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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, 1998
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 $1.6 billion at January 29, 1999.
As of January 29, 1999, there were outstanding 42.0 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.
TABLE OF CONTENTS
_________________
Part Item Description Page
____ ____ _________________________________________________ ____
I 1 Business 3
2 Properties 10
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 11
6 Selected Financial Data 12
7 Management's Discussion & Analysis of Results
of Operations and Financial Condition 13
8 Financial Statements & Supplemental Data 20
9 Disagreements on Accounting & 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 & Related Transactions 22
IV 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 22
Index to Financial Statements and Schedule 23
Signatures 42
Exhibit Index 44
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 60
to 6,000 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 1998, approximately 57 percent of net sales were in the United
States. Major international markets include Asia and Australia (13
percent of net sales); Europe and the CIS (13 percent of net sales);
Mexico and Latin America (8 percent of net sales) and Canada (7
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
600 horsepower serving the heavy-duty truck market. The Company's
heavy-duty diesel engines are offered as standard or optional power by
all major heavy-duty truck manufacturers in North America. The
Company's largest customer for heavy-duty truck engines in 1998 was
Navistar International Corporation, which represented 5 percent of the
Company's net sales.
In 1998, factory retail sales of North American heavy-duty trucks were
18 percent higher than the previous year's level. Factory retail
sales were 238,000 units in 1998, compared to 201,000 units in 1997
and 176,000 units in 1996. The Company's share of the North American
heavy-duty truck engine market was 32 percent in 1998 based on data
published by the American Automotive Manufacturers Association. The
Company's share of the North American heavy-duty truck engine market
was 32 percent in 1997 and 35 percent in 1996. The Company has
retained number one market share for 26 years.
Based on data published by the Society of Motor Manufacturers and
Traders, the Company's share of engines for trucks over 29 tonnes sold
in the United Kingdom was 11 percent in 1998 and 12 percent in 1997.
Based on data published by the National Association of Truck and Bus
Manufacturers, Cummins remained the leader of the heavy-duty truck
market in Mexico by a very wide margin with 69 percent share. This
market grew 37 percent in 1998.
In South Africa and Australia, the Company also enjoys number one
market position.
In 1998, the Company began production of a new heavy-duty engine, the
Signature 600, with the first fully electronic, dual overhead cam
engine in this market. It also began production of a new 11-liter
product called the ISM. A further new product, a 9-liter engine for
vocational and regional delivery vehicles was announced in 1998 with
production set for 1999. These engines are all part of a new series
of products called the Interact System.
In the heavy-duty truck market, the Company competes with
independent engine manufacturers as well as truck producers who
manufacture diesel 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., Scania A.B. and Nissan
Diesel.
Medium-duty Truck Market
________________________
The Company has a line of diesel engines ranging from 175 to 300
horsepower serving medium-duty and inter-city delivery truck customers
worldwide. The Company has introduced its next generation of midrange
diesel engines, electronic four-valve-head versions which bring
Interact technology to medium-duty trucks. The new versions are
called the ISB and the ISC.
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 1998 was 19
percent. Freightliner was the Company's largest customer for this
market in 1998, representing 2 percent of the Company's net sales.
The Company sells its B and C Series engines and engine components
outside North America to medium-duty truck markets in Asia, Europe and
South America. In 1998, operations in China were expanded from a
license for B Series engines to include a joint venture for production
of C Series engines. In 1998, the joint venture in India began
production ramp-up.
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 and Light Commercial Vehicles Market
________________________________________
For this market, Cummins has both diesel and natural gas engines for
pickup trucks, school buses, transit buses, delivery trucks and
recreational vehicles.
In 1998, the Company introduced its ISC engines for the recreational
vehicle market. Together with the ISC and other heavy-duty electronic
products, Cummins' share of the diesel recreational vehicle business
was 78 percent in 1998.
In North America, DaimlerChrysler, which offers the Cummins ISB
engines in its Dodge Ram pickup truck, was the Company's largest
customer for midrange engines in this market. Sales to
DaimlerChrysler for all markets combined represented 18 percent of the
Company's net sales in 1998.
The Company's ISC, M11 and ISM diesel engines are available for the US
transit bus market. Cummins also offers the L10, B and C Series
products for the natural gas markets which are primarily transit and
school bus. The demand for alternate-fueled products continues to
grow, as the Company is experiencing increased interest in
international markets.
In these markets, the Company competes with both independent
manufacturers of diesel engines and with vehicle producers who
manufacture diesel engines for their own products. Primary
competitors who manufacture diesel engines for the bus and light
commercial vehicle markets are Detroit Diesel Corporation, General
Motors Corporation, Navistar International Corporation, Caterpillar,
Inc., AB Volvo, Daimler, Scania A.B. and MWM Brazil.
Industrial Markets
__________________
Cummins engines power a wide variety of equipment in the construction,
mining, agricultural, marine, rail and government markets throughout the
world. During 1998, the product offering was expanded upward with the
limited introduction of a new high-horsepower engine in the mining
market and downward with the development of a small 3-liter engine for
the construction market.
A technical joint venture was formed with Komatsu in 1998 to provide a
medium for joint product development. Activities in the construction
market focused on furthering the financing program developed with Case
in 1997 and improving customer service levels through improved on-site
product service capabilities.
Case and Cummins also renegotiated a long-term partnership agreement
through 2022. The agreement offers both companies the opportunity for
improved sales and profitability.
Marine product applications include recreational and commercial
markets. The Company's offering in the recreational market is also
expanding with the introduction of a fully electronic 635 horsepower
M11 engine. Additionally, the financing programs developed with Case
in late 1997 were expanded to serve the marine market.
In the mining markets, the Company began the introduction of a new
high-horsepower product (QSK60) which extends the power range from
2,000 to 2,700 horsepower. This engine brings electronics to the
market place for improved performance and maintenance.
Power Generation Business
_________________________
In 1998, power generation sales represented 20 percent of the
Company's net sales. Products include Cummins engines, Onan and
Petbow branded generator sets and Newage alternators.
In stationary power, electrical power generation products and services
are provided to major markets worldwide. In 1998, the Company's joint
venture with Wartsila NSD to produce high-horsepower engines was expanded
to include customer engineering, marketing and service support. The
CW 200 series engine family was introduced in 1996 with initial deliveries
in Europe and Asia. The CW 170 series engine family was introduced in 1998.
Providing power generation products for the utility industry has become
an increasingly important market, with utilities turning to generator sets
to manage peak and seasonal demands. In the mobile business, generator
sets are produced for a variety of applications, with Onan a leading
supplier of power generation sets for recreational vehicles in the
United States.
Newage is a leading manufacturer of alternators in its product range.
During 1996, plans were initiated to expand manufacturing capacity at
Newage's joint venture in India. Production at the Company's joint
venture in China (Wuxi Newage) began in 1997.
In Power Generation, Cummins competes on a global scale with a variety
of engine manufacturers and generator set assemblers. Caterpillar,
Inc., with the purchase of Perkins Engines and an investment in FG
Wilson, provides the main competition. Detroit Diesel Corporation and
AB Volvo are the other major engine manufacturers with a presence in
the high-speed segment of the market. Onan competes with Caterpillar,
Kohler and F G Wilson, among others, in the generator set business.
Newage competes globally with Leroy Somer, Marathon and Meccalte,
among others. In recent years, Emerson Electric, which owns Leroy
Somer, has become a major player with its acquisition of F G Wilson.
Filtration Business and Other
______________________________
Fleetguard, Cummins' filtration subsidiary, is a leading designer and
manufacturer of filtration products for the North American heavy-duty
industry. Its products are also produced and sold in international
markets, including Europe, South America, India, China, Australia, and
the Far East. Fleetguard produces products for the specialty
filtration market with its Kuss subsidiary located in Findley, Ohio.
The Company purchased the stock of Nelson Industries, Inc., in January
1998. Nelson designs and manufactures air filtration products and
exhaust systems in North America and Europe.
The Company owns 14 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. In 1994, Holset introduced
a variable geometry turbocharger design for truck powertrains.
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.
BUSINESS OPERATIONS
___________________
International
_____________
The Company has manufacturing facilities worldwide, including major
operations in Europe, India, Mexico and Brazil. 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.
The Company has entered into alliances with business partners in
various areas of the world.
In 1997, the Company acquired an additional 1% 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. The Company's joint venture with Wartsila was expanded
to include worldwide marketing and service activities in addition to
design, development and manufacturing. The Company entered this joint
venture in 1995 to manufacture both diesel and natural gas engines
above 2,500 horsepower.
In 1996, a joint venture was formed with two of the Fiat Group
companies - Iveco (trucks and buses) and New Holland (agricultural
equipment) - to design and manufacture the next generation of 4-,5-,
and 6-liter engines based on Cummins 4- and 6-liter B series engines.
Operations of Dong Feng in China were expanded to form a joint venture
for production of a C series engine in addition to the license for B
Series engines.
In 1995, the Company formed a joint venture with China National Heavy
Duty Truck Corporation in Chongqing, previously a Cummins' licensee,
to manufacture a broad line of diesel engines in China.
Cummins and Scania have a joint venture to produce a fuel system for
heavy-duty diesel engines. Cummins also has a joint venture with
TELCO to manufacture the Cummins B Series engines in India for TELCO
trucks. Cummins and Komatsu have formed joint ventures to
manufacture the B Series engines in Japan and high-horsepower Komatsu
designed engines in the United States. In 1997, a third joint venture
to design next generation industrial engines was announced.
