SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
CUMMINS ENGINE COMPANY, INC.
Commission File Number 1-4949
Incorporated in the State of Indiana I.R.S. Employer Identification
No. 35-0257090
500 Jackson Street, Box 3005, Columbus, Indiana 47202-3005
(Principal Executive Office)
Telephone Number: (812) 377-5000
Securities registered pursuant to Section 12(b) of the Act: Common Stock,
$2.50 par value, which is registered on the New York Stock Exchange and on
the Pacific Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K are not contained herein and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates was
approximately $1.5 billion at January 26, 2001.
As of January 26, 2001, there were outstanding 41.4 million shares of the
only class of common stock.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement filed with the
Securities and Exchange Commission pursuant to Regulation 14A are
incorporated by reference in Part III of this Form 10-K.
2
TABLE OF CONTENTS
_________________
Part Item Description Page
____ ____ _________________________________________________ ____
I 1 Business 3
2 Properties 11
3 Legal Proceedings 12
4 Submission of Matters to Vote of Security Holders 12
II 5 Market for the Registrant's Common Equity and
Related Stockholder Matters 12
6 Selected Financial Data 13
7 Management's Discussion and Analysis of Results
of Operations and Financial Condition 14
8 Financial Statements and Supplemental Data 19
9 Disagreements on Accounting and Financial
Disclosure 19
III 10 Directors & Executive Officers of the Registrant 20
11 Executive Compensation 21
12 Security Ownership of Certain Beneficial Owners
and Management 21
13 Certain Relationships and Related Transactions 21
IV 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 22
Index to Financial Statements 23
Signatures 43
Exhibit Index 45
3
PART I
______
ITEM 1. BUSINESS
_______ ________
OVERVIEW
________
Cummins Engine Company, Inc. d/b/a Cummins Inc. ("Cummins" or "the
Company") is a leading worldwide designer and manufacturer of diesel
engines, ranging from 55 to 3,500 horsepower and the largest producer
of commercial diesel engines above 50 horsepower. The Company also
produces natural gas engines and engine components and subsystems.
Cummins provides power and components for a wide variety of equipment
in its key businesses: engine, power generation and filtration.
Cummins sells its products to original equipment manufacturers ("OEMs"),
distributors and other customers worldwide and conducts manufacturing,
sales, distribution and service activities in many areas of the world.
Sales of products to major international firms outside North America are
transacted by exports directly from the United States and shipments from
foreign facilities (operated through subsidiaries, affiliates, joint
ventures or licensees) which manufacture and/or assemble Cummins'
products.
In 2000, approximately 57 percent of net sales were in the United
States. Major international markets include Asia and Australia (14
percent of net sales); Europe and the CIS (13 percent of net sales);
Mexico and Latin America (7 percent of net sales) and Canada (6 percent
of net sales).
BUSINESS MARKETS
________________
Engine Business
_______________
Heavy-duty Truck Market
_______________________
Cummins has a complete line of diesel engines that range from 280 to 650
horsepower serving the worldwide heavy-duty truck market. All major heavy-
duty truck manufacturers in North America offer the Company's heavy-duty
diesel engines as standard or optional power. The Company's largest
customer for heavy-duty truck engines in 2000 was Freightliner
Corporation, a division of DaimlerChrysler. Sales to Freightliner for
this market represented eight percent of the Company's net sales in 2000.
In 2000, factory retail sales of North American heavy-duty trucks were
15 percent lower than in 1999. Factory retail sales were 257,000 in
2000, compared to 308,000 units in 1999, 260,000 in 1998 and 224,000
in 1997. The Company's share of the North American heavy-duty truck
engine market was 28 percent at year-end, based upon data published by
Ward's. The Company's share of the North American heavy-duty truck
engine market was 31 percent in 1999.
Cummins market share in Mexico remained stable at 73 percent, positioning
Cummins as the market share leader by a very wide margin. The market size
in 2000 was approximately 11,000 units for domestic sales.
In South Africa and Australia, the Company enjoys the number one market
position and is a leading supplier of diesel engines in Europe.
Cummins offers the ISL, ISM, ISX, N14 and Signature 600 (and Signature 650
in Australia), which constitute the most modern product line in the
industry.
In the heavy-duty truck market, the Company competes with independent
engine manufacturers as well as truck producers who manufacture engines
for their own products. In North America, the Company's primary
competitors in the heavy-duty truck engine market are Caterpillar, Inc.,
Detroit Diesel Corporation and Mack Trucks, Inc. The Company's principal
competitors in international markets vary from country to country, with
local manufacturers generally predominant in each geographic market.
Other diesel engine manufacturers in international markets include
Mercedes-Benz, AB Volvo, Renault Vehicles Industriels, Iveco Diesel
Engines, Hino Motors, Ltd., Mitsubishi Heavy Industries, Ltd., Isuzu
Motors, Ltd., DAF Trucks N.V. (a subsidiary of Paccar, Inc.), Scania A.B.
and Nissan Diesel.
4
Medium-duty Truck Market
________________________
The Company has a line of diesel engines ranging from 185 to 315
horsepower serving medium-duty and inter-city delivery truck customers
worldwide. The Company has the most advanced product line in the
industry, which is served by the ISB and ISC diesel engines.
The Company entered the North American medium-duty truck market in 1990.
Based upon data published by Ward's, the Company's share of the market for
diesel-powered medium-duty trucks in 2000 was 19 percent. Freightliner
was the Company's largest customer for this market in 2000, representing 3
percent of the Company's net sales. The Company's market share in 1999
was 19 percent.
The Company sells its ISB and ISC series engines and engine components
outside North America to medium-duty truck markets in Asia, Europe and
South America.
In the medium-duty truck market, the Company competes with independent
engine manufacturers as well as truck producers who manufacture diesel
engines for their own products. Primary engine competitors in the medium-
duty truck market in North America are Navistar International Corporation
and Caterpillar, Inc. The Company's principal competitors in
international markets vary from country to country, with local
manufacturers generally predominant in each geographic market. Other
diesel engine manufacturers in international markets include Mercedes
Benz, AB Volvo, Renault Vehicles Industriels, Iveco Diesel Engines, Hino
Motors Ltd., Mitsubishi Heavy Industries, Ltd., Isuzu Motors, Ltd., DAF
Group N.V., Scania A.B., Perkins Engines Ltd., Nissan Diesel and MWM
Brazil.
Bus Market
__________
Cummins offers both diesel- and alternate-fueled engines for school buses,
transit buses and shuttle buses.
In 2000, Cummins was the market share leader for transit buses, a position
it first achieved in 1998. Cummins offers the ISB, ISC, ISL and ISM
engines for the bus markets. Cummins also offers B and C series products
for natural gas applications, which are primarily focused on transit and
school bus markets. The demand for alternate-fueled products continues to
grow both domestically and internationally.
In these markets, the Company competes both with independent manufacturers
of diesel engines and with vehicle producers who manufacture diesel
engines for their own products. Primary competitors who manufacture
diesel engines for the bus and light commercial vehicle markets are
Detroit Diesel Corporation, General Motors Corporation, Navistar
International Corporation, Caterpillar, Inc., AB Volvo, Daimler, Scania
A.B. and MWM Brazil.
Light Commercial and Specialty Vehicles
_______________________________________
Cummins offers the ISB for the Dodge Ram pickup truck in North America and
the 4B for Ford in Brazil. DaimlerChrysler was the Company's largest
customer for midrange engines in this market and the Company's number one
customer when all markets are considered, with 19 percent of the Company's
net sales in 2000.
Cummins is the leader in the class A recreational vehicle market with
an overall market share of 29 percent and a 76 percent share of the
diesel-powered recreational vehicle market.
5
Industrial Market - Construction, Agriculture, Marine
_____________________________________________________
Cummins engines power a wide variety of equipment in the construction,
agricultural and marine markets throughout the world. The major
construction equipment manufacturers are in North America, Europe, Korea
and Japan. Construction equipment manufacturers build approximately one
million pieces of equipment per year for a diverse set of applications.
The agriculture market produces about 340,000 pieces of equipment per year
above 75 horsepower, which is the market focus for Cummins. The Company
has a substantial share of the four-wheel drive agricultural tractor
market. In marine markets, about 35,000 diesel-powered pleasure boats and
10,000 commercial boats are built every year. Major marine markets are
North America, Europe and Korea.
In 2000, Cummins successfully launched the QSM11 and QSX15 heavy-duty
products to meet Tier 2 requirements in the 302 - 602 horsepower range for
construction applications. Two additional propulsion ratings, which meet
the International Maritime Organization's emission requirements, were
introduced in the marine market.
Industrial Market - High Horsepower
___________________________________
Cummins engineers, manufactures and markets engines for mining, rail,
government and petroleum markets and also produces engines for power
generation and marine applications. The Company's engine range covers
from 19-liters to 91-liters, representing 550 horsepower to 3,500
horsepower and is the most modern high horsepower product line in the
industry.
Cummins offers a full product line for mining applications that compete in
all segments from small underground mining equipment up to 400-ton haul
trucks. The launch of the QSK78 at MINExpo 2000 extends Cummins' mining
products up to 3,500 horsepower, the largest in the mining industry.
Cummins occupies the number two position in this market.
The rail market activity is primarily in Europe and Asia, with the
Company having number one market position in the worldwide railcar
market. With the Company's new products QSK60 and QSK78, Cummins will
be able to move into a larger proportion of the locomotive market
outside North America.
Government market activity represents a small portion of high horsepower
markets and the sales are primarily in North America and Europe.
Petroleum markets currently represent a small but growing part of high
horsepower business. The new high horsepower products allow Cummins to be
a full line supplier to this industry.
Power Generation Business
_________________________
In 2000, power generation sales represented 21 percent of the Company's
net sales. The strategic mission of Cummins Power Generation is to work
in partnership with its customers to provide "powerful solutions."
Cummins will deliver products and services that generate electric power,
wherever and whenever it is needed. The Power Generation business is
vertically integrated and manufactures all of the components that make up
power generation systems, including engines, controls, alternators,
transfer switches, switchgear, air filtration and exhaust systems.
Cummins Power Generation also provides a range of services including long-
term maintenance contracts and turnkey power solutions including the
complete range of maintenance and services. Rental of power equipment is
also available through the Cummins Power Rent organization.
6
Cummins offers reciprocating engine-based power generation systems
worldwide with a power range of 2 kilowatts to 2 megawatts for either
standby or prime power applications. Engines are offered with a choice of
fuels: diesel, natural gas and gasoline-fired.
Newage, a subsidiary of Cummins Power Generation, is a leader in the
alternator industry, supplying alternators with a range up to 4 megawatts.
Cummins Power Generation competes on a global scale with a variety of
engine manufacturers and generator set assemblers. Caterpillar, Inc.
remains the primary competition, with its acquisition of MAK, Perkins
and FG Wilson. DaimlerChrysler, through its acquisition of Detroit
Diesel Corporation and AB Volvo, is another major engine manufacturer
with a presence in the high-speed generation segment of the market.
Onan brand sets compete in the consumer business segment and have a
leading market share exceeding 80 percent. Newage competes globally
with Emerson Electric, Marathon and Meccalte, among others.
Filtration Business and Other
______________________________
Fleetguard, Cummins' Filtration Business, is a leading designer and
manufacturer of filtration systems for heavy-duty equipment. Its products
are produced and sold in global markets, including Europe, North America,
South America, India, China, Australia and the Far East. Nelson,
purchased in 1998, designs and manufactures air filtration and exhaust
systems and distributes in the same markets. The two companies provide a
complete filtration business solution for their customers. The Filtration
Business also produces products for the automotive specialty filtration
market and the industrial filtration market through its two subsidiaries,
Kuss, located in Findley, Ohio, and Universal Silencer, located in
Stoughton, Wisconsin.
Cummins owns 17 distributorships, covering over 25 countries, with
most of them located outside of the United States. Cummins also
participates in three joint venture entities that serve the role of
Cummins' distributors. Most distributors engage in the selling of
loose engines, generator sets and service parts, as well as perform
service and repair activities on Cummins products. Cummins'
distributors serve the dealers and end users in the territory. Some
distributors also work with Original Equipment Manufacturers.
Holset's turbochargers are sold worldwide. Holset's joint venture
with TELCO assembled and shipped its first turbochargers in 1996. A
joint venture with Wuxi in China also began production in 1996. In
1999, Holset began full production in the United Kingdom of a variable
geometry turbocharger designed for truck powertrains. In 2000, Holset
completed consolidation of its U.S. manufacturing facilities onto one
site in Charleston, South Carolina.
BUSINESS OPERATIONS
___________________
International
_____________
The Company has manufacturing facilities worldwide, including major
operations in Europe, India, Mexico and Brazil. Parts distribution
centers in Brazil, Mexico, Australia, Singapore, China, India and Belgium
are strategically located to supply service parts to maintain and repair
Cummins engines.
The Company has entered into alliances with business partners in various
areas of the world.
In 1997, the Company acquired an additional 1 percent of the outstanding
shares of Kirloskar Cummins Limited, becoming the majority owner, and
changed the name to Cummins India Limited. This business is now
consolidated into Cummins financial statements.
7
In 1996, a joint venture was formed with two of the Fiat Group companies -
Iveco (trucks and buses) and New Holland (agricultural equipment) - to
design and manufacture the next generation of 4-, 5- and 6-liter engines
based on Cummins 4- and 6-liter B series engines. Operations of Dong Feng
in China were expanded to form a joint venture for production of a C
series engine in addition to the license for B Series engines.
In 1995, the Company formed a joint venture with China National Heavy Duty
Truck Corporation in Chongqing, previously a Cummins' licensee, to
manufacture a broad line of diesel engines in China.
Cummins and Scania have a joint venture to produce a fuel system for heavy-
duty diesel engines. Cummins also has a joint venture with TELCO to
manufacture the Cummins B Series engines in India for TELCO trucks.
