SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/AA2
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
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 $1.6 billion at January 29, 1999.
As of January 29, 1999, there were outstanding 42.0 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.
TABLE2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONTENTS
_________________
Part Item Description Page
____ ____ _________________________________________________ ____
IV 14RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
_______ _____________________________________________________________
OVERVIEW
________
Net sales were a record $6.3 billion in 1998, 11 percent higher than
in 1997, and 19 percent higher than in 1996. Nelson Industries, Inc.,
acquired in January 1998, and Cummins India Limited, which was first
consolidated in the fourth quarter of 1997, added sales of $428
million. Without these additional sales, net sales for 1998 would
have been $5.8 billion, an increase of 4 percent over 1997.
As disclosed in Notes 3 and 4 to the Consolidated Financial
Statements, the Company recorded charges in 1998 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 and the Department of Justice
regarding diesel engine emissions. Excluding these charges, earnings
before interest and taxes were $282 million in 1998, compared to $312
million in 1997 and $232 million in 1996. Including the charges, the
Company's net loss was $21 million or $(.55) per share in 1998. Net
earnings in 1997 were $212 million or $5.48 per share and $160 million
or $4.01 per share in 1996.
To maintain Cummins' technological leadership, the Company has been in
the process of upgrading or replacing engines across all product
lines. This new product development program peaked in 1998 with a
record six new engine introductions. While this investment in product
development offers competitive advantages, it resulted in a temporary
increase in product costs and a decrease in profitability in 1998.
RESULTS OF OPERATIONS
_____________________
Net Sales:
__________
In 1998, the Company achieved its seventh consecutive year of record
sales, totaling $6.3 billion. Revenues from sales of engines were 55
percent of the Company's net sales in 1998, with engine revenues and
unit shipments 8 percent and 9 percent higher, respectively, than in
1997. The Company shipped a record 403,300 engines in 1998, compared
to 369,800 in 1997 and 332,300 in 1996 as follows:
Unit shipments 1998 1997 1996
________________ _______ _______ _______
Midrange engines 287,400 264,300 237,400
Heavy-duty engines 106,100 94,900 85,000
High-horsepower engines 9,800 10,600 9,900
_______ _______ _______
403,300 369,800 332,300
_______ _______ _______
_______ _______ _______
Revenues from non-engine products, which were 45 percent of net sales
in 1998, were 16 percent higher than in 1997. The major changes
within non-engine revenues were in filtration, with the sales of
Nelson included from the date of acquisition by Cummins, and PowerCare
(which includes new parts and remanufactured engines and parts).
Sales of the remaining non-engine products, in the aggregate, were
essentially level with 1997.
The Company's sales for each of its key segments during the last three
years were:
$ Millions 1998 1997 1996
__________ ______ ______ ______
Automotive markets $2,928 $2,622 $2,447
Industrial markets 1,054 1,044 863
_____ _____ _____
Engine Business 3,982 3,666 3,310
Power Generation Business 1,230 1,205 1,213
Filtration Business & Other 1,054 754 734
______ ______ ______
$6,266 $5,625 $5,257
______ ______ ______
______ ______ ______
3
Cummins' engine business is the Company's largest business segment,
producing 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 $4.0 billion in 1998, a 9 percent increase over 1997 and
20 percent over 1996.
Sales of $2.9 billion in 1998 for automotive markets were 12 percent
higher than in 1997 and 20 percent higher than in 1996. In 1998,
heavy-duty truck engine revenues were 19 percent higher than in 1997
on a 20-percent increase in units. Within the North American heavy-
duty truck market, unit shipments were up 20 percent over 1997, and
Cummins continued to be the market leader with a 32-percent market
share. In 1998, the Company began limited production of the Signature
600, a new electronic engine designed to capture a larger share of
this market. International unit shipments for the heavy-duty market
in 1998 were 20 percent higher than in 1997 due to continued strong
demand in European and Mexican automotive markets.
Revenues from the sales of engines for medium-duty trucks in 1998 were
13 percent lower than in 1997 on a 12-percent decrease in units. In
North America, the Company was affected by Ford's relocation of its
production facilities, partially offset by increased sales in
international markets, primarily Brazil.
For the bus and light commercial vehicle market, engine revenues in
1998 were 26 percent higher than in 1997, on a 22-percent increase in
unit shipments. In January, Cummins jointly announced with
DaimlerChrysler a new, fully electronic engine -- the ISB -- for the
Dodge Ram pickup. The increase in 1998 was due primarily to record
unit shipments to DaimlerChrysler for the Dodge Ram pickup, which were
26 percent higher than in 1997 and 37 percent higher than in 1996, and
continued strong demand in bus markets.
In 1998, revenues from industrial markets were 1 percent higher than
in 1997. Revenues from sales of engines decreased, while parts sales
increased. Engine revenues in 1998 were 1 percent lower than in 1997
on an 8-percent increase in unit shipments. The variance between
revenues and units resulted from lower heavy-duty and high-horsepower
engine sales and a shift in product mix of midrange engine sales. The
increased level of shipments was due to continued strong construction
volumes in North America and Europe, partially offset by declines in
worldwide agricultural markets. Sales of engines and parts into the
marine market in 1998 were 6 percent lower than in 1997, due primarily
to the economic turmoil in Asia. Sales into the mining market were 21
percent lower than the prior year. In 1998, Cummins announced an
agreement with Komatsu, a joint venture partner, to develop a 3.3
liter engine targeted for the construction market, scheduled for
release in the second half of 1999.
Revenues of $1.2 billion in 1998 for power generation were 2 percent
higher than in 1997 and 1 percent higher than in 1996, with sales
continuing to be impacted by the economic conditions in Asia and lower
sales in Europe. Without the consolidation of Cummins India Limited,
power generation sales would have decreased 4 percent from 1997.
Sales of the Company's generator sets continued to reflect growth in
North America, which offset declines in demand for generator sets in
Asia. Engine sales to generator set assemblers were down 12 percent
from the prior year and sales of alternators were down 11 percent, due
primarily to lower demand in Asia and the Company's change in
strategy, emphasizing sales of generator sets. Sales of small
generator sets for recreational vehicles and other consumer markets
remained strong in North America, increasing 12 percent from 1997.
Sales of $1.1 billion in 1998 for filtration and other were 40 percent
higher than in 1997 and 44 percent higher than in 1996, with Nelson,
acquired in January 1998, contributing sales of $311 million.
International distributor sales increased 12 percent from 1997 due to
the consolidation of Cummins India Limited in the fourth quarter of
1997.
4
Net sales by marketing territory for each of the last three years
were:
$ Millions 1998 1997 1996
__________ ______ ______ ______
United States $3,595 $3,123 $2,925
Asia/Australia 806 898 868
Europe/CIS 791 796 759
Mexico/Latin America 468 364 260
Canada 459 318 313
Africa/Middle East 147 126 132
______ ______ ______
$6,266 $5,625 $5,257
______ ______ ______
______ ______ ______
In total, international markets accounted for 43 percent of the
Company's revenues in 1998. Europe and the CIS, representing 13
percent of the Company's sales in 1998, were 1 percent lower than in
1997 and 4 percent higher than in 1996. Sales to Canada, representing
7 percent of sales in 1998, were 44 percent higher than in 1997 due to
the acquisition of Nelson and the relocation of certain customer
production facilities. Asian and Australian markets, in total,
represented 13 percent of the Company's sales in 1998, as compared to
16 percent in 1997 and 17 percent in 1996. In Asia, sales to China
were essentially flat compared to 1997, while revenues in Korea
decreased 64 percent, Southeast Asia declined 47 percent and sales to
Japan and India were 19 percent below 1997 levels, excluding the
effect of Cummins India Limited consolidation.
Business in Mexico and Latin America, representing 8 percent of sales,
was 29 percent higher than in 1997, but began to decline in the latter
part of 1998. Sales to Latin America, including Brazil, represented 4
percent of the Company's sales in 1998 and were 28 percent higher than
in 1997. Brazil individually accounted for 2 percent of sales in 1998.
The recent economic events in Brazil have resulted in increased interest
rates and devalued currencies in the region. Many of the Company's
customers are sensitive to interest rates, which will affect sales
demand. The devaluation of local currencies also could have an impact
on operations, as certain of the Company's transactions are based in
Brazilian currency, and could result in currency gains or losses. Sales
to Mexico, representing approximately 4 percent of the Company's sales
in 1998, could also potentially be affected by the economic uncertainty
in Brazil. These events could reasonably be expected to have an adverse
effect on the Company's business, however, the extent cannot be
estimated reasonably based upon presently available information.
Gross Margin:
_____________
As disclosed in Note 3 to the Consolidated Financial Statements, the
Company recorded special charges of $92 million 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
$43 million charge attributable to base warranty costs resulted from
recent claim payment information which indicated engines in the field
were experiencing higher warranty costs than expected due to some
specific high-cost failures on certain engines. The estimate of base
warranty liability was adjusted to reflect the impact of all this new
information regarding the products' performance. The $35 million
charge attributable to extended warranty costs was the result of the
use of improved estimating techniques to determine the liability for
these costs. The special charges recorded in 1998 also include $14
million for inventory write-downs associated with the Company's
restructuring and exit activities. These write-downs reflect amounts
of inventory rendered excess or unusable due to the closing or
consolidation of facilities.
The Company's gross margin percentage before the product coverage and
inventory special charges was 21.4 percent in 1998, compared to 22.8
percent in 1997 and 22.5 percent in 1996. The Company's gross margin
percentage declined due to a temporary increase in product coverage
costs from ISB and ISC engines and higher new product costs
attributable to the production ramp-up of the ISB, ISC and Signature
600 engines. This decrease was partially offset by the benefit from
higher volume and pricing. The acquisition of Nelson and
consolidation of Cummins India Limited added $124 million. Gross
margin percentage after the special charges was 19.9 percent. Product
coverage costs, excluding the special charges, were 3.3 percent of net
sales in 1998, compared to 2.6 percent in 1997 and 2.7 percent in
1996.
5
Operating Expenses:
___________________
Selling and administrative expenses were 12.5 percent of net sales in
1998, compared to 13.2 percent in 1997 and 13.8 percent in 1996. On
the 11-percent sales increase in 1998, these expenses, which include
volume-variable components, were up less than 6 percent in absolute
dollars. Net benefits of the Company's cost reduction and
restructuring actions were partially offset by increases in expenses
associated with new product launches and information systems during
1998.
Research and engineering expenses were 4.1 percent of net sales in
1998, compared to 4.6 percent in 1997 and 4.8 percent in 1996. This
is a result of a reduction in technical spending and certain product
developments moving to the production stage.
The Company's losses from joint ventures and alliances were $30
million in 1998, compared to income of $10 million in 1997. The
difference was due primarily to the consolidation of Cummins India
Limited and losses at the Company's joint venture with Wartsila.
Cummins Wartsila SASis being affected by lower sales, primarily due to
decreased demand in Asia, and higher product coverage expenses.
In an effort to address the decline in the Company's business in Asia,
to leverage overhead costs for all operations and to improve joint
venture operating performance, the Company established a restructuring
program in 1998. As a result of this program, the Company recorded a
charge 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.