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 in the midst 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 $228 million in 1998, $250 million in 1997,
and $235 million in 1996.
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 8,400 locations in North America, primarily
owned and operated by OEMs or their dealers, at which Cummins-trained
service personnel and parts are available to maintain and repair
Cummins engines. The Company's parts distribution centers are located
strategically throughout the world.
Cummins also sells engines, parts and related products through
distributorships worldwide. The Company believes its distribution
system is an important part of its marketing strategy and competitive
position. Most of its North American distributors are independently
owned and operated. The Company has agreements with each of these
distributors, which typically are for a term of three years, subject
to certain termination provisions. Upon termination or expiration of
the agreement, the Company is obligated to purchase various assets of
the distributorship. The purchase obligation of the Company relates
primarily to inventory of the Company's products, which can be resold
by the Company over a reasonable period of time. In the event the
Company had been required to fulfill its obligations to purchase
assets from all distributors simultaneously at December 31, 1998, the
aggregate cost would have been approximately $275 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, 1998, Cummins employed 28,300 persons worldwide,
approximately 9,900 of whom are represented by various unions. The
Company has labor agreements covering employees in North America,
South America, the United Kingdom, and India. In 1993, members of the
Diesel Workers Union reached an agreement that extends until the year
2004. In 1995, members of the United Auto Workers at the Company's
crankshaft plant in Fostoria, Ohio, reached an agreement which extends
for five years. In 1995, members of the Diesel Workers Union and the
Office Committee Union at the Company's midrange engine plant in
Southern Indiana ratified 5-year agreements. In 1995, members of the
Office Committee Union ratified an early agreement which extends until
mid-1999 for offices and plants in Southern Indiana and the Company's
Technical Center. The Company plans to enter negotiations with the
Office Committee Union before the expiration of its current contract
in 1999.
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") have established for heavy-
duty on-highway diesel and gas engines and off-highway engines
produced through 1999. Cummins' ability to comply with these and
future emissions standards is an essential element in maintaining its
leadership position in the North American 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 1999 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 Environmental
Protection Agency, the U. S. Department of Justice and the California
Air Resources Board 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, three 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. A
California State Court recently ruled in favor of the Company. A
recent action was just filed in U.S. District Court, the District of
Columbia.
Model year 1998 marked the latest major change in 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 1998, 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 1998.
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. As with SEA testing, if an in-use
test is failed, an engine recall may be necessary.
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. The
Company continues to monitor such failures. In 1998, there were no
emissions-related failures which reached a level that required a
report.
Heavy-duty engines used in construction, agricultural and certain
mining applications are also subject to emission regulations. In the
United States such standards began phasing-in in 1996. In other parts
of the world similar standards are applied. Cummins has successfully
completed certification of its engines used in these 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 1998, 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 L10,
C8.3 and B5.9 engines, ranging from 150 to 300 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 1999.
Pursuant to notices received from Federal and state agencies and/or
defendant parties in site environmental contribution actions, the
Company and its subsidiaries have been identified as potentially
responsible parties ("PRPs") under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, or
similar state laws, at a number of waste disposal sites. Under such
laws, PRPs typically are jointly and severally liable for any
investigation and remediation costs incurred with respect to the
sites. Therefore, the Company's ultimate responsibility for such
costs could be a percentage greater than the percentage of waste
actually contributed to the site by the Company.
The sites at which the Company or its subsidiaries are currently
named as a PRP are the following: Old City Landfill, Columbus,
Indiana; White House Waste Oil Pits, Jacksonville, Florida; Seaboard
Chemical, Jamestown, North Carolina; Double Eagle Refinery, Oklahoma
City, Oklahoma; Wastex Research, East St. Louis, Illinois; North
Hollywood Dump, Memphis, Tennessee; Commercial Oil, Oregon, Ohio;
Berliner & Ferro, Swartz Creek, Michigan; Schnitzer Iron & Metal, St.
Paul, Minnesota; Four County Landfill, Culver, Indiana; Schumann
Site, South Bend, Indiana; Great Lakes Asphalt, Zionsville, Indiana;
Third Site, Zionsville, Indiana; Auto-Ion, Kalamazoo, Michigan; PCB
Treatment Inc., Kansas City, Kansas; ENRx, Buffalo, New York;
Uniontown Landfill, Uniontown, Indiana; Sand Springs, Oklahoma;
United Steel Drum, East St. Louis, Illinois; Putnam County Landfill,
Cookeville, Tennessee; Enterprise Oil, Detroit, Michigan; Wayne
Reclamation & Recycling, Ft. Wayne, Indiana; and Casmalia Disposal
Site, Santa Barbara, California. The Company presently is contesting
its status as a PRP at several of these sites. At some of these
sites, the Company will be released from liability at the site as a
de minimis PRP for a nominal amount.
While the Company is unable at this time to determine the aggregate
cost of remediation at these sites, it has attempted to analyze its
proportionate and actual liability by analyzing the amounts of waste
contributed to the sites by the Company, the estimated costs for total
remediation at the sites, the number and identities of other PRPs and
the level of insurance coverage. With respect to other sites at which
the Company or its subsidiaries have been named as PRPs, the Company
cannot accurately estimate the future remediation costs. At several
sites, the remedial action to be implemented has not been determined
for the site. In other cases, the Company or its subsidiary has only
recently been named as a PRP and is collecting information on the
site. Finally, in some cases, the Company believes it has no
liability at the site and is actively contesting designation as a PRP.
Based upon the Company's prior experiences at similar sites,
however, the aggregate future cost to all PRPs to remediate these
sites is not likely to be significant. In each of these cases,
the Company believes that it has good defenses at several of the
sites, that its percentage contribution at other sites is likely
to be de minimis or that other PRPs will bear most of the future
remediation costs. However, the environmental laws impose joint
and several liability and, consequently, the Company's ultimate
responsibility may be based upon many factors outside the
Company's control and could be material in the event that the
Company becomes obligated to pay a significant portion of these
expenses. Based upon information presently available, the
Company believes that such an outcome is unlikely and that its
actual and proportionate costs of participating in the
remediation of these sites will not be material.
ITEM 2. PROPERTIES
_______ __________
Cummins' worldwide manufacturing facilities occupy approximately 16
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;
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, 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 16 to the Consolidated Financial
Statements is incorporated herein by reference. The material in Item
1 "Other Environmental Statutes and Regulations" also is incorporated
herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
_______ _________________________________________________
None.
PART II
_______
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
_______ _____________________________________________________
The Company's common stock is listed on the New York Stock Exchange
and the Pacific Stock Exchange under the symbol "CUM". The following
table sets forth, for the 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
______ _______ __________________
1998
____
First quarter $62 3/4 $51 $.275
Second quarter 57 5/16 49 3/16 .275
Third quarter 56 30 .275
Fourth quarter 40 7/8 28 5/16 .275
1997
____
First quarter $55 5/8 $44 1/4 $.25
Second quarter 72 3/4 47 3/4 .275
Third quarter 83 67 7/8 .275
Fourth quarter 82 1/2 55 5/16 .275
At December 31, 1998, the approximate number of holders of record of
the Company's common stock was 5,200.
The Company has repurchased 4.3 million shares of its common stock
since 1994. In 1998, the Company repurchased .4 million shares on the
open market at an aggregate purchase price of $14 million. In 1997,
the Company repurchased 1.3 million shares from Ford Motor Company and
another .2 million shares on the open market at an aggregate purchase
price of $75 million. The Company repurchased .8 million shares of
stock in the open market at an aggregate purchase price of $34 million
in 1996 and 1.6 million shares at an aggregate purchase price of $69
million in 1995. All of the acquired shares are held as common stock
in treasury.
In 1997, the Company issued 3.75 million shares of its common stock to
an employee benefits trust to fund obligations of employee benefit and
compensation plans, principally retirement savings plans. Shares of
the common stock held by this trust are not used in the calculation of
the Company's earnings per share until distributed from the trust and
allocated to a benefit plan.
Certain of the Company's loan indentures and agreements contain
provisions which permit the holders to require the Company to
repurchase the obligations upon a change of control of the Company, as
defined in the applicable debt instruments.
The Company has a Shareholders' Rights Plan which it first adopted in
1986. The Rights Plan provides that each share of the Company's
common stock has associated with it a stock purchase right. The
Rights Plan becomes operative when a person or entity acquires 15
percent of the Company's common stock or commences a tender offer to
purchase 20 percent or more of the Company's common stock without the
approval of the Board of Directors. In the event a person or entity
acquires 15 percent of the Company's common stock, each right, except
for the acquiring person's rights, can be exercised to purchase $400
worth of common stock for $200. In addition, for a period of 10 days
after such acquisition, the Board of Directors can exchange such right
for a new right which permits the holders to purchase one share of the
Company's common stock for $1 per share. If a person or entity
commences a tender offer to purchase 20 percent or more of the
Company's common stock, unless the Board of Directors redeems the
rights within 10 days of the event, each right can be exercised to
purchase one share for $200. The plan also allows holders of the
rights to purchase shares of the acquiring person's stock at a
discount if the Company is acquired or 50 percent of the assets or
earnings power of the Company is transferred to an acquiring person.
The Company's bylaws provide that Cummins is not subject to the
provisions of the Indiana Control Share Act. However, Cummins is
governed by certain other laws of the State of Indiana applicable to
transactions involving a potential change of control of the Company.