Cummins and Komatsu have formed joint ventures to manufacture the B Series
engines in Japan and high-horsepower Komatsu designed engines in the
United States. In 1997, a third joint venture with Komatsu to design next
generation industrial engines was announced.
Cummins has entered into license agreements that provide for the
manufacture and sale of the Company's products in Turkey, China, Pakistan,
South Korea, Indonesia and other countries.
Several of the Company's subsidiaries have operations throughout the
world.
Because of the Company's global business activities, its operations are
subject to risks, such as currency controls and fluctuations, import
restrictions and changes in national governments and policies.
Research and Development
________________________
Cummins conducts an extensive research and engineering program to achieve
product improvements, innovations and cost reductions for its customers,
as well as to satisfy legislated emissions requirements. The Company is
nearing completion of a program to renew and extend its engine range.
Cummins has introduced a variety of concepts in the diesel industry that
combine electronic controls, computing capability and information
technology. The Company also offers alternate fueled engines for certain
of its markets. As disclosed in Note 1 to the Consolidated Financial
Statements, research and development expenditures approximated $220
million in 2000, $220 million in 1999 and $230 million in 1998. The
Company continues to invest in technologies to meet increasingly more
stringent emissions standards.
Sales and Distribution
______________________
While the Company has supply agreements with some customers for Cummins
engines in both on- and off-highway markets, most of the Company's
business is done on open purchase orders. These purchase orders usually
may be canceled on reasonable notice without cancellation charges.
Therefore, while incoming orders generally are indicative of anticipated
future demand, the actual demand for the Company's products may change at
any time. While the Company typically does not measure backlog, customers
provide information about future demand, which is used by the Company for
production planning. Lead times for the Company's engines are dependent
upon the customer, market and application.
While individual product lines may experience modest seasonal declines in
production, there is no material effect on the demand for the majority of
Cummins' products on a quarterly basis. The power generation business,
however, normally encounters seasonal declines in the first quarter of the
year.
The Company's products compete on a number of factors, including
performance, price, delivery, quality and customer support. Cummins
believes that its continued focus on cost, quality and delivery, extensive
technical investment, full product line and customer-led support programs
are key elements of its competitive position.
8
Cummins warrants its engines, subject to proper use and maintenance,
against defects in factory workmanship or materials for either a specified
time period or mileage or hours of use. Warranty periods vary by engine
family and market segment.
There are approximately 8,900 locations in North America, primarily owned
and operated by OEMs or their dealers, at which Cummins-trained service
personnel and parts are available to maintain and repair Cummins engines.
The Company's parts distribution centers are located strategically
throughout the world.
Cummins also sells engines, parts and related products through
distributorships worldwide. The Company believes its distribution system
is an important part of its marketing strategy and competitive position.
Most of its North American distributors are independently owned and
operated. The Company has agreements with each of these distributors,
which typically are for a term of three years, subject to certain
termination provisions. Upon termination or expiration of the agreement,
the Company is obligated to purchase various assets of the
distributorship. The purchase obligation of the Company relates primarily
to inventory of the Company's products, which can be resold by the Company
over a reasonable period of time. In the event the Company had been
required to fulfill its obligations to purchase assets from all
distributors simultaneously at December 31, 2000, the aggregate cost would
have been approximately $362 million. Management believes it is unlikely
that a significant number of distributors would terminate their agreements
at the same time, requiring the Company to fulfill its purchase
obligation.
Supply
______
The Company manufactures many of the components used in its engines,
including blocks, heads, rods, turbochargers, crankshafts and fuel
systems. Cummins has adequate sources of supply of raw materials and
components required for its operations. The Company has arrangements with
certain suppliers who are the sole sources for specific products. While
the Company believes it has adequate assurances of continued supply, the
inability of a supplier to deliver could have an adverse effect on
production at certain of the Company's manufacturing locations.
Employment
__________
At December 31, 2000, Cummins employed 28,000 persons worldwide,
approximately 10,700 of whom are represented by various unions.
The Diesel Workers' Union (DWU) represents employees at several Southern
Indiana plants, under two contracts. In 1993, members of the DWU working
in a majority of the Company's Southern Indiana manufacturing facilities
ratified an agreement that extends until the year 2004. In 2000, members
of the DWU at the Company's midrange engine plant ratified a four-year
agreement.
The Office Committee Union (OCU) represents technical and administrative
employees at the Company`s Southern Indiana facilities, including its
Technical Center, under two contracts. In 2000, members of the OCU at the
Company's midrange engine plant in Southern Indiana ratified a four-year
agreement. In 1999, members of the OCU ratified a five-year agreement for
offices and other plants in Southern Indiana and the Company's Technical
Center.
The International Association of Machinists represents employees at the
Company's remanufacturing plant in Memphis, Tennessee, under a four-year
agreement which was ratified in 2000.
The Union of Needletrades, Industrial and Textile Employees represents
employees at the Company's filtration product plan in Findlay, Ohio, under
a five-year agreement which was ratified in 1997.
9
The United Auto Workers represents employees at the Company's filtration
products plant in Cookeville, Tennessee, under a three-year agreement
ratified in 1999.
The Company has other labor agreements covering employees in North
America, South America, the United Kingdom and India.
ENVIRONMENTAL COMPLIANCE
________________________
Product Environmental Compliance
________________________________
Cummins engines are subject to extensive statutory and regulatory
requirements that directly or indirectly impose standards with respect to
emissions and noise. Cummins' products comply with emissions standards
that the US Environmental Protection Agency ("EPA") and California Air
Resources Board ("CARB"), as well as other regulatory agencies around the
world, have established for heavy-duty on-highway diesel and gas engines
and off-highway engines produced through 2001. Cummins' ability to comply
with these and future emissions standards is an essential element in
maintaining its leadership position in regulated markets. The Company
will make significant capital and research expenditures to comply with
these standards. Failure to comply could result in adverse effects on
future financial results.
Cummins has successfully completed the certification of its 2001 on-
highway products, which include both midrange and heavy-duty engines. All
of these products underwent extensive laboratory and field testing prior
to their release.
In October 1998, Cummins and other manufacturers of heavy-duty diesel
engines entered into a Consent Decree with the EPA, the U. S. Department
of Justice and the CARB related to concerns they had raised regarding the
level of Nitrogen Oxide (NOx) emissions from diesel engines under certain
driving conditions. The terms of that Consent Decree are a matter of
public record. Cummins has developed extensive corporate action plans to
comply with all aspects of the Consent Decree. Additionally, four
separate court actions have been filed as a result of allegations of the
diesel emissions matter. The New York Supreme Court ruled in favor of the
Company. An appeal was filed and the Appellate Division ruled in favor of
the Company and other defendants. Two courts in California ruled in favor
of the Company. A fourth action was filed in U.S. District Court, for the
District of Columbia. This case was dismissed in September 2000.
The company is taking steps to review the timing of the introduction of
the 2.5 gram NOx + NMHC (non-methane hydrocarbon) engines under the
Consent Decree. Analysis conducted through the company's Value Package
Introduction system indicates that significant field testing at this point
is still needed. Without this important testing there will be
reliability and durability risks to consider if the products were released
by the Consent Decree date of October 2002. This delay in field testing
of a stable and mature product design has been caused by significant
component development issues in the exhaust gas recirculation system and
because EPA has failed, until recently, to provide confirmation of the
auxiliary emissions control structure for the product. Discussions are on-
going with appropriate EPA and CARB technical and policy offices to
explore later dates for introduction.
Model year 1998 marked the latest major change in promulgated emissions
requirements for heavy-duty on-highway diesel engines when the oxides of
nitrogen standard was lowered from 5.0 to 4.0 g/bhp-hr.
Contained in the environmental regulations are several means for the EPA
to ensure and verify compliance with emissions standards. Two of the
principal means are tests of new engines as they come off the assembly
line, referred to as selective enforcement audits ("SEA"), and tests of
field engines, commonly called in-use compliance tests. The SEA
provisions have been used by the EPA to verify the compliance of heavy-
duty engines for several years. In 2000, no such audit test was performed
on Cummins engines. The failure of a SEA could result in cessation of
production of the non-compliant engines and the recall of engines produced
prior to the audit. In the product development process, Cummins
anticipates SEA requirements when it sets emissions design targets.
10
No Cummins engines were chosen for in-use compliance testing in 2000. It
is anticipated that the EPA will increase the in-use test rate in future
years, raising the probability that one or more of the Company's engines
will be selected.
In 1988, CARB promulgated a rule that necessitates the reporting of
failures of emissions-related components when the failure rate reaches a
specified level (25 component failures or one percent of build, whichever
is greater). At somewhat higher failure rates (50 components or four
percent of build), a recall may be required. In October 1999, the Company
communicated to CARB that a failure of the oxidation catalyst used with
certain urban bus engines had experienced failures at a level that
necessitates a report. This failure has now reached the level that could
require a recall. Cummins has initiated activities to correct these
failures on all affected engines in California as well as those in other
states.
Heavy-duty engines used in construction, agricultural and certain mining
applications are also subject to emission regulations. In the United
States such standards began phasing-in in 1996. In other parts of the
world similar standards are applied. Cummins has successfully completed
certification of its engines used in these non-road applications. All of
these products have undergone extensive laboratory and field tests prior
to their release.
EPA's audit provisions cover certified, non-road engines. In 2000, no
Cummins engines were selected for such audit testing.
Emissions standards in international markets, including Europe and Japan,
are becoming more stringent. Given the Company's experience in meeting US
emissions standards, it believes that it is well positioned to take
advantage of opportunities in these markets as the need for emissions-
control capability grows.
There are several Federal and state regulations which encourage and, in
some cases, mandate the use of alternate fueled heavy-duty engines. The
Company currently offers natural gas fueled versions of its B5.9 and C8.3
engines, ranging from 150 to 280 horsepower, as well as a propane-fueled
version of its B5.9 engine rated at 195 horsepower.
Vehicles and certain industrial equipment in which diesel engines are
installed must meet Federal noise standards. The Company believes that
applications in which its engines are now installed meet those noise
standards and that future installations also will be in compliance.
Other Environmental Statutes and Regulations
____________________________________________
Cummins believes it is in compliance in all material respects with laws
and regulations applicable to the plants and operations of the Company and
its subsidiaries. During the past five years, expenditures for
environmental control activities and environmental remediation projects at
the Company's operating facilities in the United States have not been a
major portion of annual capital outlays and are not expected to be
material in 2000.
Pursuant to notices received from Federal and state agencies and/or
defendant parties in site environmental contribution actions, the Company
and its subsidiaries have been identified as potentially responsible
parties ("PRPs") under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, or similar state laws,
at a number of waste disposal sites. Under such laws, PRPs typically are
jointly and severally liable for any investigation and remediation costs
incurred with respect to the sites. Therefore, the Company's ultimate
responsibility for such costs could be a percentage greater than the
percentage of waste actually contributed to the site by the Company.
The sites at which the Company or its subsidiaries are currently named as
a PRP are the following: Old City Landfill, Columbus, Indiana; White House
Waste Oil Pits, Jacksonville, Florida; Seaboard Chemical, Jamestown, North
Carolina; Double Eagle Refinery, Oklahoma City, Oklahoma; Wastex Research,
East St. Louis, Illinois; North Hollywood Dump, Memphis, Tennessee;
Commercial Oil, Oregon, Ohio; Berliner & Ferro, Swartz Creek, Michigan;
Schnitzer Iron & Metal, St. Paul, Minnesota; Four County Landfill, Culver,
Indiana; Schumann Site, South Bend, Indiana; Great Lakes Asphalt,
Zionsville, Indiana; Third Site, Zionsville, Indiana; Auto-Ion, Kalamazoo,
Michigan; PCB Treatment Inc., Kansas City, Kansas; ENRx, Buffalo, New
York; Uniontown Landfill, Uniontown, Indiana; Sand Springs, Oklahoma;
United Steel Drum, East St. Louis, Illinois; Putnam County Landfill,
Cookeville, Tennessee; Enterprise Oil, Detroit, Michigan; Wayne
Reclamation & Recycling, Ft. Wayne, Indiana; and Casmalia Disposal Site,
Santa Barbara, California. The Company presently is contesting its status
as a PRP at several of these sites. At some of these sites, the Company
will be released from liability at the site as a de minimis PRP for a
nominal amount.
11
While the Company is unable at this time to determine the aggregate cost
of remediation at these sites, it has attempted to analyze its
proportionate and actual liability by analyzing the amounts of waste
contributed to the sites by the Company, the estimated costs for total
remediation at the sites, the number and identities of other PRPs and the
level of insurance coverage. With respect to other sites at which the
Company or its subsidiaries have been named as PRPs, the Company cannot
accurately estimate the future remediation costs. At several sites, the
remedial action to be implemented has not been determined for the site.
In other cases, the Company or its subsidiary has only recently been named
as a PRP and is collecting information on the site. Finally, in some
cases, the Company believes it has no liability at the site and is
actively contesting designation as a PRP.
Based upon the Company's prior experiences at similar sites, however, the
aggregate future cost to all PRPs to remediate these sites is not likely
to be significant. In each of these cases, the Company believes that it
has good defenses at several of the sites, that its percentage
contribution at other sites is likely to be de minimis or that other PRPs
will bear most of the future remediation costs. However, the
environmental laws impose joint and several liability and, consequently,
the Company's ultimate responsibility may be based upon many factors
outside the Company's control and could be material in the event that the
Company becomes obligated to pay a significant portion of these expenses.
Based upon information presently available, the Company believes that such
an outcome is unlikely and that its actual and proportionate costs of
participating in the remediation of these sites will not be material.
In 2000, various plants and facilities of the Company commenced
development and implementation of ISO 14001 standards for an environmental
management system. This activity will continue in 2001. The Company
anticipates that four of its Central Area plants and five of its North
American plants will be certified to ISO 14001 within the next two years.
