ITEM 1. BUSINESS _______ ________
OVERVIEW ________
Cummins Engine Company, Inc. ("Cummins" or "the Company") is a leading worldwide designer and manufacturer of diesel engines, ranging from 55 to 2,700 horsepower and the largest producer of diesel engines over 200 horsepower. The Company also produces natural gas engines and engine components and subsystems. Cummins provides power and components for a wide variety of equipment in its key businesses: engine, power generation, and filtration.
Cummins sells its products to original equipment manufacturers ("OEMs"), distributors and other customers worldwide and conducts manufacturing, sales, distribution and service activities in many areas of the world. Sales of products to major international firms outside North America are transacted by exports directly from the United States and shipments from foreign facilities (operated through subsidiaries, affiliates, joint ventures or licensees) which manufacture and/or assemble Cummins' products.
In 1999, approximately 61 percent of net sales were in the United States. Major international markets include Asia and Australia (12 percent of net sales); Europe and the CIS (12 percent of net sales); Canada (7 percent of net sales) and Mexico and Latin America (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 1999 was Freightliner Corporation, a division of DaimlerChrysler. Sales to Freightliner for this market represented seven percent of the Company's net sales in 1999.
In 1999, factory retail sales of North American heavy-duty trucks were 20 percent higher than in 1998, establishing a new industry record. Factory retail sales were 305,000 units in 1999, compared to 254,000 in 1998, and 219,000 in 1997. The Company's share of the North American heavy-duty truck engine market was 31 percent through November 1999, based upon data published by Ward's. The Company's share of the North American heavy-duty truck engine market was 32 percent in 1998 and 1997. The Company has maintained the number one market share position in heavy-duty truck engine sales for 27 consecutive years.
Cummins market share in Mexico grew from 69 percent to 73 percent, positioning Cummins as the market share leader by a very wide margin. The market size in 1999 was 8,800 units for domestic sales.
In South Africa and Australia, the Company also enjoys the number one market position and is a leading supplier of diesel engines in Europe.
In 1999, the Company completed the introduction of its new heavy-duty product line with the launch of the ISL and ISX engines. Cummins offers the ISL, ISM, ISX, N14 and Signature 600 (and Signature 650 in Australia), which comprise 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.
Medium-duty Truck Market ________________________
The Company has a line of diesel engines ranging from 185 to 300 horsepower serving medium-duty and inter-city delivery truck customers worldwide. The Company has the most modern product line in the industry, which is served by the ISB and ISC diesel engines.
The Company entered the North American medium-duty truck market in 1990. Based upon data published by R. L. Polk, the Company's share of the market for diesel-powered medium-duty trucks in 1999 was 14 percent through October 1999. Freightliner was the Company's largest customer for this market in 1999, representing 2 percent of the Company's net sales. The Company's market share in 1998 was 19 percent, and the market share in 1997 was 25 percent. The decline in market share is primarily a result of the end of exclusivity with Ford and some share decline at Freightliner.
The Company sells its ISB and ISC series engines and engine components outside North America to medium-duty truck markets in Asia, Europe and South America.
In the medium-duty truck market, the Company competes with independent engine manufacturers as well as truck producers who manufacture diesel engines for their own products. Primary engine competitors in the medium- duty truck market in North America are Navistar International Corporation and Caterpillar, Inc. The Company's principal competitors in international markets vary from country to country, with local manufacturers generally predominant in each geographic market. Other diesel engine manufacturers in international markets include Mercedes Benz, AB Volvo, Renault Vehicles Industriels, Iveco Diesel Engines, Hino Motors Ltd., Mitsubishi Heavy Industries, Ltd., Isuzu Motors, Ltd., DAF Group N.V., Scania A.B., Perkins Engines Ltd., Nissan Diesel and MWM Brazil.
Bus Market __________
Cummins offers both diesel- and alternate-fueled engines for school buses, transit buses and shuttle buses.
In 1999, Cummins was the market share leader for transit buses, a position it first achieved in 1998. Cummins offers the ISB, ISC, ISL and ISM engines for the bus markets. Cummins also offers the L10, B and C series products for natural gas applications, which are primarily focused on transit and school bus markets. The demand for alternate-fueled products continues to grow both domestically and internationally.
In these markets, the Company competes both with independent manufacturers of diesel engines and with vehicle producers who manufacture diesel engines for their own products. Primary competitors who manufacture diesel engines for the bus and light commercial vehicle markets are Detroit Diesel Corporation, General Motors Corporation, Navistar International Corporation, Caterpillar, Inc., AB Volvo, DaimlerChrysler, Scania A.B. and MWM Brazil.
Light Commercial and Specialty Vehicles _______________________________________
Cummins offers the ISB for pickup trucks, primarily in the Dodge Ram pickup truck in North America and for Ford in Brazil. DaimlerChrysler was the Company's largest customer for midrange engines in this market and the Company's number one customer when all markets are considered, with 19 percent of the Company's net sales in 1999.
Cummins is the market leader in the class A recreational vehicle market with a market share of 24 percent. This represents a 75 percent share of diesel-powered recreational vehicles, and a strong growth from gasoline to diesel power for this application.
Industrial Markets __________________
Cummins engines power a wide variety of equipment in the construction, mining, agricultural, marine, rail and government markets throughout the world. The major construction equipment manufacturers are in North America, Europe, Korea and Japan. Construction equipment manufacturers build approximately one million pieces of equipment per year for a diverse set of applications. The agriculture market produces about 340,000 pieces of equipment per year above 75 horsepower, which is the focus market segment for Cummins. The Company has the dominant 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. Mining market customers are located in North America, Europe and Japan. Cummins offers a full product line for mining applications that compete in all segments, including 240- and 300-ton trucks. Rail and government represent a small portion of industrial markets. The rail market activity is primarily in Europe and Asia, and the government market is primarily in North America.
A series of new product introductions was completed in 1999, including the QSB5.9, the QSC8.3 and the QSX15 electronic engines. In addition, the B3.3 engine, developed with our joint venture partner Komatsu, was launched in 1999. For the marine market, introductions in 1999 included three ratings of the electronic QSM11 engine, a full product line of shipboard auxiliary units and upgrades of the entire product line to meet the International Maritime Organization's emissions requirements for January 1, 2000. The Company completed the successful introduction of the 2,700-horsepower QSK60 to the mining markets, which extends Cummins product range to power 300-ton haul trucks and 90-cubic-yard excavators.
Power Generation Business _________________________
In 1999, power generation sales represented 20 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." The Power Generation business is vertically integrated and manufactures all of the components that make up power generation systems, including engines, alternators, switches, switchgear and controls. Cummins Power Generation also provides a range of services including long-term maintenance contracts, turnkey power solutions and generator set rentals.
Cummins offers reciprocating engine-based power generation systems worldwide with a power range of 2 kilowatts to 2 megawatts. Engines are offered with a choice of fuels: diesel, natural gas and gasoline-fired.
During 1999, Cummins and Wartsila agreed to divide the operations of their joint venture, Cummins Wartsila. While the products have excellent potential in the marketplace, future growth can best be achieved by integrating the products into the parent companies' sales and distribution networks. Cummins will take over the manufacture and global sales and service of the CW 170/180 product line under the designation QSV engine series.
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. Detroit Diesel Corporation and AB Volvo are other major engine manufacturers with a presence in the high-speed segment of the market. Onan brand sets compete in the mobile 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, Australia, Africa and Asia. Nelson, purchased in 1998, designs and manufactures air filtration and exhaust systems and distributes in the same markets. Together, Fleetguard and Nelson provide a complete business solution for their customers. Other markets include small engine filtration and exhaust systems for small equipment. The Filtration Business also produces products for the automotive specialty filtration market and the industrial filtration market through its two subsidiaries, Kuss, located in Findley, Ohio, and Universal Silencer, located in Stoughton, Wisconsin.
Cummins owns 16 distributorships, most of them located outside of the United States. Distributors sell loose engines and service parts as well as perform service and repair activities on Cummins products.
Holset's turbochargers are sold worldwide. Holset's joint venture with TELCO assembled and shipped its first turbochargers in 1996. A joint venture with Wuxi in China also began production in 1996. During 1997, the vibration attenuation business was sold to Simpson Industries. The Company continues an alliance with Mitsubishi Heavy Industries of Japan for production of jointly developed turbochargers. In 1999, Holset began full production of a variable geometry turbocharger designed for truck powertrains.
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.
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 refurbish 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 1999, $230 million in 1998, and $250 million in 1997. 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.
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, 1998, the aggregate cost would have been approximately $333 million. Management believes it is unlikely that a significant number of distributors would terminate their agreements at the same time, requiring the Company to fulfill its purchase obligation.
Supply ______
The Company manufactures many of the components used in its engines, including blocks, heads, rods, turbochargers, crankshafts and fuel systems. Cummins has adequate sources of supply of raw materials and components required for its operations. The Company has arrangements with certain suppliers who are the sole sources for specific products. While the Company believes it has adequate assurances of continued supply, the inability of a supplier to deliver could have an adverse effect on production at certain of the Company's manufacturing locations.
Employment __________
At December 31, 1999, Cummins employed 28,500 persons worldwide, approximately 10,300 of whom are represented by various unions.
The Diesel Workers' Union (DWU) represents employees at several Southern Indiana plants, under two contracts. In 1993, members of the DWU working in a majority of the Company's Southern Indiana manufacturing facilities ratified an agreement that extends until the year 2004. In 1995, members of the DWU at the Company's midrange engine plant ratified a five-year agreement. The Company plans to enter into negotiations with the DWU at the Southern Indiana midrange plant prior to the expiration of the contract in 2000.
The Office Committee Union (OCU) represents technical and administrative employees at the Company`s Southern Indiana facilities, including its Technical Center, under two contracts. In 1995, members of the OCU at the Company's midrange engine plant in Southern Indiana ratified a five-year agreement. The Company plans to enter negotiations with the OCU prior to the expiration of the contract in 2000. In 1999, members of the OCU ratified a five-year agreement for offices and other plants in Southern Indiana and the Company's Technical Center.
The International Association of Machinists (IAM) represents employees at the Company's remanufacturing plant in Memphis, Tennessee, under a three- year agreement which was ratified in 1997. The Company plans to enter negotiations with the IAM before the expiration of its current contract in 2000.
The Union of Needletrades, Industrial and Textile Employees represents employees at the Company's filtration product plan in Findlay, Ohio, under a five-year agreement which was ratified in 1997.
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 2000. Cummins' ability to comply with these and future emissions standards is an essential element in maintaining its leadership position in regulated markets. The Company will make significant capital and research expenditures to comply with these standards. Failure to comply could result in adverse effects on future financial results.
Cummins has successfully completed the certification of its 2000 on-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 CARB related to concerns they had raised regarding the level of Nitrogen Oxide (NOx) emissions from diesel engines under certain driving conditions. The terms of that Consent Decree are a matter of public record. Cummins has developed extensive corporate action plans to comply with all aspects of the Consent Decree. Additionally, four separate court actions have been filed as a result of allegations of the diesel emissions matter. The New York Supreme Court ruled in favor of the Company. This matter is now on appeal. Two courts in California ruled in favor of the Company. A fourth action was filed in U.S. District Court, for the District of Columbia. A decision on Defendants' Motion to Dismiss is currently pending.
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 1999, no such audit test was performed on Cummins engines. The failure of an SEA could result in cessation of production of the noncompliant 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.
No Cummins engines were chosen for in-use compliance testing in 1999. 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 were phased in beginning in 1996. In other parts of the world similar standards are applied. Cummins has successfully completed certification of its engines used in these nonroad applications. All of these products have undergone extensive laboratory and field tests prior to their release.
EPA's audit provisions cover certified nonroad engines. In 1999, no Cummins engines were selected for such audit testing.