The charges for majority-owned operations included $38 million for
severance and related costs associated with workforce reductions in the
engine and power generation businesses, primarily for administrative
positions. The costs of these reductions were based on amounts pursuant
to benefit programs and contractual provisions or statutory requirements
at the affected operations. Approximately one-half of these 1,100
employees left the Company prior to December 31, 1998. An asset
impairment loss of $22 million, calculated according to the provisions of
SFAS No. 121, was recorded primarily for engine manufacturing equipment
to be disposed of upon the closure or consolidation of facilities or the
outsource of production. The recovery value for the equipment to be
disposed of was based on estimated liquidation value. The carrying value
of assets held for disposal and the effect on earnings from suspending
depreciation on such assets is immaterial. The equipment write-off of $22
million was for the following:
$ Millions
__________
N-14 engine component assets for which production
is scheduled to be outsourced in the first half of
1999 $12
Brazilian engine operation assets for which production
is planned to be discontinued by the end of 1999 4
Holset Germany operations assets to be disposed of
by the end of 1998 3
Other facility closures and consolidations to be
completed by the end of 1998 3
Facility consolidation and other costs of $17 million included lease
termination and facility exit costs of $10 million, product support
costs of $3 million, and litigation and other costs of $4 million. As
the restructuring consists primarily of the closing or consolidation
of smaller operations, the Company does not expect these actions to
have a material effect on future revenues.
The charges for restructuring joint venture operations totaled $23
million, the majority of which relates to actions being taken at the
Company's joint venture with Wartsila, which is part of the Company's
power generation business. The charges included $11 million for
employee severance and related benefits for approximately 1,200
people, $7 million for a tax asset impairment loss and $5 million for
other facility and equipment-related charges.
6
Approximately $25 million, including $12 million of payments related
to employee severance, has been charged to the restructuring
liabilities as of December 31, 1998. Of the total charges associated
with restructuring activities, cash outlays will approximate $60
million. The program is expected to be essentially complete by the
end of 1999 and yield approximately $50 million in annual savings at
completion. The annual savings of $50 million are expected to come
from lower depreciation of approximately $2 million and reduced
employee costs of approximately $48 million and relate to actions
within the engine business totaling $33 million and actions within the
power generation business of $17 million.
In 1998, the Company recorded a charge of $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, the Department of
Justice and the California Air Resources Board regarding diesel engine
emissions. In addition to the civil penalty, the agreement provides a
schedule for diesel engines to meet certain emission standards and
requires manufacturers to continue to invest in environmental projects
to further reduce oxides of nitrogen (NOx) emissions. The Company has
developed extensive corporate action plans to comply with all aspects
of the agreement. Additionally, three 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. A California State Court recently ruled in favor of
the Company. A recent action was just filed in the U.S. District
Court, the District of Columbia.
Year 2000:
__________
The Company continues to address the impact of the Year 2000 issue on
its businesses worldwide. This issue affects computer systems that
have date-sensitive programs that may not properly recognize the year
2000. With respect to the Company, this issue affects not only
computer systems but also machinery and equipment used in production
that may contain embedded computer technology.
Following a review and assessment of information systems and
technology used in its internal business operations and production,
the Company inventoried and identified those systems and products that
the Company believes may be vulnerable to Year 2000 failures and
established a program to address Year 2000 issues. The Company's Year
2000 efforts are being carried out by the Company's Year 2000 Team
under the leadership of the Director of Year 2000 Compliance. A Year
2000 program office has been established at each of the Company's
facilities and is overseen by a Year 2000 coordinator. The Year 2000
Team maintains a reporting structure to ensure that progress is made
and tracked on Year 2000 issues. In addition to internal resources,
the Company has retained external resources to assist with the
implementation of its Year 2000 program.
The Company's program consists of the remediation, replacement or
retirement of affected systems. Remediation is the alteration of a non-
compliant application to make it compliant, replacement is the
substitution of a non-compliant application with a compliant upgrade
or product and retirement is the discarding of non-compliant
applications that have been determined to be dispensable.
The Company completed a substantial portion of its remediation efforts
and testing in 1998, and expects to complete that process by the end
of the second quarter of 1999.
The Year 2000 Team will remain in place through January 1, 2000, and
beyond as needed. Their role is to ensure that compliance is
maintained once it is attained. The Company maintains contact with
its key suppliers to obtain information relating to the status of such
suppliers with respect to Year 2000 issues, placing particular
emphasis on determining the Year 2000 readiness of its critical
suppliers.
The Company expects to incur total expenditures of approximately $45
million in connection with its Year 2000 program and remediation
efforts. To date, the Company has incurred approximately $30 million
in costs relating to its Year 2000 efforts.
7
There can be no assurances that the systems or products of third
parties, which the Company relies upon, will be timely converted or
that a failure by a third party, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect
on the Company. This is particularly true because the Company
utilizes sole suppliers for certain products. The high level of skill
and expertise required to develop certain components makes it
impossible to change suppliers quickly. The failure of a sole
supplier may lead to a delay in production.
The Company continues to develop contingency plans in the event that
its operations are disrupted on January 1, 2000. Such contingency
plans include the stockpiling of certain business critical inventory,
and identifying alternative suppliers where possible.
The estimated time of completion of the Company's Year 2000 program
and compliance efforts, and the expenses related to the Company's Year
2000 compliance efforts are based upon management's best estimates,
which were based on assumptions of 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 personnel trained in this area and the ability to locate and
correct all relevant computer codes.
Other:
______
Interest expense of $71 million was $45 million higher than in 1997
and $53 million higher than in 1996 due to the increased level of
borrowings to support working capital on the higher sales level and to
complete the acquisition of Nelson. Other income decreased $13
million in 1998 as compared to the year-ago period, primarily due to
the Nelson goodwill amortization and lower royalty income.
Provision for Income Taxes:
___________________________
The Company's effective income tax rate normally is below the 35% U.S.
federal corporate tax rate. The lower tax rate is a result of tax
benefits on export sales and tax credits on research expenses. These
benefits in 1998 were more than offset by the unfavorable tax effects
of nondeductible losses in foreign joint ventures and nondeductible
EPA penalty and goodwill amortization. The combined effect was a 1998
income tax provision of $4 million.
CASH FLOW AND FINANCIAL CONDITION
_________________________________
Key elements of cash flows were:
$ Millions 1998 1997 1996
__________ ______ ______ ______
Net cash used in operating and
investing activities $(481) $(154) $ (66)
Net cash from financing activities 471 96 110
Effect of exchange rate changes on cash (1) (1) 4
_____ _____ _____
Net change in cash $ (11) $ (59) $ 48
_____ _____ _____
_____ _____ _____
During 1998, net cash used for operating and investing activities was
$481 million. The higher level of net cash requirements in 1998 was
due primarily to the acquisition of Nelson, planned capital
expenditures ($271 million in 1998, compared to $405 million in 1997
and $304 million in 1996) for investments in new products and for
working capital. Net working capital as a percent of sales was 12.8
percent in 1998, compared to 11.6 percent in 1997. Investments in
joint ventures and alliances of $22 million reflected the net effect
of capital contributions and cash generated by certain joint ventures.
8
Net cash provided from financing activities was $471 million in 1998.
As disclosed in Note 6, 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 December 1997. Net
proceeds were used to finance the acquisition of Nelson and pay down
other indebtedness outstanding at December 31, 1997. Based on the
Company's projected cash flow from operations and existing credit
facilities, management believes that sufficient liquidity is available
to meet anticipated capital and dividend requirements in the
foreseeable future.
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 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 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,
1998. 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% adverse movement in
foreign 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.
B. Interest Rates
The Company currently has in place an interest rate swap that
effectively converts fixed-rate debt into floating-rate debt. The
objective of the swap is to lower the cost of borrowed funds. A
sensitivity analysis assumed a hypothetical, instantaneous, 100 basis-
point parallel shift in the floating interest rate yield curve, after
which rates remained fixed at the new, higher level for a one-year
period. This change in the yield curve would correspond to a $2
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 response taken in response to these
changes.
C. Commodity Prices
The Company is exposed to fluctuations 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% 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
million for the annual reporting period. This amount excludes the
offsetting impact of decreases in commodity costs.
9
Forward-looking Statements
__________________________
This Management's Discussion and Analysis of Results of Operations and
Financial Condition and other sections of this Form 10-K contain
forward-looking statements that are based on current expectations,
estimates and projections about the industries in which Cummins
operates, management's beliefs and assumptions made by management.
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-
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 4
Signatures 32
PART IV
_______
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
________ _______________________________________________________________
Documentson page 10 for a list of the
financial statements filed as a part of this report:
1. Cummins Wartsila SASreport.
10
INDEX TO FINANCIAL STATEMENTS
_____________________________
Page
____
Responsibility for Financial Statements 11
Report of the Independent Public Accountants 11
Consolidated Statement of Earnings 12
Consolidated Statement of Financial Position 13
Consolidated Statement of Cash Flows 14
Consolidated Statement of Shareholders' Investment 15
Notes to Consolidated Financial Statements 16
Quarterly Financial Data 28
11
RESPONSIBILITY FOR FINANCIAL STATEMENTS
_______________________________________
Management is responsible for the years ended
December 31, 1998preparation of the Company's
consolidated financial statements and 1997 togetherall related information
appearing in this Form 10-K. The statements and notes have been
prepared in conformity with generally accepted accounting principles
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 Auditor's Report.
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 Wartsila SAS:
In compliance withEngine Company,
Inc.:
We have audited the assignment entrusted to us by youraccompanying consolidated statement of financial
position of Cummins Engine Company, Inc., (an Indiana corporation) and
subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of earnings, cash flows and shareholders'
annual general meeting, we hereby report to you,investment for each of the yearthree years in the period ended December
31, 1998, on:
- - the audit of the financial statements of Cummins Wartsila
reported in French Francs and prepared in accordance with French
GAAP. These include:
. a balance sheet
. a profit and loss statement
. Notes 1 to 12
. Schedules I to XIII
- - the audit of Schedule XIV a reconciliation to US Generally
Accepted Accounting Principles in accordance with SEC Item 17 of
Form 20-F.
- - the specific verifications and information required by law.1998. These financial statements have been approved byare the Boardresponsibility of Directors.the
Company's management. Our roleresponsibility is to express an opinion on
these financial statements based on our audit.
1. OPINION ON THE FINANCIAL STATEMENTSaudits.
We conducted our auditaudits in accordance with the professional standards
applied in France which essentially are similar to Generally
Accepted Accounting Standards.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 statementsstatement presentation. We
believe that our audit providesaudits provide a reasonable basis for our opinion.
In our opinion, the financial statements give a fair presentation ofreferred to above present
fairly, in all material respects, the company's financial position of Cummins
Engine Company, Inc., and its assets and liabilitiessubsidiaries as of December 31, 1998 and
of1997, and the results of itstheir operations and their cash flows for
each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois,
January 26, 1999.
12
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF EARNINGS
__________________________________
Millions, except per share amounts 1998 1997 1996
__________________________________ ______ ______ ______
Net sales $6,266 $5,625 $5,257
Cost of goods sold 4,925 4,345 4,072
Special charges 92 - -
______ ______ ______
Gross profit 1,249 1,280 1,185
Selling & administrative expenses 787 744 725
Research & engineering expenses 255 260 252
Net expense (income) from joint
ventures and alliances 30 (10) -
Interest expense 71 26 18
Other income, net (13) (26) (24)
Restructuring and other
non-recurring charges 125 - -
_____ _____ _____
Earnings (loss) before income taxes (6) 286 214
Provision for income taxes 4 74 54
Minority interest 11 - -
_____ _____ _____
Net earnings (loss) $ (21) $ 212 $ 160
_____ _____ _____
_____ _____ _____
Basic earnings (loss) per share $(.55) $5.55 $4.02
Diluted earnings (loss) per share (.55) 5.48 4.01
The accompanying notes are an integral part of this statement.
