UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DCD.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
CUMMINS ENGINE COMPANY, INC.
____________________________
For the Quarter Ended SeptemberMarch 26, 19992000 Commission File Number 1-4949
________________________________ ______
Indiana 35-0257090
_______ __________
(State or Other Jurisdiction of (IRS(I.R.S. Employer Identification No.)
Incorporation or Organization)
500 Jackson Street, Box 3005
____________________________
Columbus, Indiana 47202-3005
_________________ __________
(Address of Principal Executive Offices) (Zip Code)
812-377-5000
____________
(Registrant's Telephone Number)
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 proceeding 12 months and (2) has been
subject to such filing requirements for the past 90 days:
Yes [x]
No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date:
As of SeptemberMarch 26, 1999,2000, the number of shares outstanding of the
registrant's only class of common stock was 41.441.5 million.
2
TABLE OF CONTENTS
_________________
Page No.
________
PART I. FINANCIAL INFORMATION
______________________________
Item 1. Financial Statements
Consolidated Statement of Earnings for the ThirdFirst 3
Quarter Ended March 26, 2000 and Nine Months Ended September 26,March 28, 1999
and September 27, 1998
Consolidated Statement of Financial Position at 4
SeptemberMarch 26, 19992000 and December 31, 19981999
Consolidated Statement of Cash Flows for the NineFirst 5
MonthsQuarter Ended SeptemberMarch 26, 19992000 and September 27, 1998March 28, 1999
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of 9
Operations, Cash Flow and Financial Condition
PART II. OTHER INFORMATION
___________________________
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 1412
Index to Exhibits 1514
3
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF EARNINGS
FOR THE THIRD QUARTER AND NINE MONTHS
ENDED SEPTEMBER 26, 1999 AND SEPTEMBER 27, 1998
_______________________________________________
Unaudited
_________
Third__________________________________
First Quarter Nine MonthsEnded
Millions, except per share amounts 1999 1998 1999 19983/26/2000 3/28/99
__________________________________ ______ ______ ______ _______________ _______
Net sales $1,631 $1,525 $4,803 $4,660$1,648 $1,505
Cost of goods sold 1,270 1,218 3,770 3,644
Special charges - 49 - 92
______ ______1,313 1,204
______ ______
Gross profit 361 258 1,033 924335 301
Selling and& administrative expenses 192 191 570 592194 178
Research and& engineering expenses 67 61 181 19359 54
Net (income) expense from joint ventures
and alliances 8 8 20 18(1) 7
Interest expense 18 17 56 5219 19
Other expense, (income), net 3 (1) 13 ( 8)
Restructuring and other non-recurring
charges - 125 - 125
_____2 7
______ _____ ______
Earnings (loss) before income taxes 73 (143) 193 (48)62 36
Provision (benefit) for income taxes 19 ( 35) 54 (7)17 10
Minority interest 13 2 4 9
______ ______
_______ _______
Net earnings (loss) $ 5342 $ (110) $ 135 $ (50)24
______ ______
_______ _______
______ ______
_______ _______
Basic earnings (loss) per share $ 1.37 $(2.86)1.09 $ 3.50 $ (1.30).63
Diluted earnings (loss) per share 1.35 (2.86) 3.48 (1.30)1.09 .63
Cash dividends declared per share $.30 .275 $ .275 $ .825 $ .825
4
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
____________________________________________
Unaudited
_____________________________________________________
Millions, except per share amounts 9/3/26/2000 12/31/99
12/31/98
__________________________________ ________________ ________
Assets
Current assets:
Cash and cash equivalents $ 6068 $ 3874
Receivables, net of allowancesallowance of $14 & $12 1,104 833$9 1,159 1,026
Inventories 799 731840 787
Other current assets 279 274283 293
______ ______
2,242 1,8762,350 2,180
Investments and other assets 289 280335 274
Property, plant and& equipment net ofless accumulated
depreciation of $1,504 & $1,424 1,616 1,671$1,533 and $1,490 1,617 1,630
Goodwill, net of amortization of $27$30 and $17 377 384$28 362 364
Other intangibles, deferred taxes and& deferred charges 354 331251 249
______ ______
Total assets $4,878 $4,542$4,915 $4,697
______ ______
______ ______
Liabilities and shareholders' investment
Current liabilities:
Loans payable $ 9066 $ 64113
Current maturities of long-term debt 24 269 10
Accounts payable 453 340523 411
Other current liabilities 728 641774 780
______ ______
1,295 1,0711,372 1,314
______ ______
Long-term debt 1,166 1,1371,227 1,092
______ ______
Other liabilities 1,003 1,000794 788
______ ______
Minority interest 72 6278 74
______ ______
Shareholders' investment:
Common stock, $2.50 par value, 48.148.7 and 48.148.3
shares issued 120 120122 121
Additional contributed capital 1,118 1,1211,140 1,129
Retained earnings 748 648790 760
Accumulated other comprehensive income (174) (167)(124) (109)
Common stock in treasury,at cost, 6.7cost,7.2 & 6.16.8 shares (270) (240)(290) (274)
Common stock held in trust for employee benefit
plans, 3.4 and 3.6 shares (165) (172)(161) (163)
Unearned compensation (ESOP) ( 35) (38)(33) (35)
______ ______
1,342 1,2721,444 1,429
______ ______
Total liabilities & shareholders' investment $4,878 $4,542$4,915 $4,697
______ ______
______ ______
5
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
____________________________________
Unaudited