Emissions standards in international markets, including Europe and Japan, are becoming more stringent. Given the Company's experience in meeting US emissions standards, it believes that it is well positioned to take advantage of opportunities in these markets as the need for emissions- control capability grows.
There are several Federal and state regulations which encourage and, in some cases, mandate the use of alternate fueled heavy-duty engines. The Company currently offers natural gas fueled versions of its C8.3 and B5.9 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.
While the Company is unable at this time to determine the aggregate cost of remediation at these sites, it has attempted to analyze its proportionate and actual liability by analyzing the amounts of waste contributed to the sites by the Company, the estimated costs for total remediation at the sites, the number and identities of other PRPs and the level of insurance coverage. With respect to other sites at which the Company or its subsidiaries have been named as PRPs, the Company cannot accurately estimate the future remediation costs. At several sites, the remedial action to be implemented has not been determined for the site. In other cases, the Company or its subsidiary has only recently been named as a PRP and is collecting information on the site. Finally, in some cases, the Company believes it has no liability at the site and is actively contesting designation as a PRP.
Based upon the Company's prior experiences at similar sites, however, the aggregate future cost to all PRPs to remediate these sites is not likely to be significant. In each of these cases, the Company believes that it has good defenses at several of the sites, that its percentage contribution at other sites is likely to be de minimis or that other PRPs will bear most of the future remediation costs. However, the environmental laws impose joint and several liability and, consequently, the Company's ultimate responsibility may be based upon many factors outside the Company's control and could be material in the event that the Company becomes obligated to pay a significant portion of these expenses. Based upon information presently available, the Company believes that such an outcome is unlikely and that its actual and proportionate costs of participating in the remediation of these sites will not be material.
In 2000, various plants and facilities of the Company will commence development and implementation of ISO 14001 standards for an environmental management system. 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.
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.
ITEM 3.
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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS _______ _________________________________________________
None.
PART II _______
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS _______ _____________________________________________________
The Company's common stock is listed on the New York Stock Exchange and the Pacific Stock Exchange under the symbol "CUM". The following table sets forth, for the calendar quarters shown, the range of high and low composite prices of the common stock and the cash dividends declared on the common stock.
High Low Dividends Declared ______ _______ __________________ ____
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
____
First quarter $62 3/4 $51 $.275 Second quarter 57 5/16 49 3/16 .275 Third quarter 56 29 5/8 .275 Fourth quarter 40 7/8 28 5/16 .275
At December 31, 1999, the approximate number of holders of record of the Company's common stock was 4,800.
The Company has repurchased 5.0 million shares of its common stock since 1994. The Company repurchased .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.
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.
ITEM 6. SELECTED FINANCIAL DATA _______ _______________________
$ Millions, except per share amounts 1999 1998 1997 1996 1995 _____________________ ______ ______ ______ ______ ______
Net sales $6,639 $6,266 $5,625 $5,257 $5,245 Net earnings (loss) 160 (21) 212 160 224 Earnings (loss) per share: Basic 4.16 (.55) 5.55 4.02 5.53 Diluted 4.13 (.55) 5.48 4.01 5.52 Cash dividends per share 1.125 1.10 1.075 1.00 1.00 Total assets 4,697 4,542 3,765 3,369 3,056 Long-term debt 1,092 1,137 522 283 117
Earnings per share for 1995-1996 have been restated to reflect the adoption of SFAS No. 128.
In 1999, the Company's results included a charge of $60 million in connection with the dissolution of the Cummins Wartsila joint venture.
In 1998, the Company's results included charges totaling $217 million, comprised of $78 million for revised estimates of additional product coverage liability for both base and extended warranty programs, $114 million of costs associated with the Company's plan to restructure, consolidate and exit certain business activities and $25 million for a civil penalty resulting from an agreement reached with the U.S. Environmental Protection Agency, the Department of Justice and the California Air Resources Board regarding diesel engine emissions.
In 1995, the Company's results included restructuring charges of $118 million ($77 million after taxes) to reduce the worldwide work force and to close or restructure selected operations in Europe, Brazil and North America. Net earnings in 1995 also included release of the tax valuation allowance of $68 million.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION _______ _____________________________________________________________
OVERVIEW ________
Net sales were a record $6.6 billion in 1999, 6 percent higher than in 1998, and 18 percent higher than in 1997. Earnings before interest and taxes of $356 million in 1999, or 5.4 percent of sales, were also a record, excluding a $60 million pretax charge in connection with the dissolution of the Cummins Wartsila joint venture. This compares to $282 million in 1998, excluding charges of $217 million pretax for product coverage costs, restructuring and exit activities and a settlement with the U.S. Environmental Protection Agency. As reported, earnings before interest and taxes were $296 million in 1999, $65 million in 1998 and $312 million in 1997. Net earnings in 1999 were $160 million or $4.13 per share compared to a net loss of $21 million or $(.55) per share in 1998 and net earnings of $212 million or $5.48 per share in 1997.
RESULTS OF OPERATIONS _____________________
Net Sales: __________
In 1999, the Company attained its eighth consecutive year of record sales, totaling $6.6 billion. Revenues from sales of engines were 55 percent of the Company's net sales in 1999, with engine revenues 6 percent higher than in 1998 and 15 percent above 1997. The Company shipped a record 426,100 engines in 1999, compared to 403,300 in 1998 and 369,800 in 1997 as follows:
Unit shipments 1999 1998 1997 ________________ _______ _______ _______
Midrange engines 298,400 287,400 264,300 Heavy-duty engines 117,900 106,100 94,900 High-horsepower engines 9,800 9,800 10,600 _______ _______ _______ 426,100 403,300 369,800 _______ _______ _______ _______ _______ _______
Revenues from non-engine products, which were 45 percent of net sales in 1999, were 6 percent higher than in 1998. The major increases within non- engine revenues were achieved in sales of generator sets and PowerCare sales (which include new parts and remanufactured engines and parts). Sales of the remaining non-engine products, in the aggregate, were essentially level with 1998.
The Company's net sales for each of its key segments during the last three years were:
$ Millions 1999 1998 1997 __________ ______ ______ ______
Automotive markets $3,203 $2,928 $2,622 Industrial markets 1,022 1,054 1,044 _____ _____ _____ Engine Business 4,225 3,982 3,666 Power Generation Business 1,356 1,230 1,205 Filtration Business & Other 1,058 1,054 754 ______ ______ ______ $6,639 $6,266 $5,625 ______ ______ ______ ______ ______ ______
Cummins' Engine Business, the Company's largest business segment, produces engines and parts for sale to customers in both automotive and industrial markets. Engine Business customers are each serviced through the Company's worldwide distributor network. The engines are used in trucks of all sizes, buses and recreational vehicles, as well as a variety of industrial applications including construction, mining, agriculture, marine, rail and military. Engine Business revenues were $4.2 billion in 1999, a 6 percent increase over 1998 and 15 percent over 1997.
Sales of $3.2 billion in 1999 for automotive markets were 9 percent higher than in 1998 and 22 percent higher than in 1997. In 1999, heavy-duty truck engine revenues were 18 percent higher than in 1998 due to the strong market in North America, partially offset by reduced demand in international heavy-duty truck markets. Within the North
American heavy-duty truck market, unit shipments were up 21 percent over 1998, and Cummins continued to be the market leader. International unit shipments for the heavy-duty market in 1999 were 7 percent lower than in 1998 due primarily to reduced demand in Mexico.
Revenues from the sales of engines for medium-duty trucks in 1999 were 1 percent lower than in 1998 on an 8 percent increase in units. This variance reflected a mix shift towards smaller 4 cylinder engines, which have a lower selling price and margin as well as the impact of the devaluation of the Brazilian real, which reduced revenues in this market.
For the bus and light commercial vehicle market, engine revenues in 1999 were 7 percent higher than in 1998, on a 7 percent increase in unit shipments. Record unit shipments to DaimlerChrysler for the Dodge Ram pickup were 3 percent higher than in 1998 and 30 percent higher than in 1997. The Company also had record shipments to the North American bus and recreational vehicle market, where volumes were 30 percent higher than in 1998 and 39 percent higher than in 1997. Shipments for international bus markets declined 10 percent from 1998, due to lower sales into Mexico.
In 1999, revenues of $1.0 billion from industrial markets were 3 percent lower than in 1998 and 2 percent lower than in 1997, due to decreased volume and a shift in product mix. Engine revenues for this market were down 6 percent on a 6 percent decrease in units. Construction equipment business was 2 percent higher than the year-ago level, while agricultural equipment demand decreased 46 percent from 1998 as a result of very weak markets. Sales to marine markets increased 24 percent from 1998, with strength in both North American and international markets. Mining market sales declined 8 percent as compared to last year.
Revenues of $1.3 billion in 1999 for the Power Generation Business were 10 percent higher than in 1998 and 13 percent higher than in 1997. Approximately $40 million of the sales increase in 1999 related to demand for stand-by power in case of Year 2000 problems; however, the Company expects that nearly half of this increase is sustainable with revenues from new markets, including the rental and home stand-by power businesses. Sales of the Company's generator sets in 1999 increased 21 percent from 1998, continuing to reflect growth in North America, which more than offset declines in demand for generator sets in Asia and Latin America. Engine sales to generator set assemblers were down 8 percent from the prior year, due primarily to lower demand in Asia. Alternator sales decreased 2 percent as compared to 1998. Sales of small generator sets for recreational vehicles and other consumer markets remained strong in North America, increasing 12 percent from 1998.
Sales of $1.1 billion in 1999 for the Filtration Business and Other were essentially flat with 1998 and 40 percent higher than in 1997, with Nelson Industries, acquired in January 1998, accounting for the majority of the increase from 1997. In 1999, new business at small equipment, truck and agricultural equipment manufacturers offset a decrease in sales resulting from the end of a specific catalyst business, which totaled $35 million. International distributor sales included in this segment decreased 1 percent from 1998, while sales of Holset turbochargers increased 13 percent as compared to a year ago.
Net sales by marketing territory for each of the last three years were:
$ Millions 1999 1998 1997 __________ ______ ______ ______
United States $4,064 $3,595 $3,123 Asia/Australia 818 806 898 Europe/CIS 800 791 796 Canada 473 459 318 Mexico/Latin America 375 468 364 Africa/Middle East 109 147 126 ______ ______ ______ $6,639 $6,266 $5,625 ______ ______ ______ ______ ______ ______
In total, international markets accounted for 39 percent of the Company's revenues in 1999. Europe and the CIS, representing 12 percent of the Company's sales in 1999, were 1 percent higher than in 1998 and 1997. Sales to Canada, representing 7 percent of sales in 1999, were 3 percent higher than in 1998. Asian and Australian markets, in total, represented 12 percent of the Company's sales in 1999, with increases in sales to Asia more than offsetting a decline in sales to Australia. In Asia, sales to Southeast Asia increased 28 percent, sales to Korea were 25 percent higher and sales to Japan were 9 percent above 1998 levels, while sales to China decreased 6 percent and India was essentially flat compared to 1998. Business in Mexico and Latin America, representing 6 percent of sales in 1999, was 20 percent lower than in 1998. This decrease was due, in part, to the devaluation of the Brazilian real.
Gross Margin: _____________
As disclosed in Note 3 to the Consolidated Financial Statements, the Company recorded special charges of $92 million in 1998 for product coverage costs and inventory write-downs. The product coverage special charges of $78 million include $43 million primarily attributable to base warranty costs and $35 million for extended warranty programs. The special charges recorded in 1998 also included $14 million for inventory write- downs associated with the Company's restructuring and exit activities. These write-downs reflected amounts of inventory rendered excess or unusable due to the closing or consolidation of facilities.