ITEM 2. PROPERTIES
_______ __________
Cummins' worldwide manufacturing facilities occupy approximately 15
million square feet, including approximately 6 million square feet outside
the United States. Principal manufacturing facilities in the United
States include the Company's plants in Southern Indiana; Wisconsin;
Jamestown, New York; Lake Mills, Iowa; Cookeville, Tennessee; and Fridley,
Minnesota, as well as an engine plant in Rocky Mount, North Carolina,
which is operated in partnership with Case Corporation.
Countries of manufacture outside of the United States include England,
Brazil, Mexico, Canada, France and Australia. In addition, engines and
engine components are manufactured by joint ventures or independent
licensees at plants in England, France, China, India, Japan, Pakistan,
South Korea, Turkey and Indonesia.
Cummins believes that all of its plants have been maintained adequately,
are in good operating condition and are suitable for its current needs
through productive utilization of the facilities.
12
ITEM 3. LEGAL PROCEEDINGS
_______ _________________
The information appearing in Note 17 to the Consolidated Financial
Statements is incorporated herein by reference. The material in Item 1
"Other Environmental Statutes and Regulations" also is incorporated herein
by reference.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
_______ _________________________________________________
None.
PART II
_______
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
_______ _____________________________________________________
The Company's common stock is listed on the New York Stock Exchange and
the Pacific Stock Exchange under the symbol "CUM". The following table
sets forth, for the quarters shown, the range of high and low composite
prices of the common stock and the cash dividends declared on the common
stock.
High Low Dividends Declared
______ _______ __________________
2000
____
First quarter $49 5/8 $31 1/16 $.30
Second quarter 38 5/8 29 15/16 .30
Third quarter 36 7/8 27 1/4 .30
Fourth quarter 37 15/16 29 1/16 .30
1999
____
First quarter $42 1/4 $35 $.275
Second quarter 58 1/8 36 1/8 .275
Third quarter 64 9/16 49 .275
Fourth quarter 52 9/16 39 1/16 .30
At December 31, 2000, the approximate number of holders of record of
the Company's common stock was 4,800.
The Company has repurchased 5.4 million shares of its common stock
since 1994. The Company repurchased .4 million shares on the open
market at an aggregate price of $16 million in 2000, .7 million shares
on the open market at an aggregate purchase price of $34 million in
1999 and .4 million shares on the open market at an aggregate purchase
price of $14 million in 1998. In 1997, the Company repurchased 1.3
million shares from Ford Motor Company and another .2 million shares
on the open market at an aggregate purchase price of $75 million. The
Company repurchased .8 million shares of stock in the open market at
an aggregate purchase price of $34 million in 1996 and 1.6 million
shares at an aggregate purchase price of $69 million in 1995. All of
the acquired shares are held as common stock in treasury.
In 1997, the Company issued 3.75 million shares of its common stock to
an employee benefits trust to fund obligations of employee benefit and
compensation plans, principally retirement savings plans. Shares of
the common stock held by this trust are not used in the calculation of
the Company's earnings per share until distributed from the trust and
allocated to a benefit plan.
Certain of the Company's loan indentures and agreements contain
provisions which permit the holders to require the Company to
repurchase the obligations upon a change of control of the Company, as
defined in the applicable debt instruments.
13
The Company has a Shareholders' Rights Plan which it first adopted in
1986. The Rights Plan provides that each share of the Company's
common stock has associated with it a stock purchase right. The
Rights Plan becomes operative when a person or entity acquires 15
percent of the Company's common stock or commences a tender offer to
purchase 20 percent or more of the Company's common stock without the
approval of the Board of Directors. In the event a person or entity
acquires 15 percent of the Company's common stock, each right, except
for the acquiring person's rights, can be exercised to purchase $400
worth of common stock for $200. In addition, for a period of 10 days
after such acquisition, the Board of Directors can exchange such right
for a new right which permits the holders to purchase one share of the
Company's common stock for $1 per share. If a person or entity
commences a tender offer to purchase 20 percent or more of the
Company's common stock, unless the Board of Directors redeems the
rights within 10 days of the event, each right can be exercised to
purchase one share for $200. The plan also allows holders of the
rights to purchase shares of the acquiring person's stock at a
discount if the Company is acquired or 50 percent of the assets or
earnings power of the Company is transferred to an acquiring person.
The Company's bylaws provide that Cummins is not subject to the
provisions of the Indiana Control Share Act. However, Cummins is
governed by certain other laws of the State of Indiana applicable to
transactions involving a potential change of control of the Company.
ITEM 6. SELECTED FINANCIAL DATA
_______ _______________________
$ Millions, except
per share amounts 2000 1999 1998 1997 1996
_____________________ ______ ______ ______ ______ ______
Net sales $6,597 $6,639 $6,266 $5,625 $5,257
Net earnings (loss) 8 160 (21) 212 160
Earnings (loss) per share:
Basic .20 4.16 (.55) 5.55 4.02
Diluted .20 4.13 (.55) 5.48 4.01
Cash dividends per share 1.20 1.125 1.10 1.075 1.00
Total assets 4,500 4,697 4,542 3,765 3,369
Long-term debt 1,032 1,092 1,137 522 283
Earnings per share for 1996 have been restated to reflect the adoption
of SFAS No. 128.
In 2000, the Company's results included charges of $160 million ($103
million after tax, or $2.71 per share) reflecting restructuring
actions, impairment of assets and other activities largely focused in
the Engine Business. These actions were taken in response to the
downturn in the North American heavy-duty truck market and related
conditions. The charges included $42 million attributable to employee
severance actions, $72 million for impairment of equipment and other
assets, $30 million for impairment of software developed for internal
use where the programs were cancelled prior to implementation and $16
million associated with exit costs to close or consolidate a number of
smaller business operations.
In 1999, the Company's results included a charge of $60 million in
connection with the dissolution of the Cummins Wartsila joint venture.
In 1998, the Company's results included charges totaling $217 million,
comprised of $78 million for revised estimates of additional product
coverage liability for both base and extended warranty programs, $114
million of costs associated with the Company's plan to restructure,
consolidate and exit certain business activities and $25 million for a
civil penalty resulting from an agreement reached with the U.S.
Environmental Protection Agency, the Department of Justice and the
California Air Resources Board regarding diesel engine emissions.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
_______ _____________________________________________________________
OVERVIEW
________
Net sales were $6.6 billion in 2000, essentially flat with $6.6 billion
reported in 1999 and 5 percent higher than in 1998. Earnings before
interest and taxes in 2000 were $249 million, or 3.8 percent of sales,
excluding a $160 million pretax charge in connection with certain
restructuring actions and asset impairment write-downs. This compares
to $356 million in 1999, excluding charges of $60 million pretax in
connection with the dissolution of the Cummins Wartsila joint venture.
As reported, earnings before interest and taxes were $89 million in
2000, $296 million in 1999 and $65 million in 1998. Net earnings in
2000 were $8 million or $.20 per share compared to $160 million or $4.13
per share in 1999 and a net loss of $21 million or $(.55) per share in
1998.
RESULTS OF OPERATIONS
_____________________
Net Sales:
__________
In 2000, the Company's sales totaled $6.6 billion. Revenues from sales
of engines were 52 percent of the Company's net sales in 2000, with
engine revenues 5 percent lower than in 1999 and flat compared to 1998.
The Company shipped 421,800 engines in 2000, compared to 426,100 engines
in 1999 and 403,300 in 1998 as follows:
Unit shipments 2000 1999 1998
________________ _______ _______ _______
Midrange engines 318,200 298,400 287,400
Heavy-duty engines 91,900 117,900 106,100
High-horsepower engines 11,700 9,800 9,800
_______ _______ _______
421,800 426,100 403,300
_______ _______ _______
_______ _______ _______
Revenues from non-engine products, which were 48 percent of net sales in
2000, were 5 percent higher than in 1999 and 11 percent higher than in
1998. The major increases within non-engine revenues were achieved in
parts sales, company-owned distributors and the Holset turbocharger
operations. Sales of the remaining non-engine products, in the
aggregate, were essentially level with 1999.
The Company's net sales for each of its key segments during the last three
years were:
$ Millions 2000 1999 1998
__________ ______ ______ ______
Automotive markets $2,936 $3,203 $2,928
Industrial markets 1,114 1,022 1,054
_____ _____ _____
Engine Business 4,050 4,225 3,982
Power Generation Business 1,395 1,356 1,230
Filtration Business & Other 1,152 1,058 1,054
______ ______ ______
$6,597 $6,639 $6,266
______ ______ ______
______ ______ ______
Cummins' Engine Business, the Company's largest business segment,
produces engines and parts for sale to customers in both automotive
and industrial markets. Engine Business customers are 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 2000, a 4 percent decrease from 1999 and
a 2 percent increase over 1998. The 2000 discussion and analysis of
results has been aligned to reflect the organization structure of the
Engine Business in addressing its markets.
Sales of $2.1 billion in the bus and truck markets were 13 percent
lower than in 1999 and 5 percent lower than in 1998. In 2000, heavy-
duty truck engine revenues of $1.4 billion were 19 percent lower than
1999 and 7 percent lower than 1998, reflecting the downturn in the
North American heavy-duty truck market, where shipments were down 35
percent from 1999. This was partially offset by increases in
international heavy-duty markets, where shipments increased 34 percent
from 1999.
15
Medium-duty truck and bus engine revenues of $662 million were 4
percent higher than in 1999 and flat compared to 1998. In 2000,
medium-duty truck engine volumes were 5 percent lower than in 1999 and
reflect a 29 percent decline in North American volumes. This decline
was partially offset by a 14 percent shipment increase in
international medium-duty truck markets. Bus engine shipments were 41
percent higher than in 1999.
Sales of $830 million in the light commercial vehicle market were 7
percent higher than in 1999 and 16 percent higher than in 1998,
reflecting an increase in engine shipments from 1999. Record unit
shipments in 2000 to Daimler-Chrysler for the Dodge Ram pickup, while
including a sharp downturn in the fourth quarter, were 16 percent
higher than in 1999 for the full year.
Sales of $873 million to the construction, agriculture and marine
markets were 4 percent higher than in 1999 and 3 percent higher than
in 1998. In 2000, shipments were 4 percent higher than in 1999,
driven by increases in the construction and marine markets. Shipment
declines in North America were more than offset by increases in
international markets.
Sales of $241 million to the high horsepower/mining market were 32
percent higher than in 1999 and 16 percent higher than in 1998.
Engine shipments were 36 percent higher than in 1999, with higher
demand in international markets accounting for much of the increase.
Revenues of $1.4 billion in 2000 for the Power Generation Business
were 3 percent higher than in 1999 and 13 percent higher than in 1998.
Sales of the Company's generator sets in 2000 were flat compared to
1999. Engine sales to generator set assemblers were up 17 percent from
the prior year. Alternator sales decreased 7 percent as compared to
1999. Sales of small generator sets for recreational vehicles and
other consumer applications were flat compared to last year.
Sales of $1.2 billion in 2000 for the Filtration Business and Other were 9
percent higher than in 1999 and 1998. In 2000, Fleetguard/Nelson revenues
increased 2 percent, but reflected a drop in demand for OEM truck and
construction equipment products as well as reduced sales to consumer-
oriented small engine and equipment manufacturers. International
distributor sales included in this segment increased 13 percent from 1999,
while sales of Holset turbochargers increased 26 percent as compared to a
year ago.
Net sales by marketing territory for each of the last three years were:
$ Millions 2000 1999 1998
__________ ______ ______ ______
United States $3,775 $4,064 $3,595
Asia/Australia 905 818 806
Europe/CIS 860 800 791
Mexico/Latin America 451 375 468
Canada 418 473 459
Africa/Middle East 188 109 147
______ ______ ______
$6,597 $6,639 $6,266
______ ______ ______
______ ______ ______
In total, international markets accounted for 43 percent of the
Company's revenues in 2000. Europe and the CIS, representing 13
percent of the Company's sales in 2000, were 8 percent higher than in
1999 and 9 percent higher than in 1998. Sales to Canada, representing
6 percent of sales in 2000, were 12 percent lower than in 1999. Asian
and Australian markets, in total, represented 14 percent of the
Company's sales in 2000, with increases in sales to Asia from 1999.
In Asia, sales to Southeast Asia increased 14 percent, sales to Korea
increased 23 percent, sales to China increased 25 percent and sales to
Japan and India were slightly higher than 1999 levels. Business in
Mexico and Latin America, representing 7 percent of sales in 2000, was
20 percent higher than in 1999. Sales to Africa/Middle East,
representing 3 percent of sales in 2000, increased 72 percent from
1999.
Gross Margin:
_____________
The Company's gross margin percentage was 19.1 percent in 2000, 21.4
percent in 1999 and 21.4 percent in 1998, excluding the special
charges recorded for product coverage and inventory write-downs in
1998. The gross margin percent in 1998 including the special charges
was 19.9 percent. Gross margins in 2000 were impacted by lower cost
absorption in the Company's heavy-duty plants, changes in product mix,
foreign exchange and higher product coverage costs. Product coverage
costs were 4.2 percent of net sales in 2000, compared to 3.7 percent
in 1999, and 3.3 percent in 1998, excluding the special charges.
Including special charges, product coverage costs were 4.5 percent of
net sales in 1998.
16
Operating Expenses:
___________________
Selling and administrative expenses were 11.8 percent of net sales in
2000, compared to 11.8 percent in 1999 and 12.5 percent in 1998.
Research and engineering expenses were 3.7 percent of net sales in
2000, compared to 3.7 percent in 1999 and 4.1 percent in 1998.
The Company's income from joint ventures and alliances was $9 million
in 2000, compared to losses of $28 million in 1999 and losses of $30
million in 1998. This improvement resulted from the dissolution of
the Wartsila joint venture at the end of 1999.