_________
Nine MonthsFirst Quarter Ended
Millions 9/3/26/2000 3/28/99
9/27/98
________ ________________ _______
Cash flows from operating activities:
Net earnings (loss) $ 135 $( 50)42 $ 24
_____ _____
Adjustments to reconcile net earnings (loss)
to net cash from operating activities:
Depreciation and amortization 172 14857 56
Restructuring & other non-recurring actions (23) 121(2) (5)
Accounts receivable (277) (118)(141) (130)
Inventories ( 70) ( 79)(42) (2)
Accounts payable and accrued expenses 216 155100 95
Income taxes payable 12 (55)(5) (5)
Equity in (earnings) losses of joint ventures and alliances 24 242 11
Other (19) 18(2) (12)
_____ _____
Total adjustments 35 214(33) 8
_____ _____
Net cash provided by operating activities 170 1649 32
_____ _____
Cash flows from investing activities:
Property, plant and equipment:
Additions (121) (199)(31) (37)
Disposals 27 37 4
Investments in joint ventures &and alliances ( 40) ( 21)(18) (19)
Acquisition and disposition of businesses 3 (467)(35) 7
Other 6 2- (1)
_____ _____
Net cash used in investing activities (125) (682)(77) (46)
_____ _____
Net cash flows provided by (used in)used in operating and
investing activities 45 (518)(68) (14)
_____ _____
Cash flows from financing activities:
Proceeds from borrowings 53 711138 88
Payments on borrowings ( 26) ( 83)(4) (11)
Net payments under short-term credit agreements 26 ( 55)
Repurchase(46) (43)
Repurchases of common stock ( 30) ( 11)(16) -
Dividend payments ( 35) ( 35)(12) (12)
Other ( 11) 62 (1)
_____ _____
Net cash (used in) provided by financing activities ( 23) 533
_____ _____
Effect of exchange rate changes on cash - ( 1)62 21
_____ _____
Net change in cash and cash equivalents 22 14(6) 7
Cash & cash equivalents at the beginning of the year 74 38 49
_____ _____
Cash & cash equivalents at the end of the quarter $ 6068 $ 6345
_____ _____
_____ _____
6
CUMMINS ENGINE COMPANY, INC.
____________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________________________________
Unaudited
_______________________________________________________
Note 1. Accounting Policies: The Consolidated Financial Statements
for the interim periods ended SeptemberMarch 26, 19992000 and September 27, 1998March 28, 1999 have
been prepared in accordance with the accounting policies described in
the Company's Annual Report to Shareholders and Form 10-K. Management
believes the statements include all adjustments of a normal recurring
nature necessary to present fairly the results of operations for the
interim periods. Inventory values at interim reporting dates are based
upon estimates of the annual adjustments for taking physical inventory
and for the change in cost of LIFO inventories.
Note 2. Acquisition: In January 1998, Cummins 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. In accordance with APB Opinion No.16, Nelson's
net assets were recorded at fair value at the date of acquisition. The
purchase price in excess of net assets will be amortized over 40 years.
Note 3. Special Charges: In the third quarter of 1998, the Company
recorded a special charge of $35 million related to a revised estimate
of product coverage cost liability primarily for extended warranty
programs. The third quarter special charge also included $14 million
for inventory write-downs associated with the Company's restructuring
and exit activities. This write-down relates to amounts of inventory
rendered excess or unusable due to the closing 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.
In the first quarter of 1998, the Company recorded a special charge for
product coverage expense primarily attributable to the recent
experience of higher-than-anticipated costs to repair certain
automotive engines manufactured in previous years. The Company
believes it was necessary to make a special charge of $43 million pre-
tax to accrue for such product coverage costs expected to be incurred
in the future on these engines currently in the field.
Note 4. Income Taxes: Income tax expense is reported during the
interim reporting periods on the basis of the estimated annual
effective tax rate for the taxable jurisdictions in which the Company
operates.
Note 5. Long-term Debt: In February 1998, the Company issued $765
million face amount of notes and debentures. Net proceeds were used to
finance the acquisition of Nelson and pay down other indebtedness
outstanding at December 31, 1997.
Note 6. Comprehensive Income: Comprehensive income, which includes
net income and all other nonowner changes in equity during a period, is
as follows:
Third Quarter Ended Nine Months Ended
Millions 9/26/99 9/27/98 9/26/99 9/27/98
________ _______ _______ _______ _______
Net income (loss) $ 53 $(110) $135 $( 50)
Unrealized gain (loss) on securities,
net of tax 1 - 2 ( 1)
Translation adjustment, net of tax (2) 3 (9) ( 49)
___ _____ ____ _____
Comprehensive income $ 52 $(107) $128 $(100)
___ _____ ____ _____
___ _____ ____ _____
7
Note 7.3. Earnings per Share: Basic earnings per share of common stock
are computed by dividing net earnings by the weighted-average number of
common shares outstanding during 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. Shares of
stock held by the employee benefits trust are not included in
outstanding shares for EPS until distributed from the trust.
