including special charges, and 2.6product coverage costs were 4.5 percent of
net sales in 1997.1998.
16
Operating Expenses:
___________________
Selling and administrative expenses were 11.8 percent of net sales in
1999,2000, compared to 11.8 percent in 1999 and 12.5 percent in 1998 and 13.2 percent in 1997. On the 6-
percent sales increase in 1999, these expenses, which include volume-
variable components, decreased 1 percent in absolute dollars. This
improvement reflects benefits of the Company's cost reduction programs and
restructuring actions.1998.
Research and engineering expenses were 3.7 percent of net sales in
1999,2000, compared to 3.7 percent in 1999 and 4.1 percent in 1998 and 4.6 percent in 1997. This decrease is
primarily due to new products moving into production and the Company's cost
reduction and productivity initiatives.1998.
The Company's lossesincome from joint ventures and alliances werewas $9 million
in 2000, compared to losses of $28 million in 1999 compared toand losses of $30
million in 19981998. This improvement resulted from the dissolution of
the Wartsila joint venture at the end of 1999.
In the past three years, Cummins has recorded restructuring and incomeother
charges to reflect business improvement initiatives committed to by
the Company's management.
As disclosed in Note 4 to the Consolidated Financial Statements, the
Company recorded charges of $160 million ($103 million after tax, or
$2.71 per share) reflecting restructuring actions, asset impairments
and other activities largely focused in the Engine Business. These
actions are taken in response to the downturn in the North American
heavy-duty truck market and related conditions. The charges include
$42 million attributable to employee severance actions, $72 million
for impairment of equipment and other assets, $30 million for
impairment of software developed for internal use where the programs
were cancelled prior to implementation and $16 million associated with
exit costs to close or consolidate a number of smaller business
operations. Of the $160 million charge, $131 million was assigned to
the Engine Business, $19 million to the Power Generation Business and
$10 million in 1997. In 1999, higher losses at the Company's joint venture with
Wartsila were more than offset by improved performance at the Company's
other joint ventures. The difference from 1997 was due primarily to the Filtration Business and Other.
Workforce reduction actions included overall cutbacks in staffing
levels plus the impacts of closing and consolidating operations.
Restructuring charges for workforce reductions included the severance
costs and related benefits of terminating 600 salaried employees and
830 hourly employees. Costs for workforce reductions were based on
amounts pursuant to benefit programs or statutory requirements of the
affected operations.
The asset impairment loss of $72 million was calculated in accordance
with the provisions of SFAS 121. Asset impairment of equipment from
discontinuing operations was primarily for engine assembly and fuel
system manufacturing equipment to be disposed of upon the closure or
consolidation of Cummins India Limitedproduction operations. The asset impairment charge
included a write-down of $38 million for manufacturing equipment that
will continue to be used for approximately two years. Depreciation
will continue on these assets over that period of time. The expected
recovery value of equipment to be disposed of was based on estimated
salvage value and was excluded from the write-down. The charge also
included $11 million for equipment available for disposal, $6 million
for properties available for disposal, $10 million for investments and
$7 million for intangibles and minority interest positions related to
divesting smaller operations and investments. The carrying value of
assets held for disposal and the effect from suspending depreciation
on such assets is immaterial.
The asset impairment charge of $30 million consisted of capitalized
software-in-process being developed for internal use. The charge was
related to manufacturing, financial and administrative information
technology programs cancelled during program development and prior to
implementation.
Exit costs of $16 million to close or consolidate a number of small
businesses and operations included $6 million for equipment removal
costs, $5 million to satisfy contractual obligations and $5 million
for other exit costs. As the restructuring actions consist primarily
of the closing or consolidation of smaller operations, the Company
does not expect these actions to have a material effect on future
revenues.
Approximately $73 million, primarily related to the write-down of
impaired equipment and software and employee severance payments, has
been charged to the restructuring liabilities as of December 31, 2000.
Of the total charges associated with the restructuring activities,
cash outlays will approximate $54 million. The actions will be
completed in 2001 and 2002 with the fourth quartermajority of 1997 and
increased lossesthe cash outlays in
2001. The associated annual savings are estimated at $55 million upon
completion of the Company's joint venture with Wartsila.actions.
17
In December 1999, the Company recorded a charge of $60 million in
connection with the dissolution of the Cummins Wartsila joint venture. The
charge included $17 million to write off the Company's remaining investment
in the joint venture, $29 million for impairment of assets transferred from
the joint venture and $14 million for additional warranty and other
liabilities assumed by the Company.
The joint venture termination was effective December 31, 1999, with
the Company taking over the operations and assets of the product line
manufactured in Daventry, England.
The
asset impairment loss was calculated according to the provisions of SFAS
No. 121, using expected discounted cash flows as the estimate of fair
value. The majority of the impaired assets are to be held and used in the
Company's Power Generation Business, with depreciation continuing on such
assets.
17
As disclosed in Note 4 to the Consolidated Financial Statements, the Company recorded charges in 1998 totaling $125 million, comprised
of $100 million of costs associated with the Company's plan to
restructure, consolidate and exit certain business activities and $25
million for a civil penalty resulting from an agreement reached with
the U.S. Environmental Protection Agency (EPA) and the Department of
Justice regarding diesel engine emissions. In addition, the Company
recorded special charges of $14 million for inventory write-downs
associated with restructuring actions.
The Company is continuingconcluding the restructuring plan implemented in the
third quarter of 1998. AsIn the third quarter of 2000, the Company
reversed excess accruals from 1998 of $7 million and recorded $7
million of charges related to new actions committed to during the
quarter. Inclusive of the third quarter action, as of December 31,
1999,2000, approximately $81$127 million has been charged against the
liabilities associated with these actions. The Company funded the
restructuring actions using cash generated from operations. Of the planned workforce reduction of 1,100 employees,
approximately 900 people left the Company prior to December 31, 1999. The
remaining actions to be completed consist primarily of the outsourcing of
certain manufacturing operations and payment of
severance commitments to terminated employees. The program is expectedemployees in early 2001 and the
final EPA payment to be essentially completemade in early 2000 and yield approximately $50 million in annual savings at
completion. The Company does not currently anticipate any material changes
in the original charges recorded for these actions.July 2001.
Other:
______
Interest expense of $75$86 million was $4$11 million higher than in 19981999
and $49$15 million higher than in 1997. Lower1998. Higher borrowing levels in 2000
accounted for the increase from 1999. Increased borrowings and lower
capitalization of interest in 1999 accounted for the increase as compared to
1998. The increase from 1997 was
dueAs disclosed in Note 5 to the increased level of borrowings to support working capital on the
higher sales levelConsolidated Financial
Statements, other income and to complete the acquisition of Nelson. Other expense went from $13 million of income in 1998 to $8 million of expense
in 1999 to $1 million of income in 2000, primarily due to increased non-operating partnership costs and lower
interest income in 1999, and certain tax refunds and other non-recurringnon-
recurring transactions recorded in 1998.both years.
Provision for Income Taxes:
___________________________
The Company's income tax provision in 19992000 was $55a benefit of $19
million, combining an effective tax rate of 2523 percent reflectingfrom operations
and an effective tax rate of 35 percent from special charges. The
effective tax rate from operations in 2000 reflected reduced taxes on
export sales and research tax credits. In 1999, the Company's tax
provision was $55 million, reflecting an effective tax rate of 25
percent. In 1998, the Company's tax provision was $4 million, with
the tax benefits from export sales and the research credit more than
offset by the unfavorable tax effects of nondeductible losses in
foreign joint ventures and nondeductible EPA penalty and goodwill
amortization.
The Company's effective tax rate in 1997 was 26 percent.
Minority Interest:
__________________
Minority interest in net earnings of consolidated entities was $6$14
million in 1999, a decrease2000, an increase of $5$8 million from 19981999 and an increase
of $6$3 million from 1997.1998. The decreaseincrease from 19981999 was primarily due to
lower nethigher earnings attributable to minority partners of Cummins India
Limited in 1999 and the partner's shareimproved performance of losses from the joint venture with Scania. The change in minority interest from 1997 was
due to the consolidation of Cummins India Limited beginning in the fourth
quarter of 1997, when the Company increased its ownership interest to 51
percent.
Year 2000:
__________
The Company experienced no negative effects on customers, employees or
suppliers from the Year 2000 date change. No problems with the Company's
products were reported. The Company monitored the status of its worldwide
sites during the "millennium rollover" through the operation of three
communication centers located in Australia, England and Columbus, Indiana.
Teams of experts were on-hand and additional resources were available on a
stand-by basis to assist sites, if needed. Service and engineering groups
were available on-call in case customer requests arose. The Company's
sites, including its manufacturing facilities and distribution channels,
are working without any disruptive impact from the Year 2000 date change.
18
The Company also participated in an information gathering process designed
by the Automotive Industry Action Group (AIAG) and reported a "green"
status throughout the requested Year 2000 AIAG reporting phase in early
January.
While Year 2000 results to-date are positive, there are key dates yet to
monitor. The communication centers will watch Leap Year Day, February 29,
and financial closes during the first quarter. The Company continues its
preventive approach to Year 2000 issues. Sites continue to conduct process
verifications that critical systems are operating properly.
Costs and Risks of Company's Year 2000 Issues:
The Company will incur total expenditures of approximately $45 million in
connection with its Year 2000 program and remediation efforts. The Company
is funding its Year 2000 costs with its normal operating cashflow.
There can be no assurances that the systems or products of third parties
relied upon by the Company, such as suppliers, vendors or significant
customers, were timely converted or that a failure by such third parties,
or a conversion that is incompatible with the Company's systems, would not
have a material adverse effect on the Company. Other undiscovered factors
related to the Year 2000 issue may also have potential for an adverse
effect on the Company. Such adverse effects may include an adverse effect
on the Company's revenues. The time of completion and success of the
Company's Year 2000 program and compliance efforts, and the related
expenses, are based upon management's best estimates, which in turn are
based on assumptions about future events, including the availability of
certain resources, third party modification plans and other factors. There
can be no assurances that these results and estimates will be achieved, and
the actual results could materially differ from those anticipated.
Specific factors that might cause such material differences include, but
are not limited to, the availability of trained personnel, the ability to
locate and correct all relevant computer code, and the failure by third
parties to address their Year 2000 problems.
CASH FLOW AND FINANCIAL CONDITION
_________________________________
Key elements of cash flows were:
$ Millions 2000 1999 1998 1997
__________ ______ ______ ______
Net cash provided by operating activities $ 388 $ 307 $ 271 $ 200
Net cash used in investing activities (312) (166) (752) (354)
Net cash (used in) provided by financing
activities ( 86) (105) 471 96
Effect of exchange rate changes on cash (2) - (1) (1)
_____ _____ _____
Net change in cash $ (12) $ 36 $ (11) $ (59)
_____ _____ _____
_____ _____ _____
18
During 1999,2000, net cash provided from operating activities was $307$388
million, reflecting the Company's strongdecline in net earnings and the non-cashnon-
cash effect of depreciation and amortization, reduced by increases in
working capital. Net working capital asAs disclosed in Note 1 to the Consolidated Financial
Statements, the Company sold receivables in 2000 in a percentsecuritization
program, which yielded proceeds of sales was 13.0 percent$219 million. The Company is funding
the cash requirements for restructuring actions using cash generated from
operations with the majority of the cash requirement expected to occur in
1999,
compared to 12.8 percent in 1998 and 11.6 percent in 1997.2001. Net cash used in investing activities in 1999 of $1662000 was $312 million and
included planned capital expenditures of $215 million, partially offset by $54 million of proceeds
from the sale of the Company's Atlas Crankshaft business.$228 million. Capital
expenditures were $215 million in 1999 and $271 million in 1998 and $405 million in 1997, during the
Company's peak product development period.1998. The
higher level of net cash requirements in 1998 was due primarily to the
acquisition of Nelson. Acquisitions in 2000 included the South Africa
distributorship and the purchase of assets from the dissolution of the
Wartsila joint venture. Investments in joint ventures and alliances in
19992000 of $36$53 million reflected the net effect of capital contributions and
cash generated by certain joint ventures.
Net cash used in financing activities was $105$86 million in 1999.2000. This cash
was used for dividend payments, repurchases of the Company's stock and
payments on borrowings. As disclosed in Note 7 to the Consolidated
Financial Statements, the Company issued $765 million face amount of
notes 19
and debentures in 1998 under a $1 billion registration statement
filed with the Securities and Exchange Commission in December 1997. NetThe
net proceeds were used to finance the acquisition of Nelson and to pay
down other indebtedness outstanding at December 31, 1997. Based on the
Company's projected cash flowflows from operations and existing credit
facilities, management believes that sufficient liquidity is available to
meet anticipated capital and dividend requirements in the foreseeable
future.
Legal/Environmental Matters:
____________________________
The Company and its subsidiaries are defendants in a number of pending
legal actions that arise in the normal course of business, including
environmental claims and actions related to use and performance of the
Company's products. Such matters are more fully described in Note 17 to
the Consolidated Financial Statements. In the event the Company is
determined to be liable for damages in connection with such actions or
proceedings, the unreserved portion of such liability is not expected to
have a material adverse effect on the Company's results of operations,
cash flows or financial condition.
Market Risk:
____________
The Company is exposed to financial risk resulting from volatility in
foreign exchange rates, interest rates and commodity prices. This
risk is closely monitored and managed through the use of derivative
contracts. As clearly stated in the Company's policies and
procedures, financial derivatives are used expressly for hedging
purposes, and under no circumstances are they used for speculating or
for trading. Transactions are entered into only with banking
institutions with strong credit ratings, and thus the credit risk
associated with these contracts is considered immaterial. Hedging
program results and status are reported to senior management on a
monthly and quarterly basis.
The following section describes the Company's risk exposures and
provides results of sensitivity analyses performed on December 31,
1999.2000. The sensitivity tests assumed instantaneous, parallel shifts in
foreign currency exchange rates, commodity prices and interest rate
yield curves.
A. Foreign Exchange Rates
Due to its international business presence, the Company transacts
extensively in foreign currencies. As a result, corporate earnings
experience some volatility related to movements in exchange rates. In
order to exploit the benefits of global diversification and naturally
offsetting currency positions, foreign exchange balance sheet
exposures are aggregated and hedged at the corporate level through the
use of foreign exchange forward contracts. The objective of the
foreign exchange hedging program is to reduce earnings volatility
resulting from the translation of net foreign exchange balance sheet
positions. A hypothetical, instantaneous, 10 percent adverse movement
in the foreign currency exchange rates would decrease earnings by
approximately $4 million in the current reporting period. The
sensitivity analysis ignores the impact of foreign exchange movements
on Cummins' competitive position as well as the remoteness of the
likelihood that all foreign currencies will move in tandem against the
U.S. dollar. The analysis also ignores the offsetting impact on
income of the revaluation of the underlying balance sheet exposures.