In the past three years, Cummins has recorded restructuring and other
charges to reflect business improvement initiatives committed to by
the Company's management.
As disclosed in Note 4 to the Consolidated Financial Statements, the
Company recorded charges of $160 million ($103 million after tax, or
$2.71 per share) reflecting restructuring actions, asset impairments
and other activities largely focused in the Engine Business. These
actions are taken in response to the downturn in the North American
heavy-duty truck market and related conditions. The charges include
$42 million attributable to employee severance actions, $72 million
for impairment of equipment and other assets, $30 million for
impairment of software developed for internal use where the programs
were cancelled prior to implementation and $16 million associated with
exit costs to close or consolidate a number of smaller business
operations. Of the $160 million charge, $131 million was assigned to
the Engine Business, $19 million to the Power Generation Business and
$10 million to the Filtration Business and Other.
Workforce reduction actions included overall cutbacks in staffing
levels plus the impacts of closing and consolidating operations.
Restructuring charges for workforce reductions included the severance
costs and related benefits of terminating 600 salaried employees and
830 hourly employees. Costs for workforce reductions were based on
amounts pursuant to benefit programs or statutory requirements of the
affected operations.
The asset impairment loss of $72 million was calculated in accordance
with the provisions of SFAS 121. Asset impairment of equipment from
discontinuing operations was primarily for engine assembly and fuel
system manufacturing equipment to be disposed of upon the closure or
consolidation of production operations. The asset impairment charge
included a write-down of $38 million for manufacturing equipment that
will continue to be used for approximately two years. Depreciation
will continue on these assets over that period of time. The expected
recovery value of equipment to be disposed of was based on estimated
salvage value and was excluded from the write-down. The charge also
included $11 million for equipment available for disposal, $6 million
for properties available for disposal, $10 million for investments and
$7 million for intangibles and minority interest positions related to
divesting smaller operations and investments. The carrying value of
assets held for disposal and the effect from suspending depreciation
on such assets is immaterial.
The asset impairment charge of $30 million consisted of capitalized
software-in-process being developed for internal use. The charge was
related to manufacturing, financial and administrative information
technology programs cancelled during program development and prior to
implementation.
Exit costs of $16 million to close or consolidate a number of small
businesses and operations included $6 million for equipment removal
costs, $5 million to satisfy contractual obligations and $5 million
for other exit costs. As the restructuring actions consist primarily
of the closing or consolidation of smaller operations, the Company
does not expect these actions to have a material effect on future
revenues.
Approximately $73 million, primarily related to the write-down of
impaired equipment and software and employee severance payments, has
been charged to the restructuring liabilities as of December 31, 2000.
Of the total charges associated with the restructuring activities,
cash outlays will approximate $54 million. The actions will be
completed in 2001 and 2002 with the majority of the cash outlays in
2001. The associated annual savings are estimated at $55 million upon
completion of the actions.
17
In December 1999, the Company recorded a charge of $60 million in
connection with the dissolution of the Cummins Wartsila joint venture.
The joint venture termination was effective December 31, 1999, with
the Company taking over the operations and assets of the product line
manufactured in Daventry, England.
The Company recorded charges in 1998 totaling $125 million, comprised
of $100 million of costs associated with the Company's plan to
restructure, consolidate and exit certain business activities and $25
million for a civil penalty resulting from an agreement reached with
the U.S. Environmental Protection Agency (EPA) and the Department of
Justice regarding diesel engine emissions. In addition, the Company
recorded special charges of $14 million for inventory write-downs
associated with restructuring actions.
The Company is concluding the restructuring plan implemented in the
third quarter of 1998. In the third quarter of 2000, the Company
reversed excess accruals from 1998 of $7 million and recorded $7
million of charges related to new actions committed to during the
quarter. Inclusive of the third quarter action, as of December 31,
2000, approximately $127 million has been charged against the
liabilities associated with these actions. The Company funded the
restructuring actions using cash generated from operations. The
remaining actions to be completed consist primarily of the payment of
severance commitments to terminated employees in early 2001 and the
final EPA payment to be made in July 2001.
Other:
______
Interest expense of $86 million was $11 million higher than in 1999
and $15 million higher than in 1998. Higher borrowing levels in 2000
accounted for the increase from 1999. Increased borrowings and lower
capitalization of interest accounted for the increase as compared to
1998. As disclosed in Note 5 to the Consolidated Financial
Statements, other income and expense went from $8 million of expense
in 1999 to $1 million of income in 2000, primarily due to non-
recurring transactions recorded in both years.
Provision for Income Taxes:
___________________________
The Company's income tax provision in 2000 was a benefit of $19
million, combining an effective tax rate of 23 percent from operations
and an effective tax rate of 35 percent from special charges. The
effective tax rate from operations in 2000 reflected reduced taxes on
export sales and research tax credits. In 1999, the Company's tax
provision was $55 million, reflecting an effective tax rate of 25
percent. In 1998, the Company's tax provision was $4 million, with
the tax benefits from export sales and the research credit more than
offset by the unfavorable tax effects of nondeductible losses in
foreign joint ventures and nondeductible EPA penalty and goodwill
amortization.
Minority Interest:
__________________
Minority interest in net earnings of consolidated entities was $14
million in 2000, an increase of $8 million from 1999 and an increase
of $3 million from 1998. The increase from 1999 was primarily due to
higher earnings attributable to minority partners of Cummins India
Limited and improved performance of the joint venture with Scania.
CASH FLOW AND FINANCIAL CONDITION
_________________________________
Key elements of cash flows were:
$ Millions 2000 1999 1998
__________ ______ ______ ______
Net cash provided by operating activities $ 388 $ 307 $ 271
Net cash used in investing activities (312) (166) (752)
Net cash (used in) provided by financing
activities ( 86) (105) 471
Effect of exchange rate changes on cash (2) - (1)
_____ _____ _____
Net change in cash $ (12) $ 36 $ (11)
_____ _____ _____
_____ _____ _____
18
During 2000, net cash provided from operating activities was $388
million, reflecting the Company's decline in net earnings and the non-
cash effect of depreciation and amortization, reduced by increases in
working capital. As disclosed in Note 1 to the Consolidated Financial
Statements, the Company sold receivables in 2000 in a securitization
program, which yielded proceeds of $219 million. The Company is funding
the cash requirements for restructuring actions using cash generated from
operations with the majority of the cash requirement expected to occur in
2001. Net cash used in investing activities in 2000 was $312 million and
included planned capital expenditures of $228 million. Capital
expenditures were $215 million in 1999 and $271 million in 1998. The
higher level of net cash requirements in 1998 was due primarily to the
acquisition of Nelson. Acquisitions in 2000 included the South Africa
distributorship and the purchase of assets from the dissolution of the
Wartsila joint venture. Investments in joint ventures and alliances in
2000 of $53 million reflected the net effect of capital contributions and
cash generated by certain joint ventures.
Net cash used in financing activities was $86 million in 2000. This cash
was used for dividend payments, repurchases of the Company's stock and
payments on borrowings. As disclosed in Note 7 to the Consolidated
Financial Statements, the Company issued $765 million face amount of
notes and debentures in 1998 under a $1 billion registration statement
filed with the Securities and Exchange Commission in December 1997. The
net proceeds were used to finance the acquisition of Nelson and to pay
down other indebtedness outstanding at December 31, 1997. Based on the
Company's projected cash flows from operations and existing credit
facilities, management believes that sufficient liquidity is available to
meet anticipated capital and dividend requirements in the foreseeable
future.
Legal/Environmental Matters:
____________________________
The Company and its subsidiaries are defendants in a number of pending
legal actions that arise in the normal course of business, including
environmental claims and actions related to use and performance of the
Company's products. Such matters are more fully described in Note 17 to
the Consolidated Financial Statements. In the event the Company is
determined to be liable for damages in connection with such actions or
proceedings, the unreserved portion of such liability is not expected to
have a material adverse effect on the Company's results of operations,
cash flows or financial condition.
Market Risk:
____________
The Company is exposed to financial risk resulting from volatility in
foreign exchange rates, interest rates and commodity prices. This
risk is closely monitored and managed through the use of derivative
contracts. As clearly stated in the Company's policies and
procedures, financial derivatives are used expressly for hedging
purposes, and under no circumstances are they used for speculating or
for trading. Transactions are entered into only with banking
institutions with strong credit ratings, and thus the credit risk
associated with these contracts is considered immaterial. Hedging
program results and status are reported to senior management on a
monthly and quarterly basis.
The following section describes the Company's risk exposures and
provides results of sensitivity analyses performed on December 31,
2000. The sensitivity tests assumed instantaneous, parallel shifts in
foreign currency exchange rates, commodity prices and interest rate
yield curves.
A. Foreign Exchange Rates
Due to its international business presence, the Company transacts
extensively in foreign currencies. As a result, corporate earnings
experience some volatility related to movements in exchange rates. In
order to exploit the benefits of global diversification and naturally
offsetting currency positions, foreign exchange balance sheet
exposures are aggregated and hedged at the corporate level through the
use of foreign exchange forward contracts. The objective of the
foreign exchange hedging program is to reduce earnings volatility
resulting from the translation of net foreign exchange balance sheet
positions. A hypothetical, instantaneous, 10 percent adverse movement
in the foreign currency exchange rates would decrease earnings by
approximately $4 million in the current reporting period. The
sensitivity analysis ignores the impact of foreign exchange movements
on Cummins' competitive position as well as the remoteness of the
likelihood that all foreign currencies will move in tandem against the
U.S. dollar. The analysis also ignores the offsetting impact on
income of the revaluation of the underlying balance sheet exposures.
19
B. Interest Rates
The Company currently has in place three interest rate swaps that
effectively convert fixed-rate debt into floating-rate debt. The
objective of the swaps is to more efficiently balance borrowing costs
and interest rate risk. A sensitivity analysis assumed a
hypothetical, instantaneous, 100 basis-point parallel increase in the
floating interest rate yield curve, after which rates remained fixed
at the new, higher level for a one-year period. This change in yield
curve would correspond to a $4 million increase in interest expense
for the one-year period. This sensitivity analysis does not account
for the change in the Company's competitive environment indirectly
related to changes in interest rates and the potential managerial
action taken in response to these changes.
C. Commodity Prices
The Company is exposed to fluctuation in commodity prices through the
purchase of raw materials as well as contractual agreements with
component suppliers. Given the historically volatile nature of
commodity prices, this exposure can significantly impact product
costs. The Company uses commodity swap agreements to partially hedge
exposures to changes in copper and aluminum prices. Given a
hypothetical, instantaneous, 10 percent depreciation of the underlying
commodity price, with prices then remaining fixed for a 12-month
period, the Company would experience a loss of approximately $1
million for the annual reporting period. This amount excludes the
offsetting impact of decreases in commodity costs.
Forward-looking Statements
__________________________
This Management's Discussion and Analysis of Results of Operations and
Financial Condition, other sections of this Annual Report and the
Company's press releases, teleconferences and other external
communications contain forward-looking statements that are based on
current expectations, estimates and projections about the industries
in which Cummins operates and management's beliefs and assumptions.
Words, such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions ("Future Factors") which
are difficult to predict. Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in such forward-
looking statements. Cummins undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
Future Factors include increasing price and product competition by
foreign and domestic competitors, including new entrants; rapid
technological developments and changes; the ability to continue to
introduce competitive new products on a timely, cost-effective basis;
the mix of products; the achievement of lower costs and expenses;
domestic and foreign governmental and public policy changes, including
environmental regulations; protection and validity of patent and other
intellectual property rights; reliance on large customers;
technological, implementation and cost/financial risks in increasing
use of large, multi-year contracts; the cyclical nature of Cummins'
business; the outcome of pending and future litigation and
governmental proceedings; and continued availability of financing,
financial instruments and financial resources in the amounts, at the
times and on the terms required to support Cummins' future business.
These are representative of the Future Factors that could affect the
outcome of the forward-looking statements. In addition, such
statements could be affected by general industry and market conditions
and growth rates, general domestic and international economic
conditions, including interest rate and currency exchange rate
fluctuations, and other Future Factors.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
_______ __________________________________________
See Index to Financial Statements on page 23.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
_______ ____________________________________________________
None.
20
PART III
________
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
________ __________________________________________________
The information appearing under the caption "Election of Directors" of the
Company's definitive Proxy Statement for the Annual Meeting of the
Shareholders to be held on April 3, 2001 ("the Proxy Statement") is
incorporated by reference in partial answer to this item. Except as
otherwise specifically incorporated by reference, the Proxy Statement is
not to be deemed filed as part of this report.
The executive officers of the Company at December 31, 2000 are set forth
below. The Chairman of the Board and President are elected annually by
the Board of Directors at the Board's first meeting following the Annual
Meeting of the Shareholders. Other officers are appointed by the Chairman
and ratified by the Board of Directors and hold office for such period as
the Board of Directors or Chairman of the Board may prescribe.