The Company's gross margin percentage was 21.4 percent in 1999 and 21.4 percent in 1998, excluding the special charges recorded for product coverage and inventory write-downs, and 22.8 percent in 1997. Gross margin percentage in 1998 including the special charges was 19.9 percent. Gross margins in 1999 benefited from higher volumes and product cost improvements, offset by higher product coverage costs. Product coverage costs were 3.7 percent of net sales in 1999, compared to 3.3 percent in 1998, excluding the special charges, and 2.6 percent in 1997.
Operating Expenses: ___________________
Selling and administrative expenses were 11.8 percent of net sales in 1999, compared to 12.5 percent in 1998 and 13.2 percent in 1997. On the 6- percent sales increase in 1999, these expenses, which include volume- variable components, decreased 1 percent in absolute dollars. This improvement reflects benefits of the Company's cost reduction programs and restructuring actions.
Research and engineering expenses were 3.7 percent of net sales in 1999, compared to 4.1 percent in 1998 and 4.6 percent in 1997. This decrease is primarily due to new products moving into production and the Company's cost reduction and productivity initiatives.
The Company's losses from joint ventures and alliances were $28 million in 1999, compared to losses of $30 million in 1998 and income of $10 million in 1997. In 1999, higher losses at the Company's joint venture with Wartsila were more than offset by improved performance at the Company's other joint ventures. The difference from 1997 was due primarily to the consolidation of Cummins India Limited in the fourth quarter of 1997 and increased losses at the Company's joint venture with Wartsila.
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.
As disclosed in Note 4 to the Consolidated Financial Statements, the Company recorded charges in 1998 totaling $125 million, comprised of $100 million of costs associated with the Company's plan to restructure, consolidate and exit certain business activities and $25 million for a civil penalty resulting from an agreement reached with the U.S. Environmental Protection Agency and the Department of Justice regarding diesel engine emissions.
The Company is continuing the restructuring plan implemented in the third quarter of 1998. As of December 31, 1999, approximately $81 million has been charged against the liabilities associated with these actions. The Company funded the restructuring actions using cash generated from operations. Of the planned workforce reduction of 1,100 employees, approximately 900 people left the Company prior to December 31, 1999. The remaining actions to be completed consist primarily of the outsourcing of certain manufacturing operations and payment of severance commitments to terminated employees. The program is expected to be essentially complete in early 2000 and yield approximately $50 million in annual savings at completion. The Company does not currently anticipate any material changes in the original charges recorded for these actions.
Other: ______
Interest expense of $75 million was $4 million higher than in 1998 and $49 million higher than in 1997. Lower capitalization of interest in 1999 accounted for the increase as compared to 1998. The increase from 1997 was due to the increased level of borrowings to support working capital on the higher sales level and to complete the acquisition of Nelson. Other expense went from $13 million of income in 1998 to $8 million of expense in 1999, primarily due to increased non-operating partnership costs and lower interest income in 1999, and certain tax refunds and other non-recurring transactions recorded in 1998.
Provision for Income Taxes: ___________________________
The Company's income tax provision in 1999 was $55 million, an effective tax rate of 25 percent, reflecting reduced taxes on export sales and research tax credits. In 1998, the Company's tax provision was $4 million, with the tax benefits from export sales and the research credit more than offset by the unfavorable tax effects of nondeductible losses in foreign joint ventures and nondeductible EPA penalty and goodwill amortization. The Company's effective tax rate in 1997 was 26 percent.
Minority Interest: __________________
Minority interest in net earnings of consolidated entities was $6 million in 1999, a decrease of $5 million from 1998 and an increase of $6 million from 1997. The decrease from 1998 was primarily due to lower net earnings of Cummins India Limited in 1999 and the partner's share of losses from the joint venture with Scania. The change in minority interest from 1997 was due to the consolidation of Cummins India Limited beginning in the fourth quarter of 1997, when the Company increased its ownership interest to 51 percent.
Year 2000: __________
The Company experienced no negative effects on customers, employees or suppliers from the Year 2000 date change. No problems with the Company's products were reported. The Company monitored the status of its worldwide sites during the "millennium rollover" through the operation of three communication centers located in Australia, England and Columbus, Indiana. Teams of experts were on-hand and additional resources were available on a stand-by basis to assist sites, if needed. Service and engineering groups were available on-call in case customer requests arose. The Company's sites, including its manufacturing facilities and distribution channels, are working without any disruptive impact from the Year 2000 date change.
The Company also participated in an information gathering process designed by the Automotive Industry Action Group (AIAG) and reported a "green" status throughout the requested Year 2000 AIAG reporting phase in early January.
While Year 2000 results to-date are positive, there are key dates yet to monitor. The communication centers will watch Leap Year Day, February 29, and financial closes during the first quarter. The Company continues its preventive approach to Year 2000 issues. Sites continue to conduct process verifications that critical systems are operating properly.
Costs and Risks of Company's Year 2000 Issues: The Company will incur total expenditures of approximately $45 million in connection with its Year 2000 program and remediation efforts. The Company is funding its Year 2000 costs with its normal operating cashflow.
There can be no assurances that the systems or products of third parties relied upon by the Company, such as suppliers, vendors or significant customers, were timely converted or that a failure by such third parties, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. Other undiscovered factors related to the Year 2000 issue may also have potential for an adverse effect on the Company. Such adverse effects may include an adverse effect on the Company's revenues. The time of completion and success of the Company's Year 2000 program and compliance efforts, and the related expenses, are based upon management's best estimates, which in turn are based on assumptions about future events, including the availability of certain resources, third party modification plans and other factors. There can be no assurances that these results and estimates will be achieved, and the actual results could materially differ from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability of trained personnel, the ability to locate and correct all relevant computer code, and the failure by third parties to address their Year 2000 problems.
CASH FLOW AND FINANCIAL CONDITION _________________________________
Key elements of cash flows were:
$ Millions 1999 1998 1997 __________ ______ ______ ______
Net cash provided by operating activities $ 307 $ 271 $ 200 Net cash used in investing activities (166) (752) (354) Net cash (used in) provided by financing activities (105) 471 96 Effect of exchange rate changes on cash - (1) (1) _____ _____ _____ Net change in cash $ 36 $ (11) $ (59) _____ _____ _____ _____ _____ _____
During 1999, net cash provided from operating activities was $307 million, reflecting the Company's strong net earnings and the non-cash effect of depreciation and amortization, reduced by increases in working capital. Net working capital as a percent of sales was 13.0 percent in 1999, compared to 12.8 percent in 1998 and 11.6 percent in 1997. Net cash used in investing activities in 1999 of $166 million included planned capital expenditures of $215 million, partially offset by $54 million of proceeds from the sale of the Company's Atlas Crankshaft business. Capital expenditures were $271 million in 1998 and $405 million in 1997, during the Company's peak product development period. The higher level of net cash requirements in 1998 was due primarily to the acquisition of Nelson. Investments in joint ventures and alliances in 1999 of $36 million reflected the net effect of capital contributions and cash generated by certain joint ventures.
Net cash used in financing activities was $105 million in 1999. 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. 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 flow from operations and existing credit facilities, management believes that sufficient liquidity is available to meet anticipated capital and dividend requirements in the foreseeable future.
Legal/Environmental Matters: ____________________________
The Company and its subsidiaries are defendants in a number of pending legal actions that arise in the normal course of business, including environmental claims and actions related to use and performance of the Company's products. Such matters are more fully described in Note 17 to the Consolidated Financial Statements. In the event the Company is determined to be liable for damages in connection with such actions or proceedings, the unreserved portion of such liability is not expected to have a material adverse effect on the Company's results of operations, cash flows or financial condition.
Market Risk: ____________
The Company is exposed to financial risk resulting from volatility in foreign exchange rates, interest rates and commodity prices. This risk is closely monitored and managed through the use of derivative contracts. As clearly stated in the Company's policies and procedures, financial derivatives are used expressly for hedging purposes, and under no circumstances are they used for speculating or for trading. Transactions are entered into only with banking institutions with strong credit ratings, and thus the credit risk associated with these contracts is considered immaterial. Hedging program results and status are reported to senior management on a monthly and quarterly basis.
The following section describes the Company's risk exposures and provides results of sensitivity analyses performed on December 31, 1999. 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.
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 $3 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA _______ __________________________________________
See Index to Financial Statements on page 24.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE _______ ____________________________________________________
None.
PART III ________
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ________ __________________________________________________
The information appearing under the caption "Election of Directors" of the Company's definitive Proxy Statement for the Annual Meeting of the Shareholders to be held on April 4, 2000 ("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, 1999 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 45 Vice President - Human Resources (1997 to present), Vice President - General Counsel (1997)
Pamela F. Carter 50 Vice President - General Counsel and Corporate Secretary (1997 to present)
John K. Edwards 55 Executive Vice President, Group President - Power Generation and International (1996 to present), Vice President - International (1989 to 1996)
Mark R. Gerstle 44 Vice President - Cummins Business Services (1998 to present), Vice President and Chief Administrative Officer and Secretary (1997 to 1998), Vice President - Law and Corporate Affairs and Secretary (1997), Vice President - General Counsel and Secretary (1995 to 1997), Assistant General Counsel (1991 to 1995)
James A. Henderson 65 Chairman and Chief Executive Officer (1995 to Present), President and Chief Executive Officer (1994 to 1995)
M. David Jones 52 Vice President - Filtration Group and President, Fleetguard, Inc. (1996 to present), Vice President - Aftermarket Group (1989 to 1996)
F. Joseph Loughrey 50 Executive Vice President and Group President - Engine Business (1999 to present), Executive Vice President and Group President - Industrial and Chief Technical Officer (1996 to 1999), Group Vice President - Worldwide Operations and Technology (1995 to 1996), Group Vice President - Worldwide Operations (1990 to 1995)
Frank J. McDonald 53 Vice President - Quality (1999 to present), Vice President - Worldwide Midrange Operations (1996 to 1999), Vice President - Midrange Manufacturing (1992-1996)
Rick J. Mills 52 Vice President - Corporate Controller (1996 to present), Vice President Pacific Rim and Latin America - Fleetguard, Inc. (1993 to 1996)
Present Position and Business Experience Name Age During Last 5 Years _______________ ___ ________________________________________________
Kiran M. Patel 51 Executive Vice President and Chief Financial Officer (1999 to present), Vice President and Chief Financial Officer (1996 to 1999), President - Fleetguard, Inc. (1993 to 1996)
Theodore M. Solso 52 President and Chief Operating Officer (1995 to present), Executive Vice President and Chief Operating Officer (1994 to 1995)
Christine M. Vujovich 48 Vice President - Environmental Policy and Product Strategy (1999 to present), Vice President - Worldwide Marketing for Bus and Light Commercial Automotive and Environmental Management (1996 to 1999), Vice President - Product Planning and Environmental Management (1989 to 1996)
ITEM 11.
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.
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.
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.
PART IV _______
ITEM 14.
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 24 for a list of the financial statements filed as a part of this report.
2. See Exhibit Index on page 65 for a list of the exhibits filed or incorporated herein as a part of this report.
No reports on Form 8-K were filed during the fourth quarter of 1999.
_____________________________
Page ____
Responsibility for Financial Statements 25 Report of Independent Public Accountants 25 Consolidated Statement of Earnings 26 Consolidated Statement of Financial Position 27 Consolidated Statement of Cash Flows 28 Consolidated Statement of Shareholders' Investment 29 Notes to Consolidated Financial Statements 30 Quarterly Financial Data 42 Cummins Wartsila SAS Financial Statements 43
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 generally accepted accounting principles and include some amounts which are estimates based upon currently available information and management's judgment of current conditions and circumstances. The Company engaged Arthur Andersen LLP, independent public accountants, to examine the 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, 1999 and 1998, and the related consolidated statements of earnings, cash flows and shareholders' investment for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles.