ITEM 6. SELECTED FINANCIAL DATA
_______ _______________________
$ Millions, except
per share amounts 1998 1997 1996 1995 1994
_____________________ ______ ______ ______ ______ ______
Net sales $6,266 $5,625 $5,257 $5,245 $4,737
Net earnings (loss) (21) 212 160 224 253
Earnings (loss) per share:
Basic (.55) 5.55 4.02 5.53 6.14
Diluted (.55) 5.48 4.01 5.52 6.11
Cash dividends per share 1.10 1.075 1.00 1.00 .625
Total assets 4,542 3,765 3,369 3,056 2,706
Long-term debt 1,137 522 283 117 155
Earnings per share for 1994-1996 have been restated to reflect the
adoption of SFAS No. 128 as disclosed in Note 1 to the Consolidated
Financial Statements.
In 1998, the Company's results included charges totaling $217 million,
comprised of $78 million for revised estimates of additional product
coverage liability for both base and extended warranty programs, $114
million of costs associated with the Company's plan to restructure,
consolidate and exit certain business activities and $25 million for a
civil penalty resulting from an agreement reached with the U.S.
Environmental Protection Agency, the Department of Justice and the
California Air Resources Board regarding diesel engine emissions.
In 1995, the Company's results included restructuring charges of $118
million ($77 million after taxes) to reduce the worldwide work force
and to close or restructure selected operations in Europe, Brazil and
North America. Net earnings in 1995 also included release of the tax
valuation allowance of $68 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
_______ _____________________________________________________________
OVERVIEW
________
Net sales were a record $6.3 billion in 1998, 11 percent higher than
in 1997, and 19 percent higher than in 1996. Nelson Industries, Inc.,
acquired in January 1998, and Cummins India Limited, which was first
consolidated in the fourth quarter of 1997, added sales of $428
million. Without these additional sales, net sales for 1998 would
have been $5.8 billion, an increase of 4 percent over 1997.
As disclosed in Notes 3 and 4 to the Consolidated Financial
Statements, the Company recorded charges in 1998 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 and the Department of Justice
regarding diesel engine emissions. Excluding these charges, earnings
before interest and taxes were $282 million in 1998, compared to $312
million in 1997 and $232 million in 1996. Including the charges, the
Company's net loss was $21 million or $(.55) per share in 1998. Net
earnings in 1997 were $212 million or $5.48 per share and $160 million
or $4.01 per share in 1996.
To maintain Cummins' technological leadership, the Company has been in
the process of upgrading or replacing engines across all product
lines. This new product development program peaked in 1998 with a
record six new engine introductions. While this investment in product
development offers competitive advantages, it resulted in a temporary
increase in product costs and a decrease in profitability in 1998
RESULTS OF OPERATIONS
_____________________
Net Sales:
__________
In 1998, the Company achieved its seventh consecutive year of record
sales, totaling $6.3 billion. Revenues from sales of engines were 55
percent of the Company's net sales in 1998, with engine revenues and
unit shipments 8 percent and 9 percent higher, respectively, than in
1997. The Company shipped a record 403,300 engines in 1998, compared
to 369,800 in 1997 and 332,300 in 1996 as follows:
Unit shipments 1998 1997 1996
________________ _______ _______ _______
Midrange engines 287,400 264,300 237,400
Heavy-duty engines 106,100 94,900 85,000
High-horsepower engines 9,800 10,600 9,900
_______ _______ _______
403,300 369,800 332,300
_______ _______ _______
Revenues from non-engine products, which were 45 percent of net sales
in 1998, were 16 percent higher than in 1997. The major changes
within non-engine revenues were in filtration, with the sales of
Nelson included from the date of acquisition by Cummins, and PowerCare
(which includes new parts and remanufactured engines and parts).
Sales of the remaining non-engine products, in the aggregate, were
essentially level with 1997.
The Company's sales for each of its key segments during the last three
years were:
$ Millions 1998 1997 1996
__________ ______ ______ ______
Automotive markets $2,928 $2,622 $2,447
Industrial markets 1,054 1,044 863
_____ _____ _____
Engine Business 3,982 3,666 3,310
Power Generation Business 1,230 1,205 1,213
Filtration Business & Other 1,054 754 734
______ ______ ______
$6,266 $5,625 $5,257
______ ______ ______
Cummins' engine business is the Company's largest business segment,
producing 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 $4.0 billion in 1998, a 9 percent increase over 1997 and
20 percent over 1996.
Sales of $2.9 billion in 1998 for automotive markets were 12 percent
higher than in 1997 and 20 percent higher than in 1996. In 1998,
heavy-duty truck engine revenues were 19 percent higher than in 1997
on a 20-percent increase in units. Within the North American heavy-
duty truck market, unit shipments were up 20 percent over 1997, and
Cummins continued to be the market leader with a 32-percent market
share. In 1998, the Company began limited production of the Signature
600, a new electronic engine designed to capture a larger share of
this market. International unit shipments for the heavy-duty market
in 1998 were 20 percent higher than in 1997 due to continued strong
demand in European and Mexican automotive markets.
Revenues from the sales of engines for medium-duty trucks in 1998 were
13 percent lower than in 1997 on a 12-percent decrease in units. In
North America, the Company was affected by Ford's relocation of its
production facilities, partially offset by increased sales in
international markets, primarily Brazil.
For the bus and light commercial vehicle market, engine revenues in
1998 were 26 percent higher than in 1997, on a 22-percent increase in
unit shipments. In January, Cummins jointly announced with
DaimlerChrysler a new, fully electronic engine -- the ISB -- for the
Dodge Ram pickup. The increase in 1998 was due primarily to record
unit shipments to DaimlerChrysler for the Dodge Ram pickup, which were
26 percent higher than in 1997 and 37 percent higher than in 1996, and
continued strong demand in bus markets.
In 1998, revenues from industrial markets were 1 percent higher than
in 1997. Revenues from sales of engines decreased, while parts sales
increased. Engine revenues in 1998 were 1 percent lower than in 1997
on an 8-percent increase in unit shipments. The variance between
revenues and units resulted from lower heavy-duty and high-horsepower
engine sales and a shift in product mix of midrange engine sales. The
increased level of shipments was due to continued strong construction
volumes in North America and Europe, partially offset by declines in
worldwide agricultural markets. Sales of engines and parts into the
marine market in 1998 were 6 percent lower than in 1997, due primarily
to the economic turmoil in Asia. Sales into the mining market were 21
percent lower than the prior year. In 1998, Cummins announced an
agreement with Komatsu, a joint venture partner, to develop a 3.3
liter engine targeted for the construction market, scheduled for
release in the second half of 1999.
Revenues of $1.2 billion in 1998 for power generation were 2 percent
higher than in 1997 and 1 percent higher than in 1996, with sales
continuing to be impacted by the economic conditions in Asia and lower
sales in Europe. Without the consolidation of Cummins India Limited,
power generation sales would have decreased 4 percent from 1997.
Sales of the Company's generator sets continued to reflect growth in
North America, which offset declines in demand for generator sets in
Asia. Engine sales to generator set assemblers were down 12 percent
from the prior year and sales of alternators were down 11 percent, due
primarily to lower demand in Asia and the Company's change in
strategy, emphasizing sales of generator sets. Sales of small
generator sets for recreational vehicles and other consumer markets
remained strong in North America, increasing 12 percent from 1997.
Sales of $1.1 billion in 1998 for filtration and other were 40 percent
higher than in 1997 and 44 percent higher than in 1996, with Nelson,
acquired in January 1998, contributing sales of $311 million.
International distributor sales increased 12 percent from 1997 due to
the consolidation of Cummins India Limited in the fourth quarter of
1997.
Net sales by marketing territory for each of the last three years
were:
$ Millions 1998 1997 1996
__________ ______ ______ ______
United States $3,595 $3,123 $2,925
Asia/Australia 806 898 868
Europe/CIS 791 796 759
Mexico/Latin America 468 364 260
Canada 459 318 313
Africa/Middle East 147 126 132
______ ______ ______
$6,266 $5,625 $5,257
______ ______ ______
In total, international markets accounted for 43 percent of the
Company's revenues in 1998. Europe and the CIS, representing 13
percent of the Company's sales in 1998, were 1 percent lower than in
1997 and 4 percent higher than in 1996. Sales to Canada, representing
7 percent of sales in 1998, were 44 percent higher than in 1997 due to
the acquisition of Nelson and the relocation of certain customer
production facilities. Asian and Australian markets, in total,
represented 13 percent of the Company's sales in 1998, as compared to
16 percent in 1997 and 17 percent in 1996. In Asia, sales to China
were essentially flat compared to 1997, while revenues in Korea
decreased 64 percent, Southeast Asia declined 47 percent and sales to
Japan and India were 19 percent below 1997 levels, excluding the
effect of Cummins India Limited consolidation.
Business in Mexico and Latin America, representing 8 percent of sales,
was 29 percent higher than in 1997, but began to decline in the latter
part of 1998. Sales to Latin America, including Brazil, represented 4
percent of the Company's sales in 1998 and were 28 percent higher than
in 1997. Brazil individually accounted for 2 percent of sales in
1998. The recent economic events in Brazil have resulted in increased
interest rates and devalued currencies in the region. Many of the
Company's customers are sensitive to interest rates, which will affect
sales demand. The devaluation of local currencies also could have an
impact on operations, as certain of the Company's transactions are
based in Brazilian currency, and could result in currency gains or
losses. Sales to Mexico, representing approximately 4 percent of the
Company's sales in 1998, could also potentially be affected by the
economic uncertainty in Brazil. These events could reasonably be
expected to have an adverse effect on the Company's business, however,
the extent cannot be estimated reasonably based upon presently
available information.