Third Quarter Nine Months
_____________________________ ___________________________
Weighted Per- Weighted Per-
Millions, except
Net Average Share
Net Average ShareMillions, except per share amounts Earnings Shares Amount
Earnings Shares Amount
___________________________________________________ ________ _______________ ______
________ _______ ______2000
____
Basic $42 38.2 $1.09
Options - .1
___ ____
Diluted $42 38.3 $1.09
___ ____
___ ____
1999
____
Basic $24 38.5 $ 53 38.3 $ 1.37 $135 38.4 $3.50.63
Options - .6 -
.4___ ____
Diluted $24 38.5 $ .63
___ ____
___ ____
Note 4. Comprehensive Income: Comprehensive income, which includes net
income and all other nonowner changes in equity during a period, is as
follows:
First Quarter Ended
Millions March 26, 2000 March 28, 1999
________ ______________ ______________
Net income $ 42 $ 24
Unrealized (loss) gain on securities (1) 1
Translation loss (14) -
____ ____
Comprehensive income $ 27 $ 25
____ ____
____ ____
Diluted 7
Note 5. Segment Information: Operating segment information is as
follows:
Power Filtration
Millions Engine Generation And Other Total
________ ______ __________ __________ ______
Quarter Ended March 26, 2000
____________________________
Net sales $1,045 $329 $274 $1,648
Earnings before interest and
income taxes 28 23 30 81
Net assets 1,108 565 854 2,527
Quarter Ended March 28, 1999
____________________________
Net sales $1,000 $251 $254 $1,505
Earnings before interest and
income taxes 27 2 26 55
Net assets 976 523 799 2,298
Reconciliation to Consolidated Financial Statements:
First Quarter Ended
Millions 3/26/2000 3/28/99
________ _________ _______
Earnings before interest and income taxes
for reportable segments $ 53 38.981 $ 1.35 $135 38.8 $3.48
_____ ____ ____ ____
_____ ____ ____ ____
1998
____
Basic $(110) 38.5 $(2.86) $(50) 38.5 $(1.30)
Options - - - -
____ ____ ____ ____
Diluted $(110) 38.5 $(2.86) $(50) 38.5 $(1.30)
_____ ____ ____ ____
_____ ____ ____ ____55
Interest expense 19 19
Income tax expense 17 10
Minority interest 3 2
______ ______
Net earnings $ 42 $ 24
______ ______
______ ______
Net assets for reportable segments $2,527 $2,298
Liabilities deducted in arriving at net assets 2,049 2,037
Deferred tax assets not allocated to segments 320 334
Debt-related costs not allocated to segments 19 22
______ ______
Total assets $4,915 $4,691
______ ______
______ ______
Note 8.6. Restructuring and Other Non-Recurring Charges: In the third
quarter of 1998, the Company recorded charges of $125 million,
comprised of $100 million for costs to reduce the worldwide workforce
by approximately 1,100 people, as well as costs associated with
streamlining certain majority-owned and international joint venture
operations and $25 million for a civil penalty to be paid by the
Company as a result of an agreement reached with the U.S. Environmental
Protection Agency (EPA) regarding diesel engine emissions. In
addition, the Company recorded special charges of $14 million for
inventory write-downs associated with restructuring actions.
The Company is continuing the restructuring plan implemented in the
third quarter of 1998. As of SeptemberMarch 26, 1999,2000, approximately $66$88 million
has been charged against the liabilities associated with these actions.
The Company has funded the restructuring actions using cash generated
from operations. The remaining actions to be completed consist
primarily of the outsourcing of certain manufacturing operations and
payment of severance commitments to terminated employees. The program
is expected to be essentially complete in 2000 and the Company does not
currently anticipate any material changes in the original charges
recorded for these actions.