Present Position and Business Experience
Name Age During Last 5 Years
_______________ ___ _________________________________________________
Jean S. Blackwell 46 Vice President - Human Resources (December 1997 to
present), Vice President - General Counsel (1997)
John K. Edwards 56 Group President - Power Generation & International
and Executive Vice President (April 1996 to
present), Managing Director - Central Area (June
2000 to Present), Vice President - International
(1989 to 1996)
Mark R. Gerstle 45 Vice President - Cummins Business Services,
General Counsel and Secretary (April 2000 to
present), Vice President - Cummins Business
Services (1998-2000) Vice President and Chief
Administrative Officer and Secretary (1997 to
1998), Vice President - Law and Corporate
Affairs and Secretary (1997), Vice President -
General Counsel and Secretary (1995 to 1997)
Tom Linebarger 37 Vice President and Chief Financial Officer
(November 2000 to present), Vice President -
Supply Chain Management (1998 to 2000),
Managing Director - Holset Engineering Company
Limited (1997-1998), Senior Manager - Engineering
Operations and Technical Centre Leader, Holset
(1996-1997)
F. Joseph Loughrey 51 Executive Vice President and President -
Engine Business (October 1999 to present),
Executive Vice President and Group President -
Industrial and Chief Technical Officer (1996 to
1999), Group Vice President - Worldwide Operations
and Technology (1995 to 1996)
Frank J. McDonald 54 Vice President - Quality (May 1999 to present),
Vice President - Worldwide Midrange Operations
(1996 to 1999)
Rick J. Mills 53 Vice President - Filtration and President -
Fleetguard, Inc. (February 2000 to present),
Vice President - Corporate Controller (1996-2000)
Theodore M. Solso 53 Chairman and Chief Executive Officer (January
2000 to present), President and Chief Operating
Officer (1995-2000)
21
Present Position and Business Experience
Name Age During Last 5 Years
_______________ ___ ________________________________________________
Christine M. Vujovich 49 Vice President - Environmental Policy and Product
Strategy (October 1999 to present), Vice President -
Worldwide Marketing for Bus, Light Commercial
Automotive and Environmental Management (1996
to 1999)
John C. Wall 49 Vice President - Chief Technical Officer (March
2000 to present), Vice President - Research and
Development (1995-2000)
ITEM 11. EXECUTIVE COMPENSATION
________ ______________________
The information appearing under the following captions in the
Company's Proxy Statement is hereby incorporated by reference: "The
Board of Directors and Its Committees", "Executive Compensation --
Compensation Tables and Other Information", "Executive Compensation --
Change of Control Arrangements" and "Executive Compensation --
Compensation Committee Interlocks and Insider Participation".
The Company has adopted various benefit and compensation plans
covering officers and other key employees under which certain benefits
become payable upon a change of control of the Company. Cummins also
has adopted an employee retention program covering approximately 700
employees of the Company and its subsidiaries, which provides for the
payment of severance benefits in the event of termination of
employment following a change of control of Cummins. The Company and
its subsidiaries also have severance programs for other exempt
employees of the Company whose employment is terminated following a
change of control of the Company. Certain of the pension plans
covering employees of the Company provide, upon a change of control of
Cummins, that excess plan assets become dedicated solely to fund
benefits for plan participants.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
________ ______________________________________________________________
A discussion of the security ownership of certain beneficial owners and
management appearing under the captions "Principal Security Ownership,"
"Election of Directors" and "Executive Compensation -- Security Ownership
of Management" in the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
________ ______________________________________________
The information appearing under the captions "The Board of Directors and
Its Committees," "Executive Compensation - Compensation Committee
Interlocks and Insider Participation" and "Other Transactions and
Agreements with Directors, Officers and Certain Shareholders" in the Proxy
Statement is incorporated herein by reference.
22
PART IV
_______
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
________ _______________________________________________________________
Documents filed as a part of this report:
1. See Index to Financial Statements on page 23 for a list of
the financial statements filed as a part of this report.
2. See Exhibit Index on page 45 for a list of the exhibits filed
or incorporated herein as a part of this report.
No reports on Form 8-K were filed during the fourth quarter of 2000.
23
INDEX TO FINANCIAL STATEMENTS
_____________________________
Page
____
Responsibility for Financial Statements 24
Report of Independent Public Accountants 24
Consolidated Statement of Earnings 25
Consolidated Statement of Financial Position 26
Consolidated Statement of Cash Flows 27
Consolidated Statement of Shareholders' Investment 28
Notes to Consolidated Financial Statements 29
Quarterly Financial Data 43
24
RESPONSIBILITY FOR FINANCIAL STATEMENTS
_______________________________________
Management is responsible for the preparation of the Company's
consolidated financial statements and all related information
appearing in this Report. The statements and notes have been prepared
in conformity with accounting principles generally accepted in the
United States and include some amounts, which are estimates based upon
currently available information and management's judgment of current
conditions and circumstances. The Company engaged Arthur Andersen
LLP, independent public accountants, to examine the consolidated
financial statements. Their report appears on this page.
To provide reasonable assurance that assets are safeguarded against
loss from unauthorized use or disposition and that accounting records
are reliable for preparing financial statements, management maintains
a system of accounting and controls, including an internal audit
program. The system of accounting and controls is improved and
modified in response to changes in business conditions and operations
and recommendations made by the independent public accountants and the
internal auditors.
The Board of Directors has an Audit Committee whose members are not
employees of the Company. The committee meets periodically with
management, internal auditors and representatives of the Company's
independent public accountants to review the Company's program of
internal controls, audit plans and results, and the recommendations of
the internal and external auditors and management's responses to those
recommendations.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
________________________________________
To the Shareholders and Board of Directors of Cummins Engine Company, Inc.:
We have audited the accompanying consolidated statement of financial
position of Cummins Engine Company, Inc., (an Indiana corporation) and
subsidiaries as of December 31, 2000 and 1999, and the related consolidated
statements of earnings, cash flows and shareholders' investment for each of
the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cummins Engine Company,
Inc., and subsidiaries as of December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Chicago, Illinois
January 24, 2001
25
CUMMINS ENGINE COMPANY, INC.
____________________________
CONSOLIDATED STATEMENT OF EARNINGS
__________________________________
Millions, except per share amounts 2000 1999 1998
__________________________________ ______ ______ ______
Net sales $6,597 $6,639 $6,266
Cost of goods sold 5,338 5,221 4,925
Special charges - 92
______ ______ ______
Gross profit 1,259 1,418 1,249
Selling and administrative expenses 776 781 787
Research and engineering expenses 244 245 255
Net (income) expense from joint
ventures and alliances (9) 28 30
Interest expense 86 75 71
Other (income) expense, net (1) 8 (13)
Restructuring, asset impairment and
other special charges 160 60 125
_____ _____ _____
Earnings (loss) before income taxes 3 221 (6)
Provision (benefit) for income taxes (19) 55 4
Minority interest 14 6 11
_____ _____ _____
Net earnings (loss) $ 8 $ 160 $ (21)
_____ _____ _____
_____ _____ _____
Basic earnings (loss) per share $ .20 $ 4.16 $(.55)
Diluted earnings (loss) per share .20 4.13 (.55)
The accompanying notes are an integral part of this statement.
26
CUMMINS ENGINE COMPANY, INC.
____________________________
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
____________________________________________
Millions, except per share amounts December 31,
__________________________________ 2000 1999
______ ______
Assets
Current assets:
Cash and cash equivalents $ 62 $ 74
Receivables, net of allowance of $8 and $9 724 1,026
Inventories 770 787
Other current assets 274 293
_____ _____
1,830 2,180
_____ _____
Investments and other assets:
Investments in joint ventures and alliances 201 131
Other assets 137 143
_____ _____
338 274
_____ _____
Property, plant and equipment:
Land and buildings 590 577
Machinery, equipment and fixtures 2,417 2,375
Construction in process 189 168
_____ _____
3,196 3,120
Less accumulated depreciation 1,598 1,490
_____ _____
1,598 1,630
_____ _____
Goodwill, net of amortization of $42 and $28 354 364
_____ _____
Other intangibles, deferred taxes and
deferred charges 380 249
______ ______
Total assets $4,500 $4,697
______ ______
______ ______
Liabilities and shareholders' investment
Current liabilities:
Loans payable $ 156 $ 113
Current maturities of long-term debt 8 10
Accounts payable 388 411
Accrued salaries and wages 71 88
Accrued product coverage & marketing expenses 280 246
Income taxes payable 11 40
Other accrued expenses 309 406
_____ _____
1,223 1,314
_____ _____
Long-term debt 1,032 1,092
_____ _____
Other liabilities 837 788
_____ _____
Minority interest 72 74
_____ _____
Shareholders' investment:
Common stock, $2.50 par value, 48.6 and 48.3
shares issued 122 121
Additional contributed capital 1,137 1,129
Retained earnings 718 760
Accumulated other comprehensive income (167) (109)
Common stock in treasury,at cost,7.2 & 6.8 shares (290) (274)
Common stock held in trust for employee benefit
plans, 3.1 and 3.4 shares (151) (163)
Unearned compensation (33) (35)
_____ _____
1,336 1,429
_____ _____
Total liabilities & shareholders' investment $4,500 $4,697
______ ______
______ ______
The accompanying notes are an integral part of this statement.
27
CUMMINS ENGINE COMPANY, INC.
____________________________
CONSOLIDATED STATEMENT OF CASH FLOWS
____________________________________
Millions 2000 1999 1998
________ ______ ______ ______
Cash flows from operating activities:
Net earnings (loss) $ 8 $ 160 $ (21)
_____ _____ _____
Adjustments to reconcile net earnings (loss)
to net cash from operating activities:
Depreciation and amortization 240 233 199
Restructuring & other non-recurring actions 132 38 110
Equity in (earnings) losses of joint
ventures and alliances 9 35 38
Receivables 54 (200) (10)
Proceeds from sale of receivables 219 - -
Inventories 9 (60) (26)
Accounts payable and accrued expenses (241) 162 56
Deferred income taxes 2 (31) (65)
Other (44) (30) (10)
____ ____ ____
Total adjustments 380 147 292
____ ____ ____
388 307 271
____ ____ ____
Cash flows from investing activities:
Property, plant and equipment:
Additions (228) (215) (271)
Disposals 11 22 7
Investments in joint ventures and alliances (53) (36) (22)
Acquisitions and dispositions of business
activities (42) 57 (468)
Other - 6 2
____ ____ ____
(312) (166) (752)
____ ____ ____
Net cash provided by (used in) operating and
investing activities 76 141 (481)
____ ____ ____
Cash flows from financing activities:
Proceeds from borrowings 1 28 711
Payments on borrowings (65) (90) (161)
Net borrowings (payments) under short-term
credit agreements 49 49 (30)
Repurchases of common stock (16) (34) (14)
Dividend payments (50) (47) (46)
Other (5) (11) 11
____ ____ ____
(86) (105) 471
____ ____ ____
Effect of exchange rate changes on cash (2) - (1)
____ ____ ____
Net change in cash and cash equivalents (12) 36 (11)
Cash & cash equivalents at beginning of year 74 38 49
____ ____ ____
Cash & cash equivalents at end of year $ 62 $ 74 $ 38
____ ____ ____
____ ____ ____
Cash payments during the year for:
Interest $ 88 $ 82 $ 56
Income taxes 73 56 73
The accompanying notes are an integral part of this statement.
28
CUMMINS ENGINE COMPANY, INC.
____________________________
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
__________________________________________________
Millions, except per share amounts 2000 1999 1998
__________________________________ ___________ __________ __________
Common stock:
Balance at beginning of year $ 121 $ 120 $ 120
Issued to trust for employee
benefit plans - - -
Other 1 1 -
_____ _____ ____
Balance at end of year 122 121 120
_____ _____ ____
Additional contributed capital:
Balance at beginning of year 1,129 1,121 1,119
Issued to trust for employee
benefit plans (3) - -
Other 11 8 2
_____ _____ _____
Balance at end of year 1,137 1,129 1,121
_____ _____ _____
Retained earnings:
Balance at beginning of year 760 648 715
Net earnings (loss) 8 $ 8 160 $160 21 $(21)
___ ____ ___
Cash dividends (50) (47) ( 46)
Other - ( 1) -
____ ____ ____
Balance at end of year 718 760 648
____ ____ ____
Accumulated other comprehensive income:
Balance at beginning of year (109) (167) ( 70)
Foreign currency translation
adjustments (54) 4 (43)
Minimum pension liability
adjustments (2) 55 (54)
Unrealized losses on securities (2) (1) -
___ ___ ___
Other comprehensive income (58) (58) 58 58 (97) (97)
___ ___ ___ ___ ___ ___
Comprehensive income $(50) $218 $(118)
____ ____ ____
____ ____ ____
Balance at end of year (167) (109) (167)
___ ___ ___
Common stock in treasury:
Balance at beginning of year (274) (240) (245)
Repurchased (16) (34) (14)
Issued - - 19
_____ _____ ____
Balance at end of year (290) (274) (240)
_____ _____ ____
Common stock held in trust for
employee benefit plans:
Balance at beginning of year (163) (172) (175)
Issued - - -
Shares allocated to benefit plans 12 9 3
_____ _____ _____
Balance at end of year (151) (163) (172)
_____ _____ _____
Unearned compensation:
Balance at beginning of year (35) (38) (42)
Shares allocated to participants 2 3 4
______ ______ _____
Balance at end of year (33) (35) (38)
______ ______ _____
Shareholders' investment $1,336 $1,429 $1,272
______ ______ ______
______ ______ ______
Shares of stock
Common stock, $2.50 par value,
150.0 shares authorized
Balance at beginning of year 48.3 48.1 48.1
Shares issued .3 .2 -
____ ____ ____
Balance at end of year 48.6 48.3 48.1
____ ____ ____
____ ____ ____
Common stock in treasury
Balance at beginning of year 6.8 6.1 6.0
Shares repurchased .4 .7 .4
Shares issued - - (.3)
___ ___ ___
Balance at end of year 7.2 6.8 6.1
___ ___ ___
___ ___ ___
Common stock held in trust for
employee benefit plans
Balance at beginning of year 3.4 3.6 3.7
Shares issued - - -
Shares allocated to benefit plans (.3) (.2) (.1)
___ ___ ___
Balance at end of year 3.1 3.4 3.6
___ ___ ___
___ ___ ___
The accompanying notes are an integral part of this statement.
29
CUMMINS ENGINE COMPANY, INC.
____________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________________________________
NOTE 1. ACCOUNTING POLICIES:
Principles of Consolidation: The consolidated financial statements
include all significant majority-owned subsidiaries. Affiliated
companies in which Cummins does not have a controlling interest, or
for which control is expected to be temporary, are accounted for using
the equity method. Use of estimates and assumptions, as determined by
management, is required in the preparation of consolidated financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates and
assumptions.