19
B. Interest Rates
The Company currently has in place three interest rate swaps that
effectively convert fixed-rate debt into floating-rate debt. The
objective of the swaps is to more efficiently balance borrowing costs
and interest rate risk. A sensitivity analysis assumed a
hypothetical, instantaneous, 100 basis-point parallel increase in the
floating interest rate yield curve, after which rates remained fixed
at the new, higher level for a one-
yearone-year period. This change in yield
curve would correspond to a $4 million increase in interest expense
for the one-year period. This sensitivity analysis does not account
for the change in the Company's competitive environment indirectly
related to changes in interest rates and the potential managerial
action taken in response to these changes. 20
C. Commodity Prices
The Company is exposed to fluctuation in commodity prices through the
purchase of raw materials as well as contractual agreements with
component suppliers. Given the historically volatile nature of
commodity prices, this exposure can significantly impact product
costs. The Company uses commodity swap agreements to partially hedge
exposures to changes in copper and aluminum prices. Given a
hypothetical, instantaneous, 10 percent depreciation of the underlying
commodity price, with prices then remaining fixed for a 12-month
period, the Company would experience a loss of approximately $3$1
million for the annual reporting period. This amount excludes the
offsetting impact of decreases in commodity costs.
Forward-looking Statements
__________________________
This Management's Discussion and Analysis of Results of Operations and
Financial Condition, other sections of this Annual Report and the
Company's press releases, teleconferences and other external
communications contain forward-looking statements that are based on
current expectations, estimates and projections about the industries
in which Cummins operates and management's beliefs and assumptions.
Words, such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions ("Future Factors") which
are difficult to predict. Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in such forward-lookingforward-
looking statements. Cummins undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
Future Factors include increasing price and product competition by
foreign and domestic competitors, including new entrants; rapid
technological developments and changes; the ability to continue to
introduce competitive new products on a timely, cost-effective basis;
the mix of products; the achievement of lower costs and expenses;
domestic and foreign governmental and public policy changes, including
environmental regulations; protection and validity of patent and other
intellectual property rights; reliance on large customers;
technological, implementation and cost/financial risks in increasing
use of large, multi-year contracts; the cyclical nature of Cummins'
business; the outcome of pending and future litigation and
governmental proceedings; and continued availability of financing,
financial instruments and financial resources in the amounts, at the
times and on the terms required to support Cummins' future business.
These are representative of the Future Factors that could affect the
outcome of the forward-looking statements. In addition, such
statements could be affected by general industry and market conditions
and growth rates, general domestic and international economic
conditions, including interest rate and currency exchange rate
fluctuations, and other Future Factors.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
_______ __________________________________________
See Index to Financial Statements on page 24.23.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
_______ ____________________________________________________
None.
2120
PART III
________
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
________ __________________________________________________
The information appearing under the caption "Election of Directors" of the
Company's definitive Proxy Statement for the Annual Meeting of the
Shareholders to be held on April 4, 20003, 2001 ("the Proxy Statement") is
incorporated by reference in partial answer to this item. Except as
otherwise specifically incorporated by reference, the Proxy Statement is
not to be deemed filed as part of this report.
The executive officers of the Company at December 31, 19992000 are set forth
below. The Chairman of the Board and President are elected annually by
the Board of Directors at the Board's first meeting following the Annual
Meeting of the Shareholders. Other officers are appointed by the Chairman
and ratified by the Board of Directors and hold office for such period as
the Board of Directors or Chairman of the Board may prescribe.
Present Position and Business Experience
Name Age During Last 5 Years
_______________ ___ _________________________________________________
Jean S. Blackwell 4546 Vice President - Human Resources (1997(December 1997 to
present), Vice President - General Counsel (1997)
Pamela F. Carter 50 Vice President - General Counsel and Corporate
Secretary (1997 to present)
John K. Edwards 55 Executive Vice President,56 Group President - Power Generation & International
and International (1996Executive Vice President (April 1996 to
present), Managing Director - Central Area (June
2000 to Present), Vice President - International
(1989 to 1996)
Mark R. Gerstle 4445 Vice President - Cummins Business Services,
(1998General Counsel and Secretary (April 2000 to
present), Vice President - Cummins Business
Services (1998-2000) Vice President and Chief
Administrative Officer and Secretary (1997 to
1998), Vice President - Law and Corporate
Affairs and Secretary (1997), Vice President -
General Counsel and Secretary (1995 to 1997),
Assistant General Counsel (1991 to 1995)
James A. Henderson 65 Chairman and Chief Executive Officer (1995 to
Present),
Tom Linebarger 37 Vice President and Chief ExecutiveFinancial Officer
(1994 to 1995)
M. David Jones 52 Vice President - Filtration Group and President,
Fleetguard, Inc. (1996(November 2000 to present), Vice President -
Aftermarket Group (1989Supply Chain Management (1998 to 1996)2000),
Managing Director - Holset Engineering Company
Limited (1997-1998), Senior Manager - Engineering
Operations and Technical Centre Leader, Holset
(1996-1997)
F. Joseph Loughrey 5051 Executive Vice President and Group President -
Engine Business (1999(October 1999 to present),
Executive Vice President and Group President -
Industrial and Chief Technical Officer (1996 to
1999), Group Vice President - Worldwide Operations
and Technology (1995 to 1996), Group Vice
President - Worldwide Operations (1990 to 1995)
Frank J. McDonald 5354 Vice President - Quality (1999(May 1999 to present),
Vice President - Worldwide Midrange Operations
(1996 to 1999),
Rick J. Mills 53 Vice President - Midrange Manufacturing
(1992-1996)
Rick J. Mills 52Filtration and President -
Fleetguard, Inc. (February 2000 to present),
Vice President - Corporate Controller (1996(1996-2000)
Theodore M. Solso 53 Chairman and Chief Executive Officer (January
2000 to present), Vice President Pacific Rim and Latin
America - Fleetguard, Inc. (1993 to 1996)Chief Operating
Officer (1995-2000)
2221
Present Position and Business Experience
Name Age During Last 5 Years
_______________ ___ ________________________________________________
Kiran M. Patel 51 Executive Vice President and Chief Financial
Officer (1999 to present), Vice President and
Chief Financial Officer (1996 to 1999),
President - Fleetguard, Inc. (1993 to 1996)
Theodore M. Solso 52 President and Chief Operating Officer (1995 to
present), Executive Vice President and Chief
Operating Officer (1994 to 1995)
Christine M. Vujovich 4849 Vice President - Environmental Policy and Product
Strategy (1999(October 1999 to present), Vice President -
Worldwide Marketing for Bus, and Light Commercial
Automotive and Environmental Management (1996
to 1999)
John C. Wall 49 Vice President - Chief Technical Officer (March
2000 to present), Vice President - Product PlanningResearch and
Environmental Management (1989 to 1996)Development (1995-2000)
ITEM 11. EXECUTIVE COMPENSATION
________ ______________________
The information appearing under the following captions in the
Company's Proxy Statement is hereby incorporated by reference: "The
Board of Directors and Its Committees,"Committees", "Executive Compensation --
Compensation Tables and Other Information,"Information", "Executive Compensation --
Change of Control Arrangements" and "Executive Compensation --
Compensation Committee Interlocks and Insider Participation."Participation".
The Company has adopted various benefit and compensation plans
covering officers and other key employees under which certain benefits
become payable upon a change of control of the Company. Cummins also
has adopted an employee retention program covering approximately 700
employees of the Company and its subsidiaries, which provides for the
payment of severance benefits in the event of termination of
employment following a change of control of Cummins. The Company and
its subsidiaries also have severance programs for other exempt
employees of the Company whose employment is terminated following a
change of control of the Company. Certain of the pension plans
covering employees of the Company provide, upon a change of control of
Cummins, that excess plan assets become dedicated solely to fund
benefits for plan participants.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
________ ______________________________________________________________
A discussion of the security ownership of certain beneficial owners and
management appearing under the captions "Principal Security Ownership,"
"Election of Directors" and "Executive Compensation -- Security Ownership
of Management" in the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
________ ______________________________________________
The information appearing under the captions "The Board of Directors and
Its Committees," "Executive Compensation - Compensation Committee
Interlocks and Insider Participation" and "Other Transactions and
Agreements with Directors, Officers and Certain Shareholders" in the Proxy
Statement is incorporated herein by reference.
2322
PART IV
_______
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
________ _______________________________________________________________
Documents filed as a part of this report:
1. See Index to Financial Statements on page 2423 for a list of
the financial statements filed as a part of this report.
2. See Exhibit Index on page 6545 for a list of the exhibits filed
or incorporated herein as a part of this report.
No reports on Form 8-K were filed during the fourth quarter of 1999.2000.
2423
INDEX TO FINANCIAL STATEMENTS
_____________________________
Page
____
Responsibility for Financial Statements 2524
Report of Independent Public Accountants 2524
Consolidated Statement of Earnings 2625
Consolidated Statement of Financial Position 2726
Consolidated Statement of Cash Flows 2827
Consolidated Statement of Shareholders' Investment 2928
Notes to Consolidated Financial Statements 3029
Quarterly Financial Data 42
Cummins Wartsila SAS Financial Statements 43
2524
RESPONSIBILITY FOR FINANCIAL STATEMENTS
_______________________________________
Management is responsible for the preparation of the Company's
consolidated financial statements and all related information
appearing in this Report. The statements and notes have been prepared
in conformity with accounting principles generally accepted accounting principlesin the
United States and include some amounts, which are estimates based upon
currently available information and management's judgment of current
conditions and circumstances. The Company engaged Arthur Andersen
LLP, independent public accountants, to examine the consolidated
financial statements. Their report appears on this page.
To provide reasonable assurance that assets are safeguarded against
loss from unauthorized use or disposition and that accounting records
are reliable for preparing financial statements, management maintains
a system of accounting and controls, including an internal audit
program. The system of accounting and controls is improved and
modified in response to changes in business conditions and operations
and recommendations made by the independent public accountants and the
internal auditors.
The Board of Directors has an Audit Committee whose members are not
employees of the Company. The committee meets periodically with
management, internal auditors and representatives of the Company's
independent public accountants to review the Company's program of
internal controls, audit plans and results, and the recommendations of
the internal and external auditors and management's responses to those
recommendations.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
________________________________________
To the Shareholders and Board of Directors of Cummins Engine Company, Inc.:
We have audited the accompanying consolidated statement of financial
position of Cummins Engine Company, Inc., (an Indiana corporation) and
subsidiaries as of December 31, 19992000 and 1998,1999, and the related consolidated
statements of earnings, cash flows and shareholders' investment for each of
the three years in the period ended December 31, 1999.2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cummins Engine Company,
Inc., and subsidiaries as of December 31, 19992000 and 1998,1999, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1999,2000, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Chicago, Illinois
January 26, 200024, 2001
2625
CUMMINS ENGINE COMPANY, INC.
____________________________
CONSOLIDATED STATEMENT OF EARNINGS
__________________________________
Millions, except per share amounts 2000 1999 1998 1997
__________________________________ ______ ______ ______
Net sales $6,597 $6,639 $6,266 $5,625
Cost of goods sold 5,338 5,221 4,925 4,345
Special charges - 92 -
______ ______ ______
Gross profit 1,259 1,418 1,249
1,280
Selling &and administrative expenses 776 781 787
744
Research &and engineering expenses 244 245 255
260
Net (income) expense (income) from joint
ventures and alliances (9) 28 30
(10)
Interest expense 86 75 71
26
Other (income) expense, (income), net (1) 8 (13)
(26)
Restructuring, asset impairment and
other non-recurringspecial charges 160 60 125 -
_____ _____ _____
Earnings (loss) before income taxes 3 221 (6)
286
Provision (benefit) for income taxes (19) 55 4
74
Minority interest 14 6 11 -
_____ _____ _____
Net earnings (loss) $ 8 $ 160 $ (21) $ 212
_____ _____ _____
_____ _____ _____
Basic earnings (loss) per share $ .20 $ 4.16 $(.55) $5.55
Diluted earnings (loss) per share .20 4.13 (.55)
5.48The accompanying notes are an integral part of this statement.
26
CUMMINS ENGINE COMPANY, INC.
____________________________
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
____________________________________________
Millions, except per share amounts December 31,
__________________________________ 2000 1999
______ ______
Assets
Current assets:
Cash and cash equivalents $ 62 $ 74
Receivables, net of allowance of $8 and $9 724 1,026
Inventories 770 787
Other current assets 274 293
_____ _____
1,830 2,180
_____ _____
Investments and other assets:
Investments in joint ventures and alliances 201 131
Other assets 137 143
_____ _____
338 274
_____ _____
Property, plant and equipment:
Land and buildings 590 577
Machinery, equipment and fixtures 2,417 2,375
Construction in process 189 168
_____ _____
3,196 3,120
Less accumulated depreciation 1,598 1,490
_____ _____
1,598 1,630
_____ _____
Goodwill, net of amortization of $42 and $28 354 364
_____ _____
Other intangibles, deferred taxes and
deferred charges 380 249
______ ______
Total assets $4,500 $4,697
______ ______
______ ______
Liabilities and shareholders' investment
Current liabilities:
Loans payable $ 156 $ 113
Current maturities of long-term debt 8 10
Accounts payable 388 411
Accrued salaries and wages 71 88
Accrued product coverage & marketing expenses 280 246
Income taxes payable 11 40
Other accrued expenses 309 406
_____ _____
1,223 1,314
_____ _____
Long-term debt 1,032 1,092
_____ _____
Other liabilities 837 788
_____ _____
Minority interest 72 74
_____ _____
Shareholders' investment:
Common stock, $2.50 par value, 48.6 and 48.3
shares issued 122 121
Additional contributed capital 1,137 1,129
Retained earnings 718 760
Accumulated other comprehensive income (167) (109)
Common stock in treasury,at cost,7.2 & 6.8 shares (290) (274)
Common stock held in trust for employee benefit
plans, 3.1 and 3.4 shares (151) (163)
Unearned compensation (33) (35)
_____ _____
1,336 1,429
_____ _____
Total liabilities & shareholders' investment $4,500 $4,697
______ ______
______ ______
The accompanying notes are an integral part of this statement.
27
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
____________________________________________
Millions, except per share amounts December 31,
__________________________________ 1999 1998
______ ______
Assets
Current assets:
Cash and cash equivalents $ 74 $ 38
Receivables, net of allowance of $9 and $13 1,026 833
Inventories 787 731
Other current assets 293 274
_____ _____
2,180 1,876
_____ _____
Investments and other assets:
Investments in joint ventures and alliances 131 136
Other assets 143 144
_____ _____
274 280
_____ _____
Property, plant and equipment:
Land and buildings 577 590
Machinery, equipment and fixtures 2,375 2,320
Construction in process 168 185
_____ _____
3,120 3,095
Less accumulated depreciation 1,490 1,424
_____ _____
1,630 1,671
_____ _____
Goodwill, net of amortization of $28 and $17 364 384
_____ _____
Other intangibles, deferred taxes and
deferred charges 249 331
______ ______
Total assets $4,697 $4,542
______ ______
______ ______
Liabilities and shareholders' investment
Current liabilities:
Loans payable $ 113 $ 64
Current maturities of long-term debt 10 26
Accounts payable 411 340
Accrued salaries and wages 88 99
Accrued product coverage & marketing expenses 246 209
Income taxes payable 40 13
Other accrued expenses 406 320
_____ _____
1,314 1,071
_____ _____
Long-term debt 1,092 1,137
_____ _____
Other liabilities 788 1,000
_____ _____
Minority interest 74 62
_____ _____
Shareholders' investment:
Common stock, $2.50 par value, 48.3 and 48.1
shares issued 121 120
Additional contributed capital 1,129 1,121
Retained earnings 760 648
Accumulated other comprehensive income (109) (167)
Common stock in treasury,at cost,6.8 & 6.1 shares (274) (240)
Common stock held in trust for employee benefit
plans, 3.4 and 3.6 shares (163) (172)
Unearned compensation (35) (38)
_____ _____
1,429 1,272
_____ _____
Total liabilities & shareholders' investment $4,697 $4,542
______ ______
______ ______
The accompanying notes are an integral part of this statement.
