UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 June 25, 2000 Commission File Number 1-4949
_____________ ______
Indiana 35-0257090
_______ __________
(State or Other Jurisdiction of (IRS 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 June 25, 2000, the number of shares outstanding of the
registrant's only class of common stock was 41.5 million.
2
TABLE OF CONTENTS
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Page No.
________
PART I. FINANCIAL INFORMATION
______________________________
Item 1. Financial Statements
Consolidated Statement of Earnings for the Second 3
Quarter and First Half Ended June 25, 2000 and
June 27, 1999
Consolidated Statement of Financial Position at 4
June 25, 2000 and December 31, 1999
Consolidated Statement of Cash Flows for the First 5
Half Ended June 25, 2000 and June 27, 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 6. Exhibits and Reports on Form 8-K 13
Index to Exhibits 14
3
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF EARNINGS
FOR THE SECOND QUARTER AND FIRST HALF
ENDED JUNE 25, 2000 AND JUNE 27, 1999
Unaudited
_____________________________________
Second Quarter First Half
________________ ________________
Millions, except per share amounts 2000 1999 2000 1999
__________________________________ ______ ______ ______ ______
Net sales $1,769 $1,667 $3,417 $3,172
Cost of goods sold 1,418 1,296 2,731 2,500
______ ______ ______ ______
Gross profit 351 371 686 672
Selling & administrative expenses 190 200 384 378
Research & engineering expenses 59 60 118 114
Net (income) expense from joint
ventures and alliances (3) 5 (4) 12
Interest expense 21 19 40 38
Other (income) expense, net (2) 3 - 10
______ ______ ______ ______
Earnings before income taxes 86 84 148 120
Provision for income taxes 22 25 39 35
Minority interest 3 1 6 3
______ ______ ______ ______
Net earnings $ 61 $ 58 $ 103 $ 82
______ ______ ______ ______
______ ______ ______ ______
Basic earnings per share $ 1.62 $ 1.51 $ 2.71 $ 2.14
Diluted earnings per share 1.62 1.50 2.70 2.13
Cash dividends declared per share .30 .275 .60 .55
4
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Unaudited
____________________________________________
Millions, except per share amounts 6/25/2000 12/31/1999
__________________________________ _________ __________
Assets
Current assets:
Cash and cash equivalents $ 74 $ 74
Receivables, net of allowance of $9 1,138 1,026
Inventories 822 787
Other current assets 294 293
______ ______
2,328 2,180
Investments and other assets 346 274
Property, plant & equipment less accumulated
depreciation of $1,542 and $1,490 1,602 1,630
Goodwill, net of amortization of $33 and $28 359 364
Other intangibles, deferred taxes and deferred
charges 258 249
______ ______
Total assets $4,893 $4,697
______ ______
______ ______
Liabilities and shareholders' investment
Current liabilities:
Loans payable $ 68 $ 113
Current maturities of long-term debt 9 10
Accounts payable 463 411
Other current liabilities 770 780
______ ______
1,310 1,314
______ ______
Long-term debt 1,255 1,092
______ ______
Other liabilities 788 788
______ ______
Minority interest 79 74
______ ______
Shareholders' investment:
Common stock, $2.50 par value, 48.7 and 48.3
shares issued 121 121
Additional contributed capital 1,140 1,129
Retained earnings 839 760
Accumulated other comprehensive income (158) (109)
Common stock in treasury, at cost, 7.2 and 6.8
shares (290) (274)
Common stock held in trust for employee benefit
plans, 3.4 shares (158) (163)
Unearned compensation (ESOP) ( 33) ( 35)
_____ _____
1,461 1,429
______ ______
Total liabilities and shareholders' investment $4,893 $4,697
______ ______
______ ______
5
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
____________________________________
First Half Ended
_______________________
Millions 6/25/2000 6/27/1999
________ _________ _________
Cash flows from operating activities:
Net earnings $103 $ 82
____ ____
Adjustments to reconcile net earnings