Gross Margin:
_____________
As disclosed in Note 3 to the Consolidated Financial Statements, the
Company recorded special charges in 1998 of $92 million 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. These charges relate to a revised estimate of
product coverage liability for engines manufactured in previous years.
The special charges recorded in 1998 also include $14 million for
inventory write-downs associated with the Company's restructuring and
exit activities. These write-downs reflect amounts of inventory
rendered excess or unusable due to the closing or consolidation of
facilities.
The Company's gross margin percentage before the product coverage and
inventory special charges was 21.4 percent in 1998, compared to 22.8
percent in 1997 and 22.5 percent in 1996. The Company's gross margin
percentage declined due to a temporary increase in product coverage
costs from ISB and ISC engines and higher new product costs
attributable to the production ramp-up of the ISB, ISC and Signature
600 engines. This decrease was partially offset by the benefit from
higher volume and pricing. The acquisition of Nelson and
consolidation of Cummins India Limited added $124 million. Gross
margin percentage after the special charges was 19.9 percent. Product
coverage costs, excluding the special charges, were 3.3 percent of net
sales in 1998, compared to 2.6 percent in 1997 and 2.7 percent in
1996.
Operating Expenses:
___________________
Selling and administrative expenses were 12.5 percent of net sales in
1998, compared to 13.2 percent in 1997 and 13.8 percent in 1996. On
the 11-percent sales increase in 1998, these expenses, which include
volume-variable components, were up less than 6 percent in absolute
dollars. Net benefits of the Company's cost reduction and
restructuring actions were partially offset by increases in expenses
associated with new product launches and information systems during
1998.
Research and engineering expenses were 4.1 percent of net sales in
1998, compared to 4.6 percent in 1997 and 4.8 percent in 1996. This
is a result of a reduction in technical spending and certain product
developments moving to the production stage.
The Company's losses from joint ventures and alliances were $30
million in 1998, compared to income of $10 million in 1997. The
difference was due primarily to the consolidation of Cummins India
Limited and losses at the Company's joint venture with Wartsila.
Cummins Wartsila is being affected by lower sales, primarily due to
decreased demand in Asia, and higher product coverage expenses.
In an effort to address the decline in the Company's business in Asia,
to leverage overhead costs for all operations and to improve joint
venture operating performance, the Company established a restructuring
program in 1998. As a result of this program, the Company recorded a
charge 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.
The charges for majority-owned operations included $38 million for
severance and related costs associated with workforce reductions in
the engine and power generation businesses, primarily for
administrative positions. The costs of these reductions were based on
amounts pursuant to benefit programs and contractual provisions or
statutory requirements at the affected operations. Approximately one-
half of these 1,100 employees left the Company prior to December 31,
1998. An asset impairment loss of $22 million, calculated according
to the provisions of SFAS No. 121, was recorded primarily for engine
manufacturing equipment to be disposed of upon the closure or
consolidation of facilities or the outsource of production. The
recovery value for the equipment to be disposed of was based on
estimated liquidation value. The carrying value of assets held for
disposal and the effect on earnings from suspending depreciation on
such assets is immaterial. Facility consolidation and other costs of
$17 million included lease termination and facility exit costs of $10
million, product support costs of $3 million, and litigation and other
costs of $4 million. As the restructuring consists primarily of the
closing or consolidation of smaller operations, the Company does not
expect these actions to have a material effect on future revenues.
The charges for restructuring joint venture operations totaled $23
million, the majority of which relates to actions being taken at the
Company's joint venture with Wartsila, which is part of the Company's
power generation business. The charges included $11 million for
employee severance and related benefits for approximately 1,200
people, $7 million for a tax asset impairment loss and $5 million for
other facility and equipment-related charges.
Approximately $25 million, primarily related to employee severance,
has been charged to the restructuring liabilities as of December 31,
1998. Of the total charges associated with restructuring activities,
cash outlays will approximate $60 million. The program is expected to
be essentially complete by the end of 1999 and yield approximately $50
million in annual savings at completion.
In 1998, the Company recorded a charge of $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, the Department of
Justice and the California Air Resources Board regarding diesel engine
emissions. In addition to the civil penalty, the agreement provides a
schedule for diesel engines to meet certain emission standards and
requires manufacturers to continue to invest in environmental projects
to further reduce oxides of nitrogen (NOx) emissions. The Company has
developed extensive corporate action plans to comply with all aspects
of the agreement. Additionally, three 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. A California State Court recently ruled in favor of
the Company. A recent action was just filed in the U.S. District
Court, the District of Columbia.
Year 2000:
__________
The Company continues to address the impact of the Year 2000 issue on
its businesses worldwide. This issue affects computer systems that
have date-sensitive programs that may not properly recognize the year
2000. With respect to the Company, this issue affects not only
computer systems but also machinery and equipment used in production
that may contain embedded computer technology.
Following a review and assessment of information systems and
technology used in its internal business operations and production,
the Company inventoried and identified those systems and products that
the Company believes may be vulnerable to Year 2000 failures and
established a program to address Year 2000 issues. The Company's Year
2000 efforts are being carried out by the Company's Year 2000 Team
under the leadership of the Director of Year 2000 Compliance. A Year
2000 program office has been established at each of the Company's
facilities and is overseen by a Year 2000 coordinator. The Year 2000
Team maintains a reporting structure to ensure that progress is made
and tracked on Year 2000 issues. In addition to internal resources,
the Company has retained external resources to assist with the
implementation of its Year 2000 program.
The Company's program consists of the remediation, replacement or
retirement of affected systems. Remediation is the alteration of a non-
compliant application to make it compliant, replacement is the
substitution of a non-compliant application with a compliant upgrade
or product and retirement is the discarding of non-compliant
applications that have been determined to be dispensable.
The Company completed a substantial portion of its remediation efforts
and testing in 1998, and expects to complete that process by the end
of the second quarter of 1999.
The Year 2000 Team will remain in place through January 1, 2000, and
beyond as needed. Their role is to ensure that compliance is
maintained once it is attained. The Company maintains contact with
its key suppliers to obtain information relating to the status of such
suppliers with respect to Year 2000 issues, placing particular
emphasis on determining the Year 2000 readiness of its critical
suppliers.
The Company expects to incur total expenditures of approximately $45
million in connection with its Year 2000 program and remediation
efforts. To date, the Company has incurred approximately $30 million
in costs relating to its Year 2000 efforts.
There can be no assurances that the systems or products of third
parties, which the Company relies upon, will be timely converted or
that a failure by a third party, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect
on the Company. This is particularly true because the Company
utilizes sole suppliers for certain products. The high level of skill
and expertise required to develop certain components makes it
impossible to change suppliers quickly. The failure of a sole
supplier may lead to a delay in production.
The Company continues to develop contingency plans in the event that
its operations are disrupted on January 1, 2000. Such contingency
plans include the stockpiling of certain business critical inventory,
and identifying alternative suppliers where possible.
The estimated time of completion of the Company's Year 2000 program
and compliance efforts, and the expenses related to the Company's Year
2000 compliance efforts are based upon management's best estimates,
which were based on assumptions of 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 personnel trained in this area and the ability to locate and
correct all relevant computer codes.
Other:
______
Interest expense of $71 million was $45 million higher than in 1997
and $53 million higher than in 1996 due to the increased level of
borrowings to support working capital on the higher sales level and to
complete the acquisition of Nelson. Other income decreased $13
million in 1998 as compared to the year-ago period, primarily due to
the Nelson goodwill amortization and lower royalty income.
Provision for Income Taxes:
___________________________
The Company's effective income tax rate normally is below the 35% U.S.
federal corporate tax rate. The lower tax rate is a result of tax
benefits on export sales and tax credits on research expenses. These
benefits in 1998 were more than offset by the unfavorable tax effects
of nondeductible losses in foreign joint ventures and nondeductible
EPA penalty and goodwill amortization. The combined effect was a 1998
income tax provision of $4 million.
CASH FLOW AND FINANCIAL CONDITION
_________________________________
Key elements of cash flows were:
$ Millions 1998 1997 1996
__________ ______ ______ ______
Net cash used in operating and
investing activities $(481) $(154) $ (66)
Net cash from financing activities 471 96 110
Effect of exchange rate changes on cash ( 1) ( 1) 4
_____ _____ _____
Net change in cash $( 11) $( 59) $ 48
_____ _____ _____
During 1998, net cash used for operating and investing activities was
$481 million. The higher level of net cash requirements in 1998 was
due primarily to the acquisition of Nelson, planned capital
expenditures ($271 million in 1998, compared to $405 million in 1997
and $304 million in 1996) for investments in new products and for
working capital. Net working capital as a percent of sales was 12.8
percent in 1998, compared to 11.6 percent in 1997. Investments in
joint ventures and alliances of $22 million reflected the net effect
of capital contributions and cash generated by certain joint ventures.
Net cash provided from financing activities was $471 million in 1998.
As disclosed in Note 6, 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 December 1997. Net
proceeds were used to finance the acquisition of Nelson and 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.
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
periodic basis.
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 10% adverse change in the foreign currency
exchange rates would decrease earnings by approximately $4 million.
