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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 were $513 million in 1999 and $535
million in 1998.
NOTE 7. BORROWINGS: Long-term debt at December 31 was:
$ Millions 1999 1998
__________ ____ ____
7.125% debentures due 2028 $249 $249
6.45% notes due 2005 224 224
Commercial paper 168 142
5.65% debentures due 2098, net of unamortized
discount of $40 (effective interest rate 7.48%) 125 125
6.25% notes due 2003 125 125
6.75% debentures due 2027 120 120
Guaranteed notes of ESOP Trust due 2010 61 63
8.2% notes through 2003 - 79
Other 30 36
_____ _____
Total 1,102 1,163
Current maturities (10) (26)
______ ______
Long-term debt $1,092 $1,137
______ ______
______ ______
Maturities of long-term debt for the five years subsequent to December 31,
1999 are $10 million, $8 million, $9 million, $131 million and $7 million.
At December 31, 1999 and 1998, the weighted-average interest rate on loans
payable and current maturities of long-term debt approximated 6 percent and 7
percent, respectively.
The Company maintains a $500 million revolving credit agreement, maturing in
2003, under which there were no outstanding borrowings at December 31, 1999
or 1998. The revolving credit agreement supports the Company's commercial
paper borrowings. In February 1998, the Company issued $765 million face
amount of notes and debentures under a $1 billion Registration Statement
filed with the Securities and Exchange Commission in 1997. Net proceeds were
used to finance the acquisition of Nelson and to pay down other indebtedness
outstanding at December 31, 1997. The Company also has other domestic and
34
international credit lines with approximately $116 million available at
December 31, 1999.
The Company's debt agreements have several covenants which require
maintenance of a certain level of net worth, place restrictions on the amount
of additional debt the Company may incur and require maintenance of minimum
leverage ratios.
In December 1999, the Company paid off the 8.2 percent notes due in 2003
using cash generated from operations and additional commercial paper
borrowings.
At December 31, 1999 and 1998, loans payable included $100 million and $54
million, respectively, of notes payable to banks and $13 million and $10
million, respectively, of bank overdrafts.
The Company has guaranteed the outstanding borrowings of its ESOP Trust.
Cash contributions to the Trust, together with the dividends accumulated on
the common stock held by the Trust, are used to pay interest and principal.
Cash contributions and dividends to the Trust approximated $10 million in
each year. The unearned compensation, which is reflected as a reduction to
shareholders' investment, represents the historical cost of the shares of
common stock that have not yet been allocated by the Trust to participants.
NOTE 8. OTHER LIABILITIES: Other liabilities at December 31 included the
following:
$ Millions 1999 1998
__________ ______ ______
Accrued retirement & post-employment benefits $ 511 $ 720
Accrued product coverage & marketing expenses 175 156
Accrued compensation 42 38
Deferred income taxes 1 17
Other 59 69
____ ______
$ 788 $1,000
______ ______
______ ______
NOTE 9. INCOME TAXES: The provision for income taxes was as follows:
$ Millions 1999 1998 1997
_____________ ____ ____ ____
Current:
U.S. Federal and state $43 $16 $16
Foreign 43 41 32
__ __ __
86 57 48
__ __ __
Deferred:
U.S. Federal and state (17) (34) 26
Foreign (14) (19) -
__ __ __
(31) (53) 26
___ ___ __
$55 $ 4 $74
___ ___ ___
___ ___ ___
Significant components of net deferred tax assets related to the following
tax effects of differences between financial and tax reporting at December
31:
$ Millions 1999 1998
__________ ____ ____
Employee benefit plans $282 $300
Product coverage & marketing expenses 126 106
Restructuring charges 34 14
US plant & equipment (182) (176)
Net foreign taxable differences, primarily plant
and equipment 9 6
US Federal carryforward benefits:
General business tax credits, expiring 2018 to 2019 22 43
Minimum tax credits, no expiration 15 12
Other net differences 13 12
____ ____
$319 $317
____ ____
____ ____
Balance Sheet Classification
____________________________
Current assets $210 $203
Noncurrent assets 110 131
Noncurrent liabilities (1) (17)
____ ____
$319 $317
____ ____
____ ____
The Company expects to realize all of its tax assets, including the use of
all carryforwards, before any expiration.
35
Earnings before income taxes and differences between the effective tax rate
and US Federal income tax rate were:
$ Millions 1999 1998 1997
__________ ____ ____ ____
Earnings (loss) before income taxes:
US $232 $(21) $205
Foreign (11) 15 81
____ ____ ____
$221 $ (6) $286
____ ____ ____
____ ____ ____
Tax at 35 percent US statutory rate $ 77 $ (2) $100
Nondeductible EPA penalty - 9 -
Nondeductible goodwill amortization 3 3 -
Research tax credits (15) (10) (11)
Foreign sales corporation benefits (18) (9) (11)
Differences in rates and taxability of
foreign subsidiaries 10 15 (3)
All other, net (2) (2) (1)
____ ____ ____
$ 55 $ 4 $ 74
____ ____ ____
____ ____ ____
NOTE 10. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT: The Company is exposed
to financial risk resulting from volatility in foreign exchange rates and
interest rates. This risk is closely monitored and managed through the use
of financial derivative contracts. As clearly stated in the Company's
policies and procedures, financial derivatives are used expressly for hedging
purposes, and under no circumstances are they used for speculating or
trading. Transactions are entered into only with banking institutions with
strong credit ratings, and thus the credit risk associated with these
contracts is considered immaterial. Hedging program results and status are
reported to senior management on a periodic basis.
Foreign Exchange Rates
Due to its international business presence, the Company uses foreign exchange
forward contracts to manage its exposure to exchange rate volatility.
Foreign exchange balance sheet exposures are aggregated and hedged at the
corporate level. Maturities on these instruments generally fall within the
one-month and six-month range. The objective of the hedging program is to
reduce earnings volatility resulting from the translation of net foreign
exchange balance sheet positions. The total notional amount of these forward
contracts outstanding at December 31 was as follows:
$ Millions
__________
Currency 1999 1998
________ ____ ____
British Pound $120 $ 86
Euro 47 -
Australian Dollar 19 13
Hong Kong Dollar 8 8
Japanese Yen 7 6
Canadian Dollar 3 11
French Franc - 23
German Mark - 19
Other 2 8
____ ____
$206 $174
____ ____
____ ____
Interest Rates
The Company manages its exposure to interest rate fluctuations through the
use of interest rate swaps. Currently the Company has in place three
interest rate swaps that effectively convert fixed-rate debt into floating-
rate debt. The objective of the swaps is to more efficiently balance
borrowing costs and interest rate risk. The contracts were established
during 1998 and 1999 and have a total notional value of $350 million.
Fair Value of Financial Instruments
Based on borrowing rates currently available to the Company for bank loans
with similar terms and average maturities, the fair value of total debt,
including current maturities, at December 31, 1999, approximated $1,104
million. The carrying value at that date was $1,215 million. At December
31, 1998, the fair and carrying values of total debt, including current
maturities, were $1,214 and $1,227 million, respectively. The carrying
values of all other receivables and liabilities approximated fair values.
36
NOTE 11. RETIREMENT PLANS: The Company has various contributory and
noncontributory pension plans covering substantially all employees. Cummins
common stock represented 11 percent of pension plan assets at December 31,
1999.
Cummins also provides various health care and life insurance benefits to
eligible retirees and their dependents but reserves the right to change
benefits covered under these plans. The plans are contributory with
retirees' contributions adjusted annually, and they contain other cost-
sharing features, such as deductibles, coinsurance and spousal contributions.
The general policy is to fund benefits as claims and premiums are incurred.