28
CUMMINS ENGINE COMPANY, INC.____________________________
CONSOLIDATED STATEMENT OF CASH FLOWS
____________________________________
Millions 2000 1999 1998 1997
________ ______ ______ ______
Cash flows from operating activities:
Net earnings (loss) $ 8 $ 160 $ (21) $ 212
_____ _____ _____
Adjustments to reconcile net earnings (loss)
to net cash from operating activities:
Depreciation and amortization 240 233 199 158
Restructuring & other non-recurring actions 132 38 110 (24)
Equity in (earnings) losses of joint
ventures and alliances 9 35 38
(1)
Receivables 54 (200) (10)
(80)Proceeds from sale of receivables 219 - -
Inventories 9 (60) (26) (65)
Accounts payable and accrued expenses (241) 162 56 (18)
Deferred income taxes 2 (31) (65)
22
Other (44) (30) (10) (4)
____ ____ ____
Total adjustments 380 147 292 (12)
____ ____ ____
388 307 271 200
____ ____ ____
Cash flows from investing activities:
Property, plant and equipment:
Additions (228) (215) (271)
(405)
Disposals 11 22 7 21
Investments in joint ventures and alliances (53) (36) (22) (47)
Acquisitions and dispositions of business
activities (42) 57 (468)
76
Other - 6 2 1
____ ____ ____
(312) (166) (752) (354)
____ ____ ____
Net cash provided by (used in) operating and
investing activities 76 141 (481) (154)
____ ____ ____
Cash flows from financing activities:
Proceeds from borrowings 1 28 711 281
Payments on borrowings (65) (90) (161) (50)
Net borrowings (payments) under short-term
credit agreements 49 49 (30) (12)
Repurchases of common stock (16) (34) (14)
(75)
Dividend payments (50) (47) (46)
(45)
Other (5) (11) 11 (3)
____ ____ ____
(86) (105) 471 96
____ ____ ____
Effect of exchange rate changes on cash (2) - (1) (1)
____ ____ ____
Net change in cash and cash equivalents (12) 36 (11) (59)
Cash & cash equivalents at beginning of year 74 38 49 108
____ ____ ____
Cash & cash equivalents at end of year $ 62 $ 74 $ 38 $ 49
____ ____ ____
____ ____ ____
Cash payments during the year for:
Interest $ 88 $ 82 $ 56
$ 21
Income taxes 73 56 73 42
The accompanying notes are an integral part of this statement.
2928
CUMMINS ENGINE COMPANY, INC.
____________________________
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
__________________________________________________
Millions, except per share amounts 2000 1999 1998 1997
__________________________________ ___________ __________ __________
Common stock:
Balance at beginning of year $ 120121 $ 120 $ 110120
Issued to trust for employee
benefit plans - - 9-
Other 1 1 - 1
_____ _____ ____
Balance at end of year 122 121 120 120
_____ _____ ____
Additional contributed capital:
Balance at beginning of year 1,129 1,121 1,119 929
Issued to trust for employee
benefit plans (3) - -
171
Other 11 8 2 19
_____ _____ _____
Balance at end of year 1,137 1,129 1,121 1,119
_____ _____ _____
Retained earnings:
Balance at beginning of year 760 648 715 548
Net earnings (loss) 8 $ 8 160 $160 (21)21 $(21) 212 $212
___ ____ ___
Cash dividends (50) (47) (46) ( 45)46)
Other (1) - ( 1) -
____ ____ ____
Balance at end of year 718 760 648 715
____ ____ ____
Accumulated other comprehensive income:
Balance at beginning of year (109) (167) (70) (60)( 70)
Foreign currency translation
adjustments (54) 4 (43) (21)
Minimum pension liability
adjustments (2) 55 (54) 12
Unrealized losses on securities (2) (1) - (1)
___ ___ ___
Other comprehensive income (58) (58) 58 58 (97) (97) (10) (10)
___ ___ ___ ___ ___ ___
Comprehensive income $(50) $218 $(118) $202
____ ____ ____
____ ____ ____
Balance at end of year (167) (109) (167) (70)
___ ___ ___
Common stock in treasury:
Balance at beginning of year (274) (240) (245)
(169)
Repurchased (16) (34) (14)
(76)
Issued - - 19 -
_____ _____ ____
Balance at end of year (290) (274) (240) (245)
_____ _____ ____
Common stock held in trust for
employee benefit plans:
Balance at beginning of year (163) (172) (175) -
Issued - - (180)-
Shares allocated to benefit plans 12 9 3 5
_____ _____ _____
Balance at end of year (151) (163) (172) (175)
_____ _____ _____
Unearned compensation:
Balance at beginning of year (35) (38) (42) (46)
Shares allocated to participants 2 3 4 4
______ ______ _____
Balance at end of year (33) (35) (38) (42)
______ ______ _____
Shareholders' investment $1,336 $1,429 $1,272 $1,422
______ ______ ______
______ ______ ______
Shares of stock
Common stock, $2.50 par value,
150.0 shares authorized
Balance at beginning of year 48.3 48.1 48.1
43.9
Shares issued .3 .2 - 4.2
____ ____ ____
Balance at end of year 48.6 48.3 48.1 48.1
____ ____ ____
____ ____ ____
Common stock in treasury
Balance at beginning of year 6.8 6.1 6.0
4.5
Shares repurchased .4 .7 .4 1.5
Shares issued - - (.3) -
___ ___ ___
Balance at end of year 7.2 6.8 6.1 6.0
___ ___ ___
___ ___ ___
Common stock held in trust for
employee benefit plans
Balance at beginning of year 3.4 3.6 3.7 -
Shares issued - - 3.8-
Shares allocated to benefit plans (.3) (.2) (.1) (.1)
___ ___ ___
Balance at end of year 3.1 3.4 3.6 3.7
___ ___ ___
___ ___ ___
The accompanying notes are an integral part of this statement.
3029
CUMMINS ENGINE COMPANY, INC.
____________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________________________________
NOTE 1. ACCOUNTING POLICIES:
Principles of Consolidation: The consolidated financial statements
include all significant majority-owned subsidiaries. Affiliated
companies in which Cummins does not have a controlling interest, or
for which control is expected to be temporary, are accounted for using
the equity method. Use of estimates and assumptions, as determined by
management, is required in the preparation of consolidated financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates and
assumptions.
Revenue Recognition: The Company recognizes revenues on the sale of
its products, net of estimated costs of returns, allowances and sales
incentives, when the products are shipped to customers. The Company
generally sells its products on open account under credit terms
customary to the region of distribution. The Company performs ongoing
credit evaluations of its customers and generally does not require
collateral to secure its customers' receivables.
Foreign Currency: Assets and liabilities of foreign entities, where
the local currency is the functional currency, have been translated at
year-end exchange rates, and income and expenses have been translated
to US dollars at average-period rates. Adjustments resulting from
translation have been recorded in shareholders' investment and are
included in net earnings only upon sale or liquidation of the
underlying foreign investment.
For foreign entities where the US dollar is the functional currency,
including those operating in highly inflationary economies, inventory,
property, plant and equipment balances and related income statement
accounts have been translated using historical exchange rates. The
resulting gains and losses have been credited or charged to net
earnings and were net losses of $14 million in 2000, $2 million in
1999 and $5 million in 1998 and $1 million in 1997.1998.
Derivative Instruments: The Company makes use of derivative
instruments in its foreign exchange, commodity price and interest rate
hedging programs. Derivatives currently in use are commodity and
interest rate swaps, as well as foreign currency forward contracts.
These contracts are used strictly for hedging and not for speculative
purposes. Refer to Note 10 for more information on derivative
financial instruments.
The Company enters into commodity swaps to offset the Company's
exposure to price volatility for certain raw materials used in the
manufacturing process. As the Company has the discretion to settle
these transactions either in cash or by taking physical delivery,
these contracts are not considered financial instruments for
accounting purposes. These commodity swaps are accounted for as
hedges.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133 on accounting for derivative instruments and hedging activities.
The statement is effective for fiscal years beginning after June 15,
2000. The Company plans towill adopt this statement at the beginning of
fiscal 2001 and is
currently evaluatinghas evaluated and modified its hedging strategy as it
applies to the new statement. The statement iswill not expected to have a material
effect on the Company's results of operations.
Other Costs: Estimated costs of commitments for product coverage
programs are charged to earnings at the time the Company sells its
products.
Research & development expenditures, net of contract reimbursements,
are expensed when incurred and were $224 million in 2000, $218 million
in 1999 and $228 million in 1998
and $250 million in 1997.1998.
Maintenance and repair costs are charged to earnings as incurred.
Cash Equivalents: Cash equivalents include all highly liquid
investments with an original maturity of three months or less at the
time of purchase.
Accounts Receivable: During 2000, the Company entered into a
receivables securitization program and sold trade receivables in
securitization transactions to a special purpose subsidiary with
principal aggregating $741 million. The subsidiary transfers
positions in these receivables to conduits as the basis for issuing
commercial paper. The subsidiary obtains receivables from the conduit
for approximately 15 percent of a transferred position and receives
cash for the remainder of the position. The Company receives annual
servicing fees approximating .5 percent of the sold accounts
receivable. The conduit investors and the special purpose subsidiary
have no recourse to the Company's other assets for failure of debtors
to pay when due. For the marketed receivables, the Company's retained
interests are subordinated to the conduit's interests. The sold
receivables servicing portfolio amounted to $355 million at December
31, 2000.
30
The table below summarizes certain cash flows received from and paid to the
special purpose subsidiary for the year ended December 31, 2000:
$ Millions
__________
Proceeds from new securitizations $219
Proceeds from collections reinvested
in securitizations 385
Servicing fees received 2
Servicing advances (12)
Inventories: Inventories are stated at the lower of cost or net
realizable value. Approximately 2322 percent of domestic inventories
(primarily heavy-
dutyheavy-duty and high-horsepower engines and engine parts)
are valued using the last-
in,last-in, first-out (LIFO) cost method. All other
inventories are valued using the first-in, first-out (FIFO) method.
Inventories at December 31 were as follows:
$ Millions 2000 1999 1998
__________ ____ ____
Finished products $404 $402 $400
Work-in-process and raw materials 420 440 387
____ ____
Inventories at FIFO cost 824 842 787
Excess of FIFO over LIFO (54) (55) (56)
____ ____
$770 $787 $731
____ ____
____ ____
Property, Plant and Equipment: Property, plant and equipment are
stated at cost. A modified units-of-production method, which is based
upon units produced subject to a minimum level, is used to depreciate
substantially all engine production equipment. The straight-line
depreciation method is used for all other equipment. The estimated
depreciable lives range from 20 to 40 years for buildings and 3 to 20
years for machinery, equipment and fixtures.
Long-Lived Assets: The Company evaluates the carrying value of its
long-
livedlong-lived assets for impairment whenever adverse events or changes in
circumstances indicate that the carrying value of an asset may be
impaired. In accordance with SFAS No.121,No. 121, if the quoted market price
or, if not available, the undiscounted cash flows are not sufficient
to support the recorded asset value, an impairment loss is recorded to
reduce the carrying value of the asset to the amount of expected
discounted cash flows. This same policy is followed for goodwill.
Software: Internal and external software costs (excluding research,
reengineering and training) are capitalized and amortized generally
over 5 years. Capitalized software, net of amortization, was $110
million at December 31, 2000, $110 million at December 31, 1999 and
$75 million at December 31, 1998. Total software amortization expense
was $27 million in 2000, $18 million in 1999 and $8 million in 1998.
Earnings Per Share: Basic earnings per share of common stock are computed
by dividing net earnings by the weighted-average number of shares
outstanding for the period. Diluted earnings per share are computed by
dividing net earnings by the weighted-average number of shares, assuming the
exercise of stock options when the effect of their exercise is dilutive.
Shares of stock held by the employee benefits trust are not included in
outstanding shares for EPS until distributed from the trust.
Net Weighted
Millions, except Earnings Average
per share amounts (Loss) Shares Per share
_________________ ________ ________ _________
2000
____
Basic $ 8 38.2 $ .20
Options - - _____
____ ____ _____
Diluted $ 8 38.2 $ .20
____ ____ _____
____ ____ _____
1999
____
Basic $160 38.3 $4.16
Options - .3 _____
____ ____ _____
Diluted $160 38.6 $4.13
____ ____ _____
____ ____ _____
1998
____
Basic $(21) 38.5 $(.55)
Options - - _____
____ ____ _____
Diluted $(21) 38.5 $(.55)
____ ____ _____
____ ____ _____
1997
____
Basic $212 38.2 $5.55
Options - .5 _____
____ ____ _____
Diluted $212 38.7 $5.48
____ ____ _____
____ ____ _____
NOTE 2. ACQUISITION: In January 1998, the Company completed the
acquisition
of the stock of Nelson Industries, Inc., for $453 million. Nelson, a
filtration and exhaust systems manufacturer, was consolidated fromon the date of
its acquisition. On a pro forma basis, if the Company had acquired Nelson
on January 1, 1997, consolidated net sales for 1997 would have been $5.9
billion and consolidated earnings would not have been materially different. In accordance with APB Opinion No. 16, Nelson's net assets were
recorded at fair value, atand the date of acquisition. The purchase price in excess of net assets
will beis amortized over 40 years.
NOTE 3. SPECIAL CHARGES: In 1998, the Company recorded special
charges of $92 million for product coverage costs and inventory write-downs.write-
downs. The product coverage special charges of $78 million included
$43 million primarily attributable to the recent experience of higher-than-anticipatedhigher
than anticipated base warranty costs to repair certain automotive
engines manufactured in previous years, and $35 million related to a
revised estimate of product coverage cost liability primarily for
extended warranty programs. The special charges also included $14
million for inventory write-downs associated with the Company's
restructuring and exit activities. These write-
downswrite-downs related to
amounts of inventory rendered excess or unusable due to the closing or
consolidation of facilities.
3231
NOTE 4. RESTRUCTURING, ASSET IMPAIRMENT AND OTHER NON-RECURRINGSPECIAL CHARGES:
The 2000 financial results included charges of $160 million ($103
million after tax, or $2.71 per share) reflecting restructuring
actions, asset impairments and other activities largely focused in the
Engine Business. These actions were taken in response to the downturn
in the North American heavy-duty truck market and related conditions.
The charges included $42 million attributable to employee severance
actions, $72 million for impairment of equipment and other assets, $30
million for impairment of software developed for internal use where
the programs were cancelled prior to implementation and $16 million
associated with exit costs to close or consolidate a number of smaller
business operations.