13
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
____________________________________________
Millions, except per share amounts December 31,
__________________________________ 1998 1997
______ ______
Assets
Current assets:
Cash and cash equivalents $ 38 $ 49
Receivables 833 771
Inventories 731 677
Other current assets 274 213
_____ _____
1,876 1,710
_____ _____
Investments and other assets:
Investments in joint ventures and alliances 136 204
Other assets 144 142
_____ _____
280 346
_____ _____
Property, plant and equipment:
Land and buildings 590 495
Machinery, equipment and fixtures 2,320 2,079
Construction in process 185 392
_____ _____
3,095 2,966
Less accumulated depreciation 1,424 1,434
_____ _____
1,671 1,532
_____ _____
Goodwill, net of amortization of $17 and $5 384 12
_____ _____
Other intangibles, deferred taxes and
deferred charges 331 165
______ ______
Total assets $4,542 $3,765
______ ______
______ ______
Liabilities and shareholders' investment
Current liabilities:
Loans payable $ 64 $ 90
Current maturities of long-term debt 26 42
Accounts payable 340 386
Accrued salaries and wages 99 87
Accrued product coverage & marketing expenses 209 120
Income taxes payable 13 18
Other accrued expenses 320 312
_____ _____
1,071 1,055
_____ _____
Long-term debt 1,137 522
_____ _____
Other liabilities 1,000 713
_____ _____
Minority interest 62 53
_____ _____
Shareholders' investment:
Common stock, $2.50 par value, 48.1
shares issued 120 120
Additional contributed capital 1,121 1,119
Retained earnings 648 715
Accumulated other comprehensive income (167) (70)
Common stock in treasury,at cost,6.1 & 6.0 shares (240) (245)
Common stock held in trust for employee benefit
plans, 3.6 and 3.7 shares (172) (175)
Unearned compensation (38) (42)
_____ _____
1,272 1,422
_____ _____
Total liabilities & shareholders' investment $4,542 $3,765
______ ______
______ ______
The accompanying notes are an integral part of this statement.
14
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
____________________________________
Millions 1998 1997 1996
________ ______ ______ ______
Cash flows from operating activities:
Net earnings (loss) $ (21) $ 212 $ 160
_____ _____ _____
Adjustments to reconcile net earnings (loss)
to net cash from operating activities:
Depreciation and amortization 199 158 149
Restructuring actions 110 (24) (42)
Equity in (earnings) losses of joint
ventures and alliances 38 (1) 11
Receivables (10) (80) (56)
Inventories (26) (65) (62)
Accounts payable and accrued expenses 56 (18) 28
Deferred income taxes (65) 22 17
Other (10) (4) (12)
____ ____ ____
Total adjustments 292 (12) 33
____ ____ ____
271 200 193
____ ____ ____
Cash flows from investing activities:
Property, plant and equipment:
Additions (271) (405) (304)
Disposals 7 21 26
Investments in joint ventures and alliances (22) (47) (5)
Acquisitions and dispositions of business
activities (468) 76 10
Other 2 1 14
____ ____ ____
(752) (354) (259)
____ ____ ____
Net cash used in operating and
investing activities (481) (154) (66)
____ ____ ____
Cash flows from financing activities:
Proceeds from borrowings 711 281 200
Payments on borrowings (161) (50) (47)
Net (payments) borrowings under credit
agreements (30) (12) 32
Repurchases of common stock (14) (75) (34)
Dividend payments (46) (45) (40)
Other 11 (3) (1)
____ ____ ____
471 96 110
____ ____ ____
Effect of exchange rate changes on cash (1) (1) 4
____ ____ ____
Net change in cash and cash equivalents (11) (59) 48
Cash & cash equivalents at beginning of year 49 108 60
____ ____ ____
Cash & cash equivalents at end of year $ 38 $ 49 $108
____ ____ ____
____ ____ ____
Cash payments during the year then endedfor:
Interest $ 56 $ 21 $ 16
Income taxes 73 42 40
The accompanying notes are an integral part of this statement.
15
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
__________________________________________________
Millions, except per share amounts 1998 1997 1996
__________________________________ ___________ __________ __________
Common stock:
Balance at beginning of year $ 120 $ 110 $ 110
Issued to trust for employee
benefit plans - 9 -
Other - 1 -
_____ _____ ____
Balance at end of year 120 120 110
_____ _____ ____
Additional contributed capital:
Balance at beginning of year 1,119 929 926
Issued to trust for employee
benefit plans - 171 -
Other 2 19 3
_____ _____ _____
Balance at end of year 1,121 1,119 929
_____ _____ _____
Retained earnings:
Balance at beginning of year 715 548 428
Net earnings (loss) (21) $(21) 212 $212 160 $160
___ ____ ___
Cash dividends (46) (45) (40)
____ ____ ____
Balance at end of year 648 715 548
____ ____ ____
Accumulated other comprehensive income:
Balance at beginning of year (70) (60) (95)
Foreign currency translation
adjustments (43) (21) 26
Minimum pension liability
adjustments (54) 12 9
Unrealized losses on securities - (1) -
___ ___ ___
Other comprehensive income (97) (97) (10) (10) 35 35
___ ___ ___ ___ __ ___
Comprehensive income $(118) $202 $195
____ ___ ___
____ ___ ___
Balance at end of year (167) (70) (60)
____ ___ ___
Common stock in treasury:
Balance at beginning of year (245) (169) (135)
Repurchased (14) (76) (34)
Issued 19 - -
_____ _____ _____
Balance at end of year (240) (245) (169)
_____ _____ _____
Common stock held in trust for
employee benefit plans:
Balance at beginning of year (175) - -
Issued - (180) -
Shares allocated to benefit plans 3 5 -
_____ _____ ______
Balance at end of year (172) (175) -
_____ _____ ______
Unearned compensation:
Balance at beginning of year (42) (46) (51)
Shares allocated to participants 4 4 5
______ ______ ______
Balance at end of year (38) (42) (46)
______ ______ ______
Shareholders' investment $1,272 $1,422 $1,312
______ ______ ______
______ ______ ______
Shares of stock
Common stock, $2.50 par value,
150.0 shares authorized
Balance at beginning of year 48.1 43.9 43.9
Shares issued - 4.2 -
____ ____ ____
Balance at end of year 48.1 48.1 43.9
____ ____ ____
____ ____ ____
Common stock in treasury
Balance at beginning of year 6.0 4.5 3.7
Shares repurchased .4 1.5 .8
Shares issued (.3) - -
___ ___ ___
Balance at end of year 6.1 6.0 4.5
___ ___ ___
___ ___ ___
Common stock held in trust for
employee benefit plans
Balance at beginning of year 3.7 - -
Shares issued - 3.8 -
Shares allocated to benefit plans (.1) (.1) -
___ ___ ___
Balance at end of year 3.6 3.7 -
___ ___ ____
___ ___ ____
The accompanying notes are an integral part of this statement.
16
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.
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 8 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.
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 $228 million in 1998, $250 million
in 1997 and $235 million in 1996.
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 time
of purchase.
Inventories: Inventories are generally stated at cost or net
realizable value. Approximately 25 percent of domestic inventories
(primarily heavy-duty and high-horsepower engines and engine parts)
are valued using the last-in, first-out (LIFO) cost method.
Inventories at December 31 were as follows:
$ Millions 1998 1997
__________ ____ ____
Finished products $400 $351
Work-in-process and raw materials 387 388
____ ____
Inventories at FIFO cost 787 739
Excess of FIFO over LIFO (56) (62)
____ ____
$731 $677
____ ____
____ ____
17
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.
Software: Internal and external software costs (excluding research,
reengineering and training) are capitalized and amortized generally
over 5 years. Effective January 1, 1998, the Company adopted SOP 98-1
on accounting for internal use software costs. Internal software
costs capitalized in 1998 in accordance with this new rule were $9
million. Capitalized software, net of amortization, was $75 million
at December 31, 1998 and $32 million at December 31, 1997.
Earnings Per Share: Effective January 1, 1997, the Company adopted
SFAS No. 128, a new accounting principles generally
acceptedrule on calculating earnings per share.
Under the new rule, 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 France.outstanding shares for EPS until
distributed from the trust. Years prior to 1997 have been restated to
reflect this new rule.
Net Weighted
Millions, except Earnings Average
per share amounts (Loss) Shares Per share
_________________ ________ ________ _________
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
____ ____ _____
____ ____ _____
1996
____
Basic $160 39.8 $4.02
Options - .1 _____
____ ____ _____
Diluted $160 39.9 $4.01
____ ____ _____
____ ____ _____
18
NOTE 2. ACQUISITION: In our opinion,January 1998, the reconciliation schedule
givesCompany completed the
acquisition of the stock of Nelson Industries, Inc., for $453 million.
Nelson, a filtration and exhaust systems manufacturer, was
consolidated from 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 presentationvalue at
the date of all significant adjustmentsacquisition. The purchase price in excess of net assets
will be 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. The product coverage special charges of $78 million included
$43 million primarily attributable to the recent experience of higher-
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 Company believed it was necessary to
make these special charges to accrue for such product coverage costs
expected to be consistent with US Generally Accepted Accounting Principles.
2. SPECIFIC VERIFICATIONS AND INFORMATION
Weincurred in the future on these engines currently in
the field. The special charges also performed the specific verifications required by law, in
accordanceincluded $14 million for
inventory write-downs associated with the professional standards applied in France.
We have no comment asCompany's restructuring and
exit activities. These write-downs relate to the fair presentation and the conformity
with the financial statementsamounts of the information given in the
management report of the Board of Directors, and in the documents
addressed to the shareholders with respect to the financial position
and the financial statements.
We communicate to you that,inventory
rendered excess or unusable due to the incurred losses, total equityclosing or consolidation of
facilities. The Company has committed to these facility closures and
consolidations as part of a plan to reduce costs and improve operating
performance.
NOTE 4. RESTRUCTURING AND OTHER NON-RECURRING CHARGES: In 1998, the
Company recorded charges of $125 million, comprised of $100 million
for costs to reduce the worldwide workforce, 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), the Department of Justice (DOJ)
and the California Air Resources Board (CARB) regarding diesel engine
emissions.
The major components of these charges are as follows:
$ Millions
__________
Restructuring of majority-owned operations:
Workforce reductions $ 38
Asset impairment loss 22
Facility consolidations and other 17
___
77
___
Restructuring of joint venture operations:
Workforce reductions 11
Tax asset impairment loss 7
Facility and equipment-related costs 5
___
23
___
EPA penalty 25
___
Total $125
____
____
The restructuring program was undertaken to address the decline in the
Company's business in Asia, to leverage overhead costs for all
operations and to improve joint venture operating performance.
