UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
CUMMINS ENGINE COMPANY, INC.
____________________________
For the Quarter Ended June 27, 1999 Commission File Number 1-4949
_____________ ______
Indiana 35-0257090
_______ __________
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
500 Jackson Street, Box 3005,
____________________________
Columbus, Indiana 47202-3005
_________________ __________
(Address of Principal Executive Offices) (Zip Code)
812-377-5000
____________
(Registrant's Telephone Number)
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 proceeding 12 months and (2) has been
subject to such filing requirements for the past 90 days:
Yes [x]
No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date:
As of June 27, 1999, the number of shares outstanding of the
registrant's only class of common stock was 41.9 million.
<PAGE> 2
TABLE OF CONTENTS
_________________
Page No.
________
PART I. FINANCIAL INFORMATION
______________________________
Item 1. Financial Statements
Consolidated Statement of Earnings for the Second 3
Quarter and First Half Ended June 27, 1999 and
June 28, 1998
Consolidated Statement of Financial Position at 4
June 27, 1999 and December 31, 1998
Consolidated Statement of Cash Flows for the First 5
Half Ended June 27, 1999 and June 28, 1998
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of 9
Operations, Cash Flow and Financial Condition
PART II. OTHER INFORMATION
___________________________
Item 6. Exhibits and Reports on Form 8-K 14
Index to Exhibits 15
<PAGE> 3
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF EARNINGS
FOR THE SECOND QUARTER AND FIRST HALF
ENDED JUNE 27, 1999 AND JUNE 28, 1998
Unaudited
_____________________________________
Second Quarter First Half
________________ ________________
Millions, except per share amounts 1999 1998 1999 1998
__________________________________ ______ ______ ______ ______
Net sales $1,667 $1,635 $3,172 $3,135
Cost of goods sold 1,296 1,266 2,500 2,426
Special charge - - - 43
______ ______ ______ ______
Gross profit 371 369 672 666
Selling & administrative expenses 200 199 378 401
Research & engineering expenses 60 65 114 132
Net expense from joint ventures
and alliances 5 6 12 10
Interest expense 19 18 38 35
Other expense (income), net 3 - 10 (7)
______ ______ ______ ______
Earnings before income taxes 84 81 120 95
Provision for income taxes 25 24 35 28
Minority interest 1 4 3 7
______ ______ ______ ______
Net earnings $ 58 $ 53 $ 82 $ 60
______ ______ ______ ______
______ ______ ______ ______
Basic earnings per share $ 1.51 $ 1.39 $ 2.14 $ 1.57
Diluted earnings per share 1.50 1.38 2.13 1.55
Cash dividends declared per share .275 .275 .55 .55
<PAGE> 4
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Unaudited
____________________________________________
Millions, except per share amounts 6/27/99 12/31/98
__________________________________ _______ ________
Assets
Current assets:
Cash and cash equivalents $ 67 $ 38
Receivables 1,015 833
Inventories 760 731
Other current assets 274 274
______ ______
2,116 1,876
Investments and other assets 303 280
Property, plant & equipment less accumulated
depreciation of $1,469 and $1,424 1,626 1,671
Goodwill, net of amortization of $24 and $17 380 384
Other intangibles, deferred taxes and deferred
charges 345 331
______ ______
Total assets $4,770 $4,542
______ ______
______ ______
Liabilities and shareholders' investment
Current liabilities:
Loans payable $ 54 $ 64
Current maturities of long-term debt 26 26
Accounts payable 415 340
Other current liabilities 751 641
______ ______
1,246 1,071
______ ______
Long-term debt 1,118 1,137
______ ______
Other liabilities 1,008 1,000
______ ______
Minority interest 71 62
______ ______
Shareholders' investment:
Common stock, $2.50 par value, 48.2 and 48.1
shares issued 121 120
Additional contributed capital 1,124 1,121
Retained earnings 707 648
Accumulated other comprehensive income (173) (167)
Common stock in treasury, at cost, 6.3 and 6.1
shares (250) (240)