This calculation does not reflect the impact of the gains and losses
in the underlying exposures that would be offset, in part, by the
results of the derivative instruments. The sensitivity analysis also
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 Company currently has in place an interest rate swap that
effectively converts fixed-rate debt into floating-rate debt. The
objective of the swap is to lower the cost of borrowed funds. A
hypothetical 100 basis-point increase in the floating interest rate
from the current level would correspond to a $2 million increase in
interest expense over a one-year period. This sensitivity analysis
does not account for the change in the Company's competitive
environment indirectly related to change in interest rates and the
potential managerial action taken in response to these changes.
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. The effect of a
hypothetical 10% depreciation of the underlying commodity price would
be a loss of approximately $5 million. This amount excludes the
offsetting impact of the price changes in commodity costs.
Forward-looking Statements
__________________________
This Management's Discussion and Analysis of Results of Operations and
Financial Condition and other sections of this Form 10-K contain
forward-looking statements that are based on current expectations,
estimates and projections about the industries in which Cummins
operates, management's beliefs and assumptions made by management.
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 and Schedule on page 23.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
_______ ____________________________________________________
None.
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 6, 1999 ("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, 1998 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 44 Vice President - Human Resources (1997 to
present), Vice President - General Counsel (1997)
Pamela F. Carter 49 Vice President - General Counsel and Secretary
(1997 to present)
C. Roberto Cordaro 48 Executive Vice President, Group President -
Automotive (1996 to present), Group Vice
President - Marketing (1990 to 1996)
John K. Edwards 54 Executive Vice President, Group President - Power
Generation and International (1996 to present),
Vice President - International (1989 to 1996)
Mark R. Gerstle 43 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 64 Chairman and Chief Executive Officer (1995 to
present), President & Chief Executive Officer
(1994 to 1995), President and Chief Operating
Officer (1977-1994)
M. David Jones 51 Vice President - Filtration Group and President,
Fleetguard, Inc. (1996 to present), Vice
President - Aftermarket Group (1989 to 1996)
F. Joseph Loughrey 49 Executive Vice President, Group President -
Industrial and Chief Technical Officer (1996 to
present), Group Vice President - Worldwide
Operations & Technology (1995 to 1996), Group
Vice President - Worldwide Operations (1990 to
1995)
Rick J. Mills 51 Vice President - Corporate Controller (1996
to present), Vice President Pacific Rim and
Latin America - Fleetguard, Inc. (1993 to 1996)
Kiran M. Patel 50 Vice President and Chief Financial Officer
(1996 to present), President - Fleetguard, Inc.
(1993 to 1996)
Theodore M. Solso 51 President and Chief Operating Officer (1995 to
present), Executive Vice President and Chief
Operating Officer (1994 to 1995), Executive Vice
President - Operations (1992 to 1994)
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 600
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.
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 and Schedule on page 23 for
a list of the financial statements filed as a part of this
report.
2. See Exhibit Index on page 44 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 1998.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
__________________________________________
Page
____
Responsibility for Financial Statements 24
Report of the Independent Public Accountants 24
Consolidated Statement of Earnings 25
Consolidated Statement of Financial Position 26
Consolidated Statement of Cash Flows 27
Consolidated Statement of Shareholders' Investment 28
Notes to Consolidated Financial Statements 29
Quarterly Financial Data 40
Valuation and Qualifying Accounts 41
RESPONSIBILITY FOR FINANCIAL STATEMENTS
_______________________________________
Management is responsible for the preparation of the Company's
consolidated financial statements and all related information
appearing in this Form 10-K. 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, 1998 and 1997, and the related
consolidated statements of earnings, cash flows and shareholders'
investment for each of the three years in the period ended December
31, 1998. 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, 1998 and
1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois,
January 26, 1999.
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF EARNINGS
__________________________________
Millions, except per share amounts 1998 1997 1996
__________________________________ ______ ______ ______
Net sales $6,266 $5,625 $5,257
Cost of goods sold 4,925 4,345 4,072
Special charges 92 - -
______ ______ ______
Gross profit 1,249 1,280 1,185
Selling & administrative expenses 787 744 725
Research & engineering expenses 255 260 252
Net expense (income) from joint
ventures and alliances 30 (10) -
Interest expense 71 26 18
Other income, net (13) (26) (24)
Restructuring and other
non-recurring charges 125 - -
_____ _____ _____
Earnings (loss) before income taxes (6) 286 214
Provision for income taxes 4 74 54
Minority interest 11 - -
_____ _____ _____
Net earnings (loss) $ (21) $ 212 $ 160
_____ _____ _____
Basic earnings (loss) per share $(.55) $5.55 $4.02
Diluted earnings (loss) per share (.55) 5.48 4.01
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
____________________________________________
Millions, except per share amounts December 31,
__________________________________ 1998 1997
______ ______
Assets
Current assets:
Cash and cash equivalents $ 38 $ 49
Receivables 833 771
Inventories 731 677
Other current assets 274 213
_____ _____
1,876 1,710
_____ _____
Investments and other assets:
Investments in joint ventures and alliances 136 204
Other assets 144 142
_____ _____
280 346
_____ _____
Property, plant and equipment:
Land and buildings 590 495
Machinery, equipment and fixtures 2,320 2,079
Construction in process 185 392
_____ _____
3,095 2,966
Less accumulated depreciation 1,424 1,434
_____ _____
1,671 1,532
_____ _____
Goodwill, net of amortization of $17 and $5 384 12
_____ _____
Other intangibles, deferred taxes and
deferred charges 331 165
______ ______
Total assets $4,542 $3,765
______ ______
Liabilities and shareholders' investment
Current liabilities:
Loans payable $ 64 $ 90
Current maturities of long-term debt 26 42
Accounts payable 340 386
Accrued salaries and wages 99 87
Accrued product coverage & marketing expenses 209 120
Income taxes payable 13 18
Other accrued expenses 320 312
_____ _____
1,071 1,055
_____ _____
Long-term debt 1,137 522
_____ _____
Other liabilities 1,000 713
_____ _____
Minority interest 62 53
_____ _____
Shareholders' investment:
Common stock, $2.50 par value, 48.1
shares issued 120 120
Additional contributed capital 1,121 1,119
Retained earnings 648 715
Accumulated other comprehensive income (167) ( 70)
Common stock in treasury,at cost,6.1 & 6.0 shares (240) (245)
Common stock held in trust for employee benefit
plans, 3.6 and 3.7 shares (172) (175)
Unearned compensation ( 38) ( 42)
_____ _____
1,272 1,422
_____ _____
Total liabilities & shareholders' investment $4,542 $3,765
______ ______
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
____________________________________
Millions 1998 1997 1996
________ ______ ______ ______
Cash flows from operating activities:
Net earnings (loss) $ (21) $ 212 $ 160
_____ _____ _____
Adjustments to reconcile net earnings (loss)
to net cash from operating activities:
Depreciation and amortization 199 158 149
Restructuring actions 110 ( 24) ( 42)
Equity in (earnings) losses of joint
ventures and alliances 38 ( 1) 11
Receivables (10) ( 80) ( 56)
Inventories (26) ( 65) ( 62)
Accounts payable and accrued expenses 56 ( 18) 28
Deferred income taxes (65) 22 17
Other (10) ( 4) ( 12)
____ ____ ____
Total adjustments 292 ( 12) 33
____ ____ ____
271 200 193
____ ____ ____
Cash flows from investing activities:
Property, plant and equipment:
Additions (271) (405) (304)
Disposals 7 21 26
Investments in joint ventures and alliances ( 22) ( 47) ( 5)
Acquisitions and dispositions of business
activities (468) 76 10
Other 2 1 14
____ ____ ____
(752) (354) (259)
____ ____ ____
Net cash used in operating and
investing activities (481) (154) ( 66)
____ ____ ____
Cash flows from financing activities:
Proceeds from borrowings 711 281 200
Payments on borrowings (161) ( 50) ( 47)
Net (payments) borrowings under credit
agreements ( 30) ( 12) 32
Repurchases of common stock ( 14) ( 75) ( 34)
Dividend payments ( 46) ( 45) ( 40)
Other 11 ( 3) ( 1)
____ ____ ____
471 96 110
____ ____ ____
Effect of exchange rate changes on cash ( 1) ( 1) 4
____ ____ ____
Net change in cash and cash equivalents ( 11) ( 59) 48
Cash & cash equivalents at beginning of year 49 108 60
____ ____ ____
Cash & cash equivalents at end of year $ 38 $ 49 $108
____ ____ ____
Cash payments during the year for:
Interest $ 56 $ 21 $ 16
Income taxes 73 42 40
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
__________________________________________________
Millions, except per share amounts 1998 1997 1996
__________________________________ ___________ __________ __________
Common stock:
Balance at beginning of year $ 120 $ 110 $ 110
Issued to trust for employee
benefit plans - 9 -
Other - 1 -
_____ _____ ____
Balance at end of year 120 120 110
_____ _____ ____
Additional contributed capital:
Balance at beginning of year 1,119 929 926
Issued to trust for employee
benefit plans - 171 -
Other 2 19 3
_____ _____ _____
Balance at end of year 1,121 1,119 929
_____ _____ _____
Retained earnings:
Balance at beginning of year 715 548 428
Net earnings (loss) (21) $(21) 212 $212 160 $160
___ ____ ___
Cash dividends (46) ( 45) (40)
____ ____ ____
Balance at end of year 648 715 548
____ ____ ____
Accumulated other comprehensive income:
Balance at beginning of year (70) (60) (95)
Foreign currency translation
adjustments (43) (21) 26
Minimum pension liability
adjustments (54) 12 9
Unrealized losses on securities - ( 1) -
___ ___ ___
Other comprehensive income (97) (97) (10) (10) 35 35
___ ___ ___ ___ __ ___
Comprehensive income $(118) $202 $195
____ ___ ___
Balance at end of year (167) (70) (60)
____ ___ ___
Common stock in treasury:
Balance at beginning of year (245) (169) (135)
Repurchased ( 14) ( 76) (34)
Issued 19 - -
_____ _____ _____
Balance at end of year (240) (245) (169)
_____ _____ _____
Common stock held in trust for
employee benefit plans:
Balance at beginning of year (175) - -
Issued - (180) -
Shares allocated to benefit plans 3 5 -
_____ _____ ______
Balance at end of year (172) (175) -
_____ _____ ______
Unearned compensation:
Balance at beginning of year ( 42) ( 46) (51)
Shares allocated to participants 4 4 5
______ ______ ______
Balance at end of year ( 38) ( 42) (46)
______ ______ ______
Shareholders' investment $1,272 $1,422 $1,312
______ ______ ______
Shares of stock
Common stock, $2.50 par value,
150.0 shares authorized
Balance at beginning of year 48.1 43.9 43.9
Shares issued - 4.2 -
____ ____ ____
Balance at end of year 48.1 48.1 43.9
____ ____ ____
Common stock in treasury
Balance at beginning of year 6.0 4.5 3.7
Shares repurchased .4 1.5 .8
Shares issued (.3) - -
___ ___ ___
Balance at end of year 6.1 6.0 4.5
___ ___ ___
Common stock held in trust for
employee benefit plans
Balance at beginning of year 3.7 - -
Shares issued - 3.8 -
Shares allocated to benefit plans (.1) ( .1) -
___ ____ ___
Balance at end of year 3.6 3.7 -
___ ____ ____
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________________________________
NOTE 1. ACCOUNTING POLICIES:
Principles of Consolidation: The consolidated financial statements
include all significant majority-owned subsidiaries. Affiliated
companies in which Cummins does not have a controlling interest, or
for which control is expected to be temporary, are accounted for using
the equity method. Use of estimates and assumptions as determined by
management is required in the preparation of consolidated financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates and
assumptions.