The charges for majority-owned operations include $38 million for
severance and related costs associated with workforce reductions of
approximately 1,100 people. These reductions are in the engine and
power generation businesses and are primarily for administrative
positions. Costs for workforce reductions were based on amounts
pursuant to benefit programs and contractual provisions or statutory
requirements at the affected operations. Approximately one-half of
these employees left the Company prior to December 31, 1998.
The asset impairment loss, calculated according to the provisions of
SFAS 121, was recorded primarily for engine manufacturing equipment to
be disposed of upon the closure or consolidation of facilities or the
outsource of production. The recovery value for the equipment to be
disposed of was based on estimated liquidation value. The carrying
value of assets held for disposal and the effect on earnings from
suspending depreciation on such assets is immaterial.
Facility consolidation and other costs of $17 million include lease
termination and facility exit costs of $10 million, product support
costs of $3 million and litigation and other costs of $4 million. As
the restructuring consists primarily of the closing or consolidation
of smaller operations, the Company does not expect these actions to
have a material effect on future revenues.
19
The charges for restructuring joint venture operations totaled $23
million, the majority of which relates to actions being taken at the
Company's joint venture with Wartsila, which is part of the Company's
power generation business. The charges include $11 million for
employee severance and related benefits for approximately 1,200
people, $7 million for a tax asset impairment loss and $5 million for
other facility and equipment-related charges.
Approximately $25 million, primarily related to employee severance,
has been charged to the restructuring liabilities as of December 31,
1998. Of the total charges associated with restructuring activities,
cash outlays will approximate $60 million. The program is expected to
be essentially complete by the end of 1999 and yield approximately $50
million in annual savings at completion.
In addition to the civil penalty, the agreement with the EPA/DOJ/CARB
provides a schedule for diesel engines to meet certain emission
standards and requires manufacturers to continue to invest in
environmental projects to further reduce oxides of nitrogen (NOx)
emissions. The Company has become lower than halfdeveloped extensive corporate action plans
to comply with all aspects of the agreement. Additionally, three
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. A California
State Court recently ruled in favor of the Company. A recent action
was just filed in the U.S. District Court, the District of Columbia.
NOTE 5. INVESTMENTS IN JOINT VENTURES AND ALLIANCES: Investments in
joint ventures and alliances at December 31 were as follows:
$ Millions 1998 1997
__________ ____ ____
Consolidated Diesel $ 39 $ 32
Tata Cummins 22 16
Komatsu alliances 17 10
Chongqing Cummins 15 16
Behr America, Inc. 14 14
Dong Feng 8 7
Cummins Wartsila (6) 88
Other 27 21
____ ____
$136 $204
____ ____
____ ____
Summary balance sheet information for the joint ventures and alliances
was as follows:
December 31,
$ Millions 1998 1997
__________ ____ ____
Current assets $527 $447
Noncurrent assets 613 533
Current liabilities (406) (258)
Noncurrent liabilities (455) (305)
____ ____
Net assets $279 $417
____ ____
____ ____
Cummins' share capital$136 $204
____ ____
____ ____
The Company has guaranteed $79 million in outstanding debt of the
Cummins Wartsila joint venture as of December 31, 1998.
In accordanceconnection with article 241various 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 law from
July 24, 1966, you have to be convenedventures. Under
the agreement with Consolidated Diesel, Cummins' purchases were $535
million in an extraordinary
shareholders' meeting to be held before 4 months after the general
meeting approving the present financial statements to decide whether
to dissolve the Company. If the dissolution is not decided, we
remind you that the Company will have to restore its equity to a
level1998 and $538 million in 1997.
NOTE 6. LONG-TERM DEBT: Long-term debt at least equal to half of share capital by December 31 2001.
Neuilly-sur-Seine , June 29, 1999
_________________________________
BARBIER FRINAULT & ASSOCIES
Nicolas Job
CUMMINS WARTSILA SAS
BALANCE SHEET AS OFwas:
$ Millions 1998 1997
__________ ____ ____
7.125% debentures due 2028 $249 $ -
6.45% notes due 2005 224 -
Commercial paper 142 242
5.65% debentures due 2098, net
of unamortized discount of $40
(effective interest rate 7.48%) 125 -
6.25% notes due 2003 125 -
6.75% debentures due 2027 120 120
8.2% notes through 2003 79 96
Guaranteed notes of ESOP Trust due 2010 63 65
10.35%-10.65% medium-term notes through 1998 - 14
Other 36 27
_____ ____
Total 1,163 564
Current maturities (26) (42)
______ ____
Long-term debt $1,137 $522
______ ____
______ ____
Maturities of long-term debt for the five years subsequent to December
31, 1998 ____________________
(FRF thousands)
12/31/98 12/31/97
_________________________________ _________
Amort. &
ASSETS Gross Provisions Net Net
_________ __________ ________ _________
Intangible Fixed Assets
Research & development costs 6,150 2,050 4,100 0
Goodwill 12,760 7,018 5,742 6,380
Franchises Patents Licenses 418,957 28,867 390,090 347,133
Software 32,643 24,461 8,182 13,252
Intangible fixed assets
in-progress 916 - 916 500
________ ________ _______ _______
471,426 62,396 409,030 367,265
Tangible Fixed Assets
Land 925 - 925 925
Buildings, Fixtures, Fittings 149,870 62,834 87,036 83,166
Technical plantare $26 million, $26 million, $25 million, $27 million and
machinery 426,221 224,773 201,448 179,358
Other tangible fixed assets 39,123 24,756 14,367 15,949
Tangible fixed assets
in-progress 34,018 - 34,018 60,992
Advances and down payments 124 - 124 1,014
_______ _______ _______ _______
650,281 312,363 337,918 341,404
Long-Term Investments
Equity investments 6,699 4,424 2,275 2,150
Receivables from controlled
entities 1,374 - 1,374 1,374
Loans and other long-term
investments 20,312 147 20,165 19,655
_________ _______ _______ _______
28,385 4,571 23,814 23,179
_________ _______ _______ _______
Fixed Assets 1,150,092 379,330 770,762 731,848
_________ _______ _______ _______
Inventories and
Work-In-Progress
Raw materials and other
supplies 85,459 16,629 68,830 81,788
Supplies 3,751 83 3,668 3,121
Production work-in-progress 173,762 1,867 171,895 157,291
Semi-finished goods 221,877 41,639 180,238 202,841
Finished goods 30,375 0 30,375 0
_______ _______ _______ _______
515,224 60,218 455,006 445,041
Advances & down payments on
Orders 28,200 28,200 18,101
Receivables:
Receivables from sales 505,434 82,433 423,001 432,529
Other operating receivables 136,762 10,183 126,579 55,710
Liaison account 0
_______ ______ _______ _______
642,196 92,616 549,580 488,239
Marketable Securities 451 451 22,525
Cash-On-Hand 15,229 15,229 43,141
_________ _______ _________ _________
Current Assets 1,201,300 152,834 1,048,466 1,017,047
_________ _______ _________ _________
Prepaid Expenses 11,577 11,577 7,785
Charges to be spread over
several periods 4,613 4,613 0
Unrealized Foreign Exchange
Losses 8,091 8,091 2,657
_________ _______ _________ _________
Total Assets 2,375,673 532,164 1,843,509 1,759,337
_________ _______ _________ _________
12/31/98 12/31/97
______________________ _________
Partial
LIABILITIES Amounts Amounts Amounts
_________ _________ _________
Shareholders' Equity
Share capital 500,000 753,557
Legal reserve 7,674
Restricted reserve as of 3/31/98 129,521
L/T capital gain reserve 2,967 2,967
FNI reserve - Cote d'lvoire 5
Additional paid-in capital 58,670
Retained earnings (155,716)
CWEC merger clearing account 85,000
Income for the period (581,488) (119,669)
Investment subsidies 8,047 2,052
Cumulative translation adjustment 14,497 30,362
_________ _________
Total Shareholders' Equity 73,544 664,902
Conditional Advances 5,598
Provisions for legal disputes and
commitment 77,192 66,295
Provisions for restructuring and
retirement 276,722 132,578
_________ _________
Total Provisions 353,914 198,873
Liabilities:
Financial liabilities:
. Medium-term loans 844,000 74,667
. Short-term credits 311,050
. Miscellaneous loans and financial
liabilities 21,898 22,129
. Other loans 34,337 9,855
_________ _________
900,235 417,701
Down payments on orders in-progress 100,327 114,829
Operating liabilities:
. Trade payables & assimilated accounts 325,443 279,517
. Tax and social liabilities 45,835 47,917
. Other liabilities 30,408 23,199
_________ _________
401,686 350,633
Payables to fixed asset suppliers 4,110 4,726
_________ _________
Total Liabilities 1,406,358 887,889
Prepaid Revenue 1,499 1,047
Unrealized Gains on Foreign Exchange 2,596 6,626
_________ _________
Total Liabilities 1,843,509 1,759,337
_________ _________
CUMMINS WARTSILA SAS
INCOME STATEMENT
____________________
(FRF thousands)
1/1/98 to 1/1/97 to
12/31/98 12/31/97
__________ _________
Operating Revenues
Net revenues 955,348 1,205,713
Change in stored production 32,355 (23,994)
In-house production 75,972 13,256
Subsidies 2,114 2,886
Reversal of provisions and expense
transfers 179,941 165,231
Other revenues 2,484 11,820
_________ _________
Total 1,248,214 1,374,912
Operating Expenses
Purchases 626,352 656,777
Change in inventories 22,375 (24,777)
Other purchases & external charges 441,074 392,208
Taxes and assimilated payments 19,598 23,844
Payroll and associated costs 198,983 221,238
Social charges 83,419 90,707
Allocations:
Depreciation & amortization
of tangible and intangible
fixed assets 99,156 66,958
Depreciation of charges allocated
over several periods 1,153
Provisions for depreciation of assets 41,236 57,636
Provisions for losses & contingencies 89,414 118,797
Other charges 6,156 8,185
_________ _________
Total 1,628,916 1,611,573
_________ _________
1. Operating Income/Loss (380,702) (236,661)
_________ _________
Share of Income From Joint Ventures 4,378
Financial Income
Other interest & assimilated income 3,357 7,273
Reversal of provisions and expense
transfers 5,406 2,275
Positive exchange rate differences 14,961 41,878
_________ _________
Total 23,724 51,426
Financial Charges
Depreciation and provisions 9,094 5,406
Interest and assimilated charges 34,983 19,033
Negative exchange rate differences 18,335 23,486
_________ _________
Total 62,412 47,925
_________ _________
2. Financial Income/Loss (38,688) 3,501
_________ _________
3. Current Income Before Tax (419,390) (228,782)
_________ _________
"Exceptional" Revenues
On management transactions 882 206,642
On capital transactions 1,161 127,169
Share of investment subs. allocated
to income statement 97
Reversal of other provisions 15,292 61,881
_________ _________
Total 17,432 395,692
"Exceptional" Charges
On management transactions 7,478 58,844
On capital transactions 1,251 232,905
Restructuring expense 176,800 3,500
_________ _________
Total 185,529 295,249
_________ _________
4. Extraordinary Income/Loss (168,097) 100,443
_________ _________
5. Corporate Income Tax ( 5,999) ( 8,670)
_________ _________
6. Income/Loss (581,488) (119,669)
_________ _________
NOTES
_____
1. Activity
The twelve month financial period ended$141 million. At both December 31, 1998 shows
accounting revenuesand 1997, the weighted-
average interest rate on loans payable and current maturities of FRF 955.3long-
term debt approximated 7 percent.