Arthur Andersen LLP Chicago, Illinois January 26, 2000
CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF EARNINGS __________________________________
Millions, except per share amounts 1999 1998 1997 __________________________________ ______ ______ ______
Net sales $6,639 $6,266 $5,625 Cost of goods sold 5,221 4,925 4,345 Special charges - 92 - ______ ______ ______ Gross profit 1,418 1,249 1,280 Selling & administrative expenses 781 787 744 Research & engineering expenses 245 255 260 Net expense (income) from joint ventures and alliances 28 30 (10) Interest expense 75 71 26 Other expense (income), net 8 (13) (26) Restructuring and other non-recurring charges 60 125 - _____ _____ _____ Earnings (loss) before income taxes 221 (6) 286 Provision for income taxes 55 4 74 Minority interest 6 11 - _____ _____ _____ Net earnings (loss) $ 160 $ (21) $ 212 _____ _____ _____ _____ _____ _____
Basic earnings (loss) per share $ 4.16 $(.55) $5.55 Diluted earnings (loss) per share 4.13 (.55) 5.48
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF FINANCIAL POSITION ____________________________________________
Millions, except per share amounts December 31, __________________________________ 1999 1998 ______ ______ Assets Current assets: Cash and cash equivalents $ 74 $ 38 Receivables, net of allowance of $9 and $13 1,026 833 Inventories 787 731 Other current assets 293 274 _____ _____ 2,180 1,876 _____ _____ Investments and other assets: Investments in joint ventures and alliances 131 136 Other assets 143 144 _____ _____ 274 280 _____ _____ Property, plant and equipment: Land and buildings 577 590 Machinery, equipment and fixtures 2,375 2,320 Construction in process 168 185 _____ _____ 3,120 3,095 Less accumulated depreciation 1,490 1,424 _____ _____ 1,630 1,671 _____ _____
Goodwill, net of amortization of $28 and $17 364 384 _____ _____ Other intangibles, deferred taxes and deferred charges 249 331 ______ ______ Total assets $4,697 $4,542 ______ ______ ______ ______
Liabilities and shareholders' investment Current liabilities: Loans payable $ 113 $ 64 Current maturities of long-term debt 10 26 Accounts payable 411 340 Accrued salaries and wages 88 99 Accrued product coverage & marketing expenses 246 209 Income taxes payable 40 13 Other accrued expenses 406 320 _____ _____ 1,314 1,071 _____ _____ Long-term debt 1,092 1,137 _____ _____ Other liabilities 788 1,000 _____ _____ Minority interest 74 62 _____ _____
Shareholders' investment: Common stock, $2.50 par value, 48.3 and 48.1 shares issued 121 120 Additional contributed capital 1,129 1,121 Retained earnings 760 648 Accumulated other comprehensive income (109) (167) Common stock in treasury,at cost,6.8 & 6.1 shares (274) (240) Common stock held in trust for employee benefit plans, 3.4 and 3.6 shares (163) (172) Unearned compensation (35) (38) _____ _____ 1,429 1,272 _____ _____
Total liabilities & shareholders' investment $4,697 $4,542 ______ ______ ______ ______
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF CASH FLOWS ____________________________________
Millions 1999 1998 1997 ________ ______ ______ ______
Cash flows from operating activities: Net earnings (loss) $ 160 $ (21) $ 212 _____ _____ _____ Adjustments to reconcile net earnings (loss) to net cash from operating activities: Depreciation and amortization 233 199 158 Restructuring & other non-recurring actions 38 110 (24) Equity in (earnings) losses of joint ventures and alliances 35 38 (1) Receivables (200) (10) (80) Inventories (60) (26) (65) Accounts payable and accrued expenses 162 56 (18) Deferred income taxes (31) (65) 22 Other (30) (10) (4) ____ ____ ____ Total adjustments 147 292 (12) ____ ____ ____ 307 271 200 ____ ____ ____ Cash flows from investing activities: Property, plant and equipment: Additions (215) (271) (405) Disposals 22 7 21 Investments in joint ventures and alliances (36) (22) (47) Acquisitions and dispositions of business activities 57 (468) 76 Other 6 2 1 ____ ____ ____ (166) (752) (354) ____ ____ ____ Net cash provided by (used in) operating and investing activities 141 (481) (154) ____ ____ ____ Cash flows from financing activities: Proceeds from borrowings 28 711 281 Payments on borrowings (90) (161) (50) Net borrowings (payments) under short-term credit agreements 49 (30) (12) Repurchases of common stock (34) (14) (75) Dividend payments (47) (46) (45) Other (11) 11 (3) ____ ____ ____ (105) 471 96 ____ ____ ____
Effect of exchange rate changes on cash - (1) (1) ____ ____ ____ Net change in cash and cash equivalents 36 (11) (59) Cash & cash equivalents at beginning of year 38 49 108 ____ ____ ____ Cash & cash equivalents at end of year $ 74 $ 38 $ 49 ____ ____ ____ ____ ____ ____
Cash payments during the year for: Interest $ 82 $ 56 $ 21 Income taxes 56 73 42
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT __________________________________________________
Millions, except per share amounts 1999 1998 1997 __________________________________ ___________ __________ __________
Common stock: Balance at beginning of year $ 120 $ 120 $ 110 Issued to trust for employee benefit plans - - 9 Other 1 - 1 _____ _____ ____ Balance at end of year 121 120 120 _____ _____ ____ Additional contributed capital: Balance at beginning of year 1,121 1,119 929 Issued to trust for employee benefit plans - - 171 Other 8 2 19 _____ _____ _____ Balance at end of year 1,129 1,121 1,119 _____ _____ _____ Retained earnings: Balance at beginning of year 648 715 548 Net earnings (loss) 160 $160 (21) $(21) 212 $212 ___ ____ ___ Cash dividends (47) (46) ( 45) Other (1) - - ____ ____ ____ Balance at end of year 760 648 715 ____ ____ ____
Accumulated other comprehensive income: Balance at beginning of year (167) (70) (60) Foreign currency translation adjustments 4 (43) (21) Minimum pension liability adjustments 55 (54) 12 Unrealized losses on securities (1) - (1) ___ ___ ___ Other comprehensive income 58 58 (97) (97) (10) (10) ___ ___ ___ ___ ___ ___ Comprehensive income $218 $(118) $202 ____ ____ ____ ____ ____ ____ Balance at end of year (109) (167) (70) ___ ___ ___
Common stock in treasury: Balance at beginning of year (240) (245) (169) Repurchased (34) (14) (76) Issued - 19 - _____ _____ ____ Balance at end of year (274) (240) (245) _____ _____ ____ Common stock held in trust for employee benefit plans: Balance at beginning of year (172) (175) - Issued - - (180) Shares allocated to benefit plans 9 3 5 _____ _____ _____ Balance at end of year (163) (172) (175) _____ _____ _____
Unearned compensation: Balance at beginning of year (38) (42) (46) Shares allocated to participants 3 4 4 ______ ______ _____ Balance at end of year (35) (38) (42) ______ ______ _____
Shareholders' investment $1,429 $1,272 $1,422 ______ ______ ______ ______ ______ ______
Shares of stock Common stock, $2.50 par value, 150.0 shares authorized Balance at beginning of year 48.1 48.1 43.9 Shares issued .2 - 4.2 ____ ____ ____ Balance at end of year 48.3 48.1 48.1 ____ ____ ____ ____ ____ ____
Common stock in treasury Balance at beginning of year 6.1 6.0 4.5 Shares repurchased .7 .4 1.5 Shares issued - (.3) - ___ ___ ___ Balance at end of year 6.8 6.1 6.0 ___ ___ ___ ___ ___ ___
Common stock held in trust for employee benefit plans Balance at beginning of year 3.6 3.7 - Shares issued - - 3.8 Shares allocated to benefit plans (.2) (.1) (.1) ___ ___ ___ Balance at end of year 3.4 3.6 3.7 ___ ___ ___ ___ ___ ___
The accompanying notes are an integral part of this statement.
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 $2 million in 1999, $5 million in 1998 and $1 million in 1997.
Derivative Instruments: The Company makes use of derivative instruments in its foreign exchange, commodity price and interest rate hedging programs. Derivatives currently in use are commodity and interest rate swaps, as well as foreign currency forward contracts. These contracts are used strictly for hedging and not for speculative purposes. Refer to Note 10 for more information on derivative financial instruments.
The Company enters into commodity swaps to offset the Company's exposure to price volatility for certain raw materials used in the manufacturing process. As the Company has the discretion to settle these transactions either in cash or by taking physical delivery, these contracts are not considered financial instruments for accounting purposes. These commodity swaps are accounted for as hedges.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 on accounting for derivative instruments and hedging activities. The statement is effective for fiscal years beginning after June 15, 2000. The Company plans to adopt this statement at the beginning of fiscal 2001 and is currently evaluating its hedging strategy as it applies to the new statement. The statement is not expected to have a material effect on the Company's results of operations.
Other Costs: Estimated costs of commitments for product coverage programs are charged to earnings at the time the Company sells its products.
Research & development expenditures, net of contract reimbursements, are expensed when incurred and were $218 million in 1999, $228 million in 1998 and $250 million in 1997.
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.
Inventories: Inventories are stated at the lower of cost or net realizable value. Approximately 23 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 1999 1998 __________ ____ ____ Finished products $402 $400 Work-in-process and raw materials 440 387 ____ ____ Inventories at FIFO cost 842 787 Excess of FIFO over LIFO (55) (56) ____ ____ $787 $731 ____ ____ ____ ____
Property, Plant and Equipment: Property, plant and equipment are stated at cost. A modified units-of-production method, which is based upon units produced subject to a minimum level, is used to depreciate substantially all engine production equipment. The straight-line depreciation method is used for all other equipment. The estimated depreciable lives range from 20 to 40 years for buildings and 3 to 20 years for machinery, equipment and fixtures.
Long-Lived Assets: The Company evaluates the carrying value of its long- 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, 1999, and $75 million at December 31, 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 _________________ ________ ________ _________
____ Basic $160 38.3 $4.16 Options - .3 _____ ____ ____ _____ Diluted $160 38.6 $4.13 ____ ____ _____ ____ ____ _____
____ Basic $(21) 38.5 $(.55) Options - - _____ ____ ____ _____ Diluted $(21) 38.5 $(.55) ____ ____ _____ ____ ____ _____
____ Basic $212 38.2 $5.55 Options - .5 _____ ____ ____ _____ Diluted $212 38.7 $5.48 ____ ____ _____ ____ ____ _____
NOTE 2. ACQUISITION: In January 1998, the Company completed the acquisition of the stock of Nelson Industries, Inc., for $453 million. Nelson, a filtration and exhaust systems manufacturer, was consolidated from the date of its acquisition. On a pro forma basis, if the Company had acquired Nelson on January 1, 1997, consolidated net sales for 1997 would have been $5.9 billion and consolidated earnings would not have been materially different. In accordance with APB Opinion No. 16, Nelson's net assets were recorded at fair value at the date of acquisition. The purchase price in excess of net assets will be amortized over 40 years.
NOTE 3. SPECIAL CHARGES: In 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.