Revenue Recognition: The Company recognizes revenues on the sale of
its products, net of estimated costs of returns, allowances and sales
incentives, when the products are shipped to customers. The Company
generally sells its products on open account under credit terms
customary to the region of distribution. The Company performs ongoing
credit evaluations of its customers and generally does not require
collateral to secure its customers' receivables.
Foreign Currency: Assets and liabilities of foreign entities, where
the local currency is the functional currency, have been translated at
year-end exchange rates, and income and expenses have been translated
to US dollars at average-period rates. Adjustments resulting from
translation have been recorded in shareholders' investment and are
included in net earnings only upon sale or liquidation of the
underlying foreign investment.
For foreign entities where the US dollar is the functional currency,
including those operating in highly inflationary economies, inventory,
property, plant and equipment balances and related income statement
accounts have been translated using historical exchange rates. The
resulting gains and losses have been credited or charged to net
earnings.
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 8 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.
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 $228 million in 1998, $250 million
in 1997 and $235 million in 1996.
Maintenance and repair costs are charged to earnings as incurred.
Cash Equivalents: Cash equivalent include all highly liquid
investments with an original maturity of three months or less at time
of purchase.
Inventories: Inventories are generally stated at cost or net
realizable value. Approximately 25 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.
Inventories at December 31 were as follows:
$ Millions 1998 1997
__________ ____ ____
Finished products $400 $351
Work-in-process and raw materials 387 388
____ ____
Inventories at FIFO cost 787 739
Excess of FIFO over LIFO (56) (62)
____ ____
$731 $677
____ ____
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.
Software: Internal and external software costs (excluding research,
reengineering and training) are capitalized and amortized generally
over 5 years. Effective January 1, 1998, the Company adopted SOP 98-1
on accounting for internal use software costs. Internal software
costs capitalized in 1998 in accordance with this new rule were $9
million. Capitalized software, net of amortization, was $75 million
at December 31, 1998 and $32 million at December 31, 1997.
Earnings Per Share: Effective January 1, 1997, the Company adopted
SFAS No. 128, a new accounting rule on calculating earnings per share.
Under the new rule, 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. Years prior to 1997 have been restated to
reflect this new rule.
Net Weighted
Millions, except Earnings Average
per share amounts (Loss) Shares Per share
_________________ ________ ________ _________
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
____ ____ _____
1996
____
Basic $160 39.8 $4.02
Options - .1 _____
____ ____
Diluted $160 39.9 $4.01
____ ____ _____
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 Company believed it was necessary to
make these special charges to accrue for such product coverage costs
expected to be incurred in the future on these engines currently in
the field. The special charges also included $14 million for
inventory write-downs associated with the Company's restructuring and
exit activities. These write-downs relate to amounts of inventory
rendered excess or unusable due to the closing or consolidation of
facilities. The Company has committed to these facility closures and
consolidations as part of a plan to reduce costs and improve operating
performance.
NOTE 4. RESTRUCTURING AND OTHER NON-RECURRING CHARGES: In 1998, the
Company recorded charges of $125 million, comprised of $100 million
for costs to reduce the worldwide workforce, 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), the Department of Justice (DOJ)
and the California Air Resources Board (CARB) regarding diesel engine
emissions.
The major components of these charges are as follows:
$ Millions
__________
Restructuring of majority-owned operations:
Workforce reductions $ 38
Asset impairment loss 22
Facility consolidations and other 17
___
77
___
Restructuring of joint venture operations:
Workforce reductions 11
Tax asset impairment loss 7
Facility and equipment-related costs 5
___
23
___
EPA penalty 25
___
Total $125
___
The restructuring program was undertaken to address the decline in the
Company's business in Asia, to leverage overhead costs for all
operations and to improve joint venture operating performance.
The charges for majority-owned operations include $38 million for
severance and related costs associated with workforce reductions of
approximately 1,100 people. These reductions are in the engine and
power generation businesses and are primarily for administrative
positions. Costs for workforce reductions were based on amounts
pursuant to benefit programs and contractual provisions or statutory
requirements at the affected operations. Approximately one-half of
these employees left the Company prior to December 31, 1998.
The asset impairment loss, calculated according to the provisions of
SFAS 121, was recorded primarily for engine manufacturing equipment to
be disposed of upon the closure or consolidation of facilities or the
outsource of production. The recovery value for the equipment to be
disposed of was based on estimated liquidation value. The carrying
value of assets held for disposal and the effect on earnings from
suspending depreciation on such assets is immaterial.
Facility consolidation and other costs of $17 million include lease
termination and facility exit costs of $10 million, product support
costs of $3 million and litigation and other costs of $4 million. As
the restructuring consists primarily of the closing or consolidation
of smaller operations, the Company does not expect these actions to
have a material effect on future revenues.
The charges for restructuring joint venture operations totaled $23
million, the majority of which relates to actions being taken at the
Company's joint venture with Wartsila, which is part of the Company's
power generation business. The charges include $11 million for
employee severance and related benefits for approximately 1,200
people, $7 million for a tax asset impairment loss and $5 million for
other facility and equipment-related charges.
Approximately $25 million, primarily related to employee severance,
has been charged to the restructuring liabilities as of December 31,
1998. Of the total charges associated with restructuring activities,
cash outlays will approximate $60 million. The program is expected to
be essentially complete by the end of 1999 and yield approximately $50
million in annual savings at completion.
In addition to the civil penalty, the agreement with the EPA/DOJ/CARB
provides a schedule for diesel engines to meet certain emission
standards and requires manufacturers to continue to invest in
environmental projects to further reduce oxides of nitrogen (NOx)
emissions. The Company has developed extensive corporate action plans
to comply with all aspects of the agreement. Additionally, three
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. A California
State Court recently ruled in favor of the Company. A recent action
was just filed in the U.S. District Court, the District of Columbia.
NOTE 5. INVESTMENTS IN JOINT VENTURES AND ALLIANCES: Investments in
joint ventures and alliances at December 31 were as follows:
$ Millions 1998 1997
__________ ____ ____
Consolidated Diesel $ 39 $ 32
Tata Cummins 22 16
Komatsu alliances 17 10
Chongqing Cummins 15 16
Behr America, Inc. 14 14
Dong Feng 8 7
Cummins Wartsila (6) 88
Other 27 21
____ ____
$136 $204
____ ____
Net sales of the joint ventures and alliances were $1.2 billion in
1998 and $1.3 billion in 1997 and 1996. Summary balance sheet
information for the joint ventures and alliances was as follows:
December 31,
$ Millions 1998 1997
__________ ____ ____
Current assets $527 $447
Noncurrent assets 613 533
Current liabilities (406) (258)
Noncurrent liabilities (455) (305)
____ ____
Net assets $279 $417
____ ____
Cummins' share $136 $204
____ ____
The Company has guaranteed $79 million in outstanding debt of the
Cummins Wartsila joint venture as of December 31, 1998.
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 $535
million in 1998 and $538 million in 1997.