Of the $160 million charge, $131 million was assigned to the Engine
Business, $19 million to the Power Generation Business and $10 million
to the Filtration Business and Other.
Workforce reduction actions included overall cutbacks in staffing
levels plus the impacts of closing and consolidating operations.
Restructuring charges for workforce reductions included the severance
costs and related benefits of terminating 600 salaried employees and
830 hourly employees. Costs for workforce reductions were based on
amounts pursuant to benefit programs or statutory requirements of the
affected operations.
The asset impairment loss of $72 million was calculated in accordance
with the provisions of SFAS 121. Asset impairment of equipment from
discontinuing operations was primarily for engine assembly and fuel
system manufacturing equipment to be disposed of upon the closure or
consolidation of production operations. The asset impairment charge
included a write-down of $38 million for manufacturing equipment that
will continue to be used for approximately two years. Depreciation
will continue on these assets over that period of time. The expected
recovery value of equipment to be disposed of was based on estimated
salvage value and was excluded from the write-down. The charge also
included $11 million for equipment available for disposal, $6 million
for properties available for disposal, $10 million for investments and
$7 million for intangibles and minority interest positions related to
divesting smaller operations and investments. The carrying value of
assets held for disposal and the effect from suspending depreciation
on such assets is immaterial.
The asset impairment charge of $30 million consisted of capitalized
software-in-process being developed for internal use. The charge was
related to manufacturing, financial and administrative information
technology programs cancelled during program development and prior to
implementation.
Exit costs of $16 million to close or consolidate a number of small
businesses and operations included $6 million for equipment removal
costs, $5 million to satisfy contractual obligations and $5 million
for other exit costs. As the restructuring actions consist primarily
of the closing or consolidation of smaller operations, the Company
does not expect these actions to have a material effect on future
revenues.
Approximately $73 million, primarily related to the write-down of impaired
equipment and software and employee severance payments, has been charged to
the restructuring liabilities as of December 31, 2000. Of the total
charges associated with the restructuring activities, cash outlays will
approximate $54 million. The actions will be completed in 2001 and 2002
with the majority of the cash outlays in 2001. The associated annual
savings are estimated at $55 million upon completion of the actions.
Activities in the major components of these charges is as follows:
Original Charges Balance
$ Millions Provision 2000 Dec. 31, 2000
__________ _________ _______ _____________
Workforce reductions $ 42 $( 5) $ 37
Impairment of software 30 (30) -
Impairment of equipment and
other assets 72 (38) 34
Exit costs 16 - 16
____ ____ ____
$160 $(73) $ 87
____ ____ ____
____ ____ ____
32
In December 1999, the Company recorded a charge of $60 million in
connection with the dissolution of the Cummins Wartsila joint venture.
The charge included $17 million to write off the Company's remaining
investment in the joint venture, $29 million for impairment of assets
transferred from the joint venture and $14 million for additional
warranty and other liabilities assumed by the Company. The joint
venture termination was effective December 31, 1999, with the Company
taking over the operations and assets of the product line manufactured
in Daventry, England.
The asset impairment loss was calculated according to the provisions
of SFAS No. 121, using expected discounted cash flows as the estimate
of fair value. The majority of the impaired assets are to be held and
used in the Company's Power Generation Business, with depreciation
continuing on such assets.
In the third quarter of 1998, the Company recorded charges of $125
million, comprised of $100 million for costs to reduce the worldwide
workforce by approximately 1,100 people, as well as costs associated
with streamlining certain majority-owned and international joint
venture operations and $25 million for a civil penalty to be paid by
the Company as a result of an agreement reached with the U.S.
Environmental Protection Agency (EPA) regarding diesel engine
emissions. In addition, the Company recorded special charges of $14
million for inventory write-downs associated with restructuring
actions.
The Company is continuingconcluding the restructuring plan implemented in the
third quarter of 1998. In the third quarter of 2000, the Company
reversed excess accruals from 1998 of $7 million and recorded $7
million of charges related to new actions committed to during the
quarter. As of December 31, 1999,2000, approximately $81$127 million has been
charged against the liabilities associated with these actions. The
Company has funded the restructuring actions using cash generated from
operations. Of the planned workforce reduction of 1,100 employees, approximately 900
people left the Company prior to December 31, 1999. The remaining actions to be completed consist primarily of
the outsourcing of certain manufacturing
operations and payment of severance commitments to terminated employees. The
program is expected to be essentially completeemployees in early
20002001 and yield
approximately $50 millionthe remaining payment to the EPA in annual savings at completion. The Company does
not currently anticipate any material changes in the original charges
recorded for these actions.July 2001.
Activity in the major components of these charges is as follows:
Original Charges Original ______________Balance
$ Millions Provision 1998 1999 2000 12/31/992000
__________ _________ _____ _____ _____________ __________
Restructuring of majority-owned
operations:
Workforce reductions $ 38 $(12) $(14) $ 12(9) $ 3
Asset impairment loss 22 - (7) 15(15) -
Facility consolidations and
other 17 (8) (4) 5(4) 1
___ ____ ____ _______ ___ __ __
77 (20) (25) 32(28) 4
___ ____ ____ _______ ___ ___ __
Restructuring of joint venture
operations:
Workforce reductions 11 - (10) 1(1) -
Tax asset impairment loss 7 - (7) - -
Facility & equipment-related costs 5 - (5) - -
___ ____ ____ ______ ___ __ __
23 - (22) 1(1) -
___ ____ ____ _______ ___ __ __
Inventory write-downs associated
with restructuring actions 14 (5) (9) - -
___ ____ ____ ______ ___ __ __
Total restructuring charges 114 (25) (56) 33(29) 4
___ ____ ____ _______ ___ ___ __
EPA penalty 25 - (8) 17(9) 8
___ ___ ___ ___ __
Total $139 $(25) $(64) $(38) $12
____ ____ ____ ____ ___
____ ____ ____ Total $139 $(25) $(64) $ 50
____ ____ ____ ____
____ ____ ____ _______
33
NOTE 5. OTHER EXPENSE (INCOME): EXPENSE: The major components of other (income)
expense
(income) included the following:
$ Millions 2000 1999 1998 1997
__________ ____ ____ ____
Amortization of intangibles $ 13 $15 $ 14
$ 2
Interest income (13) (7) (9) (5)
Loss (gain) on sale of businesses 1 1 (7) (13)
Rental income (7) (5) (6)
(3)
Royalty income (2) (4) (5) (12)
Foreign currency losses 14 2 5 1
Non-operating partnership costs 4 6 3 -
Social tax refunds - - (3)
-Sale of scrap (3) (1) (2)
Other - (5) 4(8) 1 (3)
____ ___ ____
Total $ (1) $ 8 $(13)
____ ___ ____
____ Total $ 8 $(13) $(26)
___ ____ ____
___ ____ ____
NOTE 6. INVESTMENTS IN JOINT VENTURES AND ALLIANCES: Investments in joint
ventures and alliances at December 31 were as follows:
$ Millions 2000 1999 1998
__________ ____ ____
Consolidated Diesel $ 66 $ 11
European Engine Alliance 26 14
Tata Cummins $18 22 $ 22
Komatsu alliances 18 17
Chongqing Cummins 16 1516
Dong Feng 16 10
Komatsu alliances 16 18
Behr America 14 15
14
European Engine Alliance 14 5
Consolidated Diesel 11 39
Dong Feng 10 8
Cummins Wartsila - (6)
Other 29 25 22
____ ____
$201 $131 $136
____ ____
____ ____
Summary financial information for the joint ventures and alliances was as
follows:
December 31,
$ Millions 2000 1999 1998 1997
__________ ______ ______ ______
Net sales $1,531 $1,334 $1,245
$1,307
Gross profit 165 101 25 111
Net earnings (loss) 12 (64) (105)
5
Cummins' share 6 (32) (52)
2
Current assets $ 415 $ 302 $ 527
Noncurrent assets 555 485 613
Current liabilities (335) (223) (406)
Noncurrent liabilities (277) (284) (455)
____ _________ _____ _____
Net assets $280 $279
____ ____
____ ____$ 358 $ 280 $ 279
_____ _____ _____
_____ _____ _____
Cummins' share $131 $136
____ ____
____ ____
The Company has guaranteed $52 million in outstanding debt of the Cummins
Wartsila joint venture as of December 31, 1999. As disclosed in Note 4, the
Cummins Wartsila joint venture was terminated effective December 31, 1999.$ 201 $ 131 $ 136
_____ _____ _____
_____ _____ _____
In connection with various joint venture agreements, Cummins is
required to purchase products from the joint ventures in amounts to
provide for the recovery of specified costs of the ventures. Under
the agreement with Consolidated Diesel, Cummins' purchases were $541
million in 2000 and $513 million in 1999 and $535
million in 1998.1999.
NOTE 7. BORROWINGS: Long-term debt at December 31 was:
$ Millions 2000 1999 1998
__________ ____ ____
7.125% debentures due 2028 $249 $249
6.45% notes due 2005 224225 224
Commercial paper 112 168 142
5.65% debentures due 2098, net of unamortized
discount of $40$39 (effective interest rate 7.48%) 125 125
6.25% notes due 2003 125 125
6.75% debentures due 2027 120 120
Guaranteed notes of ESOP Trust due 2010 58 61
63
8.2% notes through 2003 - 79
Other 26 30 36
_____ _____
Total 1,040 1,102 1,163
Current maturities (8) (10) (26)
______ ______
Long-term debt $1,032 $1,092 $1,137
______ ______
______ ______
Maturities of long-term debt for the five years subsequent to December
31, 19992000 are $8 million, $10 million, $8$133 million, $9 million, $131$7 million and
$7$232 million. At December 31, 19992000 and 1998,1999, the weighted-average
interest rate on loans payable and current maturities of long-term
debt approximated 67 percent and 76 percent, respectively.
The Company maintains a $500 million revolving credit agreement, maturing
in 2003, under which there were no outstanding borrowings at December 31,
19992000 or 1998.1999. The revolving credit agreement supports the Company's
commercial paper borrowings.borrowings of $112 million at December 31, 2000 and $168
million at December 31, 1999. In February 1998, the Company issued $765
million face amount of notes and debentures under a $1 billion Registration
Statement filed with the Securities and Exchange Commission in 1997. Net
proceeds were used to finance the acquisition of Nelson and to pay down
other indebtedness outstanding at December 31, 1997. The Company also has
other domestic and 34
international credit lines with approximately $116$135
million available at December 31, 1999.2000.
The Company's debt agreements have several covenants which, among
other restrictions, require maintenance of a certain level of net
worth, place restrictions on the amount of additional debt the Company
may incur and require maintenance of minimum leverage ratios.
34
In December 1999,2000, the Company paid offdown certain borrowings with the
8.2 percent notes dueproceeds from the sale of receivables in 2003
using cash generated from operations and additional commercial paper
borrowings.a securitization program.
At December 31, 19992000 and 1998,1999, loans payable included $100$139 million and
$54$100 million, respectively, of notes payable to banks and $13$17 million
and $10$13 million, respectively, of bank overdrafts.
The Company has guaranteed the outstanding borrowings of its ESOP Trust.
Cash contributions to the Trust, together with the dividends accumulated
on the common stock held by the Trust, are used to pay interest and
principal. Cash contributions and dividends to the Trust approximated $10$9
million in each year. The unearned compensation, which is reflected as a
reduction to shareholders' investment, represents the historical cost of
the shares of common stock that have not yet been allocated by the Trust
to participants.
NOTE 8. OTHER LIABILITIES: Other liabilities at December 31 included
the following:
$ Millions 2000 1999
1998
__________ ______ __________ ____
Accrued retirement & post-employment benefits $ 511 $ 720$552 $511
Accrued product coverage & marketing expenses 170 175 156
Accrued compensation 51 42 38
Deferred income taxes 23 1
17
Other 41 59
69
____ ______
$ 788 $1,000
______ ______
______ _________ ___
$837 $788
___ ___
___ ___
NOTE 9. INCOME TAXES: The provision for income taxes was as follows:
$ Millions 2000 1999 1998 1997
_____________ ____ ____ ____
Current:
U.S. Federal and state $43 $16 $16$ 19 $ 43 $ 16
Foreign 35 43 41
32
__ __ _____ ___ ___
54 86 57
48
__ __ _____ ___ ___
Deferred:
U.S. Federal and state (94) (17) (34)
26
Foreign 21 (14) (19)
-
__ __ _____ ___ ___
(73) (31) (53)
26
___ ___ __
$55___
$(19) $ 55 $ 4 $74
___ ___ ___
___ ___ ___
Significant components of net deferred tax assets related to the following
tax effects of differences between financial and tax reporting at December
31:
$ Millions 2000 1999 1998
__________ ____ ____
Employee benefit plans $276 $282 $300
Product coverage & marketing expenses 134 126 106
Restructuring charges 64 34
14
USU.S. plant & equipment (191) (182) (176)
Net foreign taxable differences, primarily plant
and equipment (19) 9
6
USU.S. Federal carryforward benefits:
Net operating loss, expiring 2020 34 -
Foreign tax credits, expiring 2005 9 -
General business tax credits, expiring 20182009 to 20192020 72 22 43
Minimum tax credits, no expiration 19 15 12
Other net differences 2 13 12
____ ____
$400 $319 $317
____ ____
____ ____
Balance Sheet Classification
____________________________
Current assets $203 $210 $203
Noncurrent assets 220 110 131
Noncurrent liabilities (23) (1) (17)
____ ____
$400 $319 $317
____ ____
____ ____
The Company expects to realize all of its tax assets, including the use of
all carryforwards, before any expiration.
35
Earnings before income taxes and differences between the effective tax rate
and USU.S. Federal income tax rate were:
$ Millions 2000 1999 1998 1997
__________ ____ ____ ____
Earnings (loss) before income taxes:
USU.S. $(136) $232 $(21)
$205
Foreign 139 (11) 15 81
____ ____ ____
$ 3 $221 $ (6) $286
____ ____ ____
____ ____ ____
Tax at 35 percent USU.S. statutory rate $ 1 $ 77 $ (2)
$100State taxes 1 3 (1)
Nondeductible EPA penaltyspecial charges 4 - 9 -
Nondeductible goodwill amortization 3 3 -3
Research tax credits (11) (15) (10) (11)
Foreign sales corporation benefits (12) (18) (9) (11)
Differences in rates and taxability of
foreign subsidiaries (3) 10 15 (3)
All other, net (2) (2)(5) (1)
____ ____ ____
$ (19) $ 55 $ 4 $ 74
____ ____ ____
____ ____ ____
NOTE 10. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT: The Company is
exposed to financial risk resulting from volatility in foreign
exchange rates and interest rates. This risk is closely monitored and
managed through the use of financial derivative contracts. As clearly
stated in the Company's policies and procedures, financial derivatives
are used expressly for hedging purposes, and under no circumstances
are they used for speculating or trading. Transactions are entered
into only with banking institutions with strong credit ratings, and
thus the credit risk associated with these contracts is considered
immaterial. Hedging program results and status are reported to senior
management on a periodic basis.