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for plans with accumulated benefit obligations in excess
of plan assets were $651 million, $636 million, and $513 million,
respectively, as of December 31, 1999, and $1,296 million, $1,251 million,
and $999 million, respectively, as of December 31, 1998. The assumed long-
term rate of compensation increase for salaried plans was 5.25 percent in
1999 and 4.25 percent in 1998. Other significant assumptions for the
Company's principal plans were:
Pension Other
Benefits Benefits
1999 1998 1999 1998
____ ____ ____ ____
Weighted-average discount rate 7.5% 6.5% 7.5% 6.5%
Long-term rate of return on plan assets 9.0% 10.0%
For measurement purposes a 7 percent annual increase in health care costs was
assumed for 2000, decreasing gradually to 5.25 percent in ten years and
remaining constant thereafter.
Increasing the health care cost trend rate by one percent would increase the
obligation by $43 million and annual expense by $4 million. Decreasing the
health care cost trend rate by one percent would decrease the obligation by
$42 million and annual expense by $4 million.
The Company's net periodic benefit cost under these plans was as follows:
Pension Benefits Other Benefits
$ Millions 1999 1998 1997 1999 1998 1997
____________ ____ ____ ____ ____ ____ ____
Service cost $ 53 $ 47 $ 41 $ 8 $ 8 $ 8
Interest cost 116 123 115 40 44 41
Expected return on plan
assets (161) (153) (134) - - -
Amortization of transition
asset (3) (4) (9) - - -
Other 12 12 13 4 3 9
____ ____ ____ ____ ____ ____
$ 17 $ 25 $ 26 $ 52 $ 55 $ 58
____ ____ ____ ____ ____ ____
____ ____ ____ ____ ____ ____
37
Pension Benefits Other Benefits
$ Millions 1999 1998 1999 1998
__________ ______ ______ ______ ______
Change in benefit obligation:
Benefit obligation at beginning of year $1,907 $1,693 $ 640 $ 596
Service cost 53 47 8 8
Interest cost 116 123 40 44
Plan participants' contributions 7 7 1 1
Amendments 14 2 - -
Experience (gain) loss (103) 161 (21) 20
Benefits paid (119) (123) (31) (29)
Other (10) (3) - -
_____ _____ _____ _____
Benefit obligation at end of year $1,865 $1,907 $ 637 $ 640
_____ _____ _____ _____
_____ _____ _____ _____
Change in plan assets:
Fair value of plan assets at
beginning of year $1,692 $1,905 $ - $ -
Actual return on plan assets 331 (129) - -
Employer contribution 20 34 30 28
Plan participants' contributions 7 7 1 1
Benefits paid (119) (123) (31) (29)
Other (9) (2) - -
_____ _____ _____ _____
Fair value of plan assets at end of
year $1,922 $1,692 $ - $ -
_____ _____ _____ _____
_____ _____ _____ _____
Funded status $ 57 $ (215) $ (637) $ (640)
Unrecognized:
Experience (gain) loss (a) (103) 172 55 80
Prior service cost (b) 51 55 (12) (11)
Transition asset (c) (5) (7) - -
_____ _____ _____ _____
Net amount recognized $ - $ 5 $ (594) $ (571)
_____ _____ _____ _____
_____ _____ _____ _____
Amounts recognized in the statement
of financial position:
Prepaid benefit cost $ 102 $ 50 $ - $ -
Accrued benefit liability (114) (232) (594) (571)
Intangible asset 12 104 - -
Accumulated other comprehensive income - 83 - -
_____ _____ _____ _____
Net amount recognized $ - $ 5 $ (594) $ (571)
_____ _____ _____ _____
_____ _____ _____ _____
(a) The net deferred (gain) loss resulting from investments, other
experience and changes in assumptions.
(b) The prior service effect of plan amendments deferred for recognition
over remaining service.
(c) The balance of the initial difference between assets and obligations
deferred for recognition over a 15-year period.
38
NOTE 12. COMMON STOCK: The Company increased its quarterly common stock
dividend from 27.5 cents per share to 30.0 cents, effective with the dividend
payment in December 1999.
The Company repurchased 0.7 million shares on the open market at an aggregate
purchase price of $34 million in 1999 and 0.4 million shares on the open
market at an aggregate purchase price of $14 million in 1998. In 1997, the
Company repurchased 1.3 million shares from Ford Motor Company and another
0.2 million shares on the open market at an aggregate purchase price of $75
million. All of the acquired shares are held as common stock in treasury.
In 1997, the Company issued 3.75 million shares of its common stock to an
employee benefits trust to fund obligations of employee benefit and
compensation plans, principally retirement savings plans. Shares of the
stock held by this trust are not used in the calculation of earnings per
share until allocated to a benefit plan.
NOTE 13. SHAREHOLDERS' RIGHTS PLAN: The Company has a Shareholders' Rights
Plan which it first adopted in 1986. The Rights Plan provides that each
share of the Company's common stock has associated with it a stock purchase
right. The Rights Plan becomes operative when a person or entity acquires 15
percent of the Company's common stock or commences a tender offer to purchase
20 percent or more of the Company's common stock without the approval of the
Board of Directors.
NOTE 14. EMPLOYEE STOCK PLANS: Under the Company's stock incentive and
option plans, officers and other eligible employees may be awarded stock
options, stock appreciation rights and restricted stock. Under the
provisions of the stock incentive plan, up to one percent of the Company's
outstanding shares of common stock at the end of the preceding year is
available for issuance under the plan each year. At December 31, 1999, there
were no shares of common stock available for grant and 1,732,875 options
exercisable under the plans.
The Company accounts for stock options in accordance with APB Opinion No. 25
and related interpretations. No compensation expense has been recognized for
stock options since the options have exercise prices equal to the market
price of the Company's common stock at the date of grant.
Number of Weighted-average
Options Shares exercise price
________ _________ ________________
December 31, 1996 1,510,150 38.88
Granted 766,500 60.61
Exercised (294,025) 35.85
Cancelled ( 61,775) 42.66
_________
December 31, 1997 1,920,850 46.08
Granted 703,660 45.34
Exercised (54,075) 36.36
Cancelled (27,425) 53.80
_________
December 31, 1998 2,543,010 48.08
Granted 886,900 39.74
Exercised (196,500) 39.71
Cancelled (40,275) 43.99
_________
December 31, 1999 3,193,135 46.65
_________
_________
Options outstanding at December 31, 1999, have exercise prices between $15.94
and $79.81 and a weighted-average remaining life of 7 years. The weighted-
average fair value of options granted was $13.76 per share in 1999 and $18.61
per share in 1998. The fair value of each option was estimated on the date
of grant using a risk-free interest rate of 5.6 percent in 1999 and 1998,
current annual dividends, expected lives of 10 years and expected volatility
of 34 percent. A fair-value method of accounting for awards subsequent to
January 1, 1997, would have resulted in an increase in compensation expense
of $8 million, net of tax ($.20 per share) in 1999, $8 million, net of tax
($.20 per share) in 1998 and $6 million, net of tax ($.14 per share) in 1997.
39
NOTE 15. COMPREHENSIVE INCOME: Comprehensive income includes net income and
all other nonowner changes in equity during a period.