Revenue Recognition: The Company recognizes revenues on the sale of
its products, net of estimated costs of returns, allowances and sales
incentives, when the products are shipped to customers. The Company
generally sells its products on open account under credit terms
customary to the region of distribution. The Company performs ongoing
credit evaluations of its customers and generally does not require
collateral to secure its customers' receivables.
Foreign Currency: Assets and liabilities of foreign entities, where
the local currency is the functional currency, have been translated at
year-end exchange rates, and income and expenses have been translated
to US dollars at average-period rates. Adjustments resulting from
translation have been recorded in shareholders' investment and are
included in net earnings only upon sale or liquidation of the
underlying foreign investment.
For foreign entities where the US dollar is the functional currency,
including those operating in highly inflationary economies, inventory,
property, plant and equipment balances and related income statement
accounts have been translated using historical exchange rates. The
resulting gains and losses have been credited or charged to net
earnings and were net losses of $14 million in 2000, $2 million in
1999 and $5 million in 1998.
Derivative Instruments: The Company makes use of derivative
instruments in its foreign exchange, commodity price and interest rate
hedging programs. Derivatives currently in use are commodity and
interest rate swaps, as well as foreign currency forward contracts.
These contracts are used strictly for hedging and not for speculative
purposes. Refer to Note 10 for more information on derivative
financial instruments.
The Company enters into commodity swaps to offset the Company's
exposure to price volatility for certain raw materials used in the
manufacturing process. As the Company has the discretion to settle
these transactions either in cash or by taking physical delivery,
these contracts are not considered financial instruments for
accounting purposes. These commodity swaps are accounted for as
hedges.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133 on accounting for derivative instruments and hedging activities.
The statement is effective for fiscal years beginning after June 15,
2000. The Company will adopt this statement at the beginning of
fiscal 2001 and has evaluated and modified its hedging strategy as it
applies to the new statement. The statement will not have a material
effect on the Company's results of operations.
Other Costs: Estimated costs of commitments for product coverage
programs are charged to earnings at the time the Company sells its
products.
Research & development expenditures, net of contract reimbursements,
are expensed when incurred and were $224 million in 2000, $218 million
in 1999 and $228 million in 1998.
Maintenance and repair costs are charged to earnings as incurred.
Cash Equivalents: Cash equivalents include all highly liquid
investments with an original maturity of three months or less at the
time of purchase.
Accounts Receivable: During 2000, the Company entered into a
receivables securitization program and sold trade receivables in
securitization transactions to a special purpose subsidiary with
principal aggregating $741 million. The subsidiary transfers
positions in these receivables to conduits as the basis for issuing
commercial paper. The subsidiary obtains receivables from the conduit
for approximately 15 percent of a transferred position and receives
cash for the remainder of the position. The Company receives annual
servicing fees approximating .5 percent of the sold accounts
receivable. The conduit investors and the special purpose subsidiary
have no recourse to the Company's other assets for failure of debtors
to pay when due. For the marketed receivables, the Company's retained
interests are subordinated to the conduit's interests. The sold
receivables servicing portfolio amounted to $355 million at December
31, 2000.
30
The table below summarizes certain cash flows received from and paid to the
special purpose subsidiary for the year ended December 31, 2000:
$ Millions
__________
Proceeds from new securitizations $219
Proceeds from collections reinvested
in securitizations 385
Servicing fees received 2
Servicing advances (12)
Inventories: Inventories are stated at the lower of cost or net
realizable value. Approximately 22 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. All other
inventories are valued using the first-in, first-out (FIFO) method.
Inventories at December 31 were as follows:
$ Millions 2000 1999
__________ ____ ____
Finished products $404 $402
Work-in-process and raw materials 420 440
____ ____
Inventories at FIFO cost 824 842
Excess of FIFO over LIFO (54) (55)
____ ____
$770 $787
____ ____
____ ____
Property, Plant and Equipment: Property, plant and equipment are
stated at cost. A modified units-of-production method, which is based
upon units produced subject to a minimum level, is used to depreciate
substantially all engine production equipment. The straight-line
depreciation method is used for all other equipment. The estimated
depreciable lives range from 20 to 40 years for buildings and 3 to 20
years for machinery, equipment and fixtures.
Long-Lived Assets: The Company evaluates the carrying value of its
long-lived assets for impairment whenever adverse events or changes in
circumstances indicate that the carrying value of an asset may be
impaired. In accordance with SFAS No. 121, if the quoted market price
or, if not available, the undiscounted cash flows are not sufficient
to support the recorded asset value, an impairment loss is recorded to
reduce the carrying value of the asset to the amount of expected
discounted cash flows. This same policy is followed for goodwill.
Software: Internal and external software costs (excluding research,
reengineering and training) are capitalized and amortized generally
over 5 years. Capitalized software, net of amortization, was $110
million at December 31, 2000, $110 million at December 31, 1999 and
$75 million at December 31, 1998. Total software amortization expense
was $27 million in 2000, $18 million in 1999 and $8 million in 1998.
Earnings Per Share: Basic earnings per share of common stock are computed
by dividing net earnings by the weighted-average number of shares
outstanding for the period. Diluted earnings per share are computed by
dividing net earnings by the weighted-average number of shares, assuming the
exercise of stock options when the effect of their exercise is dilutive.
Shares of stock held by the employee benefits trust are not included in
outstanding shares for EPS until distributed from the trust.
Net Weighted
Millions, except Earnings Average
per share amounts (Loss) Shares Per share
_________________ ________ ________ _________
2000
____
Basic $ 8 38.2 $ .20
Options - - _____
____ ____ _____
Diluted $ 8 38.2 $ .20
____ ____ _____
____ ____ _____
1999
____
Basic $160 38.3 $4.16
Options - .3 _____
____ ____ _____
Diluted $160 38.6 $4.13
____ ____ _____
____ ____ _____
1998
____
Basic $(21) 38.5 $(.55)
Options - - _____
____ ____ _____
Diluted $(21) 38.5 $(.55)
____ ____ _____
____ ____ _____
NOTE 2. ACQUISITION: In January 1998, the Company completed the
acquisition of Nelson Industries, Inc., for $453 million. Nelson, a
filtration and exhaust manufacturer, was consolidated on the date of
acquisition. In accordance with APB No. 16, Nelson's net assets were
recorded at fair value, and the purchase price in excess of net assets
is 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 special charges also included $14
million for inventory write-downs associated with the Company's
restructuring and exit activities. These write-downs related to
amounts of inventory rendered excess or unusable due to the closing or
consolidation of facilities.
31
NOTE 4. RESTRUCTURING, ASSET IMPAIRMENT AND OTHER SPECIAL CHARGES:
The 2000 financial results included charges of $160 million ($103
million after tax, or $2.71 per share) reflecting restructuring
actions, asset impairments and other activities largely focused in the
Engine Business. These actions were taken in response to the downturn
in the North American heavy-duty truck market and related conditions.
The charges included $42 million attributable to employee severance
actions, $72 million for impairment of equipment and other assets, $30
million for impairment of software developed for internal use where
the programs were cancelled prior to implementation and $16 million
associated with exit costs to close or consolidate a number of smaller
business operations.
Of the $160 million charge, $131 million was assigned to the Engine
Business, $19 million to the Power Generation Business and $10 million
to the Filtration Business and Other.
Workforce reduction actions included overall cutbacks in staffing
levels plus the impacts of closing and consolidating operations.
Restructuring charges for workforce reductions included the severance
costs and related benefits of terminating 600 salaried employees and
830 hourly employees. Costs for workforce reductions were based on
amounts pursuant to benefit programs or statutory requirements of the
affected operations.
The asset impairment loss of $72 million was calculated in accordance
with the provisions of SFAS 121. Asset impairment of equipment from
discontinuing operations was primarily for engine assembly and fuel
system manufacturing equipment to be disposed of upon the closure or
consolidation of production operations. The asset impairment charge
included a write-down of $38 million for manufacturing equipment that
will continue to be used for approximately two years. Depreciation
will continue on these assets over that period of time. The expected
recovery value of equipment to be disposed of was based on estimated
salvage value and was excluded from the write-down. The charge also
included $11 million for equipment available for disposal, $6 million
for properties available for disposal, $10 million for investments and
$7 million for intangibles and minority interest positions related to
divesting smaller operations and investments. The carrying value of
assets held for disposal and the effect from suspending depreciation
on such assets is immaterial.
The asset impairment charge of $30 million consisted of capitalized
software-in-process being developed for internal use. The charge was
related to manufacturing, financial and administrative information
technology programs cancelled during program development and prior to
implementation.
Exit costs of $16 million to close or consolidate a number of small
businesses and operations included $6 million for equipment removal
costs, $5 million to satisfy contractual obligations and $5 million
for other exit costs. As the restructuring actions consist primarily
of the closing or consolidation of smaller operations, the Company
does not expect these actions to have a material effect on future
revenues.
Approximately $73 million, primarily related to the write-down of impaired
equipment and software and employee severance payments, has been charged to
the restructuring liabilities as of December 31, 2000. Of the total
charges associated with the restructuring activities, cash outlays will
approximate $54 million. The actions will be completed in 2001 and 2002
with the majority of the cash outlays in 2001. The associated annual
savings are estimated at $55 million upon completion of the actions.
Activities in the major components of these charges is as follows:
Original Charges Balance
$ Millions Provision 2000 Dec. 31, 2000
__________ _________ _______ _____________
Workforce reductions $ 42 $( 5) $ 37
Impairment of software 30 (30) -
Impairment of equipment and
other assets 72 (38) 34
Exit costs 16 - 16
____ ____ ____
$160 $(73) $ 87
____ ____ ____
____ ____ ____
32
In December 1999, the Company recorded a charge of $60 million in
connection with the dissolution of the Cummins Wartsila joint venture.
The charge included $17 million to write off the Company's remaining
investment in the joint venture, $29 million for impairment of assets
transferred from the joint venture and $14 million for additional
warranty and other liabilities assumed by the Company. The joint
venture termination was effective December 31, 1999, with the Company
taking over the operations and assets of the product line manufactured
in Daventry, England.
The asset impairment loss was calculated according to the provisions
of SFAS No. 121, using expected discounted cash flows as the estimate
of fair value. The majority of the impaired assets are to be held and
used in the Company's Power Generation Business, with depreciation
continuing on such assets.
In the third quarter of 1998, the Company recorded charges of $125
million, comprised of $100 million for costs to reduce the worldwide
workforce by approximately 1,100 people, as well as costs associated
with streamlining certain majority-owned and international joint
venture operations and $25 million for a civil penalty to be paid by
the Company as a result of an agreement reached with the U.S.
Environmental Protection Agency (EPA) regarding diesel engine
emissions. In addition, the Company recorded special charges of $14
million for inventory write-downs associated with restructuring
actions.
The Company is concluding the restructuring plan implemented in the
third quarter of 1998. In the third quarter of 2000, the Company
reversed excess accruals from 1998 of $7 million and recorded $7
million of charges related to new actions committed to during the
quarter. As of December 31, 2000, approximately $127 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 payment of severance commitments to terminated employees in early
2001 and the remaining payment to the EPA in July 2001.
Activity in the major components of these charges is as follows:
Original Charges Balance
$ Millions Provision 1998 1999 2000 12/31/2000
__________ _________ _____ _____ _____ __________
Restructuring of majority-owned
operations:
Workforce reductions $ 38 $(12) $(14) $ (9) $ 3
Asset impairment loss 22 - (7) (15) -
Facility consolidations and
other 17 (8) (4) (4) 1
___ ___ ___ __ __
77 (20) (25) (28) 4
___ ___ ___ ___ __
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) (29) 4
___ ___ ___ ___ __
EPA penalty 25 - (8) (9) 8
___ ___ ___ ___ __
Total $139 $(25) $(64) $(38) $12
____ ____ ____ ____ ___
____ ____ ____ ____ ___
33
NOTE 5. OTHER (INCOME) EXPENSE: The major components of other (income)
expense included the following:
$ Millions 2000 1999 1998
__________ ____ ____ ____
Amortization of intangibles $ 13 $15 $ 14
Interest income (13) (7) (9)
Loss (gain) on sale of businesses 1 1 (7)
Rental income (7) (5) (6)
Royalty income (2) (4) (5)
Foreign currency losses 14 2 5
Non-operating partnership costs 4 6 3
Social tax refunds - - (3)
Sale of scrap (3) (1) (2)
Other (8) 1 (3)
____ ___ ____
Total $ (1) $ 8 $(13)
____ ___ ____
____ ___ ____
NOTE 6. INVESTMENTS IN JOINT VENTURES AND ALLIANCES: Investments in joint
ventures and alliances at December 31 were as follows:
$ Millions 2000 1999
__________ ____ ____
Consolidated Diesel $ 66 $ 11
European Engine Alliance 26 14
Tata Cummins 18 22
Chongqing Cummins 16 16
Dong Feng 16 10
Komatsu alliances 16 18
Behr America 14 15
Other 29 25
____ ____
$201 $131
____ ____
____ ____
Summary financial information for the joint ventures and alliances was as
follows:
December 31,
$ Millions 2000 1999 1998
__________ ______ ______ ______
Net sales $1,531 $1,334 $1,245
Gross profit 165 101 25
Net earnings (loss) 12 (64) (105)
Cummins' share 6 (32) (52)
Current assets $ 415 $ 302 $ 527
Noncurrent assets 555 485 613
Current liabilities (335) (223) (406)
Noncurrent liabilities (277) (284) (455)
_____ _____ _____
Net assets $ 358 $ 280 $ 279
_____ _____ _____
_____ _____ _____
Cummins' share $ 201 $ 131 $ 136
_____ _____ _____
_____ _____ _____
In connection with various joint venture agreements, Cummins is
required to purchase products from the joint ventures in amounts to
provide for the recovery of specified costs of the ventures. Under
the agreement with Consolidated Diesel, Cummins' purchases were $541
million in 2000 and $513 million in 1999.