Common stock held in trust for employee benefit
plans, 3.5 and 3.6 shares (167) (172)
Unearned compensation (ESOP) ( 35) ( 38)
_____ _____
1,327 1,272
______ ______
Total liabilities and shareholders' investment $4,770 $4,542
______ ______
______ ______
<PAGE> 5
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
____________________________________
First Half Ended
______________________
Millions 6/27/99 6/28/98
________ _______ _______
Cash flows from operating activities:
Net earnings $ 82 $ 60
____ ____
Adjustments to reconcile net earnings
to net cash from operating activities:
Depreciation and amortization 114 98
Restructuring actions ( 11) ( 11)
Accounts receivable (188) (165)
Inventories ( 28) ( 48)
Accounts payable and accrued expenses 200 115
Income taxes payable 8 ( 6)
Equity in losses of joint ventures and
alliances 16 16
Other ( 10) 17
____ ____
Total adjustments 101 16
____ ____
Net cash provided by operating activities 183 76
____ ____
Cash flows from investing activities:
Property, plant and equipment:
Additions ( 80) (154)
Disposals 21 4
Investments in joint ventures and alliances ( 37) ( 6)
Acquisition and disposition of businesses 3 (466)
Other 2 1
____ ____
Net cash used in investing activities ( 91) (621)
____ ____
Net cash flows provided by (used in)
operating and investing activities 92 (545)
____ ____
Cash flows from financing activities:
Proceeds from borrowings - 711
Payments on borrowings ( 17) (117)
Net payments under credit agreements ( 10) ( 37)
Repurchases of common stock ( 10) -
Dividend payments ( 23) ( 23)
Other ( 3) 3
____ ____
Net cash (used in) provided by
financing activities ( 63) 537
____ ____
Effect of exchange rate changes on cash - ( 1)
____ ____
Net change in cash and cash equivalents 29 ( 9)
Cash & cash equivalents at beginning of the year 38 49
____ ____
Cash & cash equivalents at end of the first half $ 67 $ 40
____ ____
____ ____
<PAGE> 6
CUMMINS ENGINE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
__________________________________________
Note 1. Accounting Policies: The Consolidated Financial Statements
for the interim periods ended June 27, 1999 and June 28, 1998 have been
prepared in accordance with the accounting policies described in the
Company's Annual Report to Shareholders and Form 10-K. Management
believes the statements include all adjustments of a normal recurring
nature necessary to present fairly the results of operations for the
interim periods. Inventory values at interim reporting dates are based
upon estimates of the annual adjustments for taking physical inventory
and for the change in cost of LIFO inventories.
Note 2. Acquisition: In January 1998, Cummins 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. 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 Charge: In the first quarter of 1998, the Company
recorded a special charge for product coverage expense primarily
attributable to the recent experience of higher-than-anticipated costs
to repair certain automotive engines manufactured in previous years.
The Company believes it was necessary to make a special charge of $43
million pre-tax to accrue for such product coverage costs expected to
be incurred in the future on these engines currently in the field.
Note 4. Income Taxes: Income tax expense is reported during the
interim reporting periods on the basis of the estimated annual
effective tax rate for the taxable jurisdictions in which the Company
operates.
Note 5. Long-term Debt: In February 1998, the Company issued $765
million face amount of notes and debentures. Net proceeds were used to
finance the acquisition of Nelson and pay down other indebtedness
outstanding at December 31, 1997.
NOTE 6. Earnings per Share: Basic earnings per share of common stock
are computed by dividing net earnings by the weighted-average number of
common shares outstanding during 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. Shares of
stock held by the employee benefits trust are not included in
outstanding shares for EPS until distributed from the trust.