The tax effect on other comprehensive income is as follows:
Total
Foreign Minimum Other
Currency Unrealized Pension Compre-
Translation Losses on Liability hensive
$ Millions Adjustments Securities Adjustments Income
__________ ___________ __________ ___________ ______
1999
____
Pre-tax amount $ 5 $(1) $ 84 $ 88
Tax (expense) benefit (1) - (29) (30)
____ ___ ____ _____
Net amount $ (4) $(1) $ 55 $ 58
____ ___ ____ _____
____ ___ ____ _____
1998
____
Pre-tax amount $(44) $(1) $(83) $(128)
Tax (expense) benefit 1 1 29 31
____ ___ ____ _____
Net amount $(43) $ - $(54) $ (97)
____ ___ ____ _____
____ ___ ____ _____
1997
____
Pre-tax amount $(21) $(1) $ 12 $ (10)
Tax (expense) benefit - - - -
____ ___ ____ _____
Net amount $(21) $(1) $ 12 $ (10)
____ ___ ____ _____
____ ___ ____ _____
The components of accumulated other comprehensive income are as follows:
Accum-
ulated
Foreign Minimum Other
Currency Unrealized Pension Compre-
Translation Losses on Liability hensive
$ Millions Adjustments Securities Adjustments Income
__________ ___________ __________ ___________ ______
Balance at 12/31/96 $ (47) $ - $(13) $ (60)
Change in 1997 (21) (1) 12 (10)
_____ ___ ____ _____
Balance at 12/31/97 (68) (1) (1) (70)
Change in 1998 (43) - (54) (97)
_____ ___ ____ _____
Balance at 12/31/98 (111) (1) (55) (167)
Change in 1999 4 (1) 55 58
_____ ___ ____ _____
Balance at 12/31/99 $(107) $(2) $ - $(109)
_____ ___ ____ _____
_____ ___ ____ _____
NOTE 16. SEGMENTS OF THE BUSINESS: The Company has three operating
segments: Engine, Power Generation, and Filtration and Other. The engine
segment produces engines and parts for sale to customers in automotive and
industrial markets. The engines are used in trucks of all sizes, buses and
recreational vehicles, as well as various industrial applications including
construction, mining, agriculture, marine, rail and military. The power
generation segment is the Company's power systems supplier, selling engines,
generator sets and alternators and providing temporary power through rentals
of generator sets. The filtration and other segment includes sales of
filtration products and exhaust systems, turbochargers and company-owned
distributors.
The Company's operating segments are organized according to products and the
markets they each serve. This business structure was designed to focus
efforts on providing enhanced service to a wide range of customers.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies except that the Company
evaluates performance based on earnings before interest and income taxes and
on net assets; therefore, no allocation of debt-related items and income
taxes is made to the individual segments.
40
Operating segment information is as follows:
$ Millions
__________ Power Filtration
1999 Engine Generation and Other Total
____ ______ __________ ___________ ______
Net sales $4,225 $1,356 $1,058 $6,639
Depreciation & amortization 146 47 40 233
Income (expense) from joint
ventures and alliances (4) (25) 1 (28)
Earnings before interest,
income taxes and unusual
charges 182 52 122 356
Unusual charges 18 42 - 60
Earnings before interest and
income taxes 164 10 122 296
Net assets 1,015 553 868 2,436
Investment in joint
ventures and alliances 112 11 8 131
Capital expenditures 130 49 36 215
1998
____
Net sales $3,982 $1,230 $1,054 $6,266
Depreciation & amortization 120 40 39 199
Income (expense) from joint
ventures and alliances (4) (25) (1) (30)
Earnings before interest,
income taxes and unusual
charges 136 25 121 282
Unusual charges 165 50 2 217
Earnings (loss) before
interest & income taxes (29) (25) 119 65
Net assets 946 511 803 2,260
Investment in joint
ventures and alliances 132 3 1 136
Capital expenditures 172 67 32 271
Additions to goodwill 12 2 370 384
1997
____
Net sales $3,666 $1,205 $ 754 $5,625
Depreciation & amortization 102 34 22 158
Income (expense) from joint
ventures and alliances 12 (2) - 10
Earnings (loss) before
interest and income taxes 207 (2) 107 312
Net assets 1,074 531 312 1,917
Investment in joint
ventures and alliances 133 65 6 204
Capital expenditures 304 79 22 405
Reconciliation to Consolidated Financial Statements:
1999 1998 1997
____ ____ ____
Earnings before interest & income
taxes for operating segments $296 $ 65 $312
Interest expense 75 71 26
Income tax expense 55 4 74
Minority interest 6 11 -
____ ____ ____
Net earnings (loss) $160 $(21) $212
____ ____ ____
____ ____ ____
41
1999 1998 1997
______ ______ ______
Net assets for reportable segments $2,436 $2,260 $1,917
Liabilities deducted in arriving
at net assets 1,922 1,926 1,583
Deferred tax assets not allocated
to segments 320 334 256
Debt-related costs not allocated
to segments 19 22 9
______ ______ ______
Total assets $4,697 $4,542 $3,765
______ ______ ______
______ ______ ______
Summary geographic information is listed below:
All
$ Millions US UK Canada Other Total
__________ ______ ______ ______ ______ ______
1999
____
Net sales (a) $4,064 $ 400 $ 473 $1,702 $6,639
Long-lived assets $1,434 $ 206 $ - $ 264 $1,904
1998
____
Net sales (a) $3,595 $ 389 $ 459 $1,823 $6,266
Long-lived assets $1,470 $ 209 $ - $ 272 $1,951
1997
____
Net sales (a) $3,123 $ 384 $ 318 $1,800 $5,625
Long-lived assets $1,360 $ 251 $ - $ 267 $1,878
(a) Net sales are attributed to countries based on location of customer.
Revenues from the Company's largest customer represent approximately $1.3
billion of the Company's net sales in 1999. These sales are included in the
engine and filtration and other segments.
NOTE 17. GUARANTEES, COMMITMENTS AND OTHER CONTINGENCIES: At December 31,
1999, the Company had the following minimum rental commitments for
noncancelable operating leases: $47 million in 2000, $38 million in 2001, $30
million in 2002, $26 million in 2003, $18 million in 2004 and $70 million
thereafter. Rental expense under these leases approximated $75 million in
1999, $70 million in 1998 and $60 million in 1997.
Commitments under outstanding letters of credit, guarantees and contingencies
at December 31, 1999, approximated $159 million.
Cummins and its subsidiaries are defendants in a number of pending legal
actions, including actions related to use and performance of the Company's
products. The Company carries product liability insurance covering
significant claims for damages involving personal injury and property damage.
In the event the Company is determined to be liable for damages in connection
with actions and proceedings, the unreserved portion of such liability is not
expected to be material. The Company also has been identified as a
potentially responsible party at several waste disposal sites under US and
related state environmental statutes and regulations and has joint and
several liability for any investigation and remediation costs incurred with
respect to such sites. The Company denies liability with respect to many of
these legal actions and environmental proceedings and vigorously is defending
such actions or proceedings. The Company has established reserves that it
believes are adequate for its expected future liability in such actions and
proceedings where the nature and extent of such liability can be estimated
reasonably based upon presently available information.
42
NOTE 18. QUARTERLY FINANCIAL DATA (unaudited):
$ Millions, except First Second Third Fourth Full
per share amounts Quarter Quarter Quarter Quarter Year
__________________ _______ _______ _______ _______ ______
1999
____
Net sales $1,505 $1,667 $1,631 $1,836 $6,639
Gross profit 301 371 361 385 1,418
Net earnings 24 58 53 25 160
Basic earnings per share $ .63 $ 1.51 $ 1.37 $ .65 $ 4.16
Diluted earnings per share .63 1.50 1.35 .65 4.13
1998
____
Net sales $1,500 $1,635 $1,525 $1,606 $6,266
Gross profit 297 369 258 325 1,249
Net earnings (loss) 7 53 (110) 29 (21)
Basic earnings (loss) per share $ .18 $ 1.39 $(2.86) $ .75 $ (.55)
Diluted earnings (loss) per share .18 1.38 (2.86) .75 (.55)
Fourth quarter 1999 net earnings included a charge of $45 million, net of tax
($60 million pretax), or $1.17 per share, for the termination of the Cummins
Wartsila joint venture.
First quarter 1998 gross profit included a $43 million special charge for
product coverage costs. The special charge, net of taxes, included in net
earnings was $30 million or $.78 per share.
Third quarter 1998 gross profit included special charges of $49 million for
product coverage costs and inventory write-downs. Net loss for the period
also included charges for restructuring, EPA penalties and other non-
recurring items. The total charges, net of tax, included in net loss were
$130 million or $3.38 per share.