Foreign Exchange Rates
Due to its international business presence, the Company uses foreign
exchange forward contracts to manage its exposure to exchange rate
volatility. Foreign exchange balance sheet exposures are aggregated
and hedged at the corporate level. Maturities on these instruments
generally fall within the one-month and six-month range. The
objective of the hedging program is to reduce earnings volatility
resulting from the translation of net foreign exchange balance sheet
positions. The total notional amount of these forward contracts
outstanding at December 31 was as follows:
$ Millions
__________
Currency 2000 1999 1998
________ ____ ____
British Pound $148 $120
$ 86
Euro 64 47 -
Australian Dollar 20 19 13
Hong Kong Dollar 11 8
8Mexican Peso 7 -
Japanese Yen 5 7 6
Canadian Dollar 3 11
French Franc - 23
German Mark - 193
Other 2 82
____ ____
$260 $206 $174
____ ____
____ ____
Interest Rates
The Company manages its exposure to interest rate fluctuations through
the use of interest rate swaps. Currently the Company has in place
three interest rate swaps that effectively convert fixed-rate debt
into floating-
ratefloating-rate debt. The objective of the swaps is to more
efficiently balance borrowing costs and interest rate risk. The
contracts were established during 1998 and 1999 and have a total
notional value of $350 million.
Fair Value of Financial Instruments
Based on borrowing rates currently available to the Company for bank
loans with similar terms and average maturities, the fair value of total
debt, including current maturities, at December 31, 1999,2000, approximated
$1,104$1,138 million. The carrying value at that date was $1,215$1,196 million. At
December 31, 1998,1999, the fair and carrying values of total debt, including
current maturities, were $1,214$1,104 million and $1,227$1,215 million, respectively.
The carrying values of all other receivables and liabilities approximated
fair values.
36
NOTE 11. RETIREMENT PLANS: The Company has various contributory and
noncontributory pension plans covering substantially all employees.
Cummins common stock represented 119 percent of pension plan assets at
December 31, 1999.2000.
Cummins also provides various health care and life insurance benefits
to eligible retirees and their dependents but reserves the right to
change benefits covered under these plans. The plans are contributory
with retirees' contributions adjusted annually, and they contain other
cost-
sharingcost-sharing features, such as deductibles, coinsurance and spousal
contributions. The general policy is to fund benefits as claims and
premiums are incurred.
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for plans with accumulated benefit obligations
in excess of plan assets were $697 million, $682 million and $558
million, respectively, as of December 31, 2000, and $651 million, $636
million and $513 million, respectively, as of December 31, 1999, and $1,296 million, $1,251 million,
and $999 million, respectively, as of December 31, 1998.1999. The
assumed long-
termlong-term rate of compensation increase for salaried plans was
5.25 percent in 19992000 and 4.25 percent in 1998.1999. Other significant assumptions for the
Company's principal plans were:
Pension Other
Benefits Benefits
2000 1999 19982000 1999 1998
____ ____ ____ ____
Weighted-average discount rate 7.75% 7.5% 6.5%7.75% 7.5% 6.5%
Long-term rate of return on plan assets 10.0% 9.0% 10.0%
For measurement purposes a 7 percent annual increase in health care
costs was assumed for 2000,2001, decreasing gradually to 5.255.5 percent in tenfive
years and remaining constant thereafter.
Increasing the health care cost trend rate by one1 percent would increase
the obligation by $43$48 million and annual expense by $4 million.
Decreasing the health care cost trend rate by one1 percent would decrease
the obligation by $42$43 million and annual expense by $4$3 million.
The Company's net periodic benefit cost under these plans was as follows:
Pension Benefits Other Benefits
$ Millions 2000 1999 1998 19972000 1999 1998 1997
____________ ____ ____ ____ ____ ____ ____
Service cost $ 50 $ 53 $ 47 $ 41 $ 86 $ 8 $ 8
Interest cost 126 116 123 11546 40 44 41
Expected return on plan
assets (161) (161) (153) (134) - - -
Amortization of transition
asset (2) (3) (4) (9) - - -
Other 9 12 12 133 4 3 9
____ ____ ____ ____ ____ ____
$ 22 $ 17 $ 25 $ 2655 $ 52 $ 55 $ 58
____ ____ ____ ____ ____ ____
____ ____ ____ ____ ____ ____
37
Pension Benefits Other Benefits
$ Millions 2000 1999 19982000 1999 1998
__________ ______ ______ ______ ______
Change in benefit obligation:
Benefit obligation at beginning of year $1,865 $1,907 $1,693$ 637 $ 640
$ 596
Service cost 50 53 47 86 8
Interest cost 126 116 12346 40 44
Plan participants' contributions 6 7 7 12 1
Amendments 3 14 2 - -
Experience (gain) loss 63 (103) 16111 (21) 20
Benefits paid (122) (119) (123)(37) (31)
(29)
Other (36) (10) (3) - -
_____ _____ _____ _____
Benefit obligation at end of year $1,955 $1,865 $1,907$ 665 $ 637 $ 640
_____ _____ _____ _____
_____ _____ _____ _____
Change in plan assets:
Fair value of plan assets at
beginning of year $1,922 $1,692 $1,905 $ - $ -
Actual return on plan assets 162 331 (129) - -
Employer contribution 62 20 3435 30 28
Plan participants' contributions 6 7 7 12 1
Benefits paid (122) (119) (123)(37) (31)
(29)
Other (35) (9) (2) - -
_____ _____ _____ _____
Fair value of plan assets at end of
year $1,995 $1,922 $1,692 $ - $ -
_____ _____ _____ _____
_____ _____ _____ _____
Funded status $ 40 $ 57 $ (215)(665) $ (637) $ (640)
Unrecognized:
Experience (gain) loss (a) (41) (103) 17270 55 80
Prior service cost (b) 43 51 55 (12) (11)(12)
Transition asset (c) (2) (5) (7) - -
_____ _____ _____ _____
Net amount recognized $ 40 $ - $ 5(607) $ (594) $ (571)
_____ _____ _____ _____
_____ _____ _____ _____
Amounts recognized in the statement
of financial position:
Prepaid benefit cost $ 102110 $ 50102 $ - $ -
Accrued benefit liability (111) (114) (232)(607) (594) (571)
Intangible asset 38 12 104 - -
Accumulated other comprehensive income 3 - 83 - -
_____ _____ _____ _____
Net amount recognized $ 40 $ - $ 5(607) $ (594) $ (571)
_____ _____ _____ _____
_____ _____ _____ _____
(a) The net deferred (gain) loss resulting from investments, other
experience and changes in assumptions.
(b) The prior service effect of plan amendments deferred for recognition
over remaining service.
(c) The balance of the initial difference between assets and obligations
deferred for recognition over a 15-year period.
38
NOTE 12. COMMON STOCK: The Company increased its quarterly common stock
dividend from 27.5 cents per share to 30.0 cents, effective with the
dividend payment in December 1999.
The Company repurchased 0.4 million shares on the open market at an
aggregate purchase price of $16 million in 2000, 0.7 million shares on
the open market at an aggregate purchase price of $34 million in 1999
and 0.4 million shares on the open market at an aggregate purchase
price of $14 million in 1998. In 1997, the
Company repurchased 1.3 million shares from Ford Motor Company and another
0.2 million shares on the open market at an aggregate purchase price of $75
million. All of the acquired shares are held as
common stock in treasury.
In 1997, the Company issued 3.75 million shares of its common stock to an
employee benefits trust to fund obligations of employee benefit and
compensation plans, principally retirement savings plans. Shares of the
stock held by this trust are not used in the calculation of earnings per
share until allocated to a benefit plan.
NOTE 13. SHAREHOLDERS' RIGHTS PLAN: The Company has a Shareholders'
Rights Plan which it first adopted in 1986. The Rights Plan provides
that each share of the Company's common stock has associated with it a
stock purchase right. The Rights Plan becomes operative when a person or
entity acquires 15 percent of the Company's common stock or commences a
tender offer to purchase 20 percent or more of the Company's common stock
without the approval of the Board of Directors.
NOTE 14. EMPLOYEE STOCK PLANS: Under the Company's stock incentive and
option plans, officers and other eligible employees may be awarded stock
options, stock appreciation rights and restricted stock. Under the
provisions of the stock incentive plan, up to one percent of the
Company's outstanding shares of common stock at the end of the preceding
year is available for issuance under the plan each year. At December 31,
1999,2000, there were no shares of common stock available for grant and
1,732,8752,319,080 options exercisable under the plans.
The Company accounts for stock options in accordance with APB Opinion No.
25 and related interpretations. No compensation expense has been
recognized for stock options since the options have exercise prices equal
to the market price of the Company's common stock at the date of grant.
Number of Weighted-average
Options Shares exercise price
________ _________ ________________
December 31, 1996 1,510,150 38.88
Granted 766,500 60.61
Exercised (294,025) 35.85
Cancelled ( 61,775) 42.66
_________
December 31, 1997 1,920,850 46.08
Granted 703,660 45.34
Exercised (54,075) 36.36
Cancelled (27,425) 53.80
_________
December 31, 1998 2,543,010 48.08
Granted 886,900 39.74
Exercised (196,500) 39.71
Cancelled (40,275) 43.99
_________
December 31, 1999 3,193,135 46.65
Granted 938,750 34.39
Exercised (11,900) 30.27
Cancelled (114,355) 51.39
_________
December 31, 2000 4,005,630 44.43
_________
_________
Options outstanding at December 31, 1999,2000 have exercise prices between
$15.94$19.38 and $79.81 and a weighted-average remaining life of 76.8 years. The
weighted-
averageweighted-average fair value of options granted was $12.58 per share in 2000
and $13.76 per share in 1999 and $18.61
per share in 1998.1999. The fair value of each option was estimated
on the date of grant using a risk-free interest rate of 6.5 percent in 2000
and 5.6 percent in 1999 and 1998, current annual dividends, expected lives
of 10 years and expected volatility of 3441 percent. A fair-value method of
accounting for awards subsequent to January 1, 1997,1998, would have resulted in
an increase in compensation expense of $8 million, net of tax ($.20 per
share) in 1999,2000. $8 million, net of tax ($.20 per share) in 19981999 and $6$8
million, net of tax ($.14.20 per share) in 1997.1998.
39
NOTE 15. COMPREHENSIVE INCOME: Comprehensive income includes net income
and all other nonownernon-owner changes in equity during a period.
The tax effect on other comprehensive income is as follows:
Total
Foreign Minimum Other
Currency Unrealized Pension Compre-
Translation Losses on Liability hensive
$ Millions Adjustments Securities Adjustments Income
__________ ___________ __________ ___________ ______
2000
____
Pre-tax amount $(61) $(4) $ (3) $ (68)
Tax benefit 7 2 1 10
____ ___ ____ _____
Net amount $(54) $(2) $ (2) $ (58)
____ ___ ____ _____
____ ___ ____ _____
1999
____
Pre-tax amount $ 5 $(1) $ 84 $ 88
Tax (expense) benefit (1) - (29) (30)
____ ___ ____ _____
Net amount $ (4)4 $(1) $ 55 $ 58
____ ___ ____ _____
____ ___ ____ _____
1998
____
Pre-tax amount $(44) $(1) $(83) $(128)
Tax (expense) benefit 1 1 29 31
____ ___ ____ _____
Net amount $(43) $ - $(54) $ (97)
____ ___ ____ _____
____ ___ ____ _____
1997
____
Pre-tax amount $(21) $(1) $ 12 $ (10)
Tax (expense) benefit - - - -
____ ___ ____ _____
Net amount $(21) $(1) $ 12 $ (10)
____ ___ ____ _____
____ ___ ____ _____
The components of accumulated other comprehensive income are as follows:
Accum-
ulated
Foreign Minimum Other
Currency Unrealized Pension Compre-
Translation Losses on Liability hensive
$ Millions Adjustments Securities Adjustments Income
__________ ___________ __________ ___________ ______
Balance at 12/31/96 $ (47) $ - $(13) $ (60)
Change in 1997 (21) (1) 12 (10)
_____ ___2000
____ _____
Balance at 12/31/97 $ (68) $(1) $ (1) (1)$ (70)
Change in 1998 (43) - (54) (97)
_____ ___ ____ _____
Balance at 12/13/31/98 (111) (1) (55) (167)
Change in 1999 4 (1) 55 58
_____ ___ ____ _____
Balance at 12/31/99 $(107) $(2)(107) (2) - (109)
Change in 2000 (54) (2) (2) (58)
_____ ___ ____ _____
Balance at 12/31/00 $(161) $(4) $ - $(109)(2) $(167)
_____ ___ ____ _____
_____ ___ ____ _____
NOTE 16. SEGMENTS OF THE BUSINESS: The Company has three operating
segments: Engine, Power Generation and Filtration and Other. The
engineEngine segment produces engines and parts for sale to customers in
automotive and industrial markets. The engines are used in trucks of
all sizes, buses and recreational vehicles, as well as various
industrial applications including construction, mining, agriculture,
marine, rail and military. The power
generationPower Generation segment is the
Company's power systems supplier, selling engines, generator sets and
alternators and providing temporary power through rentals of generator
sets. The filtrationFiltration and otherOther segment includes sales of filtration
products, and exhaust systems and turbochargers and company-ownedsales from company-
owned distributors.
The Company's operating segments are organized according to products
and the markets they each serve. This business structure was designed
to focus efforts on providing enhanced service to a wide range of
customers.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies except
that the Company evaluates performance based on earnings before
interest and income taxes and on net assets; therefore, no allocation
of debt-related items and income taxes is made to the individual
segments.