8
Activity in the major components of these charges is as follows:
Charges
______________________________________________
Original Q1 Q2 Q3 Balance
$ Millions Provision 1998 1999 1999 1999 9/2000 3/26/992000
__________ _________ _____ _____ _____ _____ ________________
Restructuring of majority-
owned operations:
Workforce reductions $ 38 $(12) $( 5) $( 5) $(2) $14$(14) $ (3) $ 9
Asset impairment loss 22 - ( 1) ( 4)(7) (2) 1513
Facility consolidations
and other 17 ( 8) ( 2) - - 7(8) (4) (2) 3
____ ____ ____ ____ ____
___
77 (20) ( 8) ( 9) (4) 36(25) (7) 25
____ ____ ____ ____ ____ ___
Restructuring of joint
venture operations:
Workforce reductions 11 - (10) - ( 2) (2) 71
Tax asset impairment loss 7 - - ( 7)(7) - -
Facility and equipment-
related costs 5 - - - - 5
____ ____ ____ ____ ___ ___
23 - - ( 9) (2) 12
____ ____ ____ ____ ___ ___
Inventory write-downs
associated with exit
activities 14 ( 5) ( 4) ( 5)(5) - -
____ ____ ____ ____ ___
___
Total $114 $(25) $(12) $(23) $(6) $4823 - (22) - 1
____ ____ ____ ____ ___
Inventory write-downs
associated with restructuring
actions 14 (5) (9) - -
____ ____ ____ ____ ___
Total restructuring charges 114 (25) (56) (7) 26
____ ____ ____ ____ ___
EPA penalty 25 - (8) - 17
____ ____ ____ ____ ___
Total $139 $(25) $(64) $ (7) $43
____ ____ ____ ____ ___
____ ____ ____ ____ ___
___
8
Note 9. Segment Information: Operating segment information is as follows:
Power Filtration
Millions Engine Generation And Other Total
________ ______ __________ __________ ______
Third Quarter Ended Sept. 26, 1999
__________________________________
Net sales $1,032 $352 $247 $1,631
Earnings before interest and
income taxes 45 15 31 91
Net assets 996 557 830 2,383
Third Quarter Ended Sept. 27, 1998
__________________________________
Net sales $ 978 $296 $251 $1,525
Earnings before interest, income
taxes and special charges 13 5 30 48
Special charges 122 50 2 174
Earnings (loss) before interest
and income taxes (109) (45) 28 (126)
Net assets 1,047 528 811 2,386
Nine Months Ended Sept. 26, 1999
________________________________
Net sales $3,127 $908 $768 $4,803
Earnings before interest and
income taxes 131 28 90 249
Nine Months Ended Sept. 27, 1998
________________________________
Net sales $2,980 $900 $780 $4,660
Earnings before interest, income
taxes and special charges 117 17 87 221
Special charges 165 50 2 217
Earnings (loss) before interest
and income taxes (48) (33) 85 4
Reconciliation to Consolidated Financial Statements:
Third Quarter Ended Nine Months Ended
Millions 9/26/99 9/27/98 9/26/99 9/27/98
________ _______ _______ _______ _______
Earnings (loss) before interest and
income taxes for reportable segments $ 91 $ (126) $249 $ 4
Interest expense 18 17 56 52
______ ______ ____ ____
Earnings (loss) before income taxes $ 73 $ (143) $193 $(48)
______ ______ ____ ____
______ ______ ____ ____
Net assets for reportable segments $2,383 $2,386
Liabilities deducted in arriving at
net assets 2,139 1,824
Deferred tax assets not allocated
to segments 334 296
Debt-related costs not allocated to
to segments 22 22
______ ______
Total assets $4,878 $4,528
______ ______
______ ______
9
CUMMINS ENGINE COMPANY, INC.
____________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS,
CASH FLOW AND FINANCIAL CONDITION
_____________________________________________________________
Overview
________
Net sales were $1.63$1.65 billion in the thirdfirst quarter of 1999, 72000, an increase
of 10 percent higher thanfrom the thirdfirst quarter of 1998.1999. Earnings before interest
and taxes in the thirdfirst quarter of 19992000 were $91$81 million or 5.64.9 percent
of sales.sales compared to $55 million or 3.7 percent of sales in the first
quarter of 1999. Net earnings were $53$42 million or $1.35$1.09 per share
compared to a
loss of $110$24 million or $(2.86) per share in the third quarter of 1998,
including special charges of $174 million pretax. Net earnings for the
first nine months of 1999 were $135 million or $3.48 per share compared
to a loss of $50 million or $(1.30)63 cents per share in the first nine monthsquarter of
1998, including special charges of $217 million pretax recorded in
the first and third quarters of 1998.1999.
Results of Operations
_____________________
Net Sales:
__________
Revenues from sales of engines, which were 5455 percent of the Company's
net sales in the thirdfirst quarter of 1999, with engine revenues 72000, were 4 percent higher than
third-quarter 1998 and unit shipments 2 percent higher.
Revenue increased more than unit shipments due to higher heavy-duty
engine sales, primarily in the North American heavy-duty truck market.
Third Quarter Nine Months
Unit Shipments 1999 1998 1999 1998
______________ _______ ______ _______ _______
Midrange Engines 68,400 71,300 218,700 213,600
Heavy-duty Engines 30,500 25,500 87,900 79,800
High-horsepower Engines 2,500 2,400 6,700 7,300
_______ ______ _______ _______
101,400 99,200 313,300 300,700
_______ ______ _______ _______
_______ ______ _______ _______first-quarter 1999. Revenues from non-engine products, which were 4645
percent of net sales in the thirdfirst quarter of 1999,2000, were 716 percent
higher than the thirdfirst quarter of 1998.1999. This increase was primarily due
to growth in the power generation and filtration businesses and higher
parts sales.