to net cash from operating activities:
Depreciation and amortization 117 114
Restructuring actions (5) (11)
Accounts receivable (144) (188)
Inventories (38) (28)
Accounts payable and accrued expenses 55 200
Income taxes payable (5) 8
Equity in losses of joint ventures and
alliances 4 16
Other (28) (10)
____ ____
Total adjustments (44) 101
____ ____
Net cash provided by operating activities 59 183
____ ____
Cash flows from investing activities:
Property, plant and equipment:
Additions (84) (80)
Disposals 16 21
Investments in joint ventures and alliances (36) (37)
Acquisition and disposition of businesses (35) 3
Other - 2
____ ____
Net cash used in investing activities (139) (91)
____ ____
Net cash flows (used in) provided by
operating and investing activities (80) 92
____ ____
Cash flows from financing activities:
Proceeds from borrowings 168 -
Payments on borrowings (7) (17)
Net payments under short-term credit
agreements (40) (10)
Repurchases of common stock (16) (10)
Dividend payments (25) (23)
Other 1 (3)
____ ____
Net cash provided by (used in)
financing activities 81 (63)
____ ____
Effect of exchange rate changes on cash (1) -
____ ____
Net change in cash and cash equivalents - 29
Cash & cash equivalents at beginning of the year 74 38
____ ____
Cash & cash equivalents at end of the first half $ 74 $ 67
____ ____
____ ____
6
CUMMINS ENGINE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
__________________________________________
Note 1. Accounting Policies: The Consolidated Financial Statements
for the interim periods ended June 25, 2000 and June 27, 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. 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 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.
Second Quarter
________________________________
Weighted Per-
Net Average Share
Millions, except per share amounts Earnings Shares Amount
__________________________________ ________ ________ ______
2000
____
Basic $61 38.1 $1.62
Options - -
___ ____
Diluted $61 38.1 $1.62
___ ____
___ ____
1999
____
Basic $58 38.5 $1.51
Options - .2
___ ____
Diluted $58 38.7 $1.50
___ ____
___ ____
First Half
________________________________
Weighted Per-
Net Average Share
Millions, except per share amounts Earnings Shares Amount
__________________________________ ________ ________ ______
2000
____
Basic $103 38.2 $2.71
Options - -
____ ____
Diluted $103 38.2 $2.70
____ ____
____ ____
1999
____
Basic $82 38.5 $2.14
Options - .2
___ ____
Diluted $82 38.7 $2.13
___ ____
___ ____
Note 4. Comprehensive Income: Comprehensive income, which includes
net income and all other non-owner changes in equity during a period, is
as follows:
Second Quarter Ended
Millions June 25, 2000 June 27, 1999
________ _____________ _____________
Net income $ 61 $ 58
Unrealized gain on securities 1 -
Translation loss, net of tax (35) (7)
____ ____
Comprehensive income $ 27 $ 51
____ ____
____ ____
First Half Ended
Millions June 25, 2000 June 27, 1999
________ _____________ _____________
Net income $103 $ 82
Unrealized gain on securities - 1
Translation loss, net of tax (49) (7)
____ ____
Comprehensive income $ 54 $ 76
____ ____
____ ____
7
Note 5. Segment Information: Operating segment information is as
follows:
Power Filtration
Millions Engine Generation And Other Total
________ ______ __________ __________ ______
Second Quarter Ended June 25, 2000
__________________________________
Net sales $1,107 $368 $294 $1,769
Earnings before interest and
income taxes 42 30 35 107
Net assets 1,160 578 845 2,583
Second Quarter Ended June 27, 1999
__________________________________
Net sales $1,095 $305 $267 $1,667
Earnings before interest and
income taxes 59 11 33 103
Net assets 974 509 815 2,298
First Half Ended June 25, 2000
______________________________
Net sales $2,152 $697 $568 $3,417
Earnings before interest and
income taxes 70 53 65 188
First Half Ended June 27, 1999
______________________________
Net sales $2,095 $556 $521 $3,172