NOTE 4. RESTRUCTURING AND OTHER NON-RECURRING CHARGES: 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 continuing the restructuring plan implemented in the third quarter of 1998. As of December 31, 1999, approximately $81 million has been charged against the liabilities associated with these actions. The Company has funded the restructuring actions using cash generated from operations. Of the planned workforce reduction of 1,100 employees, approximately 900 people left the Company prior to December 31, 1999. The remaining actions to be completed consist primarily of the outsourcing of certain manufacturing operations and payment of severance commitments to terminated employees. The program is expected to be essentially complete in early 2000 and yield approximately $50 million in annual savings at completion. The Company does not currently anticipate any material changes in the original charges recorded for these actions. Activity in the major components of these charges is as follows: Charges Original ______________ $ Millions Provision 1998 1999 12/31/99 __________ _________ _____ _____ ________
Restructuring of majority-owned operations: Workforce reductions $ 38 $(12) $(14) $ 12 Asset impairment loss 22 - (7) 15 Facility consolidations and other 17 (8) (4) 5 ___ ____ ____ ____ 77 (20) (25) 32 ___ ____ ____ ____ 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) 33 ___ ____ ____ ____
EPA penalty 25 - (8) 17 ___ ____ ____ ____
Total $139 $(25) $(64) $ 50 ____ ____ ____ ____ ____ ____ ____ ____
NOTE 5. OTHER EXPENSE (INCOME): The major components of other expense (income) included the following:
$ Millions 1999 1998 1997 __________ ____ ____ ____
Amortization of intangibles $15 $ 14 $ 2 Interest income (7) (9) (5) Loss (gain) on sale of businesses 1 (7) (13) Rental income (5) (6) (3) Royalty income (4) (5) (12) Foreign currency losses 2 5 1 Non-operating partnership costs 6 3 - Social tax refunds - (3) - Other - (5) 4 ___ ____ ____ Total $ 8 $(13) $(26) ___ ____ ____ ___ ____ ____
NOTE 6. INVESTMENTS IN JOINT VENTURES AND ALLIANCES: Investments in joint ventures and alliances at December 31 were as follows:
$ Millions 1999 1998 __________ ____ ____
Tata Cummins $ 22 $ 22 Komatsu alliances 18 17 Chongqing Cummins 16 15 Behr America 15 14 European Engine Alliance 14 5 Consolidated Diesel 11 39 Dong Feng 10 8 Cummins Wartsila - (6) Other 25 22 ____ ____ $131 $136 ____ ____ ____ ____
Summary financial information for the joint ventures and alliances was as follows: December 31, $ Millions 1999 1998 1997 __________ ______ ______ ______ Net sales $1,334 $1,245 $1,307 Gross profit 101 25 111 Net earnings (loss) (64) (105) 5 Cummins' share (32) (52) 2
Current assets $ 302 $ 527 Noncurrent assets 485 613 Current liabilities (223) (406) Noncurrent liabilities (284) (455) ____ ____ Net assets $280 $279 ____ ____ ____ ____ Cummins' share $131 $136 ____ ____ ____ ____
The Company has guaranteed $52 million in outstanding debt of the Cummins Wartsila joint venture as of December 31, 1999. As disclosed in Note 4, the Cummins Wartsila joint venture was terminated effective December 31, 1999.
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 $513 million in 1999 and $535 million in 1998.
NOTE 7. BORROWINGS: Long-term debt at December 31 was:
$ Millions 1999 1998 __________ ____ ____ 7.125% debentures due 2028 $249 $249 6.45% notes due 2005 224 224 Commercial paper 168 142 5.65% debentures due 2098, net of unamortized discount of $40 (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 61 63 8.2% notes through 2003 - 79 Other 30 36 _____ _____ Total 1,102 1,163 Current maturities (10) (26) ______ ______ Long-term debt $1,092 $1,137 ______ ______ ______ ______
Maturities of long-term debt for the five years subsequent to December 31, 1999 are $10 million, $8 million, $9 million, $131 million and $7 million. At December 31, 1999 and 1998, the weighted-average interest rate on loans payable and current maturities of long-term debt approximated 6 percent and 7 percent, respectively.
The Company maintains a $500 million revolving credit agreement, maturing in 2003, under which there were no outstanding borrowings at December 31, 1999 or 1998. The revolving credit agreement supports the Company's commercial paper borrowings. In February 1998, the Company issued $765 million face amount of notes and debentures under a $1 billion Registration Statement filed with the Securities and Exchange Commission in 1997. Net proceeds were used to 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 $116 million available at December 31, 1999.
The Company's debt agreements have several covenants which 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.
In December 1999, the Company paid off the 8.2 percent notes due in 2003 using cash generated from operations and additional commercial paper borrowings.
At December 31, 1999 and 1998, loans payable included $100 million and $54 million, respectively, of notes payable to banks and $13 million and $10 million, respectively, of bank overdrafts.
The Company has guaranteed the outstanding borrowings of its ESOP Trust. Cash contributions to the Trust, together with the dividends accumulated on the common stock held by the Trust, are used to pay interest and principal. Cash contributions and dividends to the Trust approximated $10 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 1999 1998 __________ ______ ______ Accrued retirement & post-employment benefits $ 511 $ 720 Accrued product coverage & marketing expenses 175 156 Accrued compensation 42 38 Deferred income taxes 1 17 Other 59 69 ____ ______ $ 788 $1,000 ______ ______ ______ ______
NOTE 9. INCOME TAXES: The provision for income taxes was as follows:
$ Millions 1999 1998 1997 _____________ ____ ____ ____ Current: U.S. Federal and state $43 $16 $16 Foreign 43 41 32 __ __ __ 86 57 48 __ __ __ Deferred: U.S. Federal and state (17) (34) 26 Foreign (14) (19) - __ __ __ (31) (53) 26 ___ ___ __ $55 $ 4 $74 ___ ___ ___ ___ ___ ___
Significant components of net deferred tax assets related to the following tax effects of differences between financial and tax reporting at December 31:
$ Millions 1999 1998 __________ ____ ____
Employee benefit plans $282 $300 Product coverage & marketing expenses 126 106 Restructuring charges 34 14 US plant & equipment (182) (176) Net foreign taxable differences, primarily plant and equipment 9 6 US Federal carryforward benefits: General business tax credits, expiring 2018 to 2019 22 43 Minimum tax credits, no expiration 15 12 Other net differences 13 12 ____ ____ $319 $317 ____ ____ ____ ____ Balance Sheet Classification ____________________________ Current assets $210 $203 Noncurrent assets 110 131 Noncurrent liabilities (1) (17) ____ ____ $319 $317 ____ ____ ____ ____
The Company expects to realize all of its tax assets, including the use of all carryforwards, before any expiration.
Earnings before income taxes and differences between the effective tax rate and US Federal income tax rate were:
$ Millions 1999 1998 1997 __________ ____ ____ ____ Earnings (loss) before income taxes: US $232 $(21) $205 Foreign (11) 15 81 ____ ____ ____ $221 $ (6) $286 ____ ____ ____ ____ ____ ____
Tax at 35 percent US statutory rate $ 77 $ (2) $100 Nondeductible EPA penalty - 9 - Nondeductible goodwill amortization 3 3 - Research tax credits (15) (10) (11) Foreign sales corporation benefits (18) (9) (11) Differences in rates and taxability of foreign subsidiaries 10 15 (3) All other, net (2) (2) (1) ____ ____ ____ $ 55 $ 4 $ 74 ____ ____ ____ ____ ____ ____
NOTE 10. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT: The Company is exposed to financial risk resulting from volatility in foreign exchange rates and interest rates. This risk is closely monitored and managed through the use of financial derivative contracts. As clearly stated in the Company's policies and procedures, financial derivatives are used expressly for hedging purposes, and under no circumstances are they used for speculating or trading. Transactions are entered into only with banking institutions with strong credit ratings, and thus the credit risk associated with these contracts is considered immaterial. Hedging program results and status are reported to senior management on a periodic basis.
Foreign Exchange Rates Due to its international business presence, the Company uses foreign exchange forward contracts to manage its exposure to exchange rate volatility. Foreign exchange balance sheet exposures are aggregated and hedged at the corporate level. Maturities on these instruments generally fall within the one-month and six-month range. The objective of the hedging program is to reduce earnings volatility resulting from the translation of net foreign exchange balance sheet positions. The total notional amount of these forward contracts outstanding at December 31 was as follows:
$ Millions __________ Currency 1999 1998 ________ ____ ____
British Pound $120 $ 86 Euro 47 - Australian Dollar 19 13 Hong Kong Dollar 8 8 Japanese Yen 7 6 Canadian Dollar 3 11 French Franc - 23 German Mark - 19 Other 2 8 ____ ____ $206 $174 ____ ____ ____ ____
Interest Rates The Company manages its exposure to interest rate fluctuations through the use of interest rate swaps. Currently the Company has in place three interest rate swaps that effectively convert fixed-rate debt into floating- rate debt. The objective of the swaps is to more efficiently balance borrowing costs and interest rate risk. The contracts were established during 1998 and 1999 and have a total notional value of $350 million.
Fair Value of Financial Instruments Based on borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of total debt, including current maturities, at December 31, 1999, approximated $1,104 million. The carrying value at that date was $1,215 million. At December 31, 1998, the fair and carrying values of total debt, including current maturities, were $1,214 and $1,227 million, respectively. The carrying values of all other receivables and liabilities approximated fair values.
NOTE 11. RETIREMENT PLANS: The Company has various contributory and noncontributory pension plans covering substantially all employees. Cummins common stock represented 11 percent of pension plan assets at December 31, 1999.
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 $651 million, $636 million, and $513 million, respectively, as of December 31, 1999, and $1,296 million, $1,251 million, and $999 million, respectively, as of December 31, 1998. The assumed long- term rate of compensation increase for salaried plans was 5.25 percent in 1999 and 4.25 percent in 1998. Other significant assumptions for the Company's principal plans were: Pension Other Benefits Benefits 1999 1998 1999 1998 ____ ____ ____ ____
Weighted-average discount rate 7.5% 6.5% 7.5% 6.5% Long-term rate of return on plan assets 9.0% 10.0%
For measurement purposes a 7 percent annual increase in health care costs was assumed for 2000, decreasing gradually to 5.25 percent in ten years and remaining constant thereafter.
Increasing the health care cost trend rate by one percent would increase the obligation by $43 million and annual expense by $4 million. Decreasing the health care cost trend rate by one percent would decrease the obligation by $42 million and annual expense by $4 million.
The Company's net periodic benefit cost under these plans was as follows:
Pension Benefits Other Benefits $ Millions 1999 1998 1997 1999 1998 1997 ____________ ____ ____ ____ ____ ____ ____ Service cost $ 53 $ 47 $ 41 $ 8 $ 8 $ 8 Interest cost 116 123 115 40 44 41 Expected return on plan assets (161) (153) (134) - - - Amortization of transition asset (3) (4) (9) - - - Other 12 12 13 4 3 9 ____ ____ ____ ____ ____ ____ $ 17 $ 25 $ 26 $ 52 $ 55 $ 58 ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____
Pension Benefits Other Benefits $ Millions 1999 1998 1999 1998 __________ ______ ______ ______ ______ Change in benefit obligation: Benefit obligation at beginning of year $1,907 $1,693 $ 640 $ 596 Service cost 53 47 8 8 Interest cost 116 123 40 44 Plan participants' contributions 7 7 1 1 Amendments 14 2 - - Experience (gain) loss (103) 161 (21) 20 Benefits paid (119) (123) (31) (29) Other (10) (3) - - _____ _____ _____ _____ Benefit obligation at end of year $1,865 $1,907 $ 637 $ 640 _____ _____ _____ _____ _____ _____ _____ _____ Change in plan assets: Fair value of plan assets at beginning of year $1,692 $1,905 $ - $ - Actual return on plan assets 331 (129) - - Employer contribution 20 34 30 28 Plan participants' contributions 7 7 1 1 Benefits paid (119) (123) (31) (29) Other (9) (2) - - _____ _____ _____ _____ Fair value of plan assets at end of year $1,922 $1,692 $ - $ - _____ _____ _____ _____ _____ _____ _____ _____
Funded status $ 57 $ (215) $ (637) $ (640) Unrecognized: Experience (gain) loss (a) (103) 172 55 80 Prior service cost (b) 51 55 (12) (11) Transition asset (c) (5) (7) - - _____ _____ _____ _____ Net amount recognized $ - $ 5 $ (594) $ (571) _____ _____ _____ _____ _____ _____ _____ _____
Amounts recognized in the statement of financial position: Prepaid benefit cost $ 102 $ 50 $ - $ - Accrued benefit liability (114) (232) (594) (571) Intangible asset 12 104 - - Accumulated other comprehensive income - 83 - - _____ _____ _____ _____ Net amount recognized $ - $ 5 $ (594) $ (571) _____ _____ _____ _____ _____ _____ _____ _____
(a) The net deferred (gain) loss resulting from investments, other experience and changes in assumptions. (b) The prior service effect of plan amendments deferred for recognition over remaining service. (c) The balance of the initial difference between assets and obligations deferred for recognition over a 15-year period.