40
Operating segment information is as follows:
40
$ Millions
__________ Power Filtration
19992000 Engine Generation and Other Total
____ ______ __________ ___________ ______
Net sales $4,050 $1,395 $1,152 $6,597
Depreciation and amortization 151 47 42 240
Income (expense) from joint
ventures and alliances 5 1 3 9
Earnings before interest, income
taxes and special charges 24 103 122 249
Special charges 131 19 10 160
Earnings (loss) before interest
and income taxes (107) 84 112 89
Net assets 799 521 892 2,212
Investment in joint
ventures and alliances 163 26 12 201
Capital expenditures 143 46 39 228
1999
____
Net sales $4,225 $1,356 $1,058 $6,639
Depreciation &and amortization 146 47 40 233
Income (expense) from joint
ventures and alliances (4) (25) 1 (28)
Earnings before interest,
income taxes and unusualspecial
charges 182 52 122 356
UnusualSpecial charges 18 42 - 60
Earnings before interest and
income taxes 164 10 122 296
Net assets 1,015 553 868 2,436
Investment in joint
ventures and alliances 112 11 8 131
Capital expenditures 130 49 36 215
1998
____
Net sales $3,982 $1,230 $1,054 $6,266
Depreciation &and amortization 120 40 39 199
Income (expense) from joint
ventures and alliances (4) (25) (1) (30)
Earnings before interest,
income taxes and unusualspecial
charges 136 25 121 282
UnusualSpecial charges 165 50 2 217
Earnings (loss) before
interest &and income taxes (29) (25) 119 65
Net assets 946 511 803 2,260
Investment in joint
ventures and alliances 132 3 1 136
Capital expenditures 172 67 32 271
Additions to goodwill 12 2 370 384
1997
____
Net sales $3,666 $1,205 $ 754 $5,625
Depreciation & amortization 102 34 22 158
Income (expense) from joint
ventures and alliances 12 (2) - 10
Earnings (loss) before
interest and income taxes 207 (2) 107 312
Net assets 1,074 531 312 1,917
Investment in joint
ventures and alliances 133 65 6 204
Capital expenditures 304 79 22 405
Reconciliation to Consolidated Financial Statements:
2000 1999 1998 1997
____ ____ ____
Earnings before interest &and income
taxes for operating segments $ 89 $296 $ 65
$312
Interest expense 86 75 71 26
Income tax expense (benefit) (19) 55 4
74
Minority interest 14 6 11 -
____ ____ ____
Net earnings (loss) $ 8 $160 $(21) $212
____ ____ ____
____ ____ ____
41
2000 1999 1998 1997
______ ______ ______
Net assets for reportableoperating segments $2,212 $2,436 $2,260 $1,917
Liabilities deducted in arriving
at net assets 1,846 1,922 1,926 1,583
Deferred tax assets not allocated
to segments 423 320 334 256
Debt-related costs not allocated
to segments 19 19 22 9
______ ______ ______
Total assets $4,500 $4,697 $4,542 $3,765
______ ______ ______
______ ______ ______
Summary geographic information is listed below:
All
$ Millions US UK Canada Other Total
__________ ______ ______ ______ ______ ______
2000
____
Net sales (a) $3,775 $ 382 $ 418 $2,002 $6,597
Long-lived assets $1,442 $ 207 $ - $ 286 $1,935
1999
____
Net sales (a) $4,064 $ 400 $ 473 $1,702 $6,639
Long-lived assets $1,434 $ 206 $ - $ 264 $1,904
1998
____
Net sales (a) $3,595 $ 389 $ 459 $1,823 $6,266
Long-lived assets $1,470 $ 209 $ - $ 272 $1,951
1997
____
Net sales (a) $3,123 $ 384 $ 318 $1,800 $5,625
Long-lived assets $1,360 $ 251 $ - $ 267 $1,878
(a) Net sales are attributed to countries based on location of
customer.
Revenues from the Company's largest customer represent approximately $1.3$1.2
billion of the Company's net sales in 1999.2000. These sales are included in the
engineEngine and filtrationFiltration and otherOther segments.
NOTE 17. GUARANTEES, COMMITMENTS AND OTHER CONTINGENCIES: At December 31,
1999,2000, the Company had the following minimum rental commitments for noncancelablenon-
cancelable operating leases: $47 million in 2000, $38$45 million in 2001, $30$37 million in 2002, $26$31
million in 2003, $18$22 million in 2004, $13 million in 2005 and $70$63 million
thereafter. Rental expense under these leases approximated $79 million in
2000, $75 million in 1999 and $70 million in 1998 and $60 million in 1997.1998.
Commitments under outstanding letters of credit, guarantees and
contingencies at December 31, 1999,2000, approximated $159$89 million.
Cummins and its subsidiaries are defendants in a number of pending
legal actions, including actions related to use and performance of the
Company's products. The Company carries product liability insurance
covering significant claims for damages involving personal injury and
property damage. In the event the Company is determined to be liable
for damages in connection with actions and proceedings, the unreserved
portion of such liability is not expected to be material. The Company
also has been identified as a potentially responsible party at several
waste disposal sites under USU.S. and related state environmental
statutes and regulations and has joint and several liability for any
investigation and remediation costs incurred with respect to such
sites. The Company denies liability with respect to many of these
legal actions and environmental proceedings and is vigorously is
defending such actions or proceedings. The Company has established
reserves that it believes are adequate for its expected future
liability in such actions and proceedings where the nature and extent
of such liability can be estimated reasonably based upon presently
available information. The Company is working to comply with U.S. EPA
regulations with respect to emissions which are scheduled to become
more restrictive in 2002 and beyond.
42
NOTE 18. QUARTERLY FINANCIAL DATA (unaudited):
$ Millions, except First Second Third Fourth Full
per share amounts Quarter Quarter Quarter Quarter Year
__________________ _______ _______ _______ _______ ______
2000
____
Net sales $1,648 $1,769 $1,572 $1,608 $6,597
Gross profit 335 351 310 263 1,259
Net earnings (loss) 42 61 25 (120) 8
Basic earnings (loss) per share $ 1.09 $ 1.62 $ .66 $(3.16) $ .20
Diluted earnings (loss) per share 1.09 1.62 .66 (3.16) .20
1999
____
Net sales $1,505 $1,667 $1,631 $1,836 $6,639
Gross profit 301 371 361 385 1,418
Net earnings 24 58 53 25 160
Basic earnings per share $ .63 $ 1.51 $ 1.37 $ .65 $ 4.16
Diluted earnings per share .63 1.50 1.35 .65 4.13
1998
____
Net sales $1,500 $1,635 $1,525 $1,606 $6,266
Gross profit 297 369 258 325 1,249
NetFourth quarter 2000 net earnings (loss) 7 53 (110) 29 (21)
Basic earnings (loss)included restructuring, asset
impairment and other special charges of $103 million, net of tax ($160
million pretax), or $2.71 per share $ .18 $ 1.39 $(2.86) $ .75 $ (.55)
Diluted earnings (loss) per share .18 1.38 (2.86) .75 (.55)share.
Fourth quarter 1999 net earnings included a charge of $45 million, net
of tax ($60 million pretax), or $1.17 per share, for the termination
of the Cummins Wartsila joint venture.
First quarter 1998 gross profit included a $43 million special charge for
product coverage costs. The special charge, net of taxes, included in net
earnings was $30 million or $.78 per share.
Third quarter 1998 gross profit included special charges of $49 million for
product coverage costs and inventory write-downs. Net loss for the period
also included charges for restructuring, EPA penalties and other non-
recurring items. The total charges, net of tax, included in net loss were
$130 million or $3.38 per share.
43
CUMMINS WARTSILA SAS
BALANCE SHEET AS OF
December 31, 1999
___________________
(FRF thousands)
December 31, 1999 12/31/98
_________________________________ _________
Amort. &
ASSETS Gross Provisions Net Net
_________ __________ ________ _________
Intangible fixed assets
Research & development costs 10,709 5,619 5,090 4,100
Goodwill 12,760 7,656 5,104 5,742
Franchises, patents, licenses 423,697 148,668 275,029 390,090
Software 40,874 31,439 9,435 8,182
Intangible fixed assets
in-progress 1,816 - 1,816 916
________ ________ _______ _______
489,856 193,382 296,474 409,030
________ ________ _______ _______
Tangible fixed assets
Land 925 - 925 925
Buildings, fixtures, fittings 152,100 84,906 67,194 87,036
Technical plant and machinery 461,272 271,927 189,345 201,448
Other tangible fixed assets 40,306 27,725 12,581 14,367
Tangible fixed assets
in-progress 35,056 - 35,056 34,018
Advances and down payments - - - 124
_______ _______ _______ _______
689,659 384,558 305,101 337,918
_______ _______ _______ _______
Long-term investments
Equity investments 6,699 4,424 2,275 2,275
Receivables from controlled
entities 1,374 - 1,374 1,374
Loans and other long-term
investments 53,238 846 52,392 20,165
_________ _______ _______ _______
61,311 5,270 56,041 23,814
_________ _______ _______ _______
Fixed assets 1,240,826 583,210 657,616 770,762
_________ _______ _______ _______
Inventories and
work-in-progress
Raw materials and other
supplies 62,553 14,927 47,626 68,830
Supplies 11,315 284 11,031 3,668
Production work-in-progress 151,275 8,642 142,633 171,895
Semi-finished goods 226,352 35,573 190,779 180,238
Finished goods 23,171 - 23,171 30,375
_______ _______ _______ _______
474,666 59,426 415,240 455,006
_______ ______ _______ _______
Advances & down payments on
orders 35,752 - 35,752 28,200
_______ ______ _______ _______
Receivables
Receivables from sales 640,469 68,068 572,401 423,001
Other operating receivables 65,852 9,833 56,019 126,579
Liaison account - - - -
_______ ______ _______ _______
706,321 77,901 628,420 549,580
_______ _______ _______ _______
Marketable securities 451 - 451 451
_______ _______ _______ _______
Cash-on-hand 37,363 - 37,363 15,229
_________ _______ _________ _________
Current assets 1,254,553 137,327 1,117,226 1,048,466
_________ _______ _________ _________
Prepaid expenses 9,121 - 9,121 11,577
_________ _______ _________ _________
Charges to be spread over
several periods 3,459 - 3,459 4,613
_________ _______ _________ _________
Unrealized foreign exchange
losses 6,574 - 6,574 8,091
_________ _______ _________ _________
TOTAL ASSETS 2,514,533 720,537 1,793,996 1,843,509
_________ _______ _________ _________
_________ _______ _________ _________
44
CUMMINS WARTSILA SAS
BALANCE SHEET AS OF
December 31, 1999
___________________
(FRF thousands)
December 31, 1999 12/31/98
______________________ _________
Partial
LIABILITIES Amounts Amounts Amounts
_________ _________ _________
Shareholders' equity
Share Capital 500,000 500,000
Legal Reserve - -
Restricted reserve as of 3/31/98 - 129,521
L/T capital gain reserve 2,967 2,967
Profit and loss brought forward (451,967) -
Income for the period 106,072 (581,488)
Investment subsidies 8,385 8,047
Cumulative translation adjustment 26,776 14,497
_________ _________
Total shareholders' equity 192,233 73,544
_________ _________
Conditional advances 5,598 5,598
_________ _________
Provision for legal disputes and
commitments 103,901 77,192
Provision for restructuring and
retirement 166,681 276,722
_________ _________
Total provisions 270,582 353,914
_________ _________
Liabilities
Financial liabilities:
Medium-term loans 640,000 844,000
Short-term credits - -
Miscellaneous loans and financial
liabilities 17,521 21,898
Other loans 9,467 34,337
_________ _________
666,988 900,235
_________ _________
Down payments on orders in-progress 254,800 100,327
_________ _________
Operating liabilities
Trade payables & assimilated accounts 305,914 325,443
Tax and social liabilities 58,272 45,835
Other liabilities 26,213 30,408
_________ _________
390,399 401,686
_________ _________
Payables to fixed asset suppliers 3,586 4,110
_________ _________
Total liabilities 1,315,773 1,406,358
_________ _________
Prepaid revenue 2,184 1,499
_________ _________
Unrealized gains on foreign exchange 7,626 2,596
_________ _________
TOTAL LIABILITIES 1,793,996 1,843,509
_________ _________
_________ _________
45
CUMMINS WARTSILA SAS
INCOME STATEMENT
December 31, 1999
____________________
(FRF thousands)
12/31/99 12/31/98
_________ _________
Operating revenues
Net revenues 1,031,011 955,348
Change in stored production (43,159) 32,355
In-house production 9,410 75,972
Subsidies 466 2,114
Reversal of provisions and expense
transfers 167,147 179,941
Other revenues 839 2,484
_________ _________
1,165,714 1,248,214
_________ _________
Operating expenses
Purchases 594,749 626,352
Change in inventories (13,449) 22,375
Other purchases & external charges 403,213 441,074
Taxes and assimilated payments 13,814 19,598
Payroll and associated costs 209,846 198,983
Social charges 75,869 83,419
Allocations:
Depreciation & amortization of tangible
and intangible fixed assets 103,152 99,156
Depreciation of charges allocated
over several periods 1,153 1,153
Provisions for depreciation of assets 34,012 41,236
Provisions for losses & contingencies 164,620 89,414
Other charges 21,850 6,156
_________ _________
1,608,829 1,628,916
_________ _________
1. Operating income/loss (443,115) (380,702)
_________ _________
Share of income from joint ventures 1,695 -
_________ _________
Financial income
Other interest & assimilated income 2,463 3,357
Reversal of provisions and expense
transfers 9,094 5,406
Positive exchange rate differences 9,572 14,961
_________ _________
21,129 23,724
_________ _________
Financial charges
Depreciation and provisions 8,412 9,094
Interest and assimilated charges 37,715 34,983
Negative exchange rate differences 17,750 18,335
_________ _________
63,877 62,412
_________ _________
2. Financial income/loss (42,748) (38,688)
_________ _________
3. Current income before tax (484,168) (419,390)
_________ _________
"Exceptional" revenues
On management transactions 600,460 882
On capital transactions 1,195 1,161
Share of investment subs. allocated
to income statement 190 97
Reversal of other provisions 140,285 15,292
_________ _________
742,130 17,432
_________ _________
"Exceptional" charges
On management transactions 43,265 7,478
On capital transactions 1,020 1,251
Restructuring expense 107,405 176,800
_________ _________
151,690 185,529
_________ _________
4. Extraordinary income/loss 590,440 (168,097)
_________ _________
5. Corporate income tax 200 (5,999)
_________ _________
6. Income/loss 106,072 (581,488)
_________ _________
_________ _________
46
NOTES
1. Activity
The twelve month financial period ended December 31, 1999 shows
accounting revenues of FRF 1,031.0 million (Euro 157.1 million),
compared to FRF 955.3 million (Euro 145.6 million) for the previous
financial period.
Net sales development
_____________________
(FRF millions)
(12-months periods)
Year Net Sales
____ _________
1994 1,012
1995 1,085
1996 1,191
1997 1,206
1998 955
1999 1,031
Direct exports were FRF 533.2 million (Euro 81.3 million), i.e. 52%
of total revenues excluding taxes. Taking indirect exports into
account, the share of revenues relating to foreign markets was FRF
743.4 million (Euro 113.3 million), i.e. 72% of revenues excluding
taxes.
Direct exports in 1999
FRF 533.2 million
______________________
Percent of
Foreign Markets Export Sales
_______________ ____________
Europe 41%
Asia 21%
Africa 20%
Americas 17%
Other 1%
Orders in 1999 amounted to FRF 1,017 million (Euro 155 million). At
the end of the period, new orders were FRF 540 million (Euro 82
million).
332 megawatts were delivered in 1999.
2. Accounting principles
Cummins Wartsila prepares its financial statements in accordance with
French accounting principles.
The same accounting principles were used as those used for the 1998
financial period.
2.1. Foreign currency translation
Transactions in foreign currency outside Euro area are recorded at the
following exchange rates:
. Daily transactions are converted into French francs as follows:
- Purchase and sales invoices by using the monthly rates published
by the French Customs Authorities.
- Payments and receipts using daily bank rates.
47
. Valuation of receivables and liabilities in foreign currency as of
December 31, 1999 takes place in line with the last known rate
before the period end. These rates were published in the Journal
Officiel (Gazette).
The assets and liabilities of the two sites in England are converted
using the exchange rate in effect on December 31, 1999. The income
statement is converted at the average monthly exchange rate.
2.2. Intangible fixed assets
The costs of studies and trials relating to specific markets and
benefiting from advances whose repayment is conditional are booked in
Research and Development costs. The amount for this year is FRF 4.5
million (Euro 0.7 million). These costs are amortized over a period
of three years.
Former WARTSILA France's own goodwill, increased by the contribution
related to the takeover of Societe Surgerienne de Constructions
Mecaniques of Budi and by the repair activity of Wartsila Diesel
France, is amortized over a period of twenty years.