Second Quarter
________________________________
Weighted Per-
Net Average Share
Millions, except per share amounts Earnings Shares Amount
__________________________________ ________ ________ ______
1999
____
Basic $58 38.5 $1.51
Options - .2
___ ____
Diluted $58 38.7 $1.50
___ ____
___ ____
1998
____
Basic $53 38.5 $1.39
Options - .3
___ ____
Diluted $53 38.8 $1.38
___ ____
___ ____
First Half
________________________________
Weighted Per-
Net Average Share
Millions, except per share amounts Earnings Shares Amount
__________________________________ ________ ________ ______
1999
____
Basic $82 38.5 $2.14
Options - .2
___ ____
Diluted $82 38.7 $2.13
___ ____
___ ____
1998
____
Basic $60 38.5 $1.57
Options - .3
___ ____
Diluted $60 38.8 $1.55
___ ____
___ ____
<PAGE> 7
Note 7. Comprehensive Income: Comprehensive income, which includes
net income and all other nonowner changes in equity during a period, is
as follows:
Second Quarter Ended
Millions June 27, 1999 June 28, 1998
________ _____________ _____________
Net income $ 58 $ 53
Unrealized gain (loss) on
securities, net of tax - ( 1)
Translation loss, net of tax (7) (33)
____ ____
Comprehensive income $ 51 $ 19
____ ____
____ ____
First Half Ended
Millions June 27, 1999 June 28, 1998
________ _____________ _____________
Net income $ 82 $ 60
Unrealized gain (loss) on
securities, net of tax 1 ( 1)
Translation loss, net of tax (7) (52)
____ ____
Comprehensive income $ 76 $ 7
____ ____
____ ____
Note 8. Segment Information: Operating segment information is as
follows:
Power Filtration
Millions Engine Generation And Other Total
________ ______ __________ __________ ______
Second Quarter Ended June 27, 1999
__________________________________
Net sales $1,095 $305 $267 $1,667
Earnings before interest and
income taxes 59 11 33 103
Net assets 974 509 815 2,298
Second Quarter Ended June 28, 1998
__________________________________
Net sales $1,049 $313 $273 $1,635
Earnings before interest and
income taxes 56 10 33 99
Net assets 1,191 534 809 2,534
First Half Ended June 27, 1999
______________________________
Net sales $2,095 $556 $521 $3,172
Earnings before interest and
income taxes 86 13 59 158
First Half Ended June 28, 1998
______________________________
Net sales $2,002 $604 $529 $3,135
Earnings before interest,
income taxes & special charges 104 12 57 173
Special charges 43 - - 43
Earnings before interest and
income taxes 61 12 57 130
Reconciliation to Consolidated Financial Statements:
Second Quarter Ended
Millions 6/27/99 6/28/98
________ _______ _______
Earnings before interest and income taxes
for reportable segments $ 103 $ 99
Interest expense 19 18
______ ______
Earnings before income taxes $ 84 $ 81
______ ______
______ ______
Net assets for reportable segments $2,298 $2,534
Liabilities deducted in arriving at net assets 2,116 1,716
Deferred tax assets not allocated to segments 334 256
Debt-related costs not allocated to segments 22 22
______ ______
Total assets $4,770 $4,528
______ ______
______ ______
First Half Ended
Millions 6/27/99 6/28/98
________ _______ _______
Earnings before interest and income taxes
for reportable segments $ 158 $ 130
Interest expense 38 35
______ ______
Earnings before income taxes $ 120 $ 95
______ ______
______ ______
<PAGE> 8
Note 9. Investments to Joint Ventures and Alliances: Summary financial
information for the joint ventures and alliances was as follows:
Year Ended December 31
______________________
$ Millions 1998 1997 1996
__________ ______ ______ ______
Net sales $1,245 $1,307 $1,328
Gross profit 25 111 84
Net earnings (loss) (105) 5 3
Cummins' share ( 52) 2 2
Current assets $ 527 $ 447
Noncurrent assets 613 533
Current liabilities (406) (258)
Noncurrent liabilities (455) (305)
______ ______
Net assets $ 279 $ 417
______ ______
______ ______
Cummins' share $ 136 $ 204
______ ______
______ ______
Note 10. Restructuring and Other Non-Recurring Charges: The Company is
continuing the restructuring plan implemented in the third quarter of 1998.