20
The Company maintains a $500 million (Euro 145.6 million), comparedrevolving credit agreement,
maturing in 2003, under which there were no outstanding borrowings at
December 31, 1998 or 1997. The revolving credit agreement supports
the Company's commercial paper borrowings. 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 FRF 1,205.7finance the
acquisition of Nelson and pay down other indebtedness outstanding at
December 31, 1997. The Company also has other domestic and
international credit lines with approximately $193 million (Euro 183.8 million)available
at December 31, 1998.
In 1997, the Company issued $120 million of 6.75 percent debentures
that mature in 2027. Holders have a one-time option in 2007 to redeem
the debentures and Cummins has a recall right after ten years.
The Company has guaranteed the outstanding borrowings of its ESOP
Trust. The notes were refinanced in July 1998. 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 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 7. OTHER LIABILITIES: Other liabilities at December 31 included
the following:
$ Millions 1998 1997
__________ ____ ____
Accrued retirement & post-employment benefits $720 $487
Accrued product coverage & marketing expenses 156 111
Accrued compensation 38 34
Deferred income taxes 17 25
Other 69 56
______ ____
$1,000 $713
______ ____
______ ____
21
NOTE 8. 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 previous financial
period.
Movement In Net Sales
_____________________
(FRF millions)
12 Month Period
Year Net Sales
____ _________
1993 1,058
1994 1,012
1995 1,085
1996 1,191credit 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, 1998, and December 31, 1997, 1,206were $174
million and $257 million, respectively.
Interest Rates
The Company manages its exposure to interest rate fluctuations through
the use of interest rate swaps. Currently the Company has in place
one interest rate swap that effectively converts fixed-rate debt into
floating-rate debt. The objective of this swap is to lower the cost
of borrowed funds. The contract was established during October 1998
955
Direct exportswith a notional value of $225 million. There were FRF 580 million (Euro 88 million), i.e. 61%no interest rate
swap contracts outstanding at December 31, 1997.
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 revenues excluding taxes. Taking indirect exports into account,debt, including current maturities, at December 31, 1998,
approximated $1,214 million. The carrying value at that date was
$1,227 million. At December 31, 1997, the sharefair and carrying values of
revenues relating to foreign markets was FRF 603total debt, including current maturities, were $664 and $654 million,
(Euro 92 million), i.e. 63%respectively. The carrying values of revenues excluding taxes.
Direct exports 1998: FRF 580 million
_____________________________________
Percent of
Foreign Markets Export Sales
_______________ ____________
Europe 50%
Asia 24%
Americas 18%
Africa 7%
Other 1%
Orders in 1998 amounted to FRF 857 million (Euro 131 million). At the
end of the period, new orders were FRF 555 million (Euro 85 million).
278 megawatts were delivered in 1998.
Cummins Wartsila SAS's marketing network relies mainly on the parent
companies' distribution structures.
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 1997
financial period, with the exception of the recording of Research and
Development costs (see paragraph 2.2 below).
2.1. Foreign currency translation
Transactions in foreign currency 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.
. Valuation ofall other receivables and
liabilities approximated fair values.
NOTE 9. INCOME TAXES: The provision for income taxes was as follows:
$ Millions 1998 1997 1996
_____________ ____ ____ ____
Current:
U.S. Federal and state $16 $16 $22
Foreign 41 32 15
__ __ __
57 48 37
__ __ __
Deferred:
U.S. Federal and state (34) 26 -
Foreign (19) - 17
__ __ __
(53) 26 17
___ ___ __
$ 4 $74 $54
___ ___ ___
___ ___ ___
The Company expects to realize all of its tax assets, including the
use of all carryforwards, before any expiration.
Significant components of net deferred tax assets related to the
following tax effects of differences between financial and tax
reporting at December 31:
$ Millions 1998 1997
__________ ____ ____
Employee benefit plans $300 $266
Product coverage & marketing expenses 106 64
Restructuring charges 14 9
US plant & equipment (176) (139)
Net foreign taxable differences, primarily plant
and equipment 6 (23)
US Federal carryforward benefits:
General business tax credits, expiring 2009 to 2013 43 31
Minimum tax credits, no expiration 12 10
Other net differences 12 13
____ ____
$317 $231
____ ____
____ ____
Balance Sheet Classification
____________________________
Current assets $203 $129
Noncurrent assets 131 127
Noncurrent liabilities (17) (25)
____ ____
$317 $231
____ ____
____ ____
22
Earnings before income taxes and differences between the effective tax
rate and US Federal income tax rates were:
$ Millions 1998 1997 1996
__________ ____ ____ ____
Earnings (loss) before income taxes:
US $(21) $205 $134
Foreign 15 81 80
____ ____ ____
$ (6) $286 $214
____ ____ ____
____ ____ ____
Tax at 35 percent US statutory rate $ (2) $100 $ 75
Nondeductible EPA penalty 9 - -
Nondeductible goodwill amortization 3 - -
Research tax credits (10) (11) (6)
Foreign sales corporation benefits (9) (11) (11)
Differences in rates and taxability of
foreign currencysubsidiaries 15 (3) -
All other, net (2) (1) (4)
____ ____ ____
$ 4 $ 74 $(54)
____ ____ ____
____ ____ ____
NOTE 10. RETIREMENT PLANS: The Company has various contributory and
noncontributory pension plans covering substantially all employees.
Cummins common stock represented 9 percent of pension plan assets at
December 31, 1998.
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-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 $1,296 million, $1,251
million, and $999 million, respectively as of December 31, 1998:1998, and
$418 million, $381 million, and $339 million, respectively, as of
December 31, 1997. The assumed long-term rate of compensation
increase for salaried plans was 4.25% in 1998 and 5.00% in 1997.
Other significant assumptions for the Company's principal plans were:
Pension Other
Benefits Benefits
1998 1997 1998 1997
____ ____ ____ ____
Weighted-average discount rate 6.5% 7.5% 6.5% 7.5%
Long-term rate of return on plan assets 10.0% 10.0%
For measurement purposes a 7% annual increase in health care costs was
assumed for 1999, decreasing gradually to 4.25% in ten years and
remaining constant thereafter.
Increasing the health care cost trend rate by one percent would
increase the obligation by $42 million and annual expense by $3
million. Decreasing the health care cost trend rate by one percent
would decrease the obligation by $38 million and annual expense by $3
million.
23
The Company's net periodic benefit cost under these plans was as follows:
Pension Benefits Other Benefits
$ Millions 1998 1997 1996 1998 1997 1996
____________ ____ ____ ____ ____ ____ ____
Service cost $ 47 $ 41 $ 45 $ 8 $ 8 $ 9
Interest cost 123 115 104 40 41 36
Expected return on plan
assets (153) (134) (116) - Euro zone currencies: unrealized foreign exchange gains- -
Amortization of transition
asset (4) (9) (9) - - -
Other 12 13 16 4 9 10
____ ____ ____ ____ ____ ____
$ 25 $ 26 $ 40 $ 52 $ 58 $ 55
____ ____ ____ ____ ____ ____
____ ____ ____ ____ ____ ____
Pension Benefits Other Benefits
$ Millions 1998 1997 1998 1997
__________ ______ ______ ______ ______
Change in benefit obligation:
Benefit obligation at beginning of year $1,693 $1,491 $ 596 $ 545
Service cost 47 41 8 8
Interest cost 123 115 44 41
Plan participants' contributions 7 6 1 1
Amendments 2 4 - -
Experience (gain) loss 161 128 20 26
Benefits paid (123) (96) (29) (25)
Other (3) 4 - -
_____ _____ _____ _____
Benefit obligation at end of year $1,907 $1,693 $ 640 $ 596
_____ _____ _____ _____
_____ _____ _____ _____
Change in plan assets:
Fair value of plan assets at
beginning of year $1,905 $1,555 $ - $ -
Actual return on plan assets (129) 414 - -
Employer contribution 34 23 28 24
Plan participants' contributions 7 6 1 1
Benefits paid (123) (96) (29) (25)
Other (2) 3 - -
_____ _____ _____ _____
Fair value of plan assets at end of
year $1,692 $1,905 $ - $ -
_____ _____ _____ _____
_____ _____ _____ _____
Funded status $ (215) $ 212 $ (640) $ (596)
Unrecognized:
Experience (gain) loss (a) 172 (269) 80 62
Prior service cost (b) 55 63 (11) (12)
Transition asset (c) (7) (11) - -
_____ _____ _____ _____
Net amount recognized $ 5 $ (5) $ (571) $ (546)
_____ _____ _____ _____
_____ _____ _____ _____
Amounts recognized in the statement
of financial position:
Prepaid benefit cost $ 50 $ 9 $ - $ -
Accrued benefit liability (232) ( 14) (571) (546)
Intangible asset 104 - - -
Accumulated other comprehensive income 83 - - -
_____ _____ _____ _____
Net amount recognized $ 5 $ (5) $ (571) $ (546)
_____ _____ _____ _____
_____ _____ _____ _____
(a) The net deferred gain (loss) resulting from investments, other
experience and losses are recordedchanges in lineassumptions.
(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.
24
NOTE 11. COMMON STOCK: The Company increased its quarterly common
stock dividend from 25 cents per share to 27.5 cents, effective with
the Euro currency exchange
ratesdividend payment in June 1997.
In 1998, the Company repurchased 0.4 million shares on the open market
at an aggregate purchase price of $14 million. 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. The Company repurchased 0.8 million shares on the open
market at an aggregate purchase price of $34 million in 1996. All of
the acquired shares are held as set at December 31, 1998.
- Non-Euro zone currencies: valuation takes placecommon stock in line withtreasury.
In 1997, the last known rate beforeCompany 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 period end. These rates were
publishedstock held by this trust are not used in the Journal Official (Gazette)calculation of
January 1,
1999.earnings per share until allocated to a benefit plan.
NOTE 12. SHAREHOLDERS' RIGHTS PLAN: The assets and liabilitiesCompany has a Shareholders'
Rights Plan which it first adopted in 1986. The Rights Plan provides
that each share of the two sites in England are converted
using the exchange rate in effect on December 31, 1998.Company's common stock has associated with it a
stock purchase right. The income
statement is converted at the average monthly exchange rate.
2.2. Intangible fixed assets
The company has decided to book the costs of studies and trials
relating to specific markets and benefiting from advances whose
repayment is conditional, in Research and Development costs. These
costs are amortized overRights Plan becomes operative when 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 capitalized in 1997 for an amount of FRF 350
million, relating to know-how and technology in respectperson
or entity acquires 15 percent of the CW 200Company'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 13. 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 CW 170 motors, are amortized on a straight-line basis over a
periodprovisions of 15 years. The 1998 costs relatingthe stock incentive plan, up to know-how and technology
in respectone percent of these motors was capitalized for a sumthe
Company's outstanding shares of FRF 68.9
million, bringing the amount in intangible fixed assets to FRF 418.9
millioncommon stock at the end of the
period. These costs are amortized overpreceding year is available for issuance under the plan each year. At
December 31, 1998, there were no shares of common stock available for
grant and 1,234,875 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
Shares Options exercise price
_________ _____________ ________________
1,183,275 Dec. 31, 1995 38.45
394,150 Granted 40.13
(47,475) Exercised 32.43
(19,800 Cancelled 41.00
_________
1,510,150 Dec. 31, 1996 38.88
766,500 Granted 60.61
(294,025) Exercised 35.85
(61,775) Cancelled 42.66
_________
1,920,850 Dec. 31, 1997 46.08
703,660 Granted 45.34
(54,075) Exercised 36.36
(27,425) Cancelled 53.80
_________
2,543,010 Dec. 31, 1998 48.08
_________
_________
Options outstanding at December 31, 1998, have exercise prices between
$15.94 and $79.81 and a weighted-average remaining useful life of 8 years.