Intangible fixed assets related to know-how and technology of engines
CW 200 and the CW 170, capitalized in 1997 for an amount of FRF 350
million and increased to FRF 418.9 million by the end of 1998, are
amortized on a straight-line basis over a period of 15 years. Further
to the change of Shareholders and to the split of the CW 170 activity
forecasted for January 2000:
. the 1999 costs related to know-how and technology of the CW 200
were capitalized for a sum of FRF 4.7 million (Euro 0.7 million).
These costs are amortized over the remaining useful life of the
intangible fixed assets mentioned at the beginning of this paragraph.
. an extraordinary depreciation of FRF 91.2 million (Euro 13.9
million) related to the technology of CW 170 was booked.
Software is amortized on a straight-line basis over four years; low
value software is amortized over 12 months.
2.3. Tangible fixed assets
Tangible fixed assets are recorded at their acquisition cost.
Depreciation is calculated on a straight-line basis over the following
useful life periods:
. Buildings 20 years
. Fixtures and fittings 10 years
. Industrial equipment 10 years
. Development motors 2 years
. Plant 3 years
. Transport equipment 4 years
. Furniture 10 years
. Office equipment 4 years
. IT equipment 4 years
2.4. Inventories and work-in-progress
Purchased inventory is valued at average weighted cost.
48
Work-in-progress is valued at total cost of production, which includes
both cost of material purchased and manufacturing costs.
Manufacturing costs include normal production costs as well as
depreciation charges.
Articles with a low turnover are subject to sliding provisions of up
to 100% of their value. Provisions are booked in work-in-progress
accounts if circumstances place the completion of the project in
jeopardy.
A provision is set aside for inventories of raw materials and work-in-
progress relating to engines in the start-up phase of production when
inventory costs exceed the estimated sales price. The provision
recorded represents the excess of costs over the sales price.
2.5. Sales
The principle of product recognition is the following:
. upon dispatch of the engines and the spare parts
. upon completion of work in relation to repairs and upgrading
. for important, large-scale engines whose manufacture involves long-
term contracts, product recognition is applied according to the
following methods:
Engineering contracts:
. for the study and document submission phases, billing takes
place as work progresses; the triggering event is the
submission of plans.
. equipment is billed on the basis of deliveries on a pro
rata basis with a check being made to ensure that the
margin generated at this stage is in line with the average
margin of the contract as a whole.
Military contracts:
. Billing for development and industrialization contracts
takes place as work progresses at a pace agreed on by the
parties.
. as work progresses for turn key installations.
2.6. Loss and contingency provisions
Provisions are set aside for the estimated value of the work to be
carried out relating to the installation and commissioning of engines
delivered and invoiced.
The company sets aside provisions on the basis of statistical data in
order to cover possible expenses relating to the guarantee given to
customers.
Lastly, contingency provisions are set aside for legal disputes with
customers likely to involve either additional work or to pose a risk
to the payment of receivables.
49
2.7. Retirement indemnities
Estimated retirement indemnities due upon the retirement of an
employee, to which must be added social charges at the average company
rate, are calculated according to the following criteria:
. employees' length of service with the company
. person's age
. mortality table
. turnover rate of the company's own personnel
. discount rate, excluding inflation
. inflation rate
3. Shareholders' equity
3.1. Share capital
As of March 31, 1999, the share capital was FRF 500,000,000. It is
composed of 5,000,000 shares, each of a par value of FRF 100. The
capital is held in equal amounts by CUMMINS ENGINE COMPANY Limited and
WARTSILA NSD Corporation.
3.2. Reserve account
Following the decision of the Ordinary General Meeting of Cummins
Wartsila of June 30, 1999, the reserve account is balanced with the
corresponding amount of the 1999 loss.
3.3. Loss of half of capital
Due to the losses recorded in the financial accounts, shareholders'
equity has fallen below half the nominal value of share capital.
Decision concerning the continuation of the business activity was
taken during the Extraordinary General Meeting of October 31, 1999.
The regularization of the situation must take place in 2001 at the
latest.
4. Comments relating to exceptional items
The most significant extraordinary items consist of:
(FRF Millions)
Charges Revenues
_______ ________
. Loan waver 600.0
. Reversal of the excess provision for
restructuring charges 139.6
. Penalties on contracts 9.6
. Shutdown of Ramsgate (UK) 31.9
. Depreciation related to the CW 170 technology 91.2
. Tangible Fixed Assets provision linked to
the restructuring 16.2
50
5. Subsidies
The company received an investment subsidy for the acquisition of new
equipment. A portion of this subsidy is reversed to income at the same
rate as depreciation relating to equipment.
Furthermore, the company receives Credit National loans known as
`article 90' loans for the financing of research programs. These loans
are only repaid if research results are successful. In the case of a
recognized failure or if commercial success has not been achieved
within a certain time, these loans are converted into subsidies.
6. Operating receivables
Provisions, calculated on a case by case basis, are set aside for
doubtful debts.
7. Research tax credit
The company has got a receivable related to tax research credit in its
accounts.
This credit may be set against the charge for tax during the next three
years following the closing year where the declaration was issue.
After this period, the portion exceeding the tax charge will be paid
back to the company.
8. Prepaid expenses
This account consists mainly of insurance charges of FRF 6.5 million
(Euro 1 million) to be allocated over the twelve months following
payment of the premium.
9. Charges to be spread over several periods
These consist of costs borne by the company relating to engines
installed in field tests. They are spread over 5 years and 1/5 of the
costs are amortized in the current period.
10. Off balance sheet commitments
The company's commitments relating to the hedging of future currency to
be cashed in or out during the next twelve months are as follows:
Amount in
millions Amount in Amount in
foreign millions millions
currency FRF Euro
________ _________ _________
. USD 6.3 40.0 6.1
. GBP 1.6 16.3 2.4
Other miscellaneous commitments appear in the table attached as an
appendix.
51
11. Incorporation into the consolidated financial statements
The financial statements of our company are consolidated on a like by
like basis, using the equity method of consolidation, by our parent
companies:
CUMMINS ENGINE COMPANY, Inc., Columbus, Indiana, USA
METRA CORPORATION, Helsinki, Finland
In light of the insignificant nature of the subsidiaries held by
CUMMINS WARTSILA, consolidated financial statements were not prepared.
12. Information concerning the remuneration of the directors
This information was not provided, as it would have led to disclosure
of the amount of an individual salary.
52
I. MOVEMENT IN FIXED ASSETS - GROSS VALUE
__________________________________________
(FRF thousands)
Gross
Situation Value
As of As Of
1/1/99 Acquisitions Disposals 12/31/99
_________ ____________ _________ ________
Intangible fixed assets
_______________________
Research & development costs 6,150 4,559 - 10,709
Goodwill 12,760 - - 12,760
Licenses 50 - - 50
Software 32,643 8,249 18 40,874
Know-how W170 & W200 418,907 4,740 - 423,647
Intangible fixed assets
in-progress 916 900 - 1,816
_______ _______ _______ _______
471,426 18,448 18 489,856
_______ _______ _______ _______
_______ _______ _______ _______
Tangible fixed assets
_____________________
Land 925 - - 925
Buildings,fixtures,fittings 149,869 5,086 2,855 152,100
Technical plant & machinery 426,222 38,161 3,111 461,272
Other tangible fixed assets 39,123 3,593 2,410 40,306
Tangible fixed assets
in-progress 34,018 1,038 - 35,056
Advances and down payments 124 (124) - -
_______ _______ _______ _______
650,281 47,754 8,376 689,659
_______ _______ _______ _______
_______ _______ _______ _______
II. MOVEMENT OF DEPRECIATION AND AMORTIZATION CHARGES
______________________________________________________
(FRF thousands)
Situation Allocation Depr. of Situation
as of for the disposed as of
1/1/99 period assets 12/31/99
_________ __________ ________ ________
Intangible fixed assets
_______________________
Research & development costs 2,050 3,569 - 5,619
Goodwill 7,018 638 - 7,656
Licenses 5 5 - 10
Software 24,461 6,996 18 31,439
Know-how W170 & W200 28,861 119,797 - 148,658
_______ _______ _______ _______
62,395 131,005 18 193,382
_______ _______ _______ _______
_______ _______ _______ _______
Tangible fixed assets
_____________________
Buildings,fixtures,fittings 62,833 24,194 2,121 84,906
Technical plant & machinery 224,774 50,252 3,099 271,927
Other tangible fixed assets 24,756 5,105 2,136 27,725
_______ _______ _______ _______
312,363 79,551 7,356 384,558
_______ _______ _______ _______
_______ _______ _______ _______
53
III. MOVEMENT OF ALL PROVISIONS
(FRF thousands)
___________________________________________________
Allocations
Reversal
_____________________
_______________________________
Situation
Extra- Situation
1/1/99 Operations Financial Operations
Financial ordinary 12/31/99
_________ __________ _________ __________
_________ ________ _________
Equity interests and
assimilated accounts 4,570 - 700 -
- - - 5,270
_______ _______ ______ _______
_____ _______ _______
Inventories & work-in-progress 60,218 26,252 - 27,044
- - - 59,426
Doubtful debts France 9,357 821 - 1,002
- - 3 9,173
Doubtful debts exports 25,652 6,926 - 18,741
- - 7 13,830
Doubtful debts - other legal
disputes 47,424 13 - 2,372
- - - 45,065
Other receivables 10,183 - - -
- - 350 9,833
_______ _______ _____ _______
_____ _______ _______
Total depreciation on current
assets 152,834 34,012 - 49,159
- - 360 137,327
_______ _______ _____ _______
_____ _______ _______
Provision for legal disputes
and commitments
Legal disputes 19,555 6,233 - 3,714
- - - 22,074
Guarantees 47,602 63,809 - 37,345
- - - 74,066
Other provisions 892 - - 892
- - - -
_______ _______ ______ _______
_____ _______ _______
Sub-total contingency provision 68,049 70,042 - 41,951
- - - 96,140
_______ _______ ______ _______
_____ _______ _______
Social-foreign exchange losses 9,143 - 7,712 -
9,094 - 7,761
_______ _______ ______ _______
_____ _______ _______
Provision for restructuring
and retirement
Work to be carried out 82,611 94,578 - 63,709
- - - 113,480
Provision for retirement
indemnities 17,011 - - 985
- - - 16,026
Provision for 1998 planned
redundancy scheme 176,800 - - -
- - 139,625 37,175
Other provisions 300 - - -
- - 300 -
_______ _______ ______ _______
_____ _______ _______
Sub-total provision for losses 276,722 94,578 - 64,694
- - 139,925 166,681
_______ _______ ______ _______
_____ _______ _______
Total provisions 353,914 164,620 7,712 106,645
9,094 139,925 270,582
_______ _______ ______ _______
_____ _______ _______
Total 511,318 198,632 8,412 155,804
9,094 140,285 413,179
_______ _______ ______ _______
_____ _______ _______
_______ _______ ______ _______
_____ _______ _______
54
IV. TRADE RECEIVABLES
______________________
(FRF thousands)
Amount Amount Gross
> 1 year < 1 year Total Depreciation
________ ________ _______ ____________
Receivables on capitalized
assets
Receivables from controlled
entities 1,374 1,374
Loans 19,300 19,300
Current assets receivables
Trade receivables and
assimilated accounts
France
Affiliated companies - 31,984 31,984 -
Other receivables 225 155,993 156,218 24,376
Commercial papers 56 14,458 14,514 -
______ _______ _______ _______
Total France 281 202,435 202,716 24,376
______ _______ _______ _______
Export
Affiliated companies 248 115,376 115,624 9,473
Other receivables 2,646 314,064 316,710 34,219
Commercial papers - - - -
______ _______ _______ _______
Total export 2,894 429,440 432,334 43,692
______ _______ _______ _______
Total receivables 3,175 631,875 635,050 68,068
______ _______ _______ _______
______ _______ _______ _______
Other receivables
Affiliated companies - 2,997 2,997 -
Others 5,200 63,074 68,274 9,833
_______ _______ _______ _______
Total other receivables 5,200 66,071 71,271 9,833
_______ _______ _______ _______
_______ _______ _______ _______
V. FINANCIAL LIABILITIES
_________________________
(FRF thousands)
Maturity Maturity Maturity
date date date
< 1 year 1-5 years > 5 years Total
________ _________ __________ _______
Medium-term loans - 640,000 - 640,000
Other loans 17,688 - 9,300 26,988
______ _______ _____ _______
Total 17,688 640,000 9,300 666,988
______ _______ _____ _______
______ _______ _____ _______
55
VI. INCOME STATEMENT
(SPECIAL FORMAT)
____________________
(FRF thousands)
12/31/99 12/31/98
_________ _________
Production sold 1,031,011 955,349
Change in inventory of finished goods & WIP (43,159) 32,355
Self-created fixed assets 9,410 75,971
_________ _________
Total production 997,262 1,063,675
Purchases adj. for changes in inventories (836,135) (878,092)
Other external charges (142,551) (149,478)
Change in provision for losses (30,868) (11,929)
_________ _________
Value added (12,292) 24,176
Operating subsidies 466 2,114
Taxes and assimilated payments (13,739) (19,414)
Payroll charges (280,272) (277,028)
_________ _________
Operating cash flow (305,837) (270,152)
Depreciation and amortization charges (104,306) (100,308)
Change in provision on current assets 15,145 (21,295)
Change in contingency provision (27,106) (4,733)
Other revenues 839 2,483
Other charges (21,850) (6,156)
_________ _________
Operating income (443,115) (400,161)
Share of income from joint ventures 1,695 -
Financial income 21,129 23,724
Financial charges (63,877) (62,411)
_________ _________
Current income (484,168) (438,848)
"Exceptional" revenue 740,934 (141,168)
"Exceptional" charges (150,670) (7,478)
_________ _________
Income before tax 106,096 (587,494)
Corporate income tax (200) 5,999
Income on disposal of fixed asset items 176 7
_________ _________
Net accounting income 106,072 (581,488)
_________ _________
_________ _________
56
VII. TABLE OF OFF BALANCE SHEET COMMITMENTS
____________________________________________
(FRF thousands)
Affiliated
Type of commitment Total Companies Others
__________________ _________ __________ ________
Commitments given
Commercial guarantees provided by
banks and other institutions 141,966 6,187 135,779
Lease purchase commitments 2,296 - 2,296
_________ _________ _______
Total 144,262 6,187 138,075
_________ _________ _______
_________ _________ _______
Commitments received
Guarantees received from suppliers 5,304 - 5,304
Guarantees on lines of credit 1,000,000 1,000,000 -
_________ _________ _______
Total 1,005,304 1,000,000 5,304
_________ _________ _______
_________ _________ _______
Reciprocal commitments
Sale of foreign currency futures 40,031 - 40,031
Purchase of foreign currency futures 16,333 - 16,333
_________ _________ _______
Total 56,364 - 56,364
_________ _________ _______
_________ _________ _______
Discounted bills 5,035 - 5,035
_________ _________ _______
_________ _________ _______
*Sales and purchases of foreign currency are shown in the appendix.