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 0.7 million shares on the open market at an aggregate purchase price of $34 million in 1999 and 0.4 million shares on the open market at an aggregate purchase price of $14 million in 1998. In 1997, the Company repurchased 1.3 million shares from Ford Motor Company and another 0.2 million shares on the open market at an aggregate purchase price of $75 million. All of the acquired shares are held as common stock in treasury.
In 1997, the Company issued 3.75 million shares of its common stock to an employee benefits trust to fund obligations of employee benefit and compensation plans, principally retirement savings plans. Shares of the stock held by this trust are not used in the calculation of earnings per share until allocated to a benefit plan.
NOTE 13. SHAREHOLDERS' RIGHTS PLAN: The Company has a Shareholders' Rights Plan which it first adopted in 1986. The Rights Plan provides that each share of the Company's common stock has associated with it a stock purchase right. The Rights Plan becomes operative when a person or entity acquires 15 percent of the Company's common stock or commences a tender offer to purchase 20 percent or more of the Company's common stock without the approval of the Board of Directors.
NOTE 14. EMPLOYEE STOCK PLANS: Under the Company's stock incentive and option plans, officers and other eligible employees may be awarded stock options, stock appreciation rights and restricted stock. Under the provisions of the stock incentive plan, up to one percent of the Company's outstanding shares of common stock at the end of the preceding year is available for issuance under the plan each year. At December 31, 1999, there were no shares of common stock available for grant and 1,732,875 options exercisable under the plans.
The Company accounts for stock options in accordance with APB Opinion No. 25 and related interpretations. No compensation expense has been recognized for stock options since the options have exercise prices equal to the market price of the Company's common stock at the date of grant.
Number of Weighted-average Options Shares exercise price ________ _________ ________________
December 31, 1996 1,510,150 38.88 Granted 766,500 60.61 Exercised (294,025) 35.85 Cancelled ( 61,775) 42.66 _________
December 31, 1997 1,920,850 46.08 Granted 703,660 45.34 Exercised (54,075) 36.36 Cancelled (27,425) 53.80 _________
December 31, 1998 2,543,010 48.08 Granted 886,900 39.74 Exercised (196,500) 39.71 Cancelled (40,275) 43.99 _________ December 31, 1999 3,193,135 46.65 _________ _________
Options outstanding at December 31, 1999, have exercise prices between $15.94 and $79.81 and a weighted-average remaining life of 7 years. The weighted- average fair value of options granted was $13.76 per share in 1999 and $18.61 per share in 1998. The fair value of each option was estimated on the date of grant using a risk-free interest rate of 5.6 percent in 1999 and 1998, current annual dividends, expected lives of 10 years and expected volatility of 34 percent. A fair-value method of accounting for awards subsequent to January 1, 1997, would have resulted in an increase in compensation expense of $8 million, net of tax ($.20 per share) in 1999, $8 million, net of tax ($.20 per share) in 1998 and $6 million, net of tax ($.14 per share) in 1997.
NOTE 15. COMPREHENSIVE INCOME: Comprehensive income includes net income and all other nonowner 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 __________ ___________ __________ ___________ ______ ____ Pre-tax amount $ 5 $(1) $ 84 $ 88 Tax (expense) benefit (1) - (29) (30) ____ ___ ____ _____ Net amount $ (4) $(1) $ 55 $ 58 ____ ___ ____ _____ ____ ___ ____ _____ ____ Pre-tax amount $(44) $(1) $(83) $(128) Tax (expense) benefit 1 1 29 31 ____ ___ ____ _____ Net amount $(43) $ - $(54) $ (97) ____ ___ ____ _____ ____ ___ ____ _____ ____ Pre-tax amount $(21) $(1) $ 12 $ (10) Tax (expense) benefit - - - - ____ ___ ____ _____ Net amount $(21) $(1) $ 12 $ (10) ____ ___ ____ _____ ____ ___ ____ _____
The components of accumulated other comprehensive income are as follows:
Accum- ulated Foreign Minimum Other Currency Unrealized Pension Compre- Translation Losses on Liability hensive $ Millions Adjustments Securities Adjustments Income __________ ___________ __________ ___________ ______
Balance at 12/31/96 $ (47) $ - $(13) $ (60) Change in 1997 (21) (1) 12 (10) _____ ___ ____ _____ Balance at 12/31/97 (68) (1) (1) (70) Change in 1998 (43) - (54) (97) _____ ___ ____ _____ Balance at 12/31/98 (111) (1) (55) (167) Change in 1999 4 (1) 55 58 _____ ___ ____ _____ Balance at 12/31/99 $(107) $(2) $ - $(109) _____ ___ ____ _____ _____ ___ ____ _____
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 and exhaust systems, turbochargers and 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:
$ Millions __________ Power Filtration 1999 Engine Generation and Other Total ____ ______ __________ ___________ ______ Net sales $4,225 $1,356 $1,058 $6,639 Depreciation & amortization 146 47 40 233 Income (expense) from joint ventures and alliances (4) (25) 1 (28) Earnings before interest, income taxes and unusual charges 182 52 122 356 Unusual 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
____ Net sales $3,982 $1,230 $1,054 $6,266 Depreciation & amortization 120 40 39 199 Income (expense) from joint ventures and alliances (4) (25) (1) (30) Earnings before interest, income taxes and unusual charges 136 25 121 282 Unusual charges 165 50 2 217 Earnings (loss) before interest & income taxes (29) (25) 119 65 Net assets 946 511 803 2,260 Investment in joint ventures and alliances 132 3 1 136 Capital expenditures 172 67 32 271 Additions to goodwill 12 2 370 384
____ Net sales $3,666 $1,205 $ 754 $5,625 Depreciation & amortization 102 34 22 158 Income (expense) from joint ventures and alliances 12 (2) - 10 Earnings (loss) before interest and income taxes 207 (2) 107 312 Net assets 1,074 531 312 1,917 Investment in joint ventures and alliances 133 65 6 204 Capital expenditures 304 79 22 405
Reconciliation to Consolidated Financial Statements:
1999 1998 1997 ____ ____ ____ Earnings before interest & income taxes for operating segments $296 $ 65 $312 Interest expense 75 71 26 Income tax expense 55 4 74 Minority interest 6 11 - ____ ____ ____ Net earnings (loss) $160 $(21) $212 ____ ____ ____ ____ ____ ____
1999 1998 1997 ______ ______ ______
Net assets for reportable segments $2,436 $2,260 $1,917 Liabilities deducted in arriving at net assets 1,922 1,926 1,583 Deferred tax assets not allocated to segments 320 334 256 Debt-related costs not allocated to segments 19 22 9 ______ ______ ______ Total assets $4,697 $4,542 $3,765 ______ ______ ______ ______ ______ ______
Summary geographic information is listed below: All $ Millions US UK Canada Other Total __________ ______ ______ ______ ______ ______
____ Net sales (a) $4,064 $ 400 $ 473 $1,702 $6,639 Long-lived assets $1,434 $ 206 $ - $ 264 $1,904
____ Net sales (a) $3,595 $ 389 $ 459 $1,823 $6,266 Long-lived assets $1,470 $ 209 $ - $ 272 $1,951
____ Net sales (a) $3,123 $ 384 $ 318 $1,800 $5,625 Long-lived assets $1,360 $ 251 $ - $ 267 $1,878
(a) Net sales are attributed to countries based on location of customer.
Revenues from the Company's largest customer represent approximately $1.3 billion of the Company's net sales in 1999. These sales are included in the engine and filtration and other segments.
NOTE 17. GUARANTEES, COMMITMENTS AND OTHER CONTINGENCIES: At December 31, 1999, the Company had the following minimum rental commitments for noncancelable operating leases: $47 million in 2000, $38 million in 2001, $30 million in 2002, $26 million in 2003, $18 million in 2004 and $70 million thereafter. Rental expense under these leases approximated $75 million in 1999, $70 million in 1998 and $60 million in 1997.
Commitments under outstanding letters of credit, guarantees and contingencies at December 31, 1999, approximated $159 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 US 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 vigorously is defending such actions or proceedings. The Company has established reserves that it believes are adequate for its expected future liability in such actions and proceedings where the nature and extent of such liability can be estimated reasonably based upon presently available information.
NOTE 18. QUARTERLY FINANCIAL DATA (unaudited):
$ Millions, except First Second Third Fourth Full per share amounts Quarter Quarter Quarter Quarter Year __________________ _______ _______ _______ _______ ______
____ 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
____ Net sales $1,500 $1,635 $1,525 $1,606 $6,266 Gross profit 297 369 258 325 1,249 Net earnings (loss) 7 53 (110) 29 (21) Basic earnings (loss) per share $ .18 $ 1.39 $(2.86) $ .75 $ (.55) Diluted earnings (loss) per share .18 1.38 (2.86) .75 (.55)
Fourth quarter 1999 net earnings included a charge of $45 million, net of tax ($60 million pretax), or $1.17 per share, for the termination of the Cummins Wartsila joint venture.
First quarter 1998 gross profit included a $43 million special charge for product coverage costs. The special charge, net of taxes, included in net earnings was $30 million or $.78 per share.
Third quarter 1998 gross profit included special charges of $49 million for product coverage costs and inventory write-downs. Net loss for the period also included charges for restructuring, EPA penalties and other non- recurring items. The total charges, net of tax, included in net loss were $130 million or $3.38 per share.