Earnings before interest and
income taxes 86 13 59 158
Reconciliation to Consolidated Financial Statements:
Second Quarter Ended
Millions 6/25/2000 6/27/1999
________ _________ _________
Earnings before interest and income taxes
for reportable segments $ 107 $ 103
Interest expense 21 19
Income tax expense 22 25
Minority interest 3 1
______ ______
Net earnings $ 61 $ 58
______ ______
______ ______
Net assets for reportable segments $2,583 $2,298
Liabilities deducted in arriving at net assets 1,971 2,116
Deferred tax assets not allocated to segments 320 334
Debt-related costs not allocated to segments 19 22
______ ______
Total assets $4,893 $4,770
______ ______
______ ______
First Half Ended
Millions 6/25/2000 6/27/1999
________ _________ _________
Earnings before interest and income taxes
for reportable segments $ 188 $ 158
Interest expense 40 38
Income tax expense 39 35
Minority interest 6 3
______ ______
Net earnings $ 103 $ 82
______ ______
______ ______
Note 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 June 25, 2000, approximately $91 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 Balance
$ Millions Provision 1998 1999 2000 2000 6/25/00
__________ _________ _____ _____ ____ ____ _______
Restructuring of majority-
owned operations:
Workforce reductions $ 38 $(12) $(14) $(3) $(1) $ 8
Asset impairment loss 22 - ( 7) (2) (1) 12
Facility consolidations
and other 17 ( 8) ( 4) (2) (1) 2
____ ____ ____ ___ ___ ___
77 (20) (25) (7) (3) 22
____ ___ ____ ___ ___ ___
Restructuring of joint venture
operations:
Workforce reductions 11 - (10) - - 1
Tax asset impairment loss 7 - (7) - - -
Facility & equipment-related
costs 5 - (5) - - -
____ ____ ____ ___ __ ___
23 - (22) - - 1
____ ____ ____ ___ __ ___
Inventory write-downs associated
with restructuring actions 14 (5) (9) - - -
____ ____ ____ ___ __ ___
Total restructuring charges 114 (25) (56) (7) (3) 23
EPA penalty 25 - (8) - - 17
____ ____ ____ ___ ___ ___
Total $139 $(25) $(64) $(7) $(3) $40
____ ____ ____ ___ ___ ___
____ ____ ____ ___ ___ ___
9
CUMMINS ENGINE COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS, CASH FLOW AND FINANCIAL CONDITION
________________________________________________________
Overview
________
Net sales were $1.77 billion in the second quarter of 2000, the second
highest sales quarter ever, and 6 percent higher than the second
quarter of 1999. Earnings before interest and taxes in the second
quarter of 2000 matched an all-time record for the Company of $107
million, or 6.0 percent of sales. This compares to $103 million, or
6.2% of sales, in the second quarter of 1999. Net earnings were $61
million, or $1.62 per share, compared to $58 million, or $1.50 per
share, in the second quarter of 1999. Net earnings for the first half
of 2000 were $103 million, or $2.70 per share, compared to $82 million,
or $2.13 per share, in the first half of 1999.
Results of Operations
_____________________
Net Sales:
__________
Revenues from sales of engines were 54 percent of the Company's net
sales in the second quarter of 2000, with engine revenues 2 percent
higher than second-quarter 1999 and unit shipments 8 percent higher.
Unit shipments increased more than revenue due to lower heavy-duty
engine sales, primarily in the North American heavy-duty truck market.
Second Quarter First Half
_______________ ________________
Unit Shipments 2000 1999 2000 1999
______________ ______ ______ _______ _______
Midrange Engines 89,100 76,600 168,000 150,300
Heavy-duty Engines 25,800 30,600 53,200 57,400
High-horsepower Engines 3,000 2,200 5,500 4,200
_______ _______ _______ _______
117,900 109,400 226,700 211,900
_______ _______ _______ _______
_______ _______ _______ _______
Revenues from non-engine products, which were 46 percent of net sales
in the second quarter of 2000, were 12 percent higher than the second
quarter of 1999. The major increases included higher sales of gensets
and filtration products and revenues from international distributors.