43
CUMMINS WARTSILA SAS
BALANCE SHEET AS OF
December 31, 1999
___________________
(FRF thousands)
December 31, 1999 12/31/98
_________________________________ _________
Amort. &
ASSETS Gross Provisions Net Net
_________ __________ ________ _________
Intangible fixed assets
Research & development costs 10,709 5,619 5,090 4,100
Goodwill 12,760 7,656 5,104 5,742
Franchises, patents, licenses 423,697 148,668 275,029 390,090
Software 40,874 31,439 9,435 8,182
Intangible fixed assets
in-progress 1,816 - 1,816 916
________ ________ _______ _______
489,856 193,382 296,474 409,030
________ ________ _______ _______
Tangible fixed assets
Land 925 - 925 925
Buildings, fixtures, fittings 152,100 84,906 67,194 87,036
Technical plant and machinery 461,272 271,927 189,345 201,448
Other tangible fixed assets 40,306 27,725 12,581 14,367
Tangible fixed assets
in-progress 35,056 - 35,056 34,018
Advances and down payments - - - 124
_______ _______ _______ _______
689,659 384,558 305,101 337,918
_______ _______ _______ _______
Long-term investments
Equity investments 6,699 4,424 2,275 2,275
Receivables from controlled
entities 1,374 - 1,374 1,374
Loans and other long-term
investments 53,238 846 52,392 20,165
_________ _______ _______ _______
61,311 5,270 56,041 23,814
_________ _______ _______ _______
Fixed assets 1,240,826 583,210 657,616 770,762
_________ _______ _______ _______
Inventories and
work-in-progress
Raw materials and other
supplies 62,553 14,927 47,626 68,830
Supplies 11,315 284 11,031 3,668
Production work-in-progress 151,275 8,642 142,633 171,895
Semi-finished goods 226,352 35,573 190,779 180,238
Finished goods 23,171 - 23,171 30,375
_______ _______ _______ _______
474,666 59,426 415,240 455,006
_______ ______ _______ _______
Advances & down payments on
orders 35,752 - 35,752 28,200
_______ ______ _______ _______
Receivables
Receivables from sales 640,469 68,068 572,401 423,001
Other operating receivables 65,852 9,833 56,019 126,579
Liaison account - - - -
_______ ______ _______ _______
706,321 77,901 628,420 549,580
_______ _______ _______ _______
Marketable securities 451 - 451 451
_______ _______ _______ _______
Cash-on-hand 37,363 - 37,363 15,229
_________ _______ _________ _________
Current assets 1,254,553 137,327 1,117,226 1,048,466
_________ _______ _________ _________
Prepaid expenses 9,121 - 9,121 11,577
_________ _______ _________ _________
Charges to be spread over
several periods 3,459 - 3,459 4,613
_________ _______ _________ _________
Unrealized foreign exchange
losses 6,574 - 6,574 8,091
_________ _______ _________ _________
TOTAL ASSETS 2,514,533 720,537 1,793,996 1,843,509
_________ _______ _________ _________
_________ _______ _________ _________
44
CUMMINS WARTSILA SAS
BALANCE SHEET AS OF
December 31, 1999
___________________
(FRF thousands)
December 31, 1999 12/31/98
______________________ _________
Partial
LIABILITIES Amounts Amounts Amounts
_________ _________ _________
Shareholders' equity
Share Capital 500,000 500,000
Legal Reserve - -
Restricted reserve as of 3/31/98 - 129,521
L/T capital gain reserve 2,967 2,967
Profit and loss brought forward (451,967) -
Income for the period 106,072 (581,488)
Investment subsidies 8,385 8,047
Cumulative translation adjustment 26,776 14,497
_________ _________
Total shareholders' equity 192,233 73,544
_________ _________
Conditional advances 5,598 5,598
_________ _________
Provision for legal disputes and
commitments 103,901 77,192
Provision for restructuring and
retirement 166,681 276,722
_________ _________
Total provisions 270,582 353,914
_________ _________
Liabilities
Financial liabilities:
Medium-term loans 640,000 844,000
Short-term credits - -
Miscellaneous loans and financial
liabilities 17,521 21,898
Other loans 9,467 34,337
_________ _________
666,988 900,235
_________ _________
Down payments on orders in-progress 254,800 100,327
_________ _________
Operating liabilities
Trade payables & assimilated accounts 305,914 325,443
Tax and social liabilities 58,272 45,835
Other liabilities 26,213 30,408
_________ _________
390,399 401,686
_________ _________
Payables to fixed asset suppliers 3,586 4,110
_________ _________
Total liabilities 1,315,773 1,406,358
_________ _________
Prepaid revenue 2,184 1,499
_________ _________
Unrealized gains on foreign exchange 7,626 2,596
_________ _________
TOTAL LIABILITIES 1,793,996 1,843,509
_________ _________
_________ _________
45
CUMMINS WARTSILA SAS
INCOME STATEMENT
December 31, 1999
____________________
(FRF thousands)
12/31/99 12/31/98
_________ _________
Operating revenues
Net revenues 1,031,011 955,348
Change in stored production (43,159) 32,355
In-house production 9,410 75,972
Subsidies 466 2,114
Reversal of provisions and expense
transfers 167,147 179,941
Other revenues 839 2,484
_________ _________
1,165,714 1,248,214
_________ _________
Operating expenses
Purchases 594,749 626,352
Change in inventories (13,449) 22,375
Other purchases & external charges 403,213 441,074
Taxes and assimilated payments 13,814 19,598
Payroll and associated costs 209,846 198,983
Social charges 75,869 83,419
Allocations:
Depreciation & amortization of tangible
and intangible fixed assets 103,152 99,156
Depreciation of charges allocated
over several periods 1,153 1,153
Provisions for depreciation of assets 34,012 41,236
Provisions for losses & contingencies 164,620 89,414
Other charges 21,850 6,156
_________ _________
1,608,829 1,628,916
_________ _________
1. Operating income/loss (443,115) (380,702)
_________ _________
Share of income from joint ventures 1,695 -
_________ _________
Financial income
Other interest & assimilated income 2,463 3,357
Reversal of provisions and expense
transfers 9,094 5,406
Positive exchange rate differences 9,572 14,961
_________ _________
21,129 23,724
_________ _________
Financial charges
Depreciation and provisions 8,412 9,094
Interest and assimilated charges 37,715 34,983
Negative exchange rate differences 17,750 18,335
_________ _________
63,877 62,412
_________ _________
2. Financial income/loss (42,748) (38,688)
_________ _________
3. Current income before tax (484,168) (419,390)
_________ _________
"Exceptional" revenues
On management transactions 600,460 882
On capital transactions 1,195 1,161
Share of investment subs. allocated
to income statement 190 97
Reversal of other provisions 140,285 15,292
_________ _________
742,130 17,432
_________ _________
"Exceptional" charges
On management transactions 43,265 7,478
On capital transactions 1,020 1,251
Restructuring expense 107,405 176,800
_________ _________
151,690 185,529
_________ _________
4. Extraordinary income/loss 590,440 (168,097)
_________ _________
5. Corporate income tax 200 (5,999)
_________ _________
6. Income/loss 106,072 (581,488)
_________ _________
_________ _________
46
NOTES
1. Activity
The twelve month financial period ended December 31, 1999 shows
accounting revenues of FRF 1,031.0 million (Euro 157.1 million),
compared to FRF 955.3 million (Euro 145.6 million) for the previous
financial period.
Net sales development
_____________________
(FRF millions)
(12-months periods)
Year Net Sales
____ _________
1994 1,012
1995 1,085
1996 1,191
1997 1,206
1998 955
1999 1,031
Direct exports were FRF 533.2 million (Euro 81.3 million), i.e. 52%
of total revenues excluding taxes. Taking indirect exports into
account, the share of revenues relating to foreign markets was FRF
743.4 million (Euro 113.3 million), i.e. 72% of revenues excluding
taxes.
Direct exports in 1999
FRF 533.2 million
______________________
Percent of
Foreign Markets Export Sales
_______________ ____________
Europe 41%
Asia 21%
Africa 20%
Americas 17%
Other 1%
Orders in 1999 amounted to FRF 1,017 million (Euro 155 million). At
the end of the period, new orders were FRF 540 million (Euro 82
million).