CUMMINS WARTSILA SAS BALANCE SHEET AS OF December 31, 1999 ___________________ (FRF thousands)
December 31, 1999 12/31/98 _________________________________ _________ Amort. & ASSETS Gross Provisions Net Net _________ __________ ________ _________ Intangible fixed assets Research & development costs 10,709 5,619 5,090 4,100 Goodwill 12,760 7,656 5,104 5,742 Franchises, patents, licenses 423,697 148,668 275,029 390,090 Software 40,874 31,439 9,435 8,182 Intangible fixed assets in-progress 1,816 - 1,816 916 ________ ________ _______ _______ 489,856 193,382 296,474 409,030 ________ ________ _______ _______ Tangible fixed assets Land 925 - 925 925 Buildings, fixtures, fittings 152,100 84,906 67,194 87,036 Technical plant and machinery 461,272 271,927 189,345 201,448 Other tangible fixed assets 40,306 27,725 12,581 14,367 Tangible fixed assets in-progress 35,056 - 35,056 34,018 Advances and down payments - - - 124 _______ _______ _______ _______ 689,659 384,558 305,101 337,918 _______ _______ _______ _______ Long-term investments Equity investments 6,699 4,424 2,275 2,275 Receivables from controlled entities 1,374 - 1,374 1,374 Loans and other long-term investments 53,238 846 52,392 20,165 _________ _______ _______ _______ 61,311 5,270 56,041 23,814 _________ _______ _______ _______ Fixed assets 1,240,826 583,210 657,616 770,762 _________ _______ _______ _______
Inventories and work-in-progress Raw materials and other supplies 62,553 14,927 47,626 68,830 Supplies 11,315 284 11,031 3,668 Production work-in-progress 151,275 8,642 142,633 171,895 Semi-finished goods 226,352 35,573 190,779 180,238 Finished goods 23,171 - 23,171 30,375 _______ _______ _______ _______ 474,666 59,426 415,240 455,006 _______ ______ _______ _______ Advances & down payments on orders 35,752 - 35,752 28,200 _______ ______ _______ _______ Receivables Receivables from sales 640,469 68,068 572,401 423,001 Other operating receivables 65,852 9,833 56,019 126,579 Liaison account - - - - _______ ______ _______ _______ 706,321 77,901 628,420 549,580 _______ _______ _______ _______ Marketable securities 451 - 451 451 _______ _______ _______ _______ Cash-on-hand 37,363 - 37,363 15,229 _________ _______ _________ _________
Current assets 1,254,553 137,327 1,117,226 1,048,466 _________ _______ _________ _________
Prepaid expenses 9,121 - 9,121 11,577 _________ _______ _________ _________ Charges to be spread over several periods 3,459 - 3,459 4,613 _________ _______ _________ _________ Unrealized foreign exchange losses 6,574 - 6,574 8,091 _________ _______ _________ _________ TOTAL ASSETS 2,514,533 720,537 1,793,996 1,843,509 _________ _______ _________ _________ _________ _______ _________ _________
CUMMINS WARTSILA SAS BALANCE SHEET AS OF December 31, 1999 ___________________ (FRF thousands)
December 31, 1999 12/31/98 ______________________ _________ Partial LIABILITIES Amounts Amounts Amounts _________ _________ _________ Shareholders' equity Share Capital 500,000 500,000 Legal Reserve - - Restricted reserve as of 3/31/98 - 129,521 L/T capital gain reserve 2,967 2,967 Profit and loss brought forward (451,967) - Income for the period 106,072 (581,488) Investment subsidies 8,385 8,047 Cumulative translation adjustment 26,776 14,497 _________ _________ Total shareholders' equity 192,233 73,544 _________ _________
Conditional advances 5,598 5,598 _________ _________ Provision for legal disputes and commitments 103,901 77,192 Provision for restructuring and retirement 166,681 276,722 _________ _________ Total provisions 270,582 353,914 _________ _________ Liabilities Financial liabilities: Medium-term loans 640,000 844,000 Short-term credits - - Miscellaneous loans and financial liabilities 17,521 21,898 Other loans 9,467 34,337 _________ _________ 666,988 900,235 _________ _________ Down payments on orders in-progress 254,800 100,327 _________ _________ Operating liabilities Trade payables & assimilated accounts 305,914 325,443 Tax and social liabilities 58,272 45,835 Other liabilities 26,213 30,408 _________ _________ 390,399 401,686 _________ _________ Payables to fixed asset suppliers 3,586 4,110 _________ _________ Total liabilities 1,315,773 1,406,358 _________ _________ Prepaid revenue 2,184 1,499 _________ _________ Unrealized gains on foreign exchange 7,626 2,596 _________ _________ TOTAL LIABILITIES 1,793,996 1,843,509 _________ _________ _________ _________
CUMMINS WARTSILA SAS INCOME STATEMENT December 31, 1999 ____________________ (FRF thousands)
12/31/99 12/31/98 _________ _________ Operating revenues Net revenues 1,031,011 955,348 Change in stored production (43,159) 32,355 In-house production 9,410 75,972 Subsidies 466 2,114 Reversal of provisions and expense transfers 167,147 179,941 Other revenues 839 2,484 _________ _________ 1,165,714 1,248,214 _________ _________ Operating expenses Purchases 594,749 626,352 Change in inventories (13,449) 22,375 Other purchases & external charges 403,213 441,074 Taxes and assimilated payments 13,814 19,598 Payroll and associated costs 209,846 198,983 Social charges 75,869 83,419 Allocations: Depreciation & amortization of tangible and intangible fixed assets 103,152 99,156 Depreciation of charges allocated over several periods 1,153 1,153 Provisions for depreciation of assets 34,012 41,236 Provisions for losses & contingencies 164,620 89,414 Other charges 21,850 6,156 _________ _________ 1,608,829 1,628,916 _________ _________ 1. Operating income/loss (443,115) (380,702) _________ _________
Share of income from joint ventures 1,695 - _________ _________ Financial income Other interest & assimilated income 2,463 3,357 Reversal of provisions and expense transfers 9,094 5,406 Positive exchange rate differences 9,572 14,961 _________ _________ 21,129 23,724 _________ _________ Financial charges Depreciation and provisions 8,412 9,094 Interest and assimilated charges 37,715 34,983 Negative exchange rate differences 17,750 18,335 _________ _________ 63,877 62,412 _________ _________ 2. Financial income/loss (42,748) (38,688) _________ _________ 3. Current income before tax (484,168) (419,390) _________ _________ "Exceptional" revenues On management transactions 600,460 882 On capital transactions 1,195 1,161 Share of investment subs. allocated to income statement 190 97 Reversal of other provisions 140,285 15,292 _________ _________ 742,130 17,432 _________ _________ "Exceptional" charges On management transactions 43,265 7,478 On capital transactions 1,020 1,251 Restructuring expense 107,405 176,800 _________ _________ 151,690 185,529 _________ _________ 4. Extraordinary income/loss 590,440 (168,097) _________ _________ 5. Corporate income tax 200 (5,999) _________ _________ 6. Income/loss 106,072 (581,488) _________ _________ _________ _________
NOTES
1. Activity
The twelve month financial period ended December 31, 1999 shows accounting revenues of FRF 1,031.0 million (Euro 157.1 million), compared to FRF 955.3 million (Euro 145.6 million) for the previous financial period.
Net sales development _____________________ (FRF millions) (12-months periods)
Year Net Sales ____ _________ 1994 1,012 1995 1,085 1996 1,191 1997 1,206 1998 955 1999 1,031
Direct exports were FRF 533.2 million (Euro 81.3 million), i.e. 52% of total revenues excluding taxes. Taking indirect exports into account, the share of revenues relating to foreign markets was FRF 743.4 million (Euro 113.3 million), i.e. 72% of revenues excluding taxes.
Direct exports in 1999 FRF 533.2 million ______________________ Percent of Foreign Markets Export Sales _______________ ____________ Europe 41% Asia 21% Africa 20% Americas 17% Other 1%
Orders in 1999 amounted to FRF 1,017 million (Euro 155 million). At the end of the period, new orders were FRF 540 million (Euro 82 million).
332 megawatts were delivered in 1999.
2. Accounting principles
Cummins Wartsila prepares its financial statements in accordance with French accounting principles.
The same accounting principles were used as those used for the 1998 financial period.
2.1. Foreign currency translation
Transactions in foreign currency outside Euro area are recorded at the following exchange rates: . Daily transactions are converted into French francs as follows: - Purchase and sales invoices by using the monthly rates published by the French Customs Authorities. - Payments and receipts using daily bank rates.
. Valuation of receivables and liabilities in foreign currency as of December 31, 1999 takes place in line with the last known rate before the period end. These rates were published in the Journal Officiel (Gazette).
The assets and liabilities of the two sites in England are converted using the exchange rate in effect on December 31, 1999. The income statement is converted at the average monthly exchange rate.
2.2. Intangible fixed assets
The costs of studies and trials relating to specific markets and benefiting from advances whose repayment is conditional are booked in Research and Development costs. The amount for this year is FRF 4.5 million (Euro 0.7 million). These costs are amortized over a period of three years.
Former WARTSILA France's own goodwill, increased by the contribution related to the takeover of Societe Surgerienne de Constructions Mecaniques of Budi and by the repair activity of Wartsila Diesel France, is amortized over a period of twenty years.
Intangible fixed assets related to know-how and technology of engines CW 200 and the CW 170, capitalized in 1997 for an amount of FRF 350 million and increased to FRF 418.9 million by the end of 1998, are amortized on a straight-line basis over a period of 15 years. Further to the change of Shareholders and to the split of the CW 170 activity forecasted for January 2000:
. the 1999 costs related to know-how and technology of the CW 200 were capitalized for a sum of FRF 4.7 million (Euro 0.7 million). These costs are amortized over the remaining useful life of the intangible fixed assets mentioned at the beginning of this paragraph.
. an extraordinary depreciation of FRF 91.2 million (Euro 13.9 million) related to the technology of CW 170 was booked.
Software is amortized on a straight-line basis over four years; low value software is amortized over 12 months.
2.3. Tangible fixed assets
Tangible fixed assets are recorded at their acquisition cost.
Depreciation is calculated on a straight-line basis over the following useful life periods:
. Buildings 20 years . Fixtures and fittings 10 years . Industrial equipment 10 years . Development motors 2 years . Plant 3 years . Transport equipment 4 years . Furniture 10 years . Office equipment 4 years . IT equipment 4 years
2.4. Inventories and work-in-progress
Purchased inventory is valued at average weighted cost.
Work-in-progress is valued at total cost of production, which includes both cost of material purchased and manufacturing costs. Manufacturing costs include normal production costs as well as depreciation charges.
Articles with a low turnover are subject to sliding provisions of up to 100% of their value. Provisions are booked in work-in-progress accounts if circumstances place the completion of the project in jeopardy.
A provision is set aside for inventories of raw materials and work-in- progress relating to engines in the start-up phase of production when inventory costs exceed the estimated sales price. The provision recorded represents the excess of costs over the sales price.
2.5. Sales
The principle of product recognition is the following:
. upon dispatch of the engines and the spare parts
. upon completion of work in relation to repairs and upgrading
. for important, large-scale engines whose manufacture involves long- term contracts, product recognition is applied according to the following methods:
Engineering contracts:
. for the study and document submission phases, billing takes place as work progresses; the triggering event is the submission of plans.
. equipment is billed on the basis of deliveries on a pro rata basis with a check being made to ensure that the margin generated at this stage is in line with the average margin of the contract as a whole.
Military contracts:
. Billing for development and industrialization contracts takes place as work progresses at a pace agreed on by the parties.
. as work progresses for turn key installations.
2.6. Loss and contingency provisions
Provisions are set aside for the estimated value of the work to be carried out relating to the installation and commissioning of engines delivered and invoiced.
The company sets aside provisions on the basis of statistical data in order to cover possible expenses relating to the guarantee given to customers.
Lastly, contingency provisions are set aside for legal disputes with customers likely to involve either additional work or to pose a risk to the payment of receivables.
2.7. Retirement indemnities
Estimated retirement indemnities due upon the retirement of an employee, to which must be added social charges at the average company rate, are calculated according to the following criteria:
. employees' length of service with the company . person's age . mortality table . turnover rate of the company's own personnel . discount rate, excluding inflation . inflation rate
3. Shareholders' equity
3.1. Share capital
As of March 31, 1999, the share capital was FRF 500,000,000. It is composed of 5,000,000 shares, each of a par value of FRF 100. The capital is held in equal amounts by CUMMINS ENGINE COMPANY Limited and WARTSILA NSD Corporation.
3.2. Reserve account
Following the decision of the Ordinary General Meeting of Cummins Wartsila of June 30, 1999, the reserve account is balanced with the corresponding amount of the 1999 loss.
3.3. Loss of half of capital
Due to the losses recorded in the financial accounts, shareholders' equity has fallen below half the nominal value of share capital. Decision concerning the continuation of the business activity was taken during the Extraordinary General Meeting of October 31, 1999. The regularization of the situation must take place in 2001 at the latest.
4. Comments relating to exceptional items
The most significant extraordinary items consist of:
(FRF Millions) Charges Revenues _______ ________
. Loan waver 600.0 . Reversal of the excess provision for restructuring charges 139.6 . Penalties on contracts 9.6 . Shutdown of Ramsgate (UK) 31.9 . Depreciation related to the CW 170 technology 91.2 . Tangible Fixed Assets provision linked to the restructuring 16.2
5. Subsidies
The company received an investment subsidy for the acquisition of new equipment. A portion of this subsidy is reversed to income at the same rate as depreciation relating to equipment.
Furthermore, the company receives Credit National loans known as `article 90' loans for the financing of research programs. These loans are only repaid if research results are successful. In the case of a recognized failure or if commercial success has not been achieved within a certain time, these loans are converted into subsidies.