As of June 27, 1999, approximately $60 million has been charged against the
liabilities associated with these actions. The Company does not currently
anticipate any material changes in the original charges recorded for these
actions. Activity in the major components of these charges is as follows:
Charges
__________________
Original Q1 Q2 Balance
$ Millions Provision 1998 1999 1999 6/27/99
__________ _________ _____ _____ _____ _______
Restructuring of majority-owned
operations:
Workforce reductions $ 38 $(12) $( 5) $( 5) $16
Asset impairment loss 22 - ( 1) ( 4) 17
Facility consolidations & other 17 ( 8) ( 2) - 7
____ ____ ____ ____ ___
77 (20) ( 8) ( 9) 40
____ ____ ____ ____ ___
Restructuring of joint venture
operations:
Workforce reductions $ 11 $ - $ - $( 2) $ 9
Tax asset impairment loss 7 - - ( 7) -
Facility & equipment-related costs 5 - - - 5
____ ____ ____ ____ ___
23 - - ( 9) 14
____ ____ ____ ____ ___
Inventory write-downs associated
with exit activities 14 ( 5) ( 4) ( 5) -
____ ____ ____ ____ ___
Total $114 $(25) $(12) $(23) $54
____ ____ ____ ____ ___
____ ____ ____ ____ ___
<PAGE> 9
CUMMINS ENGINE COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS, CASH FLOW AND FINANCIAL CONDITION
________________________________________________________
Overview
________
Net sales were a record $1.67 billion in the second quarter of 1999, 2
percent higher than the second quarter of 1998. Earnings before
interest and taxes in the second quarter of 1999 were also a record,
totaling $103 million or 6.2 percent of sales. Net earnings were $58
million or $1.50 per share compared to $53 million or $1.38 per share
in the second quarter of 1998. Net earnings for the first half of 1999
were $82 million or $2.13 per share compared to $60 million or $1.55
per share in the first half of 1998.
Results of Operations
_____________________
Net Sales:
__________
Revenues from sales of engines were 56 percent of the Company's net
sales in the second quarter of 1999, with engine revenues 3 percent
higher than second-quarter 1998 and unit shipments 2 percent higher.
Revenue increased more than unit shipments due to higher heavy-duty
engine sales, primarily in the North American heavy-duty truck market.
Second Quarter First Half
_______________ ________________
Unit Shipments 1999 1998 1999 1998
______________ ______ ______ _______ _______
Midrange Engines 76,600 77,300 150,300 142,300
Heavy-duty Engines 30,600 27,400 57,400 54,300
High-horsepower Engines 2,200 2,700 4,200 4,900
_______ _______ _______ _______
109,400 107,400 211,900 201,500
_______ _______ _______ _______
_______ _______ _______ _______
Revenues from non-engine products, which were 44 percent of net sales
in the second quarter of 1999, were essentially flat compared to the
second quarter of 1998.
The Company's sales for each of its key businesses during the
comparative periods were:
Second Quarter First Half
_______________ _______________
$ Millions 1999 1998 1999 1998
__________ ______ ______ ______ ______
Automotive markets $ 820 $ 755 $1,580 $1,439
Industrial markets 275 294 515 563
______ ______ ______ ______
Engine Business 1,095 1,049 2,095 2,002
Power Generation Business 305 313 556 604
Filtration Business & Other 267 273 521 529
______ ______ ______ ______
$1,667 $1,635 $3,172 $3,135
______ ______ ______ ______
______ ______ ______ ______
In the second quarter of 1999, engine business revenues of $1.1 billion
increased 4 percent as compared to the second quarter of 1998,
primarily due to the strength of the North American automotive market.
Sales of $820 million in the second quarter of 1999 for automotive
markets were 9 percent higher than the second quarter of 1998. Heavy-
duty truck revenues increased 17 percent from the second quarter of
1998 due to the strong market in North America, partially offset by
reduced demand in Mexican automotive markets.
<PAGE> 10
Medium-duty truck revenues decreased 3 percent from the second quarter
of 1998 due to lower sales of kits into Turkey, where the truck market
has declined 90 percent from the prior year. Revenues from the sales
of engines for medium-duty trucks in the second quarter of 1999
remained flat with the prior year's quarter on a 10-percent increase in
units. This variance reflected a mix shift towards engines with a
lower selling price and margin.
Revenues of the bus and light commercial vehicle market were 1 percent
higher than the second quarter of 1998. In the second quarter of 1999,
Cummins shipped 23,700 engines to DaimlerChrysler, 7 percent lower than
the second-quarter 1998 level. The decrease in sales to
DaimlerChrysler was offset by record shipments to the North American
bus and recreational vehicle market, where volumes were 34 percent
higher than the year-ago quarter. Shipments for international bus
markets declined 25 percent from the second quarter of 1998, due to
lower sales into Mexico.
Sales to industrial markets were 6 percent lower than the second
quarter of 1998, due to decreased volume and a shift in product mix.