The Company's sales for each of its key businesses during the
comparative periods were:
Second Quarter First Half
_______________ _______________
$ Millions 2000 1999 2000 1999
__________ ______ ______ ______ ______
Automotive markets $ 810 $ 820 $1,586 $1,580
Industrial markets 297 275 566 515
______ ______ ______ ______
Engine Business 1,107 1,095 2,152 2,095
Power Generation Business 368 305 697 556
Filtration Business & Other 294 267 568 521
______ ______ ______ ______
$1,769 $1,667 $3,417 $3,172
______ ______ ______ ______
______ ______ ______ ______
In the second quarter of 2000, engine business revenues of $1.1 billion
increased 1 percent as compared to the second quarter of 1999, despite
a 28 percent decrease in shipments to the North American heavy-duty
truck market. The Company expects a further decline in the North
American heavy-duty truck market during the second half of 2000 as
compared to the first half of the year.
10
Sales of $810 million in the second quarter of 2000 for automotive
markets were 1 percent lower than the second quarter of 1999. Heavy-
duty truck revenues decreased 14 percent from the second quarter of
1999, with the market decline in North America partially offset by
increased demand in Mexican automotive markets.
Medium-duty truck revenues were essentially flat with the second
quarter of 1999, despite an 11 percent increase in unit shipments.
This variance reflected a mix shift towards engines with a lower
selling price and margin. Unit shipments to North America declined 19
percent, while international shipments increased 38 percent, primarily
in Brazil.
Revenues of the bus and light commercial vehicle market were 26 percent
higher than the second quarter of 1999. In the second quarter of 2000,
Cummins shipped a record 32,100 engines to DaimlerChrysler, 36 percent
higher than the second-quarter 1999 level. Shipments to the North
American bus and recreational vehicle market were 11 percent higher
than the year-ago quarter, and shipments for international bus markets
increased 92 percent from the second quarter of 1999, due to higher
sales into China and Mexico.
Sales to industrial markets were 8 percent higher than the second
quarter of 1999, due to increased volume and a shift in product mix.
Engine revenues for this market were up 9 percent on a 3-percent
increase in units. Construction equipment business was flat compared
to second quarter 1999, while agricultural equipment demand declined 11
percent from the prior year's quarter. Sales to marine markets
increased 11 percent from second quarter 1999, with growth in Europe
and North America. Mining market sales increased 38 percent as
compared to the second quarter of 1999, reflecting higher high-
horsepower engine volumes.
In the second quarter of 2000, sales for the Company's power generation
business increased 21 percent compared to second quarter 1999. Sales
of the Company's generator sets were 37 percent above second quarter
last year with continued strength in North American markets. Engine
sales to generator set assemblers were up 24 percent from the second
quarter of 1999, primarily in Europe and Turkey. Generator set sales
for the recreational vehicle market in North America were essentially
flat with the year-ago quarter.
Filtration business and other sales were $294 million in the second
quarter of 2000, an increase of 10 percent from the second quarter of
1999. Sales of filtration products reflected gains in North America
and Europe and strong increases in Latin America, Mexico and Asia.
Sales of international company-owned distributors and the Holset
turbocharger business included in this segment also increased compared
to the second quarter of 1999.
In total, international markets represented 41 percent of the Company's
revenues in the second quarter of 2000, with increases in most of the
international markets in which the Company participates. Sales to
Europe and the CIS, representing 13 percent of the Company's sales in
the second quarter of 2000, were 12 percent higher than the prior
year's quarter. Business in Mexico, Brazil and Latin America
represented 7 percent of sales in the second quarter of 2000, with
revenues 32 percent above the year-ago levels. Asia and Australian
markets, in total, representing 13 percent of sales in the second
quarter of 2000, were 20 percent higher than the prior year's quarter.