57
VIII - FINANCIAL RESULTS OVER THE LAST
FIVE YEARS
__________________________________________________
(Articles 133, 135 and 148 of Decree n 67-236 of March 23, 1967 relating to
commercial enterprises)
1995 1996 1997
1998 1999
_____________ _____________
_____________ _____________ _____________
1. Financial situation at period end
____________________________________
a. Share capital 150,000,000 150,000,000
753,556,800 500,000,000 500,000,000
b. Number of existing ordinary shares 1,500,000 1,500,000
7,535,568 5,000,000 5,000,000
c. Number of preferred dividend shares n/a n/a
n/a n/a n/a
d. Maximum number of shares to be
created in the future n/a n/a
n/a n/a n/a
2. Global results from operations
_________________________________
a. Revenues before tax 1,085,450,627 1,191,058,795
1,205,712,690 955,348,271 1,031,010,914
b. Income before tax, *depreciation &
provisions 257,827,072 17,971,164
(74,413,761) (297,331,650) 219,843,859
c. Income tax 100,000 100,000
100,000 150,000 200,000
d. Income after tax, depreciation &
provisions 25,686,089 10,356,903
(119,669,536) (581,488,331) 106,071,630
e. Profits distributed n/a n/a
n/a n/a n/a
3. Results on a per share basis
_______________________________
a. Income after tax but before
depreciation & provisions 171.82 11.91
(9.89) (59.50) 49.93
b. Income after tax, depreciation
and provisions 17.12 6.90
(15.88) (116.30) 21.21
c. Dividend paid on each share n/a n/a
n/a n/a n/a
4. Personnel
____________
a. Number of employees at period end 669 727
1,049 1,004 805
b. Payroll 144,694,599 133,506,549
221,238,494 198,983,384 209,845,693
c. Social charges & assimilated amounts
(social security & social works),etc. 60,054,014 60,484,248
90,707,469 83,418,514 75,869,335
*Income before tax,depreciation,provisions
and cancellation of receivables 257,827,072 17,971,164
(74,413,761) (297,331,650) (380,156,141)
58
IX - INFORMATION ON PURCHASE LEASE AGREEMENTS
AS OF DECEMBER 31, 1999
_____________________________________________________________________
(FRF thousands)
Balance sheet including
Leased fixed assets
leased fixed assets
________________________________________________________
________________________________
Depreciation charges
Initial __________________________________
Gross
Balance sheet item cost (1) Of the period (2) Accumulated (2) Net
value value Depreciation Net value
__________________ ________ _________________ _______________
_________ _______ ____________ _________
Land - - - -
925 - 925
Buildings 3,545 142 1,276 2,269
155,645 86,182 69,463
Technical plant,
equipment and machinery - - - -
461,272 271,927 189,345
Other fixed assets - - - -
40,306 27,725 12,581
Fixed assets in-progress - - - -
35,056 - 35,056
_____ ___ _____ _____
_______ _______ _______
Totals 3,545 142 1,276 2,269
693,204 385,834 307,370
_____ ___ _____ _____
_______ _______ _______
_____ ___ _____ _____
_______ _______ _______
(1) Value of these assets upon signature of contracts.
(2) Allocation for the period and accumulated charges which would have been recorded
if these assets had been acquired
and depreciated on a straight-line basis.
Purchase lease commitments
_____________________________________________________________________________________
_
Lease payments made Outstanding lease
payments
______________________
_______________________________________________ Residual
Of the
purchase
Balance sheet item period Accumulated < 1 year 1 to 5 years >
5 years Total due price (1)
__________________ ______ ___________ ________ ____________
_________ _________ _________
Land - - - -
- - - -
Buildings 367 3,436 367 1,774
29 2,170 126
Technical plant,
equipment and machinery - - - -
- - - -
Other fixed assets - - - -
- - - -
Fixed assets in-progress - - - -
- - - -
___ _____ ___ _____
___ _____ ___
Totals 367 3,436 367 1,774
29 2,170 126
___ _____ ___ _____
___ _____ ___
___ _____ ___ _____
___ _____ ___
(1) According to the contract.
59
X - INFORMATION RELATING TO SUBSIDIARIES
AND EQUITY INTEREST
___________________________________________________________
(FRF thousands)
Loans
and
Accounting value
advances
Other Share of of shares held
granted by 1999
share capital _________________ CW
not yet Revenues Income
Capital capital held (%) Gross Net paid
back (excl.taxes) 1999
_________ _________ _______ _________ _________
_________ ____________ _______
A. Detailed information
on equity interests
1) Subsidiary (at least
50% of capital held)
Cummins Wartsila ACO 1,446,000 1,433,120 99.99 3,071,100 2,050,426
1,553,577 17,744,624 492,906
Cummins Wartsila
West Africa 100,000 467,147 100.00 100,000 100,000
300,000 7,104,039 203,251
Cummins Wartsila
Moteurs S.A. - - - 125,000 125,000
- - - -
2) Equity interest (10 to
50% of capital held) - - - - -
- - - -
B. Detailed information
on other subsidiaries
or equity interests
1) Subsidiaries not
covered in paragraph A
a) French subsidiaries (1) - - - 3,378,255 -
9,200,000 - -
b) Foreign subsidiaries - - - - -
- - - -
2) Equity interests not
covered in paragraph A
a) in French
companies (2) - - - 25,000 -
- - - -
b) in Foreign
companies - - - - -
- - - -
1) SACM ROUBAIX : 100% depreciated
2) LEBOCEY : 100% depreciated
60
XI. DEFERRED AND CONTINGENT TAX
LIABILITY
__________________________________________
(FRF thousands)
Movements of
Situation at the beginning of the period
the period
______________________________________________ ____________
Deferred Contingent Taxation
Amount Taxation
________________________
of item Receivables Receivables
Liabilities Decrease
_______ ___________ ___________
___________ ________
Long-term capital gain taxed at 10% 450 - - 128
- -
Long-term capital gain taxed at 15% 2,029 - - 481
- -
Long-term capital gain taxed at 19% 488 - - 94
- -
Long-term capital losses 44,511 - 16,322 -
- -
Loss carry-forwards 325,507 119,363 - -
51,379
Deferred depreciation 231,041 84,723 - -
- -
Provision for paid leave 15,264 5,597 - -
4,811
Provision for exchange rate losses 9,094 3,335 - -
1,381
Contingent tax liability (FRF) 1,235 453 - -
- -
Provision for retirement indemnities 17,011 6,238 - -
985
Amortization of goodwill 7,018 - 2,574 -
- -
_______ _______ ______ ___
______
TOTAL 653,648 219,709 18,896 703
58,556
_______ _______ ______ ___
______
_______ _______
______
Balance of deferred taxation 219,709
_______
_______
Balance of contingent taxation 18,193
______
______
Situation at the end of the period
________________________________________________
Deferred
Amount Taxation Contingent
Taxation
of item Receivables Receivables
Liabilities
________ ___________ ___________
___________
Long-term capital gain taxed at 10% 450 - - 128
Long-term capital gain taxed at 15% 2,029 - - 481
Long-term capital gain taxed at 19% 488 - - 95
Long-term capital losses 44,511 - 16,322 -
Loss carry-forwards 274,128 100,523 - -
Deferred depreciation 303,236 111,197 - -
Provision for paid leave 10,453 3,833 - -
Provision for exchange rate losses 7,713 2,828 - -
Contingent tax liability (FRF) 1,348 494 - -
Provision for retirement indemnities 16,026 5,877 - -
Amortization of goodwill 7,656 - 2,807 -
_______ _______ ______ ___
TOTAL 668,038 224,752 19,129 704
_______ _______ ______ ___
_______ _______ ______
Balance of deferred taxation 224,752 18,425
_______ ______
_______ ______
Balance of contingent taxation
N.B.: Corporate income tax rate at the beginning and end of the period: 36.67%
61
XII. ITEMS RELATING TO SEVERAL BALANCE SHEET ITEMS AND
CONCERNING AFFILIATED COMPANIES
_______________________________________________________
(FRF thousands)
Gross Net
amount Depreciation amount
_______ ____________ ________
1. Assets
______
1.1 Fixed Assets
Equity interests 3,296 1,021 2,275
Receivables from controlled entities 1,374 - 1,374
1.2 Current Assets
Advances & down payments on orders 786 - 786
Trade receivables and assimilated
accounts 147,608 9,474 138,134
Other receivables 2,997 - 2,997
2. Liabilities
___________
Equity loan -
Other cash advances -
Other loans -
Advances on orders-in-progress 27,374
Trade payables and assimilated
accounts 53,665
Other liabilities 3,751
Financial revenue -
Financial charges 7,521
Affiliated companies:
CUMMINS
CUMMINS WARTSILA WEST AFRICA
CUMMINS WARTSILA ACO
CUMMINS WARTSILA MOTEUR S.A.
WARTSILA (Consolidated Group)
METRA FINANCE
62
XIII - BREAKDOWN OF WORKFORCE -
SITE/SECTOR
___________________________________________
Mulhouse Surgeres Gennevilliers Venissieux
Gemenos UK Total
________ ________ _____________ __________
_______ ________ _______
Workers 157 37 - - -
- - 194
Fitters 22 7 3 - -
- - 32
Middle Management 269 65 11 9 2
- - 356
Executives 184 17 4 1 1
- - 207
Apprentices 1 - - - -
- - 1
UK - - - - -
15 15
___ ___ __ __ __
__ ___
December 31, 1999 633 126 18 10 3
15 805
___ ___ __ __ __
__ ___
___ ___ __ __ __
__ ___
December 31, 1998 694 257 20 11 5
17 1,004
___ ___ __ __ __
__ _____
___ ___ __ __ __
__ _____
63
SIGNATURES
__________
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CUMMINS ENGINE COMPANY, INC.
By /s/K. M. PatelT. Linebarger By /s/R. C. Crane
__________________________ _____________________
K. M. PatelT. Linebarger R. C. Crane
Executive Vice President &and Vice President -
Chief Financial Officer Corporate Controller
(Principal Financial Officer) (Principal Accounting
Officer)
Date: March 1, 20002001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
__________ _____ ____
Director & Chairman and Chief
* Executive Officer (Principal 3/1/2000March 1, 2001
________________________ Executive Officer)
(Theodore M. Solso)
*
________________________ Director 3/1/2000
(Harold Brown)
*
________________________ Director 3/1/2000March 1, 2001
(Robert J. Darnall)
*
________________________ Director 3/1/2000March 1, 2001
(John M. Deutch)
*
________________________ Director 3/1/2000March 1, 2001
(W. Y. Elisha)
*
________________________ Director 3/1/2000March 1, 2001
(Hanna H. Gray)
*
________________________ Director March 1, 2001
(James A. Johnson)
6444
Signatures Title Date
__________ _____ ____
*
________________________ Director 3/1/2000
(James A. Johnson)
*
________________________ Director 3/1/2000March 1, 2001
(William I. Miller)
*
________________________ Director 3/1/2000March 1, 2001
(William D. Ruckelshaus)
*
________________________ Director 3/1/2000
(H. B. Schacht)
*
________________________ Director 3/1/2000March 1, 2001
(F. A. Thomas)
*
________________________ Director 3/1/2000March 1, 2001
(J. Lawrence Wilson)
By /s/K. M. PatelR. Gerstle
________________
K. M. PatelR. Gerstle
Attorney-in-fact
6545
CUMMINS ENGINE COMPANY, INC.
EXHIBIT INDEX
____________________________
3(a) Restated Articles of Incorporation of Cummins Engine Company,
Inc., as amended (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended April 3, 1994, by
reference to Quarterly Report on Form 10-Q for the quarter
ended October 1, 1989 and by reference to Form 8-K dated
July 26, 1990).
3(b) By-laws of Cummins Engine Company, Inc., as amended and
restated effective as of August 12, 1994 (incorporated
by reference to Quarterly Report on Form 10-Q for the quarter
ended October 2, 1994).February 9, 1999 and filed herewith.
4(a) Amended and Restated Credit Agreement (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended March 29, 1998).
4(b) Rights Agreement, as amended (incorporated by reference to
Annual Report on Form 10-K for the year ended December 31,
1989, by reference to Form 8-K dated July 26, 1990, by
reference to Form 8 dated November 6, 1990, by reference to
Form 8-A/A dated November 1, 1993, and by reference to
Form 8-A/A dated January 12, 1994 and by reference to
Form 8-A/A dated July 15, 1996).
10(a) Target Bonus Plan (incorporated by reference to Annual Report
on Form 10-K for the year ended December 31, 1996).
10(b) Deferred Compensation Plan (incorporated by reference to
Annual Report on Form 10-K for the year ended December 31,
1994).
10(c) Key Employee Stock Investment Plan, as amended (incorporated
by reference to Quarterly Report on Form 10-Q for the quarter
ended July 3, 1994).
10(d) Supplemental Life Insurance and Deferred Income Plan
(incorporated by reference to Annual Report on Form 10-K for
the year ended December 31, 1996).
10(e) Financial Counseling Program, (incorporated by reference to
Quarterly Report on Form 10-Q for the quarter ended
July 3, 1994).
10(f) 1986 Stock Option Plan (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended March 30, 1986,
Exhibit 10(g)).
10(g) Deferred Compensation Plan for Non-Employee Directors, as
amended, effective as of April 15, 1994 (incorporated by
reference to Annual Report on Form 10-K for the year ended
December 31, 1994).
10(h) Key Executive Compensation Protection Plan (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended October 2, 1994).
10(i) Excess Benefit Retirement Plan, (incorporated by reference to
Quarterly Report on Form 10-Q for the quarter ended October 2,
1994).
10(j) Employee Stock Purchase Plan (incorporated by reference to
Annual Report on Form 10-K for the year ended December 31, 1998).
66
10(k) Retirement Plan for Non-Employee Directors of Cummins Engine
Company, Inc., as amended February 1997 (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended March 30, 1997). 46
10(l) Stock Unit Appreciation Plan effective October 1990
(incorporated by reference to Quarterly Report on Form 10-Q
for the quarter ended April 2, 1995, Exhibit 10(m)).
10(m) Three Year Performance Plan as amended February 1997
(incorporated by reference to Quarterly Report on Form 10-Q
for the quarter ended March 30, 1997).
10(n) Consulting arrangement with Harold Brown (incorporated by
reference to the description thereof provided in the Company's
definitive Proxy Statement).
10(o) 1992 Stock Incentive Plan (incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1995,
Exhibit 10(s)).
10(p) Restricted Stock Plan for Non-Employee Directors, as amended
February 11, 1997 (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended March 30, 1997).
10(q) Executive Retention Plan (incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1995,
Exhibit 10(u)).
10(r) Performance Share Plan, as amended January 1989 (incorporated
by reference to Quarterly Report on Form 10-Q for the quarter
ended April 2, 1995, Exhibit 10(j)).
10(s) Senior Executive Bonus Plan (incorporated by reference to
Annual Report on Form 10-K for the year ended December 31, 1996).
10(t) Senior Executive Three Year Performance Plan, as amended
February 11, 1997 (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended March 30, 1997).
21 Subsidiaries of the Registrant (filed herewith).
23 Consent of Arthur Andersen LLP (filed herewith).
24 Powers of Attorney (filed herewith).
27 Financial Data Schedule (filed herewith).