Engine revenues for this market were down 10 percent on an 8-percent
decrease in units. Construction equipment business increased 8 percent
compared to second quarter 1998, while agricultural equipment demand
declined 57 percent from the prior year's quarter. Sales to marine
markets increased 33 percent from second quarter 1998, with a shift to
more mid-range engines in recreational applications. Mining market
sales decreased 27 percent as compared to the second quarter of 1998,
reflecting lower high-horsepower engine volumes.
In the second quarter of 1999, sales for the Company's power generation
business decreased 3 percent compared to second quarter 1998. Sales of
the Company's generator sets were 1 percent above second quarter last
year with increased sales in North America largely offset by declines
in China and Latin America. Engine sales to generator set assemblers
were down 19 percent from the second quarter of 1998 due to lower Asian
demand. However, generator set sales for the recreational vehicle
market in North America continued to be strong, with revenues 9 percent
above the year-ago quarter.
Filtration business and other sales were $267 million in the second
quarter of 1999, a decrease of 2 percent from the second quarter of
1998. Within the filtration business, the Company was impacted by the
global decline in agricultural equipment sales, offset by new business
gained in truck, agricultural and construction markets. Sales of
international company-owned distributors included in this segment
decreased 14 percent compared to the second quarter of 1998.
In total, international markets represented 39 percent of the Company's
revenues in the second quarter of 1999. The Company experienced declines
in many of the international markets in which it participates. Sales to
Europe and the CIS, representing 12 percent of the Company's sales in the
second quarter of 1999, were 3 percent lower than the prior year's
quarter. Business in Mexico, Brazil and Latin America represented 5
percent of sales in the second quarter of 1999, with revenues 28 percent
below the year-ago levels. Asia and Australian markets, in total,
represented 12 percent of sales in the second quarter of 1999 as compared
to 13 percent in the prior year's quarter. Sales to Canada, representing
9 percent of sales in the second quarter of 1999, were 22 percent higher
than the second quarter of 1998.
Gross Margin:
_____________
The Company's gross margin percentage was 22.3 percent in the second
quarter of 1999, compared to 22.6 percent in the prior year's quarter.
The decreased margin in 1999 was due to higher product coverage costs
and a change in product mix, mitigated by a reduction in product cost
and higher sales volume. For the first half of 1999, gross margin
percentage was 21.2 percent, equal to the first half of 1998 including
the special charge recorded for product coverage. Gross margin
percentage excluding the special charge was 22.6 percent in the first
half of 1998.
<PAGE> 11
Operating Expenses:
___________________
Selling and administrative expenses as a percent of sales were 12.0
percent in the second quarter of 1999, compared to 12.2 percent in the
second quarter of 1998, with total spending remaining flat. Research
and engineering expenses declined from 4.0 percent of sales in the
second quarter of 1998 to 3.6 percent in the second quarter of 1999.
These improvements are primarily a result of the Company's cost
reduction initiatives.
The Company is continuing the restructuring plan implemented in the
third quarter of 1998. As of June 27, 1999, approximately $60 million
has been charged against the liabilities associated with these actions.
The Company does not currently anticipate any material changes in the
original charges recorded for these actions.
The Company's losses from joint ventures and alliances were $1 million
lower in the second quarter of 1999 as compared to the second quarter
of 1998 due to a decrease in losses at the Company's joint venture with
Wartsila.
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. The Company
substantially met its goal of Year 2000 readiness by June 30, 1999.
Outstanding issues and plans to resolve them are addressed below.
The Company's Year 2000 program is a centrally coordinated, enterprise-
wide effort which is carried out by the Company's Year 2000 Program
Office under the leadership of the Director of the Year 2000 Program.
The Year 2000 program is implemented at each of the Company's
facilities and is overseen by a Year 2000 coordinator located at each
site. The Company's Year 2000 Program Office monitors the progress and
compliance of its facilities through audits and reports by the Year
2000 coordinators. In addition to internal resources, the Company
continues to retain external resources to assist with its Year 2000
program. The Company believes that it is taking full advantage of its
internal resources and all necessary external resources to understand,
identify, and correct all Year 2000 issues within its control.
The Company's Year 2000 program involves:
1) mainframe (legacy systems); 2) distributed computing (includes
manufacturing and warehousing systems, end user computing, facility
systems, laboratory equipment, technical infrastructure and remote
business systems); 3) products; 4) suppliers; 5) business readiness and
contingency planning and 6) communication. The general phases of the
program are: a) inventory; b) analyze and prioritize; c) determine
compliance; d) remediate, replace, or retire and e) test, implement,
audit and maintain.