Sales to Canada, representing 6 percent of sales in the second quarter
of 2000, were 25 percent lower than the second quarter of 1999 due to
the decline in the heavy-duty truck market.
Gross Margin:
_____________
The Company's gross margin percentage was 19.8 percent in the second
quarter of 2000, compared to 22.3 percent in the prior year's quarter.
The decreased margin in 2000 was due to higher product coverage costs
and changes in product mix. Contributing to the increased product
coverage costs is the ISX engine family, which continues to have higher
coverage costs that the N14 product it replaces. The Company currently
anticipates this increased level of product coverage expense to
continue for the next three to four quarters. The impact on gross
11
margin from changes in product mix resulted from the mix shift from the
N14 to the ISX engines, as well as mix changes in the power generation
business and in the Company's international distributor revenue. For
the first half of 2000, gross margin percentage was 20.1 percent,
compared to 21.2 percent in the first half of 1999.
Operating Expenses:
___________________
Selling and administrative expenses as a percent of sales were 10.8
percent in the second quarter of 2000, compared to 12.0 percent in the
second quarter of 1999, with total spending decreasing $10 million on a
6-percent increase in sales. Research and engineering expenses
declined from 3.6 percent of sales in the second quarter of 1999 to 3.3
percent in the second quarter of 2000. These improvements are
primarily a result of the Company's cost reduction initiatives.
The Company is continuing the restructuring plan implemented in the
third quarter of 1998. During the second quarter of 2000, $3 million
was 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.
The Company's income from joint ventures and alliances was $3 million
in the second quarter of 2000 as compared to losses of $5 million in
the second quarter of 1999 due to the termination of the Company's
joint venture with Wartsila, which had losses of $7 million in the
second quarter of 1999.
Other:
______
Interest expense was $21 million in the second quarter of 2000,
compared to $19 million in the prior year's quarter due to increased
levels of borrowings and lower interest capitalization. Other income
was $2 million in the second quarter of 2000 compared to expense of $3
million in the second quarter of 1999, with the variance resulting
primarily from increased earnings from distributors and from non-
recurring transactions recorded in the prior year.
Provision for Income Taxes:
___________________________
In the second quarter, the estimated effective tax rate for 2000 was
reduced to 26 percent for the year. The Company's tax rate for the
second quarter was 25 percent to reflect the year-to-date adjustment to
the lower 2000 effective tax rate. The effective tax rate for the
second quarter and first half of 1999 was 29 percent.
Cash Flow and Financial Condition
_________________________________
Key elements of cash flows were:
First Half
_________________
$ Millions 2000 1999
__________ _____ _____
Net cash provided by operating activities $ 59 $183
Net cash used in investing activities (139) (91)
Net cash provided by (used in)
financing activities 81 (63)
Effect of exchange rate changes on cash (1) -
_____ ____
Net change in cash and cash equivalents $ - $ 29
_____ ____
_____ ____
In the first half of 2000, net cash provided by operating activities
was $59 million, reflecting the Company's strong net earnings and the
non-cash effect of depreciation and amortization, reduced by increases
in working capital. Net cash requirements for investing activities of
$139 million included capital expenditures of $84 million in the first
half of 2000, compared to capital expenditures of $80 million in the
first half of 1999. Net cash provided by financing activities was $81
12
million in the first half of 2000. This included proceeds from
increased borrowings, reduced by cash used for dividend payments and
repurchases of the Company'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.
13
PART II. OTHER INFORMATION
___________________________
Item 6. Exhibits and Reports on Form 8-K:
__________________________________________
(a) See the Index to Exhibits on page 14 for a list of exhibits filed
herewith.
(b) The Company was not required to file a Form 8-K during the second
quarter of 2000.
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/Robert C. Crane
_________________
Robert C. Crane
Vice President - Corporate Controller
(Chief Accounting Officer) July 31, 2000
14
CUMMINS ENGINE COMPANY, INC.
____________________________
INDEX TO EXHIBITS
_________________
27 Financial Data Schedule (filed herewith)