First Quarter
Unit Shipments 2000 1999
________________ _______ _______
Midrange Engines 78,900 73,700
Heavy-duty Engines 27,400 26,800
High-horsepower Engines 2,500 2,000
_______ _______
108,800 102,500
_______ _______
_______ _______
All three of the Company's business segments had higher sales in the
first quarter of 2000 than in the year-ago quarter. The Company's
sales for each of its key businesses during the comparative periodsfirst
quarters were:
ThirdFirst Quarter Nine Months
$ Millions 2000 1999
1998 1999 1998
__________ ______ ______ ______ ______
Automotive markets $ 792776 $ 733 $2,372 $2,172760
Industrial markets 269 240
245 755 808
______ ______ ______ ___________ _____
Engine Business 1,032 978 3,127 2,9801,045 1,000
Power Generation Business 352 296 908 900329 251
Filtration Business and Other 247 251 768 780274 254
______ ______
______ ______
$1,631 $1,525 $4,803 $4,660
______ ______ ______ ______$1,648 $1,505
______ ______
______ ______
In the thirdfirst quarter of 1999,2000, engine business revenues of $1.0$1.05 billion
increased 65 percent as compared to the thirdfirst quarter of 1998,1999, primarily
due to the strength of the North American automotivebus and light commercial vehicle market.
Sales of $792$776 million in the thirdfirst quarter of 19992000 for automotive
markets were 82 percent higher than the thirdfirst quarter of 1998.1999. Heavy-
duty truck revenues increased 20were essentially flat compared to the first quarter
of 1999, with the decline in sales of engines in North America offset
by an increase in international heavy-duty truck revenues and parts
sales.
Medium-duty truck revenues decreased 13 percent from the third quarter of 1998
due to the strong market in North America, partially offset by reduced
demand in Mexican automotive markets.
10
Medium-duty truck revenues in the thirdfirst quarter
of 1999 were $121
million, a 14-percent decrease from the third quarter of 1998.with sales declines in both North American and international
markets. Revenues from the sales of engines for medium-duty trucks in
10
the thirdfirst quarter of 19992000 were 148 percent lower than the prior year's
quarter on a 6-percent decrease15-percent de-crease in units. This variance was primarilyreflected a
resultdecline in sales of the devaluation of the Brazilian Real, which significantly reduced
revenues in this market as compared to the year-ago quarter. In North
America, unit shipments were 19 percentengines with a lower than the third quarter of
1998, partially offset by a 9-percent increase in international
shipments.selling price and margin.
Revenues of the bus and light commercial vehicle market were flat with
the third quarter of 1998. In the third quarter of 1999, Cummins
shipped 23,000 engines to DaimlerChrysler, 7 percent lower than the
third-quarter 1998 level. The decrease in sales to DaimlerChrysler was
offset by record shipments to the North American bus and recreational
vehicle market, where volumes were 3614 percent
higher than the year-ago
quarter.first quarter of 1999. In the first quarter of 2000,
Cummins shipped 30,000 engines to DaimlerChrysler, 18 percent higher
than the first-quarter 1999 level. Shipments for internationalthe bus markets declined 19 percent
frommarket in the
thirdfirst quarter of 1998, due to lower sales into2000 were up 38 percent in North America and 13
percent in international markets, primarily in Mexico. Sales of
engines for recreational vehicles were 13 percent higher than the year-
ago quarter.
Sales to industrial markets were 212 percent lowerhigher than the thirdfirst
quarter of 1998,1999, due to decreasedincreased volume and a shift in product mix.
Engine revenues for this market were down 4up 15 percent on a 10-percent
decreaseincrease in units. AgriculturalConstruction equipment demand decreased 43business increased 6 percent
compared to thirdfirst quarter 1998, and construction1999, while agricultural equipment business declined 2
percent fromdemand
remained flat with the prior year's quarter. Sales to marine markets
increased 2819 percent from thirdthe first quarter 1998,of 1999, with a shift to more mid-
range enginesimprovement
in recreational applications.both Asia and North America. Mining market sales were
flat withincreased 25
percent as compared to the thirdfirst quarter of 1998.1999, reflecting some
recovery in this market.
In the thirdfirst quarter of 1999,2000, sales for the Company's power generation
business increased 1931 percent compared to thirdthe first quarter 1998.of 1999.
Sales of the Company's generator sets were 3339 percent above thirdhigher than first
quarter last year withdue to increased sales in North America, Mexico and Europe.America. Engine
and alternator
sales to generator set assemblers were up 40 percent and sales of
alternators increased 725 percent from the thirdfirst quarter of 1998.1999, with
growth in most international markets. Generator set sales for the
recreational vehicle market in North America continued to be strong,
with revenues 8and mobile markets were 14 percent above the year-agoyear-
ago quarter.
Filtration business and other sales were $247of $274 million in the thirdfirst
quarter of 1999, a decrease of 22000 were 8 percent fromhigher than the thirdfirst quarter of 1998.1999.
