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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
CUMMINS ENGINE COMPANY, INC.
Commission File Number 1-4949
Incorporated in the State of Indiana I.R.S. Employer Identification
No. 35-0257090
500 Jackson Street, Box 3005, Columbus, Indiana 47202-3005
(Principal Executive Office)
Telephone Number: (812) 377-5000
Securities registered pursuant to Section 12(b) of the Act: Common Stock,
$2.50 par value, which is registered on the New York Stock Exchange and on
the Pacific Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K are not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates was
approximately $1.5 billion at January 28, 2000.
As of January 28, 2000, there were outstanding 41.5 million shares of the
only class of common stock.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement filed with the
Securities and Exchange Commission pursuant to Regulation 14A are
incorporated by reference in Part III of this Form 10-K.
2
TABLE OF CONTENTS
_________________
Part Item Description Page
____ ____ _________________________________________________ ____
I 1 Business 3
2 Properties 11
3 Legal Proceedings 11
4 Submission of Matters to Vote of Security Holders 11
II 5 Market for the Registrant's Common Equity and
Related Stockholder Matters 12
6 Selected Financial Data 13
7 Management's Discussion and Analysis of Results
of Operations and Financial Condition 14
8 Financial Statements and Supplemental Data 20
9 Disagreements on Accounting and Financial
Disclosure 20
III 10 Directors & Executive Officers of the Registrant 21
11 Executive Compensation 22
12 Security Ownership of Certain Beneficial Owners
and Management 22
13 Certain Relationships and Related Transactions 22
IV 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 23
Index to Financial Statements 24
Signatures 63
Exhibit Index 65
3
PART I
______
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.
4
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.
5
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.
6
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.
7
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.
8
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.
9
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.
10
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.
11
While the Company is unable at this time to determine the aggregate cost of
remediation at these sites, it has attempted to analyze its proportionate
and actual liability by analyzing the amounts of waste contributed to the
sites by the Company, the estimated costs for total remediation at the sites,
the number and identities of other PRPs and the level of insurance coverage.
With respect to other sites at which the Company or its subsidiaries have
been named as PRPs, the Company cannot accurately estimate the future
remediation costs. At several sites, the remedial action to be implemented
has not been determined for the site. In other cases, the Company or its
subsidiary has only recently been named as a PRP and is collecting
information on the site. Finally, in some cases, the Company believes it
has no liability at the site and is actively contesting designation as a PRP.
Based upon the Company's prior experiences at similar sites, however, the
aggregate future cost to all PRPs to remediate these sites is not likely to
be significant. In each of these cases, the Company believes that it has
good defenses at several of the sites, that its percentage contribution at
other sites is likely to be de minimis or that other PRPs will bear most of
the future remediation costs. However, the environmental laws impose joint
and several liability and, consequently, the Company's ultimate
responsibility may be based upon many factors outside the Company's control
and could be material in the event that the Company becomes obligated to
pay a significant portion of these expenses. Based upon information
presently available, the Company believes that such an outcome is unlikely
and that its actual and proportionate costs of participating in the
remediation of these sites will not be material.
In 2000, various plants and facilities of the Company 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. 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. LEGAL PROCEEDINGS
_______ _________________
The information appearing in Note 17 to the Consolidated Financial
Statements is incorporated herein by reference. The material in Item 1
"Other Environmental Statutes and Regulations" also is incorporated herein
by reference.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
_______ _________________________________________________
None.
12
PART II
_______
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
_______ _____________________________________________________
The Company's common stock is listed on the New York Stock Exchange and the
Pacific Stock Exchange under the symbol "CUM". The following table sets
forth, for the 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
______ _______ __________________
1999
____
First quarter $42 1/4 $35 $.275
Second quarter 58 1/8 36 1/8 .275
Third quarter 64 9/16 49 .275
Fourth quarter 52 9/16 39 1/16 .30
1998
____
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
13
purchase one share for $200. The plan also allows holders of the rights to
purchase shares of the acquiring person's stock at a discount if the Company
is acquired or 50 percent of the assets or earnings power of the Company is
transferred to an acquiring person.
The Company's bylaws provide that Cummins is not subject to the provisions
of the Indiana Control Share Act. However, Cummins is governed by certain
other laws of the State of Indiana applicable to transactions involving a
potential change of control of the Company.
ITEM 6. SELECTED FINANCIAL DATA
_______ _______________________
$ Millions, except
per share amounts 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.
14
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
15
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
______ ______ ______
______ ______ ______
16
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.
17
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.
18
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
19
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.
20
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. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
_______ __________________________________________
See Index to Financial Statements on page 24.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
_______ ____________________________________________________
None.
21
PART III
________
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
________ __________________________________________________
The information appearing under the caption "Election of Directors" of the
Company's definitive Proxy Statement for the Annual Meeting of the
Shareholders to be held on April 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)
22
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. EXECUTIVE COMPENSATION
________ ______________________
The information appearing under the following captions in the Company's
Proxy Statement is hereby incorporated by reference: "The Board of
Directors and Its Committees," "Executive Compensation -- Compensation
Tables and Other Information," "Executive Compensation -- Change of Control
Arrangements" and "Executive Compensation -- Compensation Committee
Interlocks and Insider Participation."
The Company has adopted various benefit and compensation plans covering
officers and other key employees under which certain benefits become payable
upon a change of control of the Company. Cummins also has adopted an
employee retention program covering approximately 700 employees of the
Company and its subsidiaries, which provides for the payment of severance
benefits in the event of termination of employment following a change of
control of Cummins. The Company and its subsidiaries also have severance
programs for other exempt employees of the Company whose employment is
terminated following a change of control of the Company. Certain of the
pension plans covering employees of the Company provide, upon a change of
control of Cummins, that excess plan assets become dedicated solely to fund
benefits for plan participants.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
________ ______________________________________________________________
A discussion of the security ownership of certain beneficial owners and
management appearing under the captions "Principal Security Ownership,"
"Election of Directors" and "Executive Compensation -- Security Ownership of
Management" in the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
________ ______________________________________________
The information appearing under the captions "The Board of Directors and Its
Committees," "Executive Compensation - Compensation Committee Interlocks and
Insider Participation" and "Other Transactions and Agreements with
Directors, Officers and Certain Shareholders" in the Proxy Statement is
incorporated herein by reference.
23
PART IV
_______
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
________ _______________________________________________________________
Documents filed as a part of this report:
1. See Index to Financial Statements on page 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.
24
INDEX TO FINANCIAL STATEMENTS
_____________________________
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
25
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
26
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.
27
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.
28
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.
29
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.
30
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.
31
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
_________________ ________ ________ _________
1999
____
Basic $160 38.3 $4.16
Options - .3 _____
____ ____ _____
Diluted $160 38.6 $4.13
____ ____ _____
____ ____ _____
1998
____
Basic $(21) 38.5 $(.55)
Options - - _____
____ ____ _____
Diluted $(21) 38.5 $(.55)
____ ____ _____
____ ____ _____
1997
____
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.
32
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
____ ____ ____ ____
____ ____ ____ ____
33
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