NOTE 7. BORROWINGS: Long-term debt at December 31 was:
$ Millions 2000 1999
__________ ____ ____
7.125% debentures due 2028 $249 $249
6.45% notes due 2005 225 224
Commercial paper 112 168
5.65% debentures due 2098, net of unamortized
discount of $39 (effective interest rate 7.48%) 125 125
6.25% notes due 2003 125 125
6.75% debentures due 2027 120 120
Guaranteed notes of ESOP Trust due 2010 58 61
Other 26 30
_____ _____
Total 1,040 1,102
Current maturities (8) (10)
______ ______
Long-term debt $1,032 $1,092
______ ______
______ ______
Maturities of long-term debt for the five years subsequent to December
31, 2000 are $8 million, $10 million, $133 million, $7 million and
$232 million. At December 31, 2000 and 1999, the weighted-average
interest rate on loans payable and current maturities of long-term
debt approximated 7 percent and 6 percent, respectively.
The Company maintains a $500 million revolving credit agreement, maturing
in 2003, under which there were no outstanding borrowings at December 31,
2000 or 1999. The revolving credit agreement supports the Company's
commercial paper borrowings of $112 million at December 31, 2000 and $168
million at December 31, 1999. In February 1998, the Company issued $765
million face amount of notes and debentures under a $1 billion Registration
Statement filed with the Securities and Exchange Commission in 1997. Net
proceeds were used to finance the acquisition of Nelson and to pay down
other indebtedness outstanding at December 31, 1997. The Company also has
other domestic and international credit lines with approximately $135
million available at December 31, 2000.
The Company's debt agreements have several covenants which, among
other restrictions, require maintenance of a certain level of net
worth, place restrictions on the amount of additional debt the Company
may incur and require maintenance of minimum leverage ratios.
34
In December 2000, the Company paid down certain borrowings with the
proceeds from the sale of receivables in a securitization program.
At December 31, 2000 and 1999, loans payable included $139 million and
$100 million, respectively, of notes payable to banks and $17 million
and $13 million, respectively, of bank overdrafts.
The Company has guaranteed the outstanding borrowings of its ESOP Trust.
Cash contributions to the Trust, together with the dividends accumulated
on the common stock held by the Trust, are used to pay interest and
principal. Cash contributions and dividends to the Trust approximated $9
million in each year. The unearned compensation, which is reflected as a
reduction to shareholders' investment, represents the historical cost of
the shares of common stock that have not yet been allocated by the Trust
to participants.
NOTE 8. OTHER LIABILITIES: Other liabilities at December 31 included
the following:
$ Millions 2000 1999
__________ ____ ____
Accrued retirement & post-employment benefits $552 $511
Accrued product coverage & marketing expenses 170 175
Accrued compensation 51 42
Deferred income taxes 23 1
Other 41 59
___ ___
$837 $788
___ ___
___ ___
NOTE 9. INCOME TAXES: The provision for income taxes was as follows:
$ Millions 2000 1999 1998
_____________ ____ ____ ____
Current:
U.S. Federal and state $ 19 $ 43 $ 16
Foreign 35 43 41
___ ___ ___
54 86 57
___ ___ ___
Deferred:
U.S. Federal and state (94) (17) (34)
Foreign 21 (14) (19)
___ ___ ___
(73) (31) (53)
___ ___ ___
$(19) $ 55 $ 4
___ ___ ___
___ ___ ___
Significant components of net deferred tax assets related to the following
tax effects of differences between financial and tax reporting at December
31:
$ Millions 2000 1999
__________ ____ ____
Employee benefit plans $276 $282
Product coverage & marketing expenses 134 126
Restructuring charges 64 34
U.S. plant & equipment (191) (182)
Net foreign taxable differences, primarily plant
and equipment (19) 9
U.S. Federal carryforward benefits:
Net operating loss, expiring 2020 34 -
Foreign tax credits, expiring 2005 9 -
General business tax credits, expiring 2009 to 2020 72 22
Minimum tax credits, no expiration 19 15
Other net differences 2 13
____ ____
$400 $319
____ ____
____ ____
Balance Sheet Classification
____________________________
Current assets $203 $210
Noncurrent assets 220 110
Noncurrent liabilities (23) (1)
____ ____
$400 $319
____ ____
____ ____
The Company expects to realize all of its tax assets, including the use of
all carryforwards, before any expiration.
35
Earnings before income taxes and differences between the effective tax rate
and U.S. Federal income tax rate were:
$ Millions 2000 1999 1998
__________ ____ ____ ____
Earnings (loss) before income taxes:
U.S. $(136) $232 $(21)
Foreign 139 (11) 15
____ ____ ____
$ 3 $221 $ (6)
____ ____ ____
____ ____ ____
Tax at 35 percent U.S. statutory rate $ 1 $ 77 $ (2)
State taxes 1 3 (1)
Nondeductible special charges 4 - 9
Nondeductible goodwill amortization 3 3 3
Research tax credits (11) (15) (10)
Foreign sales corporation benefits (12) (18) (9)
Differences in rates and taxability of
foreign subsidiaries (3) 10 15
All other, net (2) (5) (1)
____ ____ ____
$ (19) $ 55 $ 4
____ ____ ____
____ ____ ____
NOTE 10. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT: The Company is
exposed to financial risk resulting from volatility in foreign
exchange rates and interest rates. This risk is closely monitored and
managed through the use of financial derivative contracts. As clearly
stated in the Company's policies and procedures, financial derivatives
are used expressly for hedging purposes, and under no circumstances
are they used for speculating or trading. Transactions are entered
into only with banking institutions with strong credit ratings, and
thus the credit risk associated with these contracts is considered
immaterial. Hedging program results and status are reported to senior
management on a periodic basis.
Foreign Exchange Rates
Due to its international business presence, the Company uses foreign
exchange forward contracts to manage its exposure to exchange rate
volatility. Foreign exchange balance sheet exposures are aggregated
and hedged at the corporate level. Maturities on these instruments
generally fall within the one-month and six-month range. The
objective of the hedging program is to reduce earnings volatility
resulting from the translation of net foreign exchange balance sheet
positions. The total notional amount of these forward contracts
outstanding at December 31 was as follows:
$ Millions
__________
Currency 2000 1999
________ ____ ____
British Pound $148 $120
Euro 64 47
Australian Dollar 20 19
Hong Kong Dollar 11 8
Mexican Peso 7 -
Japanese Yen 5 7
Canadian Dollar 3 3
Other 2 2
____ ____
$260 $206
____ ____
____ ____
Interest Rates
The Company manages its exposure to interest rate fluctuations through
the use of interest rate swaps. Currently the Company has in place
three interest rate swaps that effectively convert fixed-rate debt
into floating-rate debt. The objective of the swaps is to more
efficiently balance borrowing costs and interest rate risk. The
contracts were established during 1998 and 1999 and have a total
notional value of $350 million.
Fair Value of Financial Instruments
Based on borrowing rates currently available to the Company for bank
loans with similar terms and average maturities, the fair value of total
debt, including current maturities, at December 31, 2000, approximated
$1,138 million. The carrying value at that date was $1,196 million. At
December 31, 1999, the fair and carrying values of total debt, including
current maturities, were $1,104 million and $1,215 million, respectively.
The carrying values of all other receivables and liabilities approximated
fair values.
36
NOTE 11. RETIREMENT PLANS: The Company has various contributory and
noncontributory pension plans covering substantially all employees.
Cummins common stock represented 9 percent of pension plan assets at
December 31, 2000.
Cummins also provides various health care and life insurance benefits
to eligible retirees and their dependents but reserves the right to
change benefits covered under these plans. The plans are contributory
with retirees' contributions adjusted annually, and they contain other
cost-sharing features, such as deductibles, coinsurance and spousal
contributions. The general policy is to fund benefits as claims and
premiums are incurred.
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for plans with accumulated benefit obligations
in excess of plan assets were $697 million, $682 million and $558
million, respectively, as of December 31, 2000, and $651 million, $636
million and $513 million, respectively, as of December 31, 1999. The
assumed long-term rate of compensation increase for salaried plans was
5.25 percent in 2000 and 1999. Other significant assumptions for the
Company's principal plans were:
Pension Other
Benefits Benefits
2000 1999 2000 1999
____ ____ ____ ____
Weighted-average discount rate 7.75% 7.5% 7.75% 7.5%
Long-term rate of return on plan assets 10.0% 9.0%
For measurement purposes a 7 percent annual increase in health care
costs was assumed for 2001, decreasing gradually to 5.5 percent in five
years and remaining constant thereafter.
Increasing the health care cost trend rate by 1 percent would increase
the obligation by $48 million and annual expense by $4 million.
Decreasing the health care cost trend rate by 1 percent would decrease
the obligation by $43 million and annual expense by $3 million.
The Company's net periodic benefit cost under these plans was as follows:
Pension Benefits Other Benefits
$ Millions 2000 1999 1998 2000 1999 1998
____________ ____ ____ ____ ____ ____ ____
Service cost $ 50 $ 53 $ 47 $ 6 $ 8 $ 8
Interest cost 126 116 123 46 40 44
Expected return on plan
assets (161) (161) (153) - - -
Amortization of transition
asset (2) (3) (4) - - -
Other 9 12 12 3 4 3
____ ____ ____ ____ ____ ____
$ 22 $ 17 $ 25 $ 55 $ 52 $ 55
____ ____ ____ ____ ____ ____
____ ____ ____ ____ ____ ____
37
Pension Benefits Other Benefits
$ Millions 2000 1999 2000 1999
__________ ______ ______ ______ ______
Change in benefit obligation:
Benefit obligation at beginning of year $1,865 $1,907 $ 637 $ 640
Service cost 50 53 6 8
Interest cost 126 116 46 40
Plan participants' contributions 6 7 2 1
Amendments 3 14 - -
Experience (gain) loss 63 (103) 11 (21)
Benefits paid (122) (119) (37) (31)
Other (36) (10) - -
_____ _____ _____ _____
Benefit obligation at end of year $1,955 $1,865 $ 665 $ 637
_____ _____ _____ _____
_____ _____ _____ _____
Change in plan assets:
Fair value of plan assets at
beginning of year $1,922 $1,692 $ - $ -
Actual return on plan assets 162 331 - -
Employer contribution 62 20 35 30
Plan participants' contributions 6 7 2 1
Benefits paid (122) (119) (37) (31)
Other (35) (9) - -
_____ _____ _____ _____
Fair value of plan assets at end of
year $1,995 $1,922 $ - $ -
_____ _____ _____ _____
_____ _____ _____ _____
Funded status $ 40 $ 57 $ (665) $ (637)
Unrecognized:
Experience (gain) loss (a) (41) (103) 70 55
Prior service cost (b) 43 51 (12) (12)
Transition asset (c) (2) (5) - -
_____ _____ _____ _____
Net amount recognized $ 40 $ - $ (607) $ (594)
_____ _____ _____ _____
_____ _____ _____ _____
Amounts recognized in the statement
of financial position:
Prepaid benefit cost $ 110 $ 102 $ - $ -
Accrued benefit liability (111) (114) (607) (594)
Intangible asset 38 12 - -
Accumulated other comprehensive income 3 - - -
_____ _____ _____ _____
Net amount recognized $ 40 $ - $ (607) $ (594)
_____ _____ _____ _____
_____ _____ _____ _____
(a) The net deferred (gain) loss resulting from investments, other
experience and changes in assumptions.
(b) The prior service effect of plan amendments deferred for recognition
over remaining service.
(c) The balance of the initial difference between assets and obligations
deferred for recognition over a 15-year period.
38
NOTE 12. COMMON STOCK: The Company increased its quarterly common stock
dividend from 27.5 cents per share to 30.0 cents, effective with the
dividend payment in December 1999.
The Company repurchased 0.4 million shares on the open market at an
aggregate purchase price of $16 million in 2000, 0.7 million shares on
the open market at an aggregate purchase price of $34 million in 1999
and 0.4 million shares on the open market at an aggregate purchase
price of $14 million in 1998. All of the acquired shares are held as
common stock in treasury.
NOTE 13. SHAREHOLDERS' RIGHTS PLAN: The Company has a Shareholders'
Rights Plan which it first adopted in 1986. The Rights Plan provides
that each share of the Company's common stock has associated with it a
stock purchase right. The Rights Plan becomes operative when a person or
entity acquires 15 percent of the Company's common stock or commences a
tender offer to purchase 20 percent or more of the Company's common stock
without the approval of the Board of Directors.
NOTE 14. EMPLOYEE STOCK PLANS: Under the Company's stock incentive and
option plans, officers and other eligible employees may be awarded stock
options, stock appreciation rights and restricted stock. Under the
provisions of the stock incentive plan, up to one percent of the
Company's outstanding shares of common stock at the end of the preceding
year is available for issuance under the plan each year. At December 31,
2000, there were no shares of common stock available for grant and
2,319,080 options exercisable under the plans.
The Company accounts for stock options in accordance with APB Opinion No.
25 and related interpretations. No compensation expense has been
recognized for stock options since the options have exercise prices equal
to the market price of the Company's common stock at the date of grant.