NOTE 6. LONG-TERM DEBT: Long-term debt at December 31 was:
$ Millions 1998 1997
__________ ____ ____
7.125% debentures due 2028 $249 $ -
6.45% notes due 2005 224 -
Commercial paper 142 242
5.65% debentures due 2098, net
of unamortized discount of $40
(effective interest rate 7.48%) 125 -
6.25% notes due 2003 125 -
6.75% debentures due 2027 120 120
8.2% notes through 2003 79 96
Guaranteed notes of ESOP Trust due 2010 63 65
10.35%-10.65% medium-term notes through 1998 - 14
Other 36 27
_____ ____
Total 1,163 564
Current maturities (26) (42)
______ ____
Long-term debt $1,137 $522
______ ____
Maturities of long-term debt for the five years subsequent to December
31, 1998 are $26 million, $26 million, $25 million, $27 million and
$141 million. At both December 31, 1998 and 1997, the weighted-
average interest rate on loans payable and current maturities of long-
term debt approximated 7 percent.
The Company maintains a $500 million revolving credit agreement,
maturing in 2003, under which there were no outstanding borrowings at
December 31, 1998 or 1997. 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 pay down other indebtedness outstanding at
December 31, 1997. The Company also has other domestic and
international credit lines with approximately $193 million available
at December 31, 1998.
In 1997, the Company issued $120 million of 6.75 percent debentures
that mature in 2027. Holders have a one-time option in 2007 to redeem
the debentures and Cummins has a recall right after ten years.
The Company has guaranteed the outstanding borrowings of its ESOP
Trust. The notes were refinanced in July 1998. 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 7. OTHER LIABILITIES: Other liabilities at December 31 included
the following:
$ Millions 1998 1997
__________ ____ ____
Accrued retirement & post-employment benefits $720 $487
Accrued product coverage & marketing expenses 156 111
Accrued compensation 38 34
Deferred income taxes 17 25
Other 69 56
______ ____
$1,000 $713
______ ____
NOTE 8. 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, 1998, and December 31, 1997, were $174
million and $257 million, respectively.
Interest Rates
The Company manages its exposure to interest rate fluctuations through
the use of interest rate swaps. Currently the Company has in place
one interest rate swap that effectively converts fixed-rate debt into
floating-rate debt. The objective of this swap is to lower the cost
of borrowed funds. The contract was established during October 1998
with a notional value of $225 million. There were no interest rate
swap contracts outstanding at December 31, 1997.
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, 1998,
approximated $1,214 million. The carrying value at that date was
$1,227 million. At December 31, 1997, the fair and carrying values of
total debt, including current maturities, were $664 and $654 million,
respectively. The carrying values of all other receivables and
liabilities approximated fair values.
NOTE 9. INCOME TAXES: The provision for income taxes was as follows:
$ Millions 1998 1997 1996
_____________ ____ ____ ____
Current:
U.S. Federal and state $16 $16 $22
Foreign 41 32 15
__ __ __
57 48 37
__ __ __
Deferred:
U.S. Federal and state (34) 26 -
Foreign (19) - 17
__ __ __
(53) 26 17
___ ___ __
$ 4 $74 $54
___ ___ ___
The Company expects to realize all of its tax assets, including the
use of all carryforwards, before any expiration.
Significant components of net deferred tax assets related to the
following tax effects of differences between financial and tax
reporting at December 31:
$ Millions 1998 1997
__________ ____ ____
Employee benefit plans $300 $266
Product coverage & marketing expenses 106 64
Restructuring charges 14 9
US plant & equipment (176) (139)
Net foreign taxable differences, primarily plant
and equipment 6 ( 23)
US Federal carryforward benefits:
General business tax credits, expiring 2009 to 2013 43 31
Minimum tax credits, no expiration 12 10
Other net differences 12 13
____ ____
$317 $231
____ ____
Balance Sheet Classification
____________________________
Current assets $203 $129
Noncurrent assets 131 127
Noncurrent liabilities (17) (25)
____ ____
$317 $231
____ ____
Earnings before income taxes and differences between the effective tax
rate and US Federal income tax rates were:
$ Millions 1998 1997 1996
__________ ____ ____ ____
Earnings (loss) before income taxes:
US $(21) $205 $134
Foreign 15 81 80
____ ____ ____
$( 6) $286 $214
____ ____ ____
Tax at 35 percent US statutory rate $( 2) $100 $ 75
Nondeductible EPA penalty 9 - -
Nondeductible goodwill amortization 3 - -
Research tax credits (10) (11) ( 6)
Foreign sales corporation benefits ( 9) (11) (11)
Differences in rates and taxability of
foreign subsidiaries 15 ( 3) -
All other, net ( 2) ( 1) ( 4)
____ ____ ____
$ 4 $ 74 $(54)
____ ____ ____
NOTE 10. RETIREMENT PLANS: The Company has various contributory and
noncontributory pension plans covering substantially all employees.
Cummins common stock represented 9 percent of pension plan assets at
December 31, 1998.
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 $1,296 million, $1,251
million, and $999 million, respectively as of December 31, 1998, and
$418 million, $381 million, and $339 million, respectively, as of
December 31, 1997. The assumed long-term rate of compensation
increase for salaried plans was 4.25% in 1998 and 5.00% in 1997.
Other significant assumptions for the Company's principal plans were:
Pension Other
Benefits Benefits
1998 1997 1998 1997
____ ____ ____ ____
Weighted-average discount rate 6.5% 7.5% 6.5% 7.5%
Long-term rate of return on plan assets 10.0% 10.0%
For measurement purposes a 7% annual increase in health care costs was
assumed for 1999, decreasing gradually to 4.25% in ten years and
remaining constant thereafter.
Increasing the health care cost trend rate by one percent would
increase the obligation by $42 million and annual expense by $3
million. Decreasing the health care cost trend rate by one percent
would decrease the obligation by $38 million and annual expense by $3
million.
The Company's net periodic benefit cost under these plans was as follows:
Pension Benefits Other Benefits
$ Millions 1998 1997 1996 1998 1997 1996
____________ ____ ____ ____ ____ ____ ____
Service cost $ 47 $ 41 $ 45 $ 8 $ 8 $ 9
Interest cost 123 115 104 40 41 36
Expected return on plan
assets (153) (134) (116) - - -
Amortization of transition
asset ( 4) ( 9) ( 9) - - -
Other 12 13 16 4 9 10
____ ____ ____ ____ ____ ____
$ 25 $ 26 $ 40 $ 52 $ 58 $ 55
____ ____ ____ ____ ____ ____
Pension Benefits Other Benefits
$ Millions 1998 1997 1998 1997
__________ ______ ______ ______ ______
Change in benefit obligation:
Benefit obligation at beginning of year $1,693 $1,491 $ 596 $ 545
Service cost 47 41 8 8
Interest cost 123 115 44 41
Plan participants' contributions 7 6 1 1
Amendments 2 4 - -
Experience (gain) loss 161 128 20 26
Benefits paid (123) ( 96) ( 29) ( 25)
Other ( 3) 4 - -
_____ _____ _____ _____
Benefit obligation at end of year $1,907 $1,693 $ 640 $ 596
_____ _____ _____ _____
Change in plan assets:
Fair value of plan assets at
beginning of year $1,905 $1,555 $ - $ -
Actual return on plan assets (129) 414 - -
Employer contribution 34 23 28 24
Plan participants' contributions 7 6 1 1
Benefits paid (123) ( 96) ( 29) ( 25)
Other ( 2) 3 - -
_____ _____ _____ _____
Fair value of plan assets at end of
year $1,692 $1,905 $ - $ -
_____ _____ _____ _____
Funded status $ (215) $ 212 $ (640) $ (596)
Unrecognized:
Experience (gain) loss (a) 172 (269) 80 62
Prior service cost (b) 55 63 ( 11) ( 12)
Transition asset (c) ( 7) ( 11) - -
_____ _____ _____ _____
Net amount recognized $ 5 $ ( 5) $ (571) $ (546)
_____ _____ _____ _____
Amounts recognized in the statement
of financial position:
Prepaid benefit cost $ 50 $ 9 $ - $ -
Accrued benefit liability (232) ( 14) (571) (546)
Intangible asset 104 - - -
Accumulated other comprehensive income 83 - - -
_____ _____ _____ _____
Net amount recognized $ 5 $ ( 5) $ (571) $ (546)
_____ _____ _____ _____
(a) The net deferred gain (loss) resulting from investments, other
experience and changes in assumptions.
(b) The prior service effect of plan amendments deferred for
recognition over remaining service.
(c) The balance of the initial difference between assets and
obligations deferred for recognition over a 15-year period.
NOTE 11. COMMON STOCK: The Company increased its quarterly common
stock dividend from 25 cents per share to 27.5 cents, effective with
the dividend payment in June 1997.
In 1998, the Company repurchased 0.4 million shares on the open market
at an aggregate purchase price of $14 million. 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. The Company repurchased 0.8 million shares on the open
market at an aggregate purchase price of $34 million in 1996. 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 12. 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 13. 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, 1998, there were no shares of common stock available for
grant and 1,234,875 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, 1995 1,183,275 $38.45
Granted 394,150 40.13
Exercised (47,475) 32.43
Cancelled (19,800) 41.00
_________
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
_________
Options outstanding at December 31, 1998, have exercise prices between
$15.94 and $79.81 and a weighted-average remaining life of 8 years.