332 megawatts were delivered in 1999.
2. Accounting principles
Cummins Wartsila prepares its financial statements in accordance with
French accounting principles.
The same accounting principles were used as those used for the 1998
financial period.
2.1. Foreign currency translation
Transactions in foreign currency outside Euro area are recorded at the
following exchange rates:
. Daily transactions are converted into French francs as follows:
- Purchase and sales invoices by using the monthly rates published
by the French Customs Authorities.
- Payments and receipts using daily bank rates.
47
. Valuation of receivables and liabilities in foreign currency as of
December 31, 1999 takes place in line with the last known rate
before the period end. These rates were published in the Journal
Officiel (Gazette).
The assets and liabilities of the two sites in England are converted
using the exchange rate in effect on December 31, 1999. The income
statement is converted at the average monthly exchange rate.
2.2. Intangible fixed assets
The costs of studies and trials relating to specific markets and
benefiting from advances whose repayment is conditional are booked in
Research and Development costs. The amount for this year is FRF 4.5
million (Euro 0.7 million). These costs are amortized over a period
of three years.
Former WARTSILA France's own goodwill, increased by the contribution
related to the takeover of Societe Surgerienne de Constructions
Mecaniques of Budi and by the repair activity of Wartsila Diesel
France, is amortized over a period of twenty years.
Intangible fixed assets related to know-how and technology of engines
CW 200 and the CW 170, capitalized in 1997 for an amount of FRF 350
million and increased to FRF 418.9 million by the end of 1998, are
amortized on a straight-line basis over a period of 15 years. Further
to the change of Shareholders and to the split of the CW 170 activity
forecasted for January 2000:
. the 1999 costs related to know-how and technology of the CW 200
were capitalized for a sum of FRF 4.7 million (Euro 0.7 million).
These costs are amortized over the remaining useful life of the
intangible fixed assets mentioned at the beginning of this paragraph.
. an extraordinary depreciation of FRF 91.2 million (Euro 13.9
million) related to the technology of CW 170 was booked.
Software is amortized on a straight-line basis over four years; low
value software is amortized over 12 months.
2.3. Tangible fixed assets
Tangible fixed assets are recorded at their acquisition cost.
Depreciation is calculated on a straight-line basis over the following
useful life periods:
. Buildings 20 years
. Fixtures and fittings 10 years
. Industrial equipment 10 years
. Development motors 2 years
. Plant 3 years
. Transport equipment 4 years
. Furniture 10 years
. Office equipment 4 years
. IT equipment 4 years
2.4. Inventories and work-in-progress
Purchased inventory is valued at average weighted cost.
48
Work-in-progress is valued at total cost of production, which includes
both cost of material purchased and manufacturing costs.
Manufacturing costs include normal production costs as well as
depreciation charges.
Articles with a low turnover are subject to sliding provisions of up
to 100% of their value. Provisions are booked in work-in-progress
accounts if circumstances place the completion of the project in
jeopardy.
A provision is set aside for inventories of raw materials and work-in-
progress relating to engines in the start-up phase of production when
inventory costs exceed the estimated sales price. The provision
recorded represents the excess of costs over the sales price.
2.5. Sales
The principle of product recognition is the following:
. upon dispatch of the engines and the spare parts
. upon completion of work in relation to repairs and upgrading
. for important, large-scale engines whose manufacture involves long-
term contracts, product recognition is applied according to the
following methods:
Engineering contracts:
. for the study and document submission phases, billing takes
place as work progresses; the triggering event is the
submission of plans.
. equipment is billed on the basis of deliveries on a pro
rata basis with a check being made to ensure that the
margin generated at this stage is in line with the average
margin of the contract as a whole.
Military contracts:
. Billing for development and industrialization contracts
takes place as work progresses at a pace agreed on by the
parties.
. as work progresses for turn key installations.
2.6. Loss and contingency provisions
Provisions are set aside for the estimated value of the work to be
carried out relating to the installation and commissioning of engines
delivered and invoiced.
The company sets aside provisions on the basis of statistical data in
order to cover possible expenses relating to the guarantee given to
customers.
Lastly, contingency provisions are set aside for legal disputes with
customers likely to involve either additional work or to pose a risk
to the payment of receivables.
49
2.7. Retirement indemnities
Estimated retirement indemnities due upon the retirement of an
employee, to which must be added social charges at the average company
rate, are calculated according to the following criteria:
. employees' length of service with the company
. person's age
. mortality table
. turnover rate of the company's own personnel
. discount rate, excluding inflation
. inflation rate
3. Shareholders' equity
3.1. Share capital
As of March 31, 1999, the share capital was FRF 500,000,000. It is
composed of 5,000,000 shares, each of a par value of FRF 100. The
capital is held in equal amounts by CUMMINS ENGINE COMPANY Limited and
WARTSILA NSD Corporation.
3.2. Reserve account
Following the decision of the Ordinary General Meeting of Cummins
Wartsila of June 30, 1999, the reserve account is balanced with the
corresponding amount of the 1999 loss.
3.3. Loss of half of capital
Due to the losses recorded in the financial accounts, shareholders'
equity has fallen below half the nominal value of share capital.
Decision concerning the continuation of the business activity was
taken during the Extraordinary General Meeting of October 31, 1999.
The regularization of the situation must take place in 2001 at the
latest.
4. Comments relating to exceptional items
The most significant extraordinary items consist of:
(FRF Millions)
Charges Revenues
_______ ________
. Loan waver 600.0
. Reversal of the excess provision for
restructuring charges 139.6
. Penalties on contracts 9.6
. Shutdown of Ramsgate (UK) 31.9
. Depreciation related to the CW 170 technology 91.2
. Tangible Fixed Assets provision linked to
the restructuring 16.2
50
5. Subsidies
The company received an investment subsidy for the acquisition of new
equipment. A portion of this subsidy is reversed to income at the same
rate as depreciation relating to equipment.
Furthermore, the company receives Credit National loans known as
`article 90' loans for the financing of research programs. These loans
are only repaid if research results are successful. In the case of a
recognized failure or if commercial success has not been achieved
within a certain time, these loans are converted into subsidies.
6. Operating receivables
Provisions, calculated on a case by case basis, are set aside for
doubtful debts.
7. Research tax credit
The company has got a receivable related to tax research credit in its
accounts.
This credit may be set against the charge for tax during the next three
years following the closing year where the declaration was issue.
After this period, the portion exceeding the tax charge will be paid
back to the company.
8. Prepaid expenses
This account consists mainly of insurance charges of FRF 6.5 million
(Euro 1 million) to be allocated over the twelve months following
payment of the premium.
9. Charges to be spread over several periods
These consist of costs borne by the company relating to engines
installed in field tests. They are spread over 5 years and 1/5 of the
costs are amortized in the current period.
10. Off balance sheet commitments
The company's commitments relating to the hedging of future currency to
be cashed in or out during the next twelve months are as follows:
Amount in
millions Amount in Amount in
foreign millions millions
currency FRF Euro
________ _________ _________
. USD 6.3 40.0 6.1
. GBP 1.6 16.3 2.4
Other miscellaneous commitments appear in the table attached as an
appendix.
51
11. Incorporation into the consolidated financial statements
The financial statements of our company are consolidated on a like by
like basis, using the equity method of consolidation, by our parent
companies:
CUMMINS ENGINE COMPANY, Inc., Columbus, Indiana, USA
METRA CORPORATION, Helsinki, Finland
In light of the insignificant nature of the subsidiaries held by
CUMMINS WARTSILA, consolidated financial statements were not prepared.
12. Information concerning the remuneration of the directors
This information was not provided, as it would have led to disclosure
of the amount of an individual salary.