Number of Weighted-average
Options Shares exercise price
________ _________ ________________
December 31, 1997 1,920,850 46.08
Granted 703,660 45.34
Exercised (54,075) 36.36
Cancelled (27,425) 53.80
_________
December 31, 1998 2,543,010 48.08
Granted 886,900 39.74
Exercised (196,500) 39.71
Cancelled (40,275) 43.99
_________
December 31, 1999 3,193,135 46.65
Granted 938,750 34.39
Exercised (11,900) 30.27
Cancelled (114,355) 51.39
_________
December 31, 2000 4,005,630 44.43
_________
_________
Options outstanding at December 31, 2000 have exercise prices between
$19.38 and $79.81 and a weighted-average remaining life of 6.8 years. The
weighted-average fair value of options granted was $12.58 per share in 2000
and $13.76 per share in 1999. The fair value of each option was estimated
on the date of grant using a risk-free interest rate of 6.5 percent in 2000
and 5.6 percent in 1999 and 1998, current annual dividends, expected lives
of 10 years and expected volatility of 41 percent. A fair-value method of
accounting for awards subsequent to January 1, 1998, would have resulted in
an increase in compensation expense of $8 million, net of tax ($.20 per
share) in 2000. $8 million, net of tax ($.20 per share) in 1999 and $8
million, net of tax ($.20 per share) in 1998.
39
NOTE 15. COMPREHENSIVE INCOME: Comprehensive income includes net income
and all other non-owner changes in equity during a period.
The tax effect on other comprehensive income is as follows:
Total
Foreign Minimum Other
Currency Unrealized Pension Compre-
Translation Losses on Liability hensive
$ Millions Adjustments Securities Adjustments Income
__________ ___________ __________ ___________ ______
2000
____
Pre-tax amount $(61) $(4) $ (3) $ (68)
Tax benefit 7 2 1 10
____ ___ ____ _____
Net amount $(54) $(2) $ (2) $ (58)
____ ___ ____ _____
____ ___ ____ _____
1999
____
Pre-tax amount $ 5 $(1) $ 84 $ 88
Tax benefit (1) - (29) (30)
____ ___ ____ _____
Net amount $ 4 $(1) $ 55 $ 58
____ ___ ____ _____
____ ___ ____ _____
1998
____
Pre-tax amount $(44) $(1) $(83) $(128)
Tax benefit 1 1 29 31
____ ___ ____ _____
Net amount $(43) $ - $(54) $ (97)
____ ___ ____ _____
____ ___ ____ _____
The components of accumulated other comprehensive income are as follows:
Accum-
ulated
Foreign Minimum Other
Currency Unrealized Pension Compre-
Translation Losses on Liability hensive
$ Millions Adjustments Securities Adjustments Income
__________ ___________ __________ ___________ ______
2000
____
Balance at 12/31/97 $ (68) $(1) $ (1) $ (70)
Change in 1998 (43) - (54) (97)
_____ ___ ____ _____
Balance at 13/31/98 (111) (1) (55) (167)
Change in 1999 4 (1) 55 58
_____ ___ ____ _____
Balance at 12/31/99 (107) (2) - (109)
Change in 2000 (54) (2) (2) (58)
_____ ___ ____ _____
Balance at 12/31/00 $(161) $(4) $ (2) $(167)
_____ ___ ____ _____
_____ ___ ____ _____
NOTE 16. SEGMENTS OF THE BUSINESS: The Company has three operating
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
all sizes, buses and recreational vehicles, as well as various
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 and providing temporary power through rentals of generator
sets. The Filtration and Other segment includes sales of filtration
products, exhaust systems and turbochargers and sales from company-
owned distributors.
The Company's operating segments are organized according to products
and the markets they each serve. This business structure was designed
to focus efforts on providing enhanced service to a wide range of
customers.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies except
that the Company evaluates performance based on earnings before
interest and income taxes and on net assets; therefore, no allocation
of debt-related items and income taxes is made to the individual
segments.
Operating segment information is as follows:
40
$ Millions
__________ Power Filtration
2000 Engine Generation and Other Total
____ ______ __________ ___________ ______
Net sales $4,050 $1,395 $1,152 $6,597
Depreciation and amortization 151 47 42 240
Income (expense) from joint
ventures and alliances 5 1 3 9
Earnings before interest, income
taxes and special charges 24 103 122 249
Special charges 131 19 10 160
Earnings (loss) before interest
and income taxes (107) 84 112 89
Net assets 799 521 892 2,212
Investment in joint
ventures and alliances 163 26 12 201
Capital expenditures 143 46 39 228
1999
____
Net sales $4,225 $1,356 $1,058 $6,639
Depreciation and amortization 146 47 40 233
Income (expense) from joint
ventures and alliances (4) (25) 1 (28)
Earnings before interest,
income taxes and special
charges 182 52 122 356
Special charges 18 42 - 60
Earnings before interest and
income taxes 164 10 122 296
Net assets 1,015 553 868 2,436
Investment in joint
ventures and alliances 112 11 8 131
Capital expenditures 130 49 36 215
1998
____
Net sales $3,982 $1,230 $1,054 $6,266
Depreciation and amortization 120 40 39 199
Income (expense) from joint
ventures and alliances (4) (25) (1) (30)
Earnings before interest,
income taxes and special
charges 136 25 121 282
Special charges 165 50 2 217
Earnings (loss) before
interest and income taxes (29) (25) 119 65
Net assets 946 511 803 2,260
Investment in joint
ventures and alliances 132 3 1 136
Capital expenditures 172 67 32 271
Additions to goodwill 12 2 370 384
Reconciliation to Consolidated Financial Statements:
2000 1999 1998
____ ____ ____
Earnings before interest and income
taxes for operating segments $ 89 $296 $ 65
Interest expense 86 75 71
Income tax expense (benefit) (19) 55 4
Minority interest 14 6 11
____ ____ ____
Net earnings (loss) $ 8 $160 $(21)
____ ____ ____
____ ____ ____
41
2000 1999 1998
______ ______ ______
Net assets for operating segments $2,212 $2,436 $2,260
Liabilities deducted in arriving
at net assets 1,846 1,922 1,926
Deferred tax assets not allocated
to segments 423 320 334
Debt-related costs not allocated
to segments 19 19 22
______ ______ ______
Total assets $4,500 $4,697 $4,542
______ ______ ______
______ ______ ______
Summary geographic information is listed below:
All
$ Millions US UK Canada Other Total
__________ ______ ______ ______ ______ ______
2000
____
Net sales (a) $3,775 $ 382 $ 418 $2,002 $6,597
Long-lived assets $1,442 $ 207 $ - $ 286 $1,935
1999
____
Net sales (a) $4,064 $ 400 $ 473 $1,702 $6,639
Long-lived assets $1,434 $ 206 $ - $ 264 $1,904
1998
____
Net sales (a) $3,595 $ 389 $ 459 $1,823 $6,266
Long-lived assets $1,470 $ 209 $ - $ 272 $1,951
(a) Net sales are attributed to countries based on location of
customer.
Revenues from the Company's largest customer represent approximately $1.2
billion of the Company's net sales in 2000. These sales are included in the
Engine and Filtration and Other segments.
NOTE 17. GUARANTEES, COMMITMENTS AND OTHER CONTINGENCIES: At December 31,
2000, the Company had the following minimum rental commitments for non-
cancelable operating leases: $45 million in 2001, $37 million in 2002, $31
million in 2003, $22 million in 2004, $13 million in 2005 and $63 million
thereafter. Rental expense under these leases approximated $79 million in
2000, $75 million in 1999 and $70 million in 1998.
Commitments under outstanding letters of credit, guarantees and
contingencies at December 31, 2000, approximated $89 million.
Cummins and its subsidiaries are defendants in a number of pending
legal actions, including actions related to use and performance of the
Company's products. The Company carries product liability insurance
covering significant claims for damages involving personal injury and
property damage. In the event the Company is determined to be liable
for damages in connection with actions and proceedings, the unreserved
portion of such liability is not expected to be material. The Company
also has been identified as a potentially responsible party at several
waste disposal sites under U.S. and related state environmental
statutes and regulations and has joint and several liability for any
investigation and remediation costs incurred with respect to such
sites. The Company denies liability with respect to many of these
legal actions and environmental proceedings and is vigorously
defending such actions or proceedings. The Company has established
reserves that it believes are adequate for its expected future
liability in such actions and proceedings where the nature and extent
of such liability can be estimated reasonably based upon presently
available information. The Company is working to comply with U.S. EPA
regulations with respect to emissions which are scheduled to become
more restrictive in 2002 and beyond.
42
NOTE 18. QUARTERLY FINANCIAL DATA (unaudited):
$ Millions, except First Second Third Fourth Full
per share amounts Quarter Quarter Quarter Quarter Year
__________________ _______ _______ _______ _______ ______
2000
____
Net sales $1,648 $1,769 $1,572 $1,608 $6,597
Gross profit 335 351 310 263 1,259
Net earnings (loss) 42 61 25 (120) 8
Basic earnings (loss) per share $ 1.09 $ 1.62 $ .66 $(3.16) $ .20
Diluted earnings (loss) per share 1.09 1.62 .66 (3.16) .20
1999
____
Net sales $1,505 $1,667 $1,631 $1,836 $6,639
Gross profit 301 371 361 385 1,418
Net earnings 24 58 53 25 160
Basic earnings per share $ .63 $ 1.51 $ 1.37 $ .65 $ 4.16
Diluted earnings per share .63 1.50 1.35 .65 4.13
Fourth quarter 2000 net earnings included restructuring, asset
impairment and other special charges of $103 million, net of tax ($160
million pretax), or $2.71 per share.
Fourth quarter 1999 net earnings included a charge of $45 million, net
of tax ($60 million pretax), or $1.17 per share, for the termination
of the Cummins Wartsila joint venture.
43
SIGNATURES
__________
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CUMMINS ENGINE COMPANY, INC.
By /s/T. Linebarger By /s/R. C. Crane
__________________________ _____________________
T. Linebarger R. C. Crane
Vice President and Vice President -
Chief Financial Officer Corporate Controller
(Principal Financial Officer) (Principal Accounting
Officer)
Date: March 1, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
__________ _____ ____
Director & Chairman and Chief
* Executive Officer (Principal March 1, 2001
________________________ Executive Officer)
(Theodore M. Solso)
*
________________________ Director March 1, 2001
(Robert J. Darnall)
*
________________________ Director March 1, 2001
(John M. Deutch)
*
________________________ Director March 1, 2001
(W. Y. Elisha)
*
________________________ Director March 1, 2001
(Hanna H. Gray)
*
________________________ Director March 1, 2001
(James A. Johnson)
44
Signatures Title Date
__________ _____ ____
*
________________________ Director March 1, 2001
(William I. Miller)
*
________________________ Director March 1, 2001
(William D. Ruckelshaus)
*
________________________ Director March 1, 2001
(F. A. Thomas)
*
________________________ Director March 1, 2001
(J. Lawrence Wilson)
By /s/M. R. Gerstle
________________
M. R. Gerstle
Attorney-in-fact
45
CUMMINS ENGINE COMPANY, INC.
EXHIBIT INDEX
____________________________
3(a) Restated Articles of Incorporation of Cummins Engine Company,
Inc., as amended (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended April 3, 1994, by
reference to Quarterly Report on Form 10-Q for the quarter
ended October 1, 1989 and by reference to Form 8-K dated
July 26, 1990).
3(b) By-laws of Cummins Engine Company, Inc., as amended and
restated February 9, 1999 and filed herewith.
4(a) Amended and Restated Credit Agreement (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended March 29, 1998).
4(b) Rights Agreement, as amended (incorporated by reference to
Annual Report on Form 10-K for the year ended December 31,
1989, by reference to Form 8-K dated July 26, 1990, by
reference to Form 8 dated November 6, 1990, by reference to
Form 8-A/A dated November 1, 1993, and by reference to
Form 8-A/A dated January 12, 1994 and by reference to
Form 8-A/A dated July 15, 1996).
10(a) Target Bonus Plan (incorporated by reference to Annual Report
on Form 10-K for the year ended December 31, 1996).
10(b) Deferred Compensation Plan (incorporated by reference to
Annual Report on Form 10-K for the year ended December 31,
1994).
10(c) Key Employee Stock Investment Plan, as amended (incorporated
by reference to Quarterly Report on Form 10-Q for the quarter
ended July 3, 1994).
10(d) Supplemental Life Insurance and Deferred Income Plan
(incorporated by reference to Annual Report on Form 10-K for
the year ended December 31, 1996).
10(e) Financial Counseling Program, (incorporated by reference to
Quarterly Report on Form 10-Q for the quarter ended
July 3, 1994).
10(f) 1986 Stock Option Plan (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended March 30, 1986,
Exhibit 10(g)).
10(g) Deferred Compensation Plan for Non-Employee Directors, as
amended, effective as of April 15, 1994 (incorporated by
reference to Annual Report on Form 10-K for the year ended
December 31, 1994).
10(h) Key Executive Compensation Protection Plan (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended October 2, 1994).
10(i) Excess Benefit Retirement Plan, (incorporated by reference to
Quarterly Report on Form 10-Q for the quarter ended October 2,
1994).
10(j) Employee Stock Purchase Plan (incorporated by reference to
Annual Report on Form 10-K for the year ended December 31, 1998).
10(k) Retirement Plan for Non-Employee Directors of Cummins Engine
Company, Inc., as amended February 1997 (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended March 30, 1997).
46
10(l) Stock Unit Appreciation Plan effective October 1990
(incorporated by reference to Quarterly Report on Form 10-Q
for the quarter ended April 2, 1995, Exhibit 10(m)).
10(m) Three Year Performance Plan as amended February 1997
(incorporated by reference to Quarterly Report on Form 10-Q
for the quarter ended March 30, 1997).
10(n) Consulting arrangement with Harold Brown (incorporated by
reference to the description thereof provided in the Company's
definitive Proxy Statement).
10(o) 1992 Stock Incentive Plan (incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1995,
Exhibit 10(s)).
10(p) Restricted Stock Plan for Non-Employee Directors, as amended
February 11, 1997 (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended March 30, 1997).
10(q) Executive Retention Plan (incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1995,
Exhibit 10(u)).
21 Subsidiaries of the Registrant (filed herewith).
23 Consent of Arthur Andersen LLP (filed herewith).
24 Powers of Attorney (filed herewith).