The weighted-average fair value of options granted was $18.61 per
share in 1998 and $14.94 per share in 1997. The fair value of each
option was estimated on the date of grant using a risk-free interest
rate of 5.6 percent in 1998 and 6.4 percent in 1997, 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, 1996, would have had no material effect on results of
operations.
NOTE 14. COMPREHENSIVE INCOME: Effective January 1, 1998, the
Company adopted SFAS No. 130, a new accounting rule which requires
companies to report 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
Adjustments Securities Adjustments Income
___________ __________ ___________ ______
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)
____ ___ ____ _____
1996
____
Pre-tax amount $ 26 $ - $ 9 $ 35
Tax (expense) benefit - - - -
____ ___ ____ _____
Net amount $ 26 $ - $ 9 $ 35
____ ___ ____ _____
The components of accumulated other comprehensive income are as follows:
Accumu-
lated
Foreign Minimum Other
Currency Unrealized Pension Compre-
Translation Losses on Liability hensive
Adjustments Securities Adjustments Income
___________ __________ ___________ ______
Balance at 12/31/95 $( 73) $ - $(22) $( 95)
Change in 1996 26 - 9 35
_____ ___ ____ _____
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)
_____ ___ ____ _____
NOTE 15. SEGMENTS OF THE BUSINESS: Effective for 1998 annual
reporting, the Company adopted SFAS No. 131 on segment reporting.
Under the provisions of the new standard, Cummins has three reportable
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. The filtration and other segment includes sales of
filtration products and exhaust systems, turbochargers and company-
owned distributors.
The Company's reportable 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, and, therefore, no
allocation of debt-related items and income taxes is made to the
individual segments.
Operating segment information is as follows:
Power Filtration
1998 Engine Generation and Other Total
____ ______ __________ ___________ ______
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 special
charges 136 25 121 282
Special 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
1996
____
Net sales $3,310 $1,213 $ 734 $5,257
Depreciation & amortization 97 31 21 149
Income (expense) from joint
ventures and alliances ( 2) 2 - -
Earnings before interest and
income taxes 160 14 58 232
Net assets 784 459 249 1,492
Investment in joint
ventures and alliances 114 89 4 207
Capital expenditures 242 44 18 304
Reconciliation to Consolidated Financial Statements:
1998 1997 1996
______ ______ ______
Earnings before interest & income
taxes for reportable segments $ 65 $ 312 $ 232
Interest expense 71 26 18
Income tax expense 4 74 54
Minority interest 11 - -
______ ______ ______
Net earnings (loss) $ (21) $ 212 $ 160
______ ______ ______
Net assets for reportable segments $2,260 $1,917 $1,492
Liabilities deducted in arriving
at net assets 1,926 1,583 1,586
Deferred tax assets not allocated
to segments 334 256 284
Debt-related costs not allocated
to segments 22 9 7
______ ______ ______
Total assets $4,542 $3,765 $3,369
______ ______ ______
Summary geographic information is listed below:
$ Millions US UK Canada Other Total
__________ ______ ______ ______ ______ ______
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
1996
____
Net sales (a) $2,925 $ 348 $ 313 $1,671 $5,257
Long-lived assets $1,201 $ 200 $ - $ 211 $1,612
(a) Net sales are attributed to countries based on location of customer.
Revenues from the Company's largest customer represent approximately
$1.1 billion of the Company's net sales in 1998. These sales are
included in the engine and filtration and other segments.
NOTE 16. GUARANTEES, COMMITMENTS AND OTHER CONTINGENCIES: At
December 31, 1998, the Company had the following minimum rental
commitments for noncancelable operating leases: $41 million in 1999,
$38 million in 2000, $30 million in 2001, $25 million in 2002, $21
million in 2003 and $46 million thereafter. Rental expense under
these leases approximated $70 million in 1998, $60 million in 1997 and
$55 million in 1996.
Commitments under outstanding letters of credit, guarantees and
contingencies at December 31, 1998, approximated $195 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
and uninsured 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. The Company denies
liability with respect to many of these legal actions and
environmental proceedings and vigorously is defending such actions or
proceedings. The Company has established reserves that it believes
are adequate for its expected future liability in such actions and
proceedings where the nature and extent of such liability can be
estimated reasonably based upon presently available information.
NOTE 17. QUARTERLY FINANCIAL DATA (unaudited):
$ Millions, except First Second Third Fourth Full
per share amounts Quarter Quarter Quarter Quarter Year
__________________ _______ _______ _______ _______ ______
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)
1997
____
Net sales $1,304 $1,396 $1,366 $1,559 $5,625
Gross profit 286 324 309 361 1,280
Net earnings 41 53 54 64 212
Basic earnings per share $ 1.07 $ 1.40 $ 1.41 $ 1.69 $ 5.55
Diluted earnings per share 1.06 1.38 1.38 1.66 5.48
Earnings per share for the first three quarters of 1997 have been restated to
reflect the adoption of SFAS No. 128 as disclosed in Note 1.
CUMMINS ENGINE COMPANY, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
_________________________________
(Dollars in Millions)
1995 Restructuring Cost Liabilities: 1998 1997 1996
____________________________________ ____ ____ ____
Balance at beginning of year $ 35 $ 65 $114
Additions:
Provisions - - -
Deductions:
Charges against liabilities (35) (30) (49)
____ ____ ____
Balance at end of year $ - $ 35 $ 65
____ ____ ____
1998 Restructuring Cost Liabilities:
____________________________________
Balance at beginning of year $ - $ - $ -
Additions:
Provisions 114 - -
Deductions:
Charges against liabilities (25) - -
____ ____ ____
Balance at end of year $ 89 $ - $ -
____ ____ ____
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. J. Mills
________________________ _________________
K. M. Patel R. J. Mills
Vice President and Chief Vice President -
Financial Officer Corporate Controller
(Principal Financial (Principal Accounting
Officer) Officer)
Date: March 1, 1999
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 of the Board 3/1/99
* of Directors & Chief Executive
_____________________ Officer (Principal Executive Officer)
(James A. Henderson)
* Director and President & Chief 3/1/99
_____________________ Operating Officer
(Theodore M. Solso)
* 3/1/99
_____________________ Director
(Harold Brown)
*
_____________________ Director 3/1/99
(Robert J. Darnall)
*
_____________________ Director 3/1/99
(John M. Deutch)
*
_____________________ Director 3/1/99
(W. Y. Elisha)
*
_____________________ Director 3/1/99
(Hanna H. Gray)
*
_____________________ Director 3/1/99
(James A. Johnson)
*
_____________________ Director 3/1/99
(William I. Miller)
*
_____________________ Director 3/1/99
(Donald S. Perkins)
*
________________________ Director 3/1/99
(William D. Ruckelshaus)
*
_____________________ Director 3/1/99
(H. B. Schacht)
*
_____________________ Director 3/1/99
(F. A. Thomas)
*
_____________________ Director 3/1/99
(J. Lawrence Wilson)
By /s/K. M. Patel
________________
K. M. Patel
Attorney-in-fact
CUMMINS ENGINE COMPANY, INC.
EXHIBIT INDEX
____________________________
3(a) Restated Articles of Incorporation of Cummins Engine Company,
Inc., as amended (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended April 3, 1994, by
reference to Quarterly Report on Form 10-Q for the quarter
ended October 1, 1989 and by reference to Form 8-K dated
July 26, 1990).
3(b) By-laws of Cummins Engine Company, Inc., as amended and
restated effective as of August 12, 1994 (incorporated
by reference to Quarterly Report on Form 10-Q for the quarter
ended October 2, 1994).
4(a) Amended and Restated Credit Agreement (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended March 29, 1998).
4(b) Rights Agreement, as amended (incorporated by reference to
Annual Report on Form 10-K for the year ended December 31,
1989, by reference to Form 8-K dated July 26, 1990, by
reference to Form 8 dated November 6, 1990, by reference to
Form 8-A/A dated November 1, 1993, and by reference to
Form 8-A/A dated January 12, 1994 and by reference to
Form 8-A/A dated July 15, 1996).
10(a) Target Bonus Plan (incorporated by reference to Annual Report
on Form 10-K for the year ended December 31, 1996).
10(b) Deferred Compensation Plan (incorporated by reference to
Annual Report on Form 10-K for the year ended December 31,
1994).
10(c) Key Employee Stock Investment Plan, as amended (incorporated
by reference to Quarterly Report on Form 10-Q for the quarter
ended July 3, 1994).
10(d) Supplemental Life Insurance and Deferred Income Plan
(incorporated by reference to Annual Report on Form 10-K for
the year ended December 31, 1996).
10(e) Financial Counseling Program, (incorporated by reference to
Quarterly Report on Form 10-Q for the quarter ended
July 3, 1994).
10(f) 1986 Stock Option Plan (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended March 30, 1986,
Exhibit 10(g)).
10(g) Deferred Compensation Plan for Non-Employee Directors, as
amended, effective as of April 15, 1994 (incorporated by
reference to Annual Report on Form 10-K for the year ended
December 31, 1994).
10(h) Key Executive Compensation Protection Plan (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended October 2, 1994).
10(i) Excess Benefit Retirement Plan, (incorporated by reference to
Quarterly Report on Form 10-Q for the quarter ended October 2,
1994).
10(j) Employee Stock Purchase Plan (filed herewith)
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).
10(u) Guarantees of Perpetual Loan Facility of Cummins Finance
Limited dated January 31, 1996 with the Toronto Dominion Bank,
The Bank of New York and Societe Generale (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996, Exhibit 10(y)).
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).