52
I. MOVEMENT IN FIXED ASSETS - GROSS VALUE
__________________________________________
(FRF thousands)
Gross
Situation Value
As of As Of
1/1/99 Acquisitions Disposals 12/31/99
_________ ____________ _________ ________
Intangible fixed assets
_______________________
Research & development costs 6,150 4,559 - 10,709
Goodwill 12,760 - - 12,760
Licenses 50 - - 50
Software 32,643 8,249 18 40,874
Know-how W170 & W200 418,907 4,740 - 423,647
Intangible fixed assets
in-progress 916 900 - 1,816
_______ _______ _______ _______
471,426 18,448 18 489,856
_______ _______ _______ _______
_______ _______ _______ _______
Tangible fixed assets
_____________________
Land 925 - - 925
Buildings,fixtures,fittings 149,869 5,086 2,855 152,100
Technical plant & machinery 426,222 38,161 3,111 461,272
Other tangible fixed assets 39,123 3,593 2,410 40,306
Tangible fixed assets
in-progress 34,018 1,038 - 35,056
Advances and down payments 124 (124) - -
_______ _______ _______ _______
650,281 47,754 8,376 689,659
_______ _______ _______ _______
_______ _______ _______ _______
II. MOVEMENT OF DEPRECIATION AND AMORTIZATION CHARGES
______________________________________________________
(FRF thousands)
Situation Allocation Depr. of Situation
as of for the disposed as of
1/1/99 period assets 12/31/99
_________ __________ ________ ________
Intangible fixed assets
_______________________
Research & development costs 2,050 3,569 - 5,619
Goodwill 7,018 638 - 7,656
Licenses 5 5 - 10
Software 24,461 6,996 18 31,439
Know-how W170 & W200 28,861 119,797 - 148,658
_______ _______ _______ _______
62,395 131,005 18 193,382
_______ _______ _______ _______
_______ _______ _______ _______
Tangible fixed assets
_____________________
Buildings,fixtures,fittings 62,833 24,194 2,121 84,906
Technical plant & machinery 224,774 50,252 3,099 271,927
Other tangible fixed assets 24,756 5,105 2,136 27,725
_______ _______ _______ _______
312,363 79,551 7,356 384,558
_______ _______ _______ _______
_______ _______ _______ _______
53
III. MOVEMENT OF ALL PROVISIONS
(FRF thousands)
___________________________________________________
Allocations
Reversal
_____________________
_______________________________
Situation
Extra- Situation
1/1/99 Operations Financial Operations
Financial ordinary 12/31/99
_________ __________ _________ __________
_________ ________ _________
Equity interests and
assimilated accounts 4,570 - 700 -
- - - 5,270
_______ _______ ______ _______
_____ _______ _______
Inventories & work-in-progress 60,218 26,252 - 27,044
- - - 59,426
Doubtful debts France 9,357 821 - 1,002
- - 3 9,173
Doubtful debts exports 25,652 6,926 - 18,741
- - 7 13,830
Doubtful debts - other legal
disputes 47,424 13 - 2,372
- - - 45,065
Other receivables 10,183 - - -
- - 350 9,833
_______ _______ _____ _______
_____ _______ _______
Total depreciation on current
assets 152,834 34,012 - 49,159
- - 360 137,327
_______ _______ _____ _______
_____ _______ _______
Provision for legal disputes
and commitments
Legal disputes 19,555 6,233 - 3,714
- - - 22,074
Guarantees 47,602 63,809 - 37,345
- - - 74,066
Other provisions 892 - - 892
- - - -
_______ _______ ______ _______
_____ _______ _______
Sub-total contingency provision 68,049 70,042 - 41,951
- - - 96,140
_______ _______ ______ _______
_____ _______ _______
Social-foreign exchange losses 9,143 - 7,712 -
9,094 - 7,761
_______ _______ ______ _______
_____ _______ _______
Provision for restructuring
and retirement
Work to be carried out 82,611 94,578 - 63,709
- - - 113,480
Provision for retirement
indemnities 17,011 - - 985
- - - 16,026
Provision for 1998 planned
redundancy scheme 176,800 - - -
- - 139,625 37,175
Other provisions 300 - - -
- - 300 -
_______ _______ ______ _______
_____ _______ _______
Sub-total provision for losses 276,722 94,578 - 64,694
- - 139,925 166,681
_______ _______ ______ _______
_____ _______ _______
Total provisions 353,914 164,620 7,712 106,645
9,094 139,925 270,582
_______ _______ ______ _______
_____ _______ _______
Total 511,318 198,632 8,412 155,804
9,094 140,285 413,179
_______ _______ ______ _______
_____ _______ _______
_______ _______ ______ _______
_____ _______ _______
54
IV. TRADE RECEIVABLES
______________________
(FRF thousands)
Amount Amount Gross
> 1 year < 1 year Total Depreciation
________ ________ _______ ____________
Receivables on capitalized
assets
Receivables from controlled
entities 1,374 1,374
Loans 19,300 19,300
Current assets receivables
Trade receivables and
assimilated accounts
France
Affiliated companies - 31,984 31,984 -
Other receivables 225 155,993 156,218 24,376
Commercial papers 56 14,458 14,514 -
______ _______ _______ _______
Total France 281 202,435 202,716 24,376
______ _______ _______ _______
Export
Affiliated companies 248 115,376 115,624 9,473
Other receivables 2,646 314,064 316,710 34,219
Commercial papers - - - -
______ _______ _______ _______
Total export 2,894 429,440 432,334 43,692
______ _______ _______ _______
Total receivables 3,175 631,875 635,050 68,068
______ _______ _______ _______
______ _______ _______ _______
Other receivables
Affiliated companies - 2,997 2,997 -
Others 5,200 63,074 68,274 9,833
_______ _______ _______ _______
Total other receivables 5,200 66,071 71,271 9,833
_______ _______ _______ _______
_______ _______ _______ _______
V. FINANCIAL LIABILITIES
_________________________
(FRF thousands)
Maturity Maturity Maturity
date date date
< 1 year 1-5 years > 5 years Total
________ _________ __________ _______
Medium-term loans - 640,000 - 640,000
Other loans 17,688 - 9,300 26,988
______ _______ _____ _______
Total 17,688 640,000 9,300 666,988
______ _______ _____ _______
______ _______ _____ _______
55
VI. INCOME STATEMENT
(SPECIAL FORMAT)
____________________
(FRF thousands)
12/31/99 12/31/98
_________ _________
Production sold 1,031,011 955,349
Change in inventory of finished goods & WIP (43,159) 32,355
Self-created fixed assets 9,410 75,971
_________ _________
Total production 997,262 1,063,675
Purchases adj. for changes in inventories (836,135) (878,092)
Other external charges (142,551) (149,478)
Change in provision for losses (30,868) (11,929)
_________ _________
Value added (12,292) 24,176
Operating subsidies 466 2,114
Taxes and assimilated payments (13,739) (19,414)
Payroll charges (280,272) (277,028)
_________ _________
Operating cash flow (305,837) (270,152)
Depreciation and amortization charges (104,306) (100,308)
Change in provision on current assets 15,145 (21,295)
Change in contingency provision (27,106) (4,733)
Other revenues 839 2,483
Other charges (21,850) (6,156)
_________ _________
Operating income (443,115) (400,161)
Share of income from joint ventures 1,695 -
Financial income 21,129 23,724
Financial charges (63,877) (62,411)
_________ _________
Current income (484,168) (438,848)
"Exceptional" revenue 740,934 (141,168)
"Exceptional" charges (150,670) (7,478)
_________ _________
Income before tax 106,096 (587,494)
Corporate income tax (200) 5,999
Income on disposal of fixed asset items 176 7
_________ _________
Net accounting income 106,072 (581,488)
_________ _________
_________ _________
56
VII. TABLE OF OFF BALANCE SHEET COMMITMENTS
____________________________________________
(FRF thousands)
Affiliated
Type of commitment Total Companies Others
__________________ _________ __________ ________
Commitments given
Commercial guarantees provided by
banks and other institutions 141,966 6,187 135,779
Lease purchase commitments 2,296 - 2,296
_________ _________ _______
Total 144,262 6,187 138,075
_________ _________ _______
_________ _________ _______
Commitments received
Guarantees received from suppliers 5,304 - 5,304
Guarantees on lines of credit 1,000,000 1,000,000 -
_________ _________ _______
Total 1,005,304 1,000,000 5,304
_________ _________ _______
_________ _________ _______
Reciprocal commitments
Sale of foreign currency futures 40,031 - 40,031
Purchase of foreign currency futures 16,333 - 16,333
_________ _________ _______
Total 56,364 - 56,364
_________ _________ _______
_________ _________ _______
Discounted bills 5,035 - 5,035
_________ _________ _______
_________ _________ _______
*Sales and purchases of foreign currency are shown in the appendix.