6. Operating receivables
Provisions, calculated on a case by case basis, are set aside for doubtful debts.
7. Research tax credit
The company has got a receivable related to tax research credit in its accounts.
This credit may be set against the charge for tax during the next three years following the closing year where the declaration was issue. After this period, the portion exceeding the tax charge will be paid back to the company.
8. Prepaid expenses
This account consists mainly of insurance charges of FRF 6.5 million (Euro 1 million) to be allocated over the twelve months following payment of the premium.
9. Charges to be spread over several periods
These consist of costs borne by the company relating to engines installed in field tests. They are spread over 5 years and 1/5 of the costs are amortized in the current period.
10. Off balance sheet commitments
The company's commitments relating to the hedging of future currency to be cashed in or out during the next twelve months are as follows:
Amount in millions Amount in Amount in foreign millions millions currency FRF Euro ________ _________ _________
. USD 6.3 40.0 6.1 . GBP 1.6 16.3 2.4
Other miscellaneous commitments appear in the table attached as an appendix.
11. Incorporation into the consolidated financial statements
The financial statements of our company are consolidated on a like by like basis, using the equity method of consolidation, by our parent companies:
CUMMINS ENGINE COMPANY, Inc., Columbus, Indiana, USA
METRA CORPORATION, Helsinki, Finland
In light of the insignificant nature of the subsidiaries held by CUMMINS WARTSILA, consolidated financial statements were not prepared.
12. Information concerning the remuneration of the directors
This information was not provided, as it would have led to disclosure of the amount of an individual salary.
I. MOVEMENT IN FIXED ASSETS - GROSS VALUE __________________________________________ (FRF thousands)
Gross Situation Value As of As Of 1/1/99 Acquisitions Disposals 12/31/99 _________ ____________ _________ ________ Intangible fixed assets _______________________
Research & development costs 6,150 4,559 - 10,709 Goodwill 12,760 - - 12,760 Licenses 50 - - 50 Software 32,643 8,249 18 40,874 Know-how W170 & W200 418,907 4,740 - 423,647 Intangible fixed assets in-progress 916 900 - 1,816 _______ _______ _______ _______ 471,426 18,448 18 489,856 _______ _______ _______ _______ _______ _______ _______ _______
Tangible fixed assets _____________________
Land 925 - - 925 Buildings,fixtures,fittings 149,869 5,086 2,855 152,100 Technical plant & machinery 426,222 38,161 3,111 461,272 Other tangible fixed assets 39,123 3,593 2,410 40,306 Tangible fixed assets in-progress 34,018 1,038 - 35,056 Advances and down payments 124 (124) - - _______ _______ _______ _______ 650,281 47,754 8,376 689,659 _______ _______ _______ _______ _______ _______ _______ _______
II. MOVEMENT OF DEPRECIATION AND AMORTIZATION CHARGES ______________________________________________________ (FRF thousands)
Situation Allocation Depr. of Situation as of for the disposed as of 1/1/99 period assets 12/31/99 _________ __________ ________ ________ Intangible fixed assets _______________________
Research & development costs 2,050 3,569 - 5,619 Goodwill 7,018 638 - 7,656 Licenses 5 5 - 10 Software 24,461 6,996 18 31,439 Know-how W170 & W200 28,861 119,797 - 148,658 _______ _______ _______ _______ 62,395 131,005 18 193,382 _______ _______ _______ _______ _______ _______ _______ _______
Tangible fixed assets _____________________
Buildings,fixtures,fittings 62,833 24,194 2,121 84,906 Technical plant & machinery 224,774 50,252 3,099 271,927 Other tangible fixed assets 24,756 5,105 2,136 27,725 _______ _______ _______ _______ 312,363 79,551 7,356 384,558 _______ _______ _______ _______ _______ _______ _______ _______
IV. TRADE RECEIVABLES ______________________ (FRF thousands)
Amount Amount Gross > 1 year < 1 year Total Depreciation ________ ________ _______ ____________
Receivables on capitalized assets Receivables from controlled entities 1,374 1,374 Loans 19,300 19,300
Current assets receivables
Trade receivables and assimilated accounts
France Affiliated companies - 31,984 31,984 - Other receivables 225 155,993 156,218 24,376 Commercial papers 56 14,458 14,514 - ______ _______ _______ _______ Total France 281 202,435 202,716 24,376 ______ _______ _______ _______ Export Affiliated companies 248 115,376 115,624 9,473 Other receivables 2,646 314,064 316,710 34,219 Commercial papers - - - - ______ _______ _______ _______ Total export 2,894 429,440 432,334 43,692 ______ _______ _______ _______ Total receivables 3,175 631,875 635,050 68,068 ______ _______ _______ _______ ______ _______ _______ _______
Other receivables Affiliated companies - 2,997 2,997 - Others 5,200 63,074 68,274 9,833 _______ _______ _______ _______ Total other receivables 5,200 66,071 71,271 9,833 _______ _______ _______ _______ _______ _______ _______ _______
V. FINANCIAL LIABILITIES _________________________ (FRF thousands)
Maturity Maturity Maturity date date date < 1 year 1-5 years > 5 years Total ________ _________ __________ _______
Medium-term loans - 640,000 - 640,000 Other loans 17,688 - 9,300 26,988 ______ _______ _____ _______ Total 17,688 640,000 9,300 666,988 ______ _______ _____ _______ ______ _______ _____ _______
VI. INCOME STATEMENT (SPECIAL FORMAT) ____________________ (FRF thousands)
12/31/99 12/31/98 _________ _________
Production sold 1,031,011 955,349 Change in inventory of finished goods & WIP (43,159) 32,355 Self-created fixed assets 9,410 75,971 _________ _________ Total production 997,262 1,063,675
Purchases adj. for changes in inventories (836,135) (878,092) Other external charges (142,551) (149,478) Change in provision for losses (30,868) (11,929) _________ _________ Value added (12,292) 24,176
Operating subsidies 466 2,114 Taxes and assimilated payments (13,739) (19,414) Payroll charges (280,272) (277,028) _________ _________ Operating cash flow (305,837) (270,152)
Depreciation and amortization charges (104,306) (100,308) Change in provision on current assets 15,145 (21,295) Change in contingency provision (27,106) (4,733) Other revenues 839 2,483 Other charges (21,850) (6,156) _________ _________ Operating income (443,115) (400,161)
Share of income from joint ventures 1,695 - Financial income 21,129 23,724 Financial charges (63,877) (62,411) _________ _________ Current income (484,168) (438,848)
"Exceptional" revenue 740,934 (141,168) "Exceptional" charges (150,670) (7,478) _________ _________ Income before tax 106,096 (587,494)
Corporate income tax (200) 5,999 Income on disposal of fixed asset items 176 7 _________ _________
Net accounting income 106,072 (581,488) _________ _________ _________ _________
VII. TABLE OF OFF BALANCE SHEET COMMITMENTS ____________________________________________ (FRF thousands)
Affiliated Type of commitment Total Companies Others __________________ _________ __________ ________ Commitments given Commercial guarantees provided by banks and other institutions 141,966 6,187 135,779 Lease purchase commitments 2,296 - 2,296 _________ _________ _______ Total 144,262 6,187 138,075 _________ _________ _______ _________ _________ _______ Commitments received Guarantees received from suppliers 5,304 - 5,304 Guarantees on lines of credit 1,000,000 1,000,000 - _________ _________ _______ Total 1,005,304 1,000,000 5,304 _________ _________ _______ _________ _________ _______ Reciprocal commitments Sale of foreign currency futures 40,031 - 40,031 Purchase of foreign currency futures 16,333 - 16,333 _________ _________ _______ Total 56,364 - 56,364 _________ _________ _______ _________ _________ _______
Discounted bills 5,035 - 5,035 _________ _________ _______ _________ _________ _______
*Sales and purchases of foreign currency are shown in the appendix.
XII. ITEMS RELATING TO SEVERAL BALANCE SHEET ITEMS AND CONCERNING AFFILIATED COMPANIES _______________________________________________________ (FRF thousands)
Gross Net amount Depreciation amount _______ ____________ ________ 1. Assets ______
1.1 Fixed Assets
Equity interests 3,296 1,021 2,275 Receivables from controlled entities 1,374 - 1,374
1.2 Current Assets
Advances & down payments on orders 786 - 786 Trade receivables and assimilated accounts 147,608 9,474 138,134 Other receivables 2,997 - 2,997
2. Liabilities ___________
Equity loan - Other cash advances - Other loans - Advances on orders-in-progress 27,374 Trade payables and assimilated accounts 53,665 Other liabilities 3,751
Financial revenue - Financial charges 7,521
Affiliated companies: CUMMINS CUMMINS WARTSILA WEST AFRICA CUMMINS WARTSILA ACO CUMMINS WARTSILA MOTEUR S.A. WARTSILA (Consolidated Group) METRA FINANCE
SIGNATURES __________
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CUMMINS ENGINE COMPANY, INC.
By /s/K. M. Patel By /s/R. C. Crane __________________________ _____________________ K. M. Patel R. C. Crane Executive Vice President & Vice President - Chief Financial Officer Corporate Controller (Principal Financial Officer) (Principal Accounting Officer)
Date: March 1, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date __________ _____ ____
Director & Chairman and Chief * Executive Officer (Principal 3/1/2000 ________________________ Executive Officer) (Theodore M. Solso)
* ________________________ Director 3/1/2000 (Harold Brown)
* ________________________ Director 3/1/2000 (Robert J. Darnall)
* ________________________ Director 3/1/2000 (John M. Deutch)
* ________________________ Director 3/1/2000 (W. Y. Elisha)
* ________________________ Director 3/1/2000 (Hanna H. Gray)
Signatures Title Date __________ _____ ____
* ________________________ Director 3/1/2000 (James A. Johnson)
* ________________________ Director 3/1/2000 (William I. Miller)
* ________________________ Director 3/1/2000 (William D. Ruckelshaus)
* ________________________ Director 3/1/2000 (H. B. Schacht)
* ________________________ Director 3/1/2000 (F. A. Thomas)
* ________________________ Director 3/1/2000 (J. Lawrence Wilson)
By /s/K. M. Patel ________________ K. M. Patel Attorney-in-fact
CUMMINS ENGINE COMPANY, INC. EXHIBIT INDEX ____________________________
3(a) Restated Articles of Incorporation of Cummins Engine Company, Inc., as amended (incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended April 3, 1994, by reference to Quarterly Report on Form 10-Q for the quarter ended October 1, 1989 and by reference to Form 8-K dated July 26, 1990).
3(b) By-laws of Cummins Engine Company, Inc., as amended and restated effective as of August 12, 1994 (incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended October 2, 1994).
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).
10(l) Stock Unit Appreciation Plan effective October 1990 (incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended April 2, 1995, Exhibit 10(m)).
10(m) Three Year Performance Plan as amended February 1997 (incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 30, 1997).
10(n) Consulting arrangement with Harold Brown (incorporated by reference to the description thereof provided in the Company's definitive Proxy Statement).
10(o) 1992 Stock Incentive Plan (incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1995, Exhibit 10(s)).
10(p) Restricted Stock Plan for Non-Employee Directors, as amended February 11, 1997 (incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 30, 1997).
10(q) Executive Retention Plan (incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1995, Exhibit 10(u)).
10(r) Performance Share Plan, as amended January 1989 (incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended April 2, 1995, Exhibit 10(j)).
10(s) Senior Executive Bonus Plan (incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1996).
10(t) Senior Executive Three Year Performance Plan, as amended February 11, 1997 (incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 30, 1997).
21 Subsidiaries of the Registrant (filed herewith).
23 Consent of Arthur Andersen LLP (filed herewith).
24 Powers of Attorney (filed herewith).
27 Financial Data Schedule (filed herewith).