Within the filtration business, the sales were flat with the year-
ago quarter, with the global decline in agricultural equipment sales
being offset byincrease was broadly
distributed across markets worldwide, reflecting both new business
gained in North Americanpenetration and international
truck markets and sales to small-equipment original equipment
manufacturers.market growth. Sales of internationalat company-owned distributors included in this segment reflected modest declinesand
Holset, the Company's turbocharger business, also increased as compared
to the thirdfirst quarter of 1998.1999.
In total, international markets represented 3841 percent of the Company's
revenues in the thirdfirst quarter of 1999.2000. The Company experienced gains
in all of the international markets in which it participates. Sales to
Europe and the CIS, representing 1113 percent of the Company's sales in
the thirdfirst quarter of 1999,2000, were flat with15 percent higher than the prior year's
quarter. Business in Mexico, Brazil and Latin America represented 6
percent of sales in the thirdfirst quarter of 1999,2000, with revenues 1641 percent
belowabove the year-ago levels. Asia and Australian markets, in total,
represented 1312 percent of sales in the thirdfirst quarter of 1999, with revenues 92000,
increasing 23 percent higher thanfrom the prior year's quarter. Sales to Canada,
representing 68 percent of sales in the thirdfirst quarter of 1999,2000, were flat with33
percent higher than the thirdfirst quarter of 1998.1999.
Gross Margin:
_____________
The Company's gross margin percentage was 22.120.3 percent in the thirdfirst
quarter of 1999,2000, compared to 20.120.0 percent in the prior year's quarter
excluding the special charges for product coverage and inventory write-
downs. Gross margin percentage including the special charges was 16.9
percent in the third quarter of 1998.quarter.
The increased margin in 19992000 was
primarily due to lowerhigher volume and reduced costs
related to new products, partially offset by higher product coverage
costs, a shift in product mix
to higher margin heavy-duty and high-horsepower engines and product
cost improvements. For the first nine months of 1999, gross margin
percentage was 21.5 percent, as compared to 21.8 percent in the first
nine months of 1998 excluding the special charges recorded for product
coverage and inventory write-downs. Gross margin percentage including
the special charges was 19.8 percent in the first nine months of 1998.
11costs.
Operating Expenses:
___________________
Selling and administrative expenses as a percent of sales were 11.8
percent in the third quarterfirst quarters of 1999, compared to 12.5 percent in the
third quarter of 1998, with total spending remaining essentially flat
on a 7-percent higher sales level.2000 and 1999. Research and
engineering expenses increased from 4.0were 3.6 percent of sales in the thirdfirst quarter of
19982000 compared to 4.13.5 percent in the thirdfirst quarter of 1999. This increase reflects a catch-
up from the low level of spending in the first half of 1999. Research
and engineering expenses as a percent of sales for the first nine
months were 3.8 percent for 1999 as compared to 4.1 percent for 1998.
The Company is continuing the restructuring plan implemented in the
third quarter of 1998. AsDuring the first quarter of September 26, 1999, approximately $662000, $7 million
has beenwas charged against the liabilities associated with these actions. The
Company expects to complete the restructuring in 2000 and does not currently
anticipate any material changes in the original charges recorded for
these actions.
11
The Company's lossesCompany had income from joint ventures and alliances were $8of $1 million
in the thirdfirst quarter of 1999, equal2000, compared to losses of $7 million in the
thirdfirst quarter of 1998,
primarily due to losses at1999. This improvement resulted from the termination
of the Company's joint venture with Wartsila.Wartsila at the end of 1999.
Other:
______
Interest expense was $18$19 million in the thirdfirst quarter of 1999, compared
to $17 million in2000, flat
with the prior year's quarter. Other expense increased $4decreased $5 million from the third quarter of 1998, with the variance resulting
primarily from lower interest income and certain tax refunds recorded
in the prior year.
Provision for Income Taxes:
___________________________
In the third quarter, the estimated effective tax rate for 1999 was
reduced to 28 percent for the year. The Company's tax rate for the
third quarter was 26 percent to reflect the year-to-date adjustment to
the lower 1999 effective tax rate.
Year 2000:
__________
The Company experienced no issues on the 9-9-99-date horizon.
Preparation for Year 2000 continues to be a priority for Cummins into
and after January 1, 2000. While the Company substantially met its
goal of Year 2000 readiness by June 30, 1999, a few outstanding issues
remain. Plans to resolve such issues are addressed below.
The Company's Year 2000 program is a centrally coordinated, enterprise-
wide effort which is carried out by the Company's Year 2000 Program
Office under the leadership of the Director of the Year 2000 Program.
The Year 2000 program is implemented at each of the Company's
facilities and is overseen by a Year 2000 coordinator assigned to each
site. The Company's Year 2000 Program Office monitors the progress and
compliance of its facilities through audits and reports by the Year
2000 coordinators. In addition to internal resources, the Company
continues to retain external resources to assist with its Year 2000
program. The Company believes that it is taking full advantage of its
internal resources and all necessary external resources to understand,
identify and correct all Year 2000 issues within its control.