57
VIII - FINANCIAL RESULTS OVER THE LAST
FIVE YEARS
__________________________________________________
(Articles 133, 135 and 148 of Decree n 67-236 of March 23, 1967 relating to
commercial enterprises)
1995 1996 1997
1998 1999
_____________ _____________
_____________ _____________ _____________
1. Financial situation at period end
____________________________________
a. Share capital 150,000,000 150,000,000
753,556,800 500,000,000 500,000,000
b. Number of existing ordinary shares 1,500,000 1,500,000
7,535,568 5,000,000 5,000,000
c. Number of preferred dividend shares n/a n/a
n/a n/a n/a
d. Maximum number of shares to be
created in the future n/a n/a
n/a n/a n/a
2. Global results from operations
_________________________________
a. Revenues before tax 1,085,450,627 1,191,058,795
1,205,712,690 955,348,271 1,031,010,914
b. Income before tax, *depreciation &
provisions 257,827,072 17,971,164
(74,413,761) (297,331,650) 219,843,859
c. Income tax 100,000 100,000
100,000 150,000 200,000
d. Income after tax, depreciation &
provisions 25,686,089 10,356,903
(119,669,536) (581,488,331) 106,071,630
e. Profits distributed n/a n/a
n/a n/a n/a
3. Results on a per share basis
_______________________________
a. Income after tax but before
depreciation & provisions 171.82 11.91
(9.89) (59.50) 49.93
b. Income after tax, depreciation
and provisions 17.12 6.90
(15.88) (116.30) 21.21
c. Dividend paid on each share n/a n/a
n/a n/a n/a
4. Personnel
____________
a. Number of employees at period end 669 727
1,049 1,004 805
b. Payroll 144,694,599 133,506,549
221,238,494 198,983,384 209,845,693
c. Social charges & assimilated amounts
(social security & social works),etc. 60,054,014 60,484,248
90,707,469 83,418,514 75,869,335
*Income before tax,depreciation,provisions
and cancellation of receivables 257,827,072 17,971,164
(74,413,761) (297,331,650) (380,156,141)
58
IX - INFORMATION ON PURCHASE LEASE AGREEMENTS
AS OF DECEMBER 31, 1999
_____________________________________________________________________
(FRF thousands)
Balance sheet including
Leased fixed assets
leased fixed assets
________________________________________________________
________________________________
Depreciation charges
Initial __________________________________
Gross
Balance sheet item cost (1) Of the period (2) Accumulated (2) Net
value value Depreciation Net value
__________________ ________ _________________ _______________
_________ _______ ____________ _________
Land - - - -
925 - 925
Buildings 3,545 142 1,276 2,269
155,645 86,182 69,463
Technical plant,
equipment and machinery - - - -
461,272 271,927 189,345
Other fixed assets - - - -
40,306 27,725 12,581
Fixed assets in-progress - - - -
35,056 - 35,056
_____ ___ _____ _____
_______ _______ _______
Totals 3,545 142 1,276 2,269
693,204 385,834 307,370
_____ ___ _____ _____
_______ _______ _______
_____ ___ _____ _____
_______ _______ _______
(1) Value of these assets upon signature of contracts.
(2) Allocation for the period and accumulated charges which would have been recorded
if these assets had been acquired
and depreciated on a straight-line basis.
Purchase lease commitments
_____________________________________________________________________________________
_
Lease payments made Outstanding lease
payments
______________________
_______________________________________________ Residual
Of the
purchase
Balance sheet item period Accumulated < 1 year 1 to 5 years >
5 years Total due price (1)
__________________ ______ ___________ ________ ____________
_________ _________ _________
Land - - - -
- - - -
Buildings 367 3,436 367 1,774
29 2,170 126
Technical plant,
equipment and machinery - - - -
- - - -
Other fixed assets - - - -
- - - -
Fixed assets in-progress - - - -
- - - -
___ _____ ___ _____
___ _____ ___
Totals 367 3,436 367 1,774
29 2,170 126
___ _____ ___ _____
___ _____ ___
___ _____ ___ _____
___ _____ ___
(1) According to the contract.
59
X - INFORMATION RELATING TO SUBSIDIARIES
AND EQUITY INTEREST
___________________________________________________________
(FRF thousands)
Loans
and
Accounting value
advances
Other Share of of shares held
granted by 1999
share capital _________________ CW
not yet Revenues Income
Capital capital held (%) Gross Net paid
back (excl.taxes) 1999
_________ _________ _______ _________ _________
_________ ____________ _______
A. Detailed information
on equity interests
1) Subsidiary (at least
50% of capital held)
Cummins Wartsila ACO 1,446,000 1,433,120 99.99 3,071,100 2,050,426
1,553,577 17,744,624 492,906
Cummins Wartsila
West Africa 100,000 467,147 100.00 100,000 100,000
300,000 7,104,039 203,251
Cummins Wartsila
Moteurs S.A. - - - 125,000 125,000
- - - -
2) Equity interest (10 to
50% of capital held) - - - - -
- - - -
B. Detailed information
on other subsidiaries
or equity interests
1) Subsidiaries not
covered in paragraph A
a) French subsidiaries (1) - - - 3,378,255 -
9,200,000 - -
b) Foreign subsidiaries - - - - -
- - - -
2) Equity interests not
covered in paragraph A
a) in French
companies (2) - - - 25,000 -
- - - -
b) in Foreign
companies - - - - -
- - - -
1) SACM ROUBAIX : 100% depreciated
2) LEBOCEY : 100% depreciated
60
XI. DEFERRED AND CONTINGENT TAX
LIABILITY
__________________________________________
(FRF thousands)
Movements of
Situation at the beginning of the period
the period
______________________________________________ ____________
Deferred Contingent Taxation
Amount Taxation
________________________
of item Receivables Receivables
Liabilities Decrease
_______ ___________ ___________
___________ ________
Long-term capital gain taxed at 10% 450 - - 128
- -
Long-term capital gain taxed at 15% 2,029 - - 481
- -
Long-term capital gain taxed at 19% 488 - - 94
- -
Long-term capital losses 44,511 - 16,322 -
- -
Loss carry-forwards 325,507 119,363 - -
51,379
Deferred depreciation 231,041 84,723 - -
- -
Provision for paid leave 15,264 5,597 - -
4,811
Provision for exchange rate losses 9,094 3,335 - -
1,381
Contingent tax liability (FRF) 1,235 453 - -
- -
Provision for retirement indemnities 17,011 6,238 - -
985
Amortization of goodwill 7,018 - 2,574 -
- -
_______ _______ ______ ___
______
TOTAL 653,648 219,709 18,896 703
58,556
_______ _______ ______ ___
______
_______ _______
______
Balance of deferred taxation 219,709
_______
_______
Balance of contingent taxation 18,193
______
______
Situation at the end of the period
________________________________________________
Deferred
Amount Taxation Contingent
Taxation
of item Receivables Receivables
Liabilities
________ ___________ ___________
___________
Long-term capital gain taxed at 10% 450 - - 128
Long-term capital gain taxed at 15% 2,029 - - 481
Long-term capital gain taxed at 19% 488 - - 95
Long-term capital losses 44,511 - 16,322 -
Loss carry-forwards 274,128 100,523 - -
Deferred depreciation 303,236 111,197 - -
Provision for paid leave 10,453 3,833 - -
Provision for exchange rate losses 7,713 2,828 - -
Contingent tax liability (FRF) 1,348 494 - -
Provision for retirement indemnities 16,026 5,877 - -
Amortization of goodwill 7,656 - 2,807 -
_______ _______ ______ ___
TOTAL 668,038 224,752 19,129 704
_______ _______ ______ ___
_______ _______ ______
Balance of deferred taxation 224,752 18,425
_______ ______
_______ ______
Balance of contingent taxation
N.B.: Corporate income tax rate at the beginning and end of the period: 36.67%
61
XII. ITEMS RELATING TO SEVERAL BALANCE SHEET ITEMS AND
CONCERNING AFFILIATED COMPANIES
_______________________________________________________
(FRF thousands)
Gross Net
amount Depreciation amount
_______ ____________ ________
1. Assets
______
1.1 Fixed Assets
Equity interests 3,296 1,021 2,275
Receivables from controlled entities 1,374 - 1,374
1.2 Current Assets
Advances & down payments on orders 786 - 786
Trade receivables and assimilated
accounts 147,608 9,474 138,134
Other receivables 2,997 - 2,997
2. Liabilities
___________
Equity loan -
Other cash advances -
Other loans -
Advances on orders-in-progress 27,374
Trade payables and assimilated
accounts 53,665
Other liabilities 3,751
Financial revenue -
Financial charges 7,521
Affiliated companies:
CUMMINS
CUMMINS WARTSILA WEST AFRICA
CUMMINS WARTSILA ACO
CUMMINS WARTSILA MOTEUR S.A.