The weighted-average fair value of options granted was $18.61 per
share in 1998 and $14.94 per share in 1997. The fair value of each
option was estimated on the intangible fixed assets mentioned at the
beginningdate of this paragraph.
Software is amortized ongrant using 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
. Fixturesrisk-free interest
rate of 5.6 percent in 1998 and fittings6.4 percent in 1997, current annual
dividends, expected lives of 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 inventoryexpected volatility of 34
percent. A fair-value method of accounting for awards subsequent to
January 1, 1996, would have had no material effect on results of
operations.
NOTE 14. COMPREHENSIVE INCOME: Effective January 1, 1998, the
Company adopted SFAS No. 130, a new accounting rule which requires
companies to report comprehensive income. Comprehensive income
includes net income and all other nonowner changes in equity during a
period.
25
The tax effect on other comprehensive income is valuedas follows:
Total
Foreign Minimum Other
Currency Unrealized Pension Compre-
Translation Losses on Liability hensive
Adjustments Securities Adjustments Income
___________ __________ ___________ ______
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)
____ ___ ____ _____
____ ___ ____ _____
1996
____
Pre-tax amount $ 26 $ - $ 9 $ 35
Tax (expense) benefit - - - -
____ ___ ____ _____
Net amount $ 26 $ - $ 9 $ 35
____ ___ ____ _____
____ ___ ____ _____
The components of accumulated other comprehensive income are as follows:
Accum-
ulated
Foreign Minimum Other
Currency Unrealized Pension Compre-
Translation Losses on Liability hensive
Adjustments Securities Adjustments Income
___________ __________ ___________ ______
Balance at average weighted cost.
Work-in-progress is valued12/31/95 $ (73) $ - $(22) $ (95)
Change in 1996 26 - 9 35
_____ ___ ____ _____
Balance at total cost12/31/96 (47) - (13) (60)
Change in 1997 (21) (1) 12 (10)
_____ ___ ____ _____
Balance at 12/31/97 (68) (1) (1) (70)
Change in 1998 (43) - (54) (97)
_____ ___ ____ _____
Balance at 12/31/98 $(111) $(1) $(55) $(167)
_____ ___ ____ _____
_____ ___ ____ _____
NOTE 15. SEGMENTS OF THE BUSINESS: Effective for 1998 annual
reporting, the Company adopted SFAS No. 131 on segment reporting.
Under the provisions of production, which includes
both costthe new standard, Cummins has three reportable
segments: Engine, Power Generation, and Filtration and Other. The
engine segment produces engines and parts for sale to customers in
automotive and industrial markets. The engines are used in trucks of
material purchasedall sizes, buses and manufacturing costs. Manufacturing
costs include normal production costsrecreational vehicles, as well as depreciation charges.
Articles withvarious
industrial applications including construction, mining, agriculture,
marine, rail and military. The power generation segment is the
Company's power systems supplier, selling engines, generator sets and
alternators. The filtration and other segment includes sales of
filtration products and exhaust systems, turbochargers and company-
owned distributors.
The Company's reportable 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 low turnover are subject to sliding provisionswide range of
up to
90% of their value. Provisions are booked in work-in-progress accounts
if circumstances place the completioncustomers.
26
The accounting policies of the project in jeopardy.
A provision is set aside for inventories of raw materials and work-in-
progress relating to enginessegments are the same as those
described in the start-up phasesummary of production when
inventorysignificant accounting policies except
that the Company evaluates performance based on earnings before
interest and income taxes and on net assets, and, therefore, no
allocation of debt-related items and income taxes is made to the
individual segments.
Operating segment information is as follows:
Power Filtration
1998 Engine Generation and Other Total
____ ______ __________ ___________ ______
Net sales $3,982 $1,230 $1,054 $6,266
Depreciation & amortization 120 40 39 199
Income (expense) from joint
ventures and alliances (4) (25) (1) (30)
Earnings before interest,
income taxes and special
charges 136 25 121 282
Special charges 165 50 2 217
Earnings (loss) before
interest & 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
1996
____
Net sales $3,310 $1,213 $ 734 $5,257
Depreciation & amortization 97 31 21 149
Income (expense) from joint
ventures and alliances (2) 2 - -
Earnings before interest and
income taxes 160 14 58 232
Net assets 784 459 249 1,492
Investment in joint
ventures and alliances 114 89 4 207
Capital expenditures 242 44 18 304
27
Reconciliation to Consolidated Financial Statements:
1998 1997 1996
______ ______ ______
Earnings before interest & income
taxes for reportable segments $ 65 $ 312 $ 232
Interest expense 71 26 18
Income tax expense 4 74 54
Minority interest 11 - -
______ ______ ______
Net earnings (loss) $ (21) $ 212 $ 160
______ ______ ______
______ ______ ______
Net assets for reportable segments $2,260 $1,917 $1,492
Liabilities deducted in arriving
at net assets 1,926 1,583 1,586
Deferred tax assets not allocated
to segments 334 256 284
Debt-related costs exceednot allocated
to segments 22 9 7
______ ______ ______
Total assets $4,542 $3,765 $3,369
______ ______ ______
______ ______ ______
Summary geographic information is listed below:
$ Millions US UK Canada Other Total
__________ ______ ______ ______ ______ ______
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
1996
____
Net sales (a) $2,925 $ 348 $ 313 $1,671 $5,257
Long-lived assets $1,201 $ 200 $ - $ 211 $1,612
(a) Net sales are attributed to countries based on location of customer.
Revenues from 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 dispatchCompany's largest customer represent approximately
$1.1 billion of the enginesCompany's net sales in 1998. These sales are
included in the engine and the spare parts
. upon completion of work in relation to repairsfiltration 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 contract
takes place as work progresses at a pace agreed on by the
parties.
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.
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, 1998, the Extraordinary General Meeting of
Shareholders decided:
. to reduce the share capital from FRF 753,556,800 to FRF
500,000,000
. transform the company into a simplified joint-stock company
As ofother segments.
NOTE 16. GUARANTEES, COMMITMENTS AND OTHER CONTINGENCIES: At
December 31, 1998, the Company had the following minimum rental
commitments for noncancelable operating leases: $41 million in 1999,
$38 million in 2000, $30 million in 2001, $25 million in 2002, $21
million in 2003 and $46 million thereafter. Rental expense under
these leases approximated $70 million in 1998, $60 million in 1997 and
$55 million in 1996.
Commitments under outstanding letters of credit, guarantees and
contingencies at December 31, 1998, approximated $195 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
and uninsured 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 US and related
state environmental statutes and regulations. The Company denies
liability with respect to many of these legal actions and
environmental proceedings and 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.
28
NOTE 17. QUARTERLY FINANCIAL DATA (unaudited):
$ Millions, except First Second Third Fourth Full
per share capital was FRF 500,000,000. It
is composedamounts Quarter Quarter Quarter Quarter Year
__________________ _______ _______ _______ _______ ______
1998
____
Net sales $1,500 $1,635 $1,525 $1,606 $6,266
Gross profit 297 369 258 325 1,249
Net earnings (loss) 7 53 (110) 29 (21)
Basic earnings (loss) per share $ .18 $ 1.39 $(2.86) $ .75 $ (.55)
Diluted earnings (loss) per share .18 1.38 (2.86) .75 (.55)
1997
____
Net sales $1,304 $1,396 $1,366 $1,559 $5,625
Gross profit 286 324 309 361 1,280
Net earnings 41 53 54 64 212
Basic earnings per share $ 1.07 $ 1.40 $ 1.41 $ 1.69 $ 5.55
Diluted earnings per share 1.06 1.38 1.38 1.66 5.48
Earnings per share for the first three quarters of 5,000,000 shares, each1997 have been restated to
reflect the adoption of a parSFAS No. 128 as disclosed in Note 1.
NOTE 18. ADDITIONAL INFORMATION:
Long-Lived Assets: The Company evaluates the carrying value of FRF 100.
The capitalits
long-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 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 held in equal amounts by CUMMINS ENGINE COMPANY
Limited and WARTSILA NSD Corporation.
3.2. Reserve account
Followingrecorded to
reduce the decisioncarrying value of the Extraordinary General Meeting of
Cummins Wartsila of March 31, 1998, a reserve account was set up
for an amount of FRF 129,520,500 correspondingasset to the amount of estimatedexpected
discounted cash flows. This same policy is followed for goodwill.
Foreign Currency Gains and Losses: Total foreign currency
remeasurement and transaction losses for the first quarter of 1998.
This account can only be used either for offsetting future losses
or for being included in share capital.
3.3. Lossearnings were $5
million in 1998, $1 million in 1997 and $2 million in 1996.
Foreign Exchange Forward Contracts: The notional amounts 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.
Decisions concerning the continuation of the business activity will
be examined within the legal deadlines.
4. Comments relating to exceptional items
The most significant extraordinary items consist of:
(FRF millions)
Charges Rev.
_______ ______
. Release of provision for retirement indemnity
corresponding to employees made redundant 11.3
. Reversal of the excess provision for restructuring
charges following the shutdown of the melting
activity 2.8
. Penalties onforeign
exchange forward contracts 4.5
. Additional pensions 1.4
. Restructuring provision 176.8
. Research tax credit 5.8
The restructuring provision of FRF 176.8 million
is composed of:
. costs related to the planned redundancy
scheme 105.3
. write-off of tangible fixed assets 52.5
. costs relating to the transfer of activities 19.0
Costs related to the planned redundancy scheme have been computed based on
amounts pursuant to detailed benefit programs, contractual provisions or
statutory requirements for each category of employees. Planned workforce
reduction is approximately 320 people. None of these employees left the
company prior tooutstanding at December 31 1998.
5. Subsidies
The company receivedwere as follows:
Millions
________
Currency 1998 1997
________ ____ ____
British Pound $ 86 $ 90
French Franc 23 -
German Mark 19 27
Australian Dollar 13 103
Canadian Dollar 11 12
Hong Kong Dollar 8 -
Other 14 9
___ ___
$174 $241
____ ____
____ ____
Employee Stock Plans: A fair-value method of accounting for awards
subsequent to January 1, 1996, would have resulted in an investment subsidy for the acquisitionincrease in
compensation expense of new
equipment. A portion$8 million, net of this subsidy is reversed to income at the same
rate as depreciation relating to equipment.
Furthermore, the company receives Credit National loans known as
`article 90' loans for the financing of research programs. These loans
are only repaid if research results are successful. In the case of a
recognized failure or if commercial success has not been achieved
within a certain time, these loans are converted into subsidies.
6. Operating receivables
Provisions, calculated on a case by case basis, are set aside for
doubtful debts.