The Company's Year 2000 program involves:
1) mainframe (legacy systems); 2) distributed computing (includes
manufacturing and warehousing systems, end user computing, facility
systems, laboratory equipment, technical infrastructure and remote
business systems); 3) products; 4) suppliers; 5) business readiness and
contingency planning; and 6) communication. The general phases of the
program are: a) inventory; b) analyze and prioritize; c) determine
compliance; d) remediate, replace or retire and e) test, implement,
audit and maintain.
12
Mainframe, Distributed Computing:
The Company completed the inventory, analysis and prioritization phases
of its mainframe and distributed computing in 1998. The inventory
process led to the packaging of mainframe programs into remediation
groups to facilitate testing. Testing began in 1998 and will continue
through 1999. Quality assurance checks resulted in the review, repair,
testing and re-installation of some programs. Tests of software
applications using the 9-9-99 and 1-1-2000 dates were successfully
executed. Some outstanding issues remain. About 5 of the Company's
142 sites continue to address Year 2000 issues. One issue involves the
"ALPS" (Aftermarket Logistics and Planning System) software program
used by the Company's aftermarket and distributor locations. The
outstanding issues are known and monitored. The remainder of the year
will be used to address these and any other outstanding issues that
emerge, and also to complete related contingency plans. The Company
will use its best efforts to ensure that any outstanding Year 2000 item
will be completed before the end of 1999.
Products:
During
the first quarter of 1999, the Company announced that its
commercial products met the Company's Year 2000 compliance standards.
A postingdue to Brazilian currency translation losses
and losses on the Company's Internet website provides this information
to customers and other stakeholders.
Suppliers:
The greatest area of potential risk is the supply chain. This is
particularly true because the Company utilizes global, sole suppliers
for certain critical components usedvarious asset dispositions recorded in the manufacturefirst quarter
of the
Company's products. The high level of skill and expertise required to
develop certain components makes it impractical and sometimes
impossible to change such suppliers quickly. The failure of a sole
supplier may lead to a delay in production and/or business
interruption. To mitigate this potential risk, the Company initiated a
global effort in 1997 to evaluate its business critical suppliers. The
Company continues its efforts to review the Year 2000 readiness of key
suppliers through a formal program of prioritization and communication
using questionnaires and/or follow up contacts, as appropriate. To
further the Company's efforts with suppliers, the Company continues to
be a member of the Automotive Industry Action Group (AIAG). The
Company completed the identification of high-risk suppliers in April
1999 and has continued to update this information as additional AIAG
surveys are completed. Using survey data and other input where
required, the Company has developed contingency plans1999.
Provision for suppliers
that have been identified as "high-risk."Income Taxes:
__________________________
The Company's plants are
also developing site-specific contingency plans for critical suppliers.
Business Readiness and Contingency Planning (BRCP):
As previously stated, the Company believes that its "reasonably likely
worst case scenarios" may involve the failure of third parties with
whom the Company does business to address Year 2000 issues. As a
result, the Company is taking steps to minimize the impact of its
exposure to Year 2000 risks outside its control. The objective of our
BRCP is to assure that the Company retains the ability to sustain
acceptable operations despite the Year 2000 failures of third parties
or failures induced by them. The process for BRCP is process design,
business impact analysis, contingency planning and auditing, testing
and monitoring. Our model is consistent with the recommendations of
the U.S. General Accounting Office. In the following months, the
Company will finalize its business readiness and contingency planning
to address possible external Year 2000 problems. A significant part of
this effort has been the evaluation of the risk to the Company's
operations from external sources, and the development of strategies to
manage those risks. The Company's efforts in this regard include
identifying alternate suppliers, setting up work-arounds and adjusting
inventory levels. The Company's contingency planning also covers the
identification and evaluation of risk areas at the Company's
international locations and international independent distributors,
particularly at countries that have been identified as behind in their
Year 2000 readiness efforts. The Company is providing information on
country and industry risk to its international locations, and is also
considering country riskincome tax provision in the developmentfirst quarter of its contingency plans.
Contingency plans will also address any potential internal issues that
may arise.
13
Communication:
The Company continues to receive and respond to customer inquiries
regarding the general Year 2000 readinesswas $17
million, reflecting an effective tax rate of the Company, and the Year
2000 compliance of the Company's commercial products. The inquiries
and responses take the form of telephone calls, written communication
and electronic mail. For the convenience of its customers, the Company
maintains a Year 2000 Internet website at www.cummins.com/custasis/y2k.html.
The Company's product compliance information is also included on that
website. The Company also maintains an Intranet Year 2000 website27 percent for the use of its employees.
Costs of Company's Year 2000 issues:
The Company expects to incur total expenditures of approximately $45
million in connection with its Year 2000 program and remediation
efforts. The Company is funding its Year 2000 costs with cash flows
from operations. To date, the Company has incurred $42 million in
costs relating to its Year 2000 efforts. The Company has forecasted a
temporary increase in inventory levels per year-end contingency plans
for high-risk suppliers.