WARTSILA (Consolidated Group)
METRA FINANCE
62
XIII - BREAKDOWN OF WORKFORCE -
SITE/SECTOR
___________________________________________
Mulhouse Surgeres Gennevilliers Venissieux
Gemenos UK Total
________ ________ _____________ __________
_______ ________ _______
Workers 157 37 - - -
- - 194
Fitters 22 7 3 - -
- - 32
Middle Management 269 65 11 9 2
- - 356
Executives 184 17 4 1 1
- - 207
Apprentices 1 - - - -
- - 1
UK - - - - -
15 15
___ ___ __ __ __
__ ___
December 31, 1999 633 126 18 10 3
15 805
___ ___ __ __ __
__ ___
___ ___ __ __ __
__ ___
December 31, 1998 694 257 20 11 5
17 1,004
___ ___ __ __ __
__ _____
___ ___ __ __ __
__ _____
63
SIGNATURES
__________
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CUMMINS ENGINE COMPANY, INC.
By /s/K. M. Patel By /s/R. C. Crane
__________________________ _____________________
K. M. Patel R. C. Crane
Executive Vice President & Vice President -
Chief Financial Officer Corporate Controller
(Principal Financial Officer) (Principal Accounting
Officer)
Date: March 1, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date
__________ _____ ____
Director & Chairman and Chief
* Executive Officer (Principal 3/1/2000
________________________ Executive Officer)
(Theodore M. Solso)
*
________________________ Director 3/1/2000
(Harold Brown)
*
________________________ Director 3/1/2000
(Robert J. Darnall)
*
________________________ Director 3/1/2000
(John M. Deutch)
*
________________________ Director 3/1/2000
(W. Y. Elisha)
*
________________________ Director 3/1/2000
(Hanna H. Gray)
64
Signatures Title Date
__________ _____ ____
*
________________________ Director 3/1/2000
(James A. Johnson)
*
________________________ Director 3/1/2000
(William I. Miller)
*
________________________ Director 3/1/2000
(William D. Ruckelshaus)
*
________________________ Director 3/1/2000
(H. B. Schacht)
*
________________________ Director 3/1/2000
(F. A. Thomas)
*
________________________ Director 3/1/2000
(J. Lawrence Wilson)
By /s/K. M. Patel
________________
K. M. Patel
Attorney-in-fact
65
CUMMINS ENGINE COMPANY, INC.
EXHIBIT INDEX
____________________________
3(a) Restated Articles of Incorporation of Cummins Engine Company,
Inc., as amended (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended April 3, 1994, by
reference to Quarterly Report on Form 10-Q for the quarter
ended October 1, 1989 and by reference to Form 8-K dated
July 26, 1990).
3(b) By-laws of Cummins Engine Company, Inc., as amended and
restated effective as of August 12, 1994 (incorporated
by reference to Quarterly Report on Form 10-Q for the quarter
ended October 2, 1994).
4(a) Amended and Restated Credit Agreement (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended March 29, 1998).
4(b) Rights Agreement, as amended (incorporated by reference to
Annual Report on Form 10-K for the year ended December 31,
1989, by reference to Form 8-K dated July 26, 1990, by
reference to Form 8 dated November 6, 1990, by reference to
Form 8-A/A dated November 1, 1993, and by reference to
Form 8-A/A dated January 12, 1994 and by reference to
Form 8-A/A dated July 15, 1996).
10(a) Target Bonus Plan (incorporated by reference to Annual Report
on Form 10-K for the year ended December 31, 1996).
10(b) Deferred Compensation Plan (incorporated by reference to
Annual Report on Form 10-K for the year ended December 31,
1994).
10(c) Key Employee Stock Investment Plan, as amended (incorporated
by reference to Quarterly Report on Form 10-Q for the quarter
ended July 3, 1994).
10(d) Supplemental Life Insurance and Deferred Income Plan
(incorporated by reference to Annual Report on Form 10-K for
the year ended December 31, 1996).
10(e) Financial Counseling Program, (incorporated by reference to
Quarterly Report on Form 10-Q for the quarter ended
July 3, 1994).
10(f) 1986 Stock Option Plan (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended March 30, 1986,
Exhibit 10(g)).
10(g) Deferred Compensation Plan for Non-Employee Directors, as
amended, effective as of April 15, 1994 (incorporated by
reference to Annual Report on Form 10-K for the year ended
December 31, 1994).
10(h) Key Executive Compensation Protection Plan (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended October 2, 1994).
10(i) Excess Benefit Retirement Plan, (incorporated by reference to
Quarterly Report on Form 10-Q for the quarter ended October 2,
1994).
10(j) Employee Stock Purchase Plan (incorporated by reference to
Annual Report on Form 10-K for the year ended December 31, 1998).
66
10(k) Retirement Plan for Non-Employee Directors of Cummins Engine
Company, Inc., as amended February 1997 (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended March 30, 1997).
10(l) Stock Unit Appreciation Plan effective October 1990
(incorporated by reference to Quarterly Report on Form 10-Q
for the quarter ended April 2, 1995, Exhibit 10(m)).
10(m) Three Year Performance Plan as amended February 1997
(incorporated by reference to Quarterly Report on Form 10-Q
for the quarter ended March 30, 1997).
10(n) Consulting arrangement with Harold Brown (incorporated by
reference to the description thereof provided in the Company's
definitive Proxy Statement).
10(o) 1992 Stock Incentive Plan (incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1995,
Exhibit 10(s)).
10(p) Restricted Stock Plan for Non-Employee Directors, as amended
February 11, 1997 (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended March 30, 1997).
10(q) Executive Retention Plan (incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1995,
Exhibit 10(u)).
10(r) Performance Share Plan, as amended January 1989 (incorporated
by reference to Quarterly Report on Form 10-Q for the quarter
ended April 2, 1995, Exhibit 10(j)).
10(s) Senior Executive Bonus Plan (incorporated by reference to
Annual Report on Form 10-K for the year ended December 31, 1996).
10(t) Senior Executive Three Year Performance Plan, as amended
February 11, 1997 (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended March 30, 1997).
21 Subsidiaries of the Registrant (filed herewith).
23 Consent of Arthur Andersen LLP (filed herewith).
24 Powers of Attorney (filed herewith).
27 Financial Data Schedule (filed herewith).