7. Research tax credit
Because of research and development undertaken($.20 per share) in
1998, the company
declared a$6 million, net of tax research credit($.14 per share) in 1997 and $2 million,
net of approximately FRF 5.8 million which
is recordedtax ($.05 per share) in the income statement as a tax revenue.
This credit may be set against the charge1996.
Investment in Joint Ventures and Alliances: Additional summary financial
information for tax during the next three
years. 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 8.8 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 millions (FRF)
(foreign currency)
__________________ ________________________
. USD 31 174
. DEM 16 55
. GBP 5 47
Other miscellaneous commitments appear in the table attached as an
appendix.
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.
I. MOVEMENT IN FIXED ASSETS - GROSS VALUE
__________________________________________
(FRF thousands)
Gross
Situation Value
As of As Of
1/1/98 Acquisitions Disposals 12/31/98
_________ ____________ _________ ________
Intangible Fixed Assets
_______________________
Research & Development Costs 6,150 6,150
Goodwill 12,760 12,760
Licenses 50 50
Software 30,905 1,738 32,643
Know-How W170 & W200 350,000 68,907 418,907
Intangible Fixed Assets
In-Progress 500 416 916
_______ _______ _______ _______
Total 394,215 77,211 471,426
_______ _______ _______ _______
Tangible Fixed Assets
_____________________
Land 925 925
Buildings Fixtures Fittings 136,478 16,249 2,858 149,869
Technical Plant & Machinery 372,841 80,557 27,176 426,222
Other Tangible Fixed Assets 36,867 3,790 1,534 39,123
Tangible Fixed Assets
In-Progress 60,992 (26,974) 34,018
Advances and Down Payments 1,014 ( 890) 124
_______ _______ _______ _______
Total 609,117 72,732 31,568 650,281
_______ _______ _______ _______
II. MOVEMENT OF DEPRECIATION AND AMORTIZATION CHARGES
______________________________________________________
(FRF thousands)
Situation Allocation Depr. of Situation
As of for the Disposed As Of
1/1/98 Period Assets 12/31/98
_________ __________ ________ ________
Intangible Fixed Assets
_______________________
Research & Development Costs 2,050 2,050
Goodwill 6,380 638 7,018
Licenses 5 5
Software 17,653 6,808 24,461
Know-How W170 & W200 2,917 25,944 28,861
_______ _______ _______ _______
Total 26,950 35,445 62,395
_______ _______ _______ _______
Tangible Fixed Assets
_____________________
Buildings Fixtures Fittings 53,312 10,393 872 62,833
Technical Plant & Machinery 193,482 47,057 15,765 224,774
Other Tangible Fixed Assets 20,919 4,977 1,140 24,756
_______ _______ _______ _______
Total 267,713 62,427 17,777 312,363
_______ _______ _______ _______
III. MOVEMENT OF ALL PROVISIONS
________________________________
(FRF thousands)
ALLOCATIONS
REVERSAL
_______________________________
_______________________________
SITUATION REGUL./ EXTRA-
EXTRA- SITUATION
01/01/98 MEDIUM SP OPERATIONS FINANCIAL ORDINARY
OPERATIONS FINANCIAL ORDINARY 12/31/98
_________ _________ __________ _________ ________
__________ _________ ________ ________
Equity Interests and
Assimilated Accounts 4,570
4,570
Inventories & work-in-progress 59,217 20,646
19,645 60,218
Doubtful debts France 9,349 192
184 9,357
Doubtful debts exports 24,505 1,487
105 235 25,652
Doubtful debts - other legal
disputes 27,534 19,897
7 47,424
Other receivables 10,533
350 10,183
Marketable securities
_______ ______ _______ _____ _______
_______ _____ ______ _______
Total Depreciation on Current
Assets: 131,138 42,222
19,941 585 152,834
_______ ______ _______ _____ _______
_______ _____ ______ _______
Provision for Legal Disputes
and Commitments
.Legal disputes 18,382 50 5,453
4,115 215 19,555
.Guarantees 35,728 14,120
2,246 47,602
.Other provisions 6,730
5,811 27 892
_______ ______ _______ _____ _______
_______ _____ ______ _______
Sub-total Contingency Provision 60,840 50 19,573
12,172 242 68,049
Social-Foreign Exchange Losses 5,455 9,094
5,406 9,143
Provision for Restructuring
and Retirement
.Work to be carried out 88,406 (8,033) 69,880
67,642 82,611
.Provision for retirement
indemnities 40,672
12,396 11,265 17,011
.Provision for 1998 planned
redundancy scheme 176,800
176,800
.Other provisions 3,500
3,200 300
_______ ______ _______ _____ _______
_______ _____ ______ _______
Sub-total Provision for Losses 132,578 (8,083) 69,880 176,800
80,038 14,465 276,722
_______ ______ _______ _____ _______
_______ _____ ______ _______
Total Provisions 198,873 (7,983) 89,453 9,094 176,800
92,210 5,406 14,707 353,914
_______ ______ _______ _____ _______
_______ _____ ______ _______
334,581 (7,983) 131,675 9,094 176,800
112,151 5,406 15,292 511,318
_______ ______ _______ _____ _______
_______ _____ ______ _______
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 18,558 18,558
Current Assets Receivables
Trade receivables and
assimilated accounts
France
Affiliated companies 31,091 31,091
Other receivables 107,373 107,373 24,696
Commercial papers 27,022 27,022
_______ _______ _______ _______
Total France 165,486 165,486 24,696
_______ ________ _______ _______
Export
Affiliated companies 542 146,069 146,611 6,877
Other receivables 587 192,734 193,321 50,860
Commercial papers 15 15
_______ _______ _______ _______
Total Export 1,129 338,818 339,947 57,737
_______ ________ _______ _______
Total Receivables 1,129 504,304 505,433 82,433
_______ ________ _______ _______
Other Receivables
Affiliated companies 55,482 55,482
Others 14,467 66,813 81,280 10,183
_______ ________ _______ _______
Total Other Receivables 14,467 122,295 136,762 10,183
_______ ________ _______ _______
V. FINANCIAL LIABILITIES
_________________________
(FRF thousands)
1 <
MATURITY MATURITY MATURITY
DATE DATE DATE
< 1 YEAR < 5 YEARS > 5 YEARS TOTAL
________ _________ __________ _______
Medium-Term Loans 64,000 780,000 844,000
Other Loans 16,874 3,051 9,300 29,225
______ _______ _____ _______
Total 80,874 783,051 9,300 873,225
VI. INCOME STATEMENT (SPECIAL FORMAT)
______________________________________
(FRF thousands)
12/31/98 12/31/97
_________ _________
Production Sold 955,349 1,205,713
Change in inventory of finished goods & WIP 32,355 (23,994)
Self-created fixed assets 75,971 13,256
_________ _________
Total Production: 1,063,675 1,194,975
Purchases adj. for changes in inventories (878,092) (896,643)
Other external charges (149,478) (109,307)
Change in provision for losses ( 11,929) ( 6,744)
_________ _________
Value Added: 24,176 182,281
Operating subsidies 2,114 2,886
Taxes and assimilated payments (19,414) (23,763)
Payroll charges (277,028) (308,040)
_________ _________
Operating Cash Flow: (270,152) (146,636)
Depreciation and amortization charges (100,308) ( 66,958)
Change in provision on current assets ( 21,295) ( 22,698)
Change in contingency provision ( 4,733) ( 4,004)
Other revenues 2,483 11,820
Other charges ( 6,156) ( 8,185)
_________ _________
Operating Income: (400,161) (236,661)
Share of income from joint ventures 0 4,378
Financial income 23,724 51,426
Financial charges (62,411) ( 47,925)
_________ _________
Current Income: (438,848) (228,782)
"Exceptional" revenue (141,168) 265,022
"Exceptional" charges ( 7,478) ( 58,845)
_________ _________
Income Before Tax: (587,494) ( 22,605)
Corporate income tax 5,999 8,670
Income on disposal of fixed asset items 7 (105,734)
_________ _________
Net Accounting Income: (581,488) (119,669)
_________ _________
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 94,643 94,643
Lease purchase commitments 2,663 2,663
_______ _______ _______
Total 97,306 97,306
_______ _______ _______
Commitments received
Guarantees received from suppliers 5,679 5,679
Guarantees on lines of credit 800,000 800,000
_______ _______ _______
Total 805,679 800,000 5,679
_______ _______ _______
Reciprocal commitments
Sale of foreign currency futures 174,278 174,278
Purchase of foreign currency futures 102,657 102,657
_______ _______ _______
Total 276,935 276,935
_______ _______ _______
*sales and purchases of foreign currency are shown in the appendix.
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)
1994 1995 1996
1997 1998
_____________ _____________
_____________ _____________ ____________
1. Financial Situation at Period End
____________________________________
a. Share capital 150,000,000 150,000,000
150,000,000 753,556,800 500,000,000
b. Number of existing ordinary shares 1,500,000 1,500,000
1,500,000 7,535,568 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 1,012,128,978 1,085,450,627
1,191,058,795 1,205,712,690 955,348,271
b. Income before tax, *depreciation &
provisions (79,253,376) 257,827,072
17,971,164 (74,413,761) (297,331,650)
c. Income tax 100,000 100,000
100,000 100,000 150,000
d. Income after tax, depreciation &
provisions (66,662,423) 25,686,089
10,356,903 (119,669,536) (581,488,331)
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 (52.90) 171.82 11.91
(9.89) (59.50)
b. Income after tax, depreciation
and provisions (44.44) 17.12 6.90
(15.88) (116.30)
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 998 669
727 1,049 1,004
b. Payroll 196,404,316 144,694,599
133,506,549 221,238,494 198,983,384
c. Social charges & assimilated amounts
(social security, & social works),etc. 75,940,353 60,054,014
60,484,248 90,707,469 83,418,514
___________ ___________
___________ ___________ ___________
*Income before tax,depreciation,provisions
and cancellation of receivables (79,253,376) 257,827,072
17,971,164 (74,413,761) (297,331,650)
___________ ___________
___________ ___________ ____________
IX - INFORMATION ON PURCHASE LEASE
AGREEMENTS AS OF 12/31/98
____________________________________________________________
(FRF thousands)
BALANCE SHEET
LEASED FIXED ASSETS
INCLUDING LEASED FIXED ASSETS
___________________________________________________________________________________
________________________________
INITIAL DEPRECIATION CHARGES
GROSS
BALANCE SHEET ITEM COST (1) OF PERIOD (2) ACCUMULATED (2) NET VALUE
VALUE DEPRECIATION NET VALUE
__________________ ________ _____________ _______________ _________
_______ ____________ _________
Land
925 925
Buildings 3,545 142 1,135 2,410
153,415 63,968 89,447
Technical plant,
equipment and machinery
426,221 224,773 201,448
Other fixed assets
39,123 24,756 14,367
Fixed assets in-progress
34,018 34,018
Adv & down payments on orders
124 124
_____ ___ _____ _____
_______ _______ _______
TOTALS 3,545 142 1,135 2,410
653,826 313,497 340,329
_____ ___ _____ _____
_______ _______ _______
(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 1 TO 5
> 5 PURCHASE
BALANCE SHEET ITEM PERIOD ACCUMULATED < 1 YEAR YEARS
YEARS TOTAL DUE PRICE (1)
__________________ ________ _____________ _______________ _________
_______ ____________ _________
Land
Buildings 367 3,069 367 1,774
396 2,537 126
Technical plant,
equipment and machinery
Other fixed assets
Fixed assets in-progress
___ _____ ___ _____
___ _____ ___
TOTALS 367 3,069 367 1,774
396 2,537 126
___ _____ ___ _____
___ _____ ___
(1) According to the contract.