There can be no assurances that the systems or products of third
parties relied upon by the Company, such as suppliers, vendors or
significant customers, will be timely converted or that a failure by
such third parties, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the
Company. Other undiscovered factors related to the Year 2000 issue may
also have potential for an adverse effect on the Company. Such adverse
effects may include an adverse effect on the Company's revenues. The
estimated time of completion and success 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 trained personnel, the ability to locate and correct all relevant
computer code, and the failure by third parties to address their Year
2000 problems.year.
Cash Flow and Financial Condition
_________________________________
Key elements of cash flows were:
Nine MonthsFirst Quarter
$ Millions 2000 1999
1998
__________ ______ ___________ _____
Net cash provided by operating activities $ 1709 $ 16432
Net cash used in investing activities (125) (682)(77) (46)
Net cash (used in) provided by financing activities ( 23) 533
Effect of exchange rate changes on cash - ( 1)
_____ _____62 21
____ ____
Net change in cash and cash equivalents $ 22(6) $ 14
_____ _____
_____ _____7
____ ____
____ ____
In the first nine monthsquarter of 1999,2000, net cash provided by operating activities
was $170 million. The high level$9 million, with the Company's earnings and the non-cash effect of
netdepreciation and amortization reduced by increases in working capital.
Net cash requirements
forused in investing activities included $31 million of planned
capital expenditures and $35 million related to the business assumed by
the Company following the termination of the Cummins Wartsila joint
venture. Net cash provided by financing activities in the first nine monthsquarter
of 1998 was due2000 included net borrowings of $88 million primarily to the acquisition of Nelson and planned capital expenditures
of $199 million. In the first quarter of 1998, the Company issued $765
million face amount of notes and debentures to supportfund increases
in working capital, partially offset by cash used to pay dividends and
to completerepurchase shares of the acquisition of Nelson.
14Company's stock.
FORWARD-LOOKING STATEMENTS
__________________________
When used herein, the terms "expect, plan, anticipate, believe" or
similar expressions, as they relate to the Company or its management,
are intended to identify forward-looking statements.
The Company has included certain forward-looking statements in this
Management's Discussion and Analysis of Results of Operations, Cash
Flow and Financial Condition and in the Company's press releases,
teleconferences and other external communications. These statements
are based on current expectations, estimates and projections about the
industries in which the Company operates, management's beliefs and
various assumptions made by management which are difficult to predict.
Among the factors that could affect the outcome of the statements are
general industry and market conditions and growth rates. Therefore,
actual outcomes and their impact on the Company may differ materially
from what is expressed or forecasted. The Company undertakes no
obligation to update publicly any forward-looking statements, whether
as a result of new information, future events or otherwise.
12
PART II. OTHER INFORMATION
___________________________
Item 4. Submission of Matters to a Vote of Security Holders
____________________________________________________________
The Company held its annual meeting of security holders on April 4,
2000 at which security holders elected 10 directors of the Company for
the ensuing year and ratified the appointment of Arthur Andersen LLP as
auditors for the year 2000.
Results of the voting in connection with each of the items were as
follows:
Voting on Directors:
____________________
For Withheld
__________ ________
R. Darnall 38,044,402 1,181,968
J. M. Deutch 37,803,520 1,422,850
W. Y. Elisha 37,956,865 1,269,505
H. H. Gray 37,915,804 1,310,566
J. A. Johnson 38,087,243 1,139,127
W. I. Miller 38,069,076 1,157,294
W. D. Ruckelshaus 37,912,621 1,313,749
T. M. Solso 37,704,868 1,521,502
F. A. Thomas 37,955,056 1,271,314
J. L. Wilson 38,142,414 1,083,956
Ratify Appointment of Auditors:
_______________________________
For Against Abstain
__________ _________ _______
37,490,483 1,370,007 365,880
With regard to the election of directors, votes were cast in favor of
or withheld from each nominee; votes that were withheld were excluded
entirely from the vote and had no effect. Abstentions on the
ratification of the appointment of Arthur Andersen LLP were counted as
present for purposes of determining the existence of a quorum. Under
the rules of the New York Stock Exchange, brokers who held shares in
street names had the authority to vote on certain items when they did
not receive instructions from beneficial owners. Brokers who did not
receive instructions were entitled to vote on the election of
directors. Under applicable Indiana law, a broker non-vote had no
effect on the outcome of the election of directors.
Item 6. Exhibits and Reports on Form 8-K:
__________________________________________
(a) See the Index to Exhibits on page 15Page 14 for a list of exhibits filed
herewith.
(b) The Company was not required to file a Form 8-K during the thirdfirst
quarter of 1999.2000.
13
Signatures
__________
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CUMMINS ENGINE COMPANY, INC.
By: /s/Rick J. Mills
________________
Rick J. MillsRobert C. Crane April 25, 2000
__________________
Robert C. Crane
Vice President - Corporate Controller
(Chief Accounting Officer)
October 28, 1999
1514
CUMMINS ENGINE COMPANY, INC.
____________________________
INDEX TO EXHIBITS
_________________
27 Financial Data Schedule (filed herewith)