X - INFORMATION RELATING TO SUBSIDIARIES
AND EQUITY INTEREST
___________________________________________________________
(FRF thousands)
LOANS
AND AMOUNT OF
ADVANCES DEPOSITS/ DIVIDENDS
OTHER SHARE OF ACCOUNTING VALUE
GRANTED BY GUARANTEES 1998 RECEIVED
SHARE CAPITAL OF SHARES HELD CW
NOT YET PROVIDED REVENUES INCOME BY CW
CAPITAL CAPITAL HELD (%) GROSS NET PAID
BACK BY CW (EXCL.TAXES) 1998 In 1998
_________ _________ _______ _________ _________
_________ __________ ____________ _______ _______
A. Detailed information
on equity interests
1) Subsidiary (at least
50% of capital held)
Cummins Wartsila ACO 1,446,000 940,215 99.99 3,071,100 2,050,426
1,553,577 0 14,646,281 168,953 0
Cummins Wartsila West
Africa 100,000 (430,524) 100.00 100,000 100,000
300,000 0 11,144,795 434,252 0
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 3,378,255 0
9,550,000 0 0 (1)
b) Foreign subsidiarie 0
0 0
2) Equity interests not
covered in paragraph A
a) in French
companies 25,000 0
0 0 (2)
b) in Foreign
companies 0
0 0
1) SACM ROUBAIX : 100% depreciated
2) LEBOCEY : 100% depreciated
XI. DEFERRED AND CONTINGENT TAX
LIABILITY
__________________________________________
(FRF thousands)
Situation at the beginning of the
period Movements of the period
___________________________________
________________________ _______________________
Amount of Deferred taxation
Contingent taxation
Item Receivables Liabilities
Receivables Liabilities Increase 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 60,368
22,137 15,857
Loss carry-forwards 155,358 56,970
170,149
Deferred depreciation 153,341 56,230
77,700
Provision for paid leave 15,877 5,822
613
Provision for exchange rate losses 5,406 1,982
3,688
Contingent tax liability (FRF): 2,010 737
775
Provision for retirement indemnities 40,672 14,914
Amortization of goodwill 6,380
2,339 638 23,661
_______ _______
______ ___ _______ ______
Total 442,379 136,655
24,476 703 252,175 40,906
Balance of deferred taxation 136,655
Balance of contingent taxation
23,773
Situation at the end of the
period
___________________________________
________________________
Amount of Deferred taxation
Contingent taxation
Item Receivables Liabilities
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
94
Long-term capital losses 44,511
16,322
Loss carry-forwards 325,507 119,363
Deferred depreciation 231,041 84,723
Provision for paid leave 15,264 5,597
Provision for exchange rate losses 9,094 3,335
Contingent tax liability (FRF): 1,235 453
Provision for retirement indemnities 17,011 6,238
Amortization of goodwill 7,018
2,574
_______ _______
______ ___
Total 653,648 219,709
18,896 703
Balance of deferred taxation 219,709
Balance of contingent taxation
18,193
N.B.: Corporate income tax rate at the beginning and end of the period: 36.67%
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 1,192 1,192
Trade receivables and assimilated
accounts 177,702 6,877 170,825
Other receivables 55,482 55,482
2 - LIABILITIES
_______________
Equity loan
Other cash advances 587
Other loans 406
Advances on orders-in-progress 20,093
Trade payables and assimilated
accounts 85,206
Other liabilities 5,095
Financial revenue
Financial charges 8,872
Affiliated companies:
Cummins
Cummins Wartsila West Africa
Cummins Wartsila ACO
Cummins Wartsila Moteur S.A.
Wartsila (Consolidated Group)
Metra Finance
XIII - BREAKDOWN OF WORKFORCE -
SITE/SECTOR
___________________________________________
MULHOUSE SURGERES NEUILLY COURBEVOIE
VENISSIEUX GEMENOS UK TOTAL
________ ________ _______ __________
__________ _______ ________ _______
Workers 217 48
265
Fitters 35 13 4
52
Middle Management 268 138 10 9
4 429
Executives 174 58 6 2
1 241
Apprentices
UK
17 17
12/31/98 694 257 20 11
5 17 1,004
12/31/97 782 221 1 21 12
6 6 1,049
XIV RECONCILIATION TO US GAAP
_____________________________
In accordance with requests from Cummins Group, a reconciliation to US
GAAP is presented below:
XIV.1 Reconciliation of net result
FRF `000
Note 1998
______ _________
Net statutory result (581,488)
Deferred taxation XIV.3 28,502
Assets not capitalized in US GAAP XIV.4a 1,114
Adjustment of depreciation period: XIV.4b 1,355
equipment
R&D costs capitalized in French XIV.4c ( 4,516)
accounts
R&D costs `know how' capitalized in XIV.4c ( 42,963)
French Accounts
Expenses spread for tax purposes XIV.4e ( 4,613)
Unrealized exchange gains XIV.5 ( 4,030)
_________
Net result US GAAP (606,639)
_________
XIV.2 Reconciliation of equity
FRF `000
Note 1998
______ _________
Net equity statutory 73,544
Deferred taxation XIV.3 84,561
Assets not capitalized in US GAAP XIV.4a (3,876)
Adjustment of depreciation period: XIV.4b 6,292
equipment
R&D costs capitalized in French XIV.4c ( 5,016)
accounts
R&D costs `know how' capitalized in XIV.4c (390,046)
French Accounts
Expenses spread for tax purposes XIV.4e ( 4,613)
Unrealized exchange gains XIV.5 2,596
_________
Net equity US GAAP (236,558)
_________
XIV.3 Deferred taxation
In accordance with french accounting regulation, no deferred taxation has
been recognised in French accounts.
In US GAAP, only tax losses carried forward having no expiry date have been
capitalized using the enacted tax rate (36.6%)
XIV.4 Adjustment on assets
In accordance with accounting policies used in the Cummins Group,
adjustments have been made on fixed assets to revise the economic useful
lives of some significant assets.
Most significant adjustments are as follows:
a) Some assets, having a net book value of KFF 3,876 should have been
expensed upon purchase in accordance with Group accounting policy.
Net assets and net profit (depreciation charge)are adjusted
accordingly.
b) Some equipment are depreciated in statutory accounts over a 10 year
period (tax rates). Economic useful lives of these assets have been
estimated by management to be 20 years. Net assets and net profit
(depreciation charge) are adjusted accordingly.
c) Research and development should be expensed as incurred. For tax
purposes, and in accordance with French accounting rules, such costs
can be capitalised under some circumstances and amortized. The R&D
expenses of Cummins Wartsila have been reversed back to P/L.
d) For tax purposes, some expenses can be capitalised and amortized over
a maximum of 5 years. All these expenses have been reversed back to
P/L.
No deferred taxation is recorded on these items due to immateriality.
XIV.5. Unrealized exchange gains
In accordance with French regulation, unrealized exchange gains are kept
in the balance sheet while unrealized exchange losses are provided for.
In accordance with US GAAP, assets and liabilities are valued at market
value using year-end exchange rates. Unrealized exchange gains or losses
are recorded as profit or losses.
XIV.6 Statement of comprehensive income
1998
_________
Net income (US GAAP) (606,639)
Foreign currency translation adjustments,
net of nil deferred taxation ( 15,865)
_________
Comprehensive income (US GAAP) (622,504)
_________
XIV.7 Cash flow statement (US GAAP)
In accordance with French accounting regulation, no cash flows statement
needs to be presented. The cash flow for Cummins Wartsila in 1998 isalliances was as follows:
Year Ended December 31
$Millions 1998 _________________
Operating activities1997 1996
_________ ______ ______ ______
Net sales $1,245 $1,307 $1,328
Gross profit 25 111 84
Net earnings (loss) (105) 5 3
Cummins' share (52) 2 2
29
Other Income: The major components of Other Income, Net include the
following:
$ Millions 1998 1997 1996
__________ ____ ____ ____
Goodwill amortization $ 12 $ 2 $ 2
Interest income (9) (5) (11)
Gain on sale of businesses (7) (13) (8)
Rental income (6) (3) -
Royalty income (5) (12) (6)
Foreign currency losses 5 1 2
Gain on sale of building - - (8)
Distribution system support - - 7
Other (3) 4 (2)
____ ____ ____
Total $(13) $(26) $(24)
____ ____ ____
____ ____ ____
Restructuring and Other Non-Recurring Charges: Activity in the major
components of these charges was as follows:
Original Charges Balance
$ Millions Provision 1998 Dec. 31, 1998
__________ _________ _______ _____________
Restructuring of majority-
owned operations:
Workforce reductions $ 38 $(12) $ 26
Asset impairment loss (US GAAP (606,639)
Depreciation & amoirtization of property, plant
and equipment (US GAAP) 68,693
Change in provisions (except restructuring) ( 63)
Provision for restructuring 176,800
Other non cash profits 4,531
Increase (decrease) in cash from:
accounts receivable22 - 22
Facility consolidations
and other assets (119,764)
inventories ( 21,065)
accounts payable17 (8) 9
____ ____ ____
77 (20) 57
____ ____ ____
Restructuring of joint
venture operations:
Workforce reductions 11 - 11
Tax asset impairment loss 7 - 7
Facility and accruals 38,571
________
Net cash used in operating aactivities (458,936)
________
Investingequipment-
related costs 5 - 5
____ ____ ____
23 - 23
____ ____ ____
Inventory write-downs
associated with exit
activities Purchase of property, plant and equipment ( 75,086)
________
Net cash used in investing activities ( 75,086)
________
Financing activities
Change in interest bearing current accounts (286,799)
Change in long term debt (external) 769,333
________
Net cash from financing activities 482,534
________
Effect of exchange rate on cash and cash equivalent 1,502
________
Net increase (decrease) in cash and cash equivalent ( 49,986)
________
Cash and cash equivalent, beginning of period 65,666
Cash and cash equivalent, end of period 15,680
SIGNATURES
__________
Pursuant to the requirements of Section 13 or 15(d)14 (5) 9
____ ____ ____
Total $114 $(25) $ 89
____ ____ ____
____ ____ ____
The remaining one-half of the Securities
Exchange Act of 1934, the Registrant has duly caused this reportemployees to be signed on its behalf bysevered related to these
actions are expected to be terminated at various dates during 1999.
The tax asset impairment loss relates to a write-down of the
undersigned, thereunto duly authorized.
CUMMINS ENGINE COMPANY, INC.
By /s/K. M. Patel By /s/R. J. Mills
________________________ _________________
K. M. Patel R. J. Mills
Vice Presidentinvestment in the Cummins Wartsila joint venture in an amount equal to
certain deferred taxes previously recorded for losses of the joint
venture. The Company had been adjusting the investment in the joint
venture to reflect deferred taxes associated with net operating losses
for the venture. Upon review of the restructuring plan and Chief Vice President -
Financial Officer Corporate Controller
(Principal Financial (Principal Accounting
Officer) Officer)
Date: June 30, 1999future
operating results, it was determined that certain of the associated
deferred tax assets for this joint venture are less likely to be
recoverable.