Mainframe, Distributed Computing:
The Company completed the inventory, analysis and prioritization phases
of its mainframe and distributed computing in 1998. Testing began in
1998 and will continue through 1999. Virtually all outstanding
remediation and implementation work was completed by the end of the
second quarter of 1999. Some outstanding issues remain. These were
discovered through the Company's quality assurance activities and also
through the regular testing and review process. Approximately 15 of
the Company's 142 sites continue to resolve Year 2000 issues. Some of
the issues currently being addressed involve software programs such as
the "ALPS" program (Aftermarket Logistics and Planning System) used by
the Company's aftermarket and distributor locations. The next six
months will be used to address these and any other outstanding issues
that emerge and to complete related contingency plans. The Company
will use its best efforts to ensure that any outstanding Year 2000 item
will be completed before the end of 1999.
<PAGE> 12
Products:
During the first quarter of 1999, the Company announced that its
commercial products met the Company's Year 2000 compliance standards.
Suppliers:
The greatest area of potential risk is the supply chain. This is
particularly true because the Company utilizes sole suppliers for
certain critical components used in the manufacture of the Company's
products. The high level of skill and expertise required to develop
certain components makes it impractical and sometimes impossible to
change such suppliers quickly. The failure of a sole supplier may lead
to a delay in production and/or business interruption. To mitigate
this, the Company initiated a global effort in 1997 to evaluate its
business critical suppliers. The Company continues its efforts to
review the Year 2000 readiness of key suppliers through a formal
program of prioritization and communication using questionnaires and
/or follow up contacts, as appropriate. To further the Company's
efforts with suppliers, the Company continues to be a member of the
Automotive Industry Action Group (AIAG). The Company completed the
identification of high-risk suppliers in April 1999 and has continued
to update this information as additional AIAG surveys are completed.
Contingency plans for suppliers that have been identified as "high-
risk" are being developed.
Business Readiness and Contingency Planning:
The Company believes that its "reasonably likely worst case scenarios"
may involve the failure of third parties with whom the Company does
business to address Year 2000 issues. As a result, the Company is
taking steps to minimize the impact of its exposure to Year 2000 risks
outside its control. In the following months, the Company will
continue to focus on business readiness and contingency planning to
address possible external Year 2000 problems. A significant part of
this effort will be the evaluation of the risk to the Company's
operations from external sources, and the development of strategies to
manage those risks. The Company's efforts in this regard include
identifying alternate suppliers, setting up work-arounds and adjusting
inventory levels. The Company's contingency planning also covers the
identification and evaluation of risk areas at the Company's
international locations and international independent distributors,
particularly at countries that have been identified as behind in their
Year 2000 readiness efforts. The Company is providing information on
country and industry risk to its international locations, and is also
considering country risk in the development of its contingency plans.
Contingency plans will also address any potential internal issues that
may arise.
Communication:
The Company continues to receive and respond to customer inquiries
regarding the general Year 2000 readiness of the Company, and the Year
2000 compliance of the Company's commercial products. The inquiries
and responses take the form of telephone calls, written communication
and electronic mail. For the convenience of its customers, the Company
also maintains a Year 2000 Internet website at
www.cummins.com/custasis/y2k.html. The Company's product compliance
information is also included on that website. The Company also
maintains an Intranet Year 2000 website for the use of its employees.
Costs:
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 $37 million
in costs relating to its Year 2000 efforts.
There can be no assurances that the systems or products of third
parties relied upon by the Company, such as suppliers, vendors or
significant customers, will be timely converted or that a failure by
such third parties, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the
Company. Other undiscovered factors related to the Year 2000 issue may
also have potential for an adverse effect on the Company. Such adverse
effects may include an adverse effect on the Company's revenues. The
estimated time of completion and success 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 trained personnel, the ability to locate and correct all relevant
computer code, and failure by third parties.
<PAGE> 13
Other:
______
Interest expense was $19 million in the second quarter of 1999, compared
to $18 million in the prior year's quarter. Other expense increased $3
million from the second quarter of 1998, with the variance resulting from
non-recurring transactions recorded in the prior year.
Provision for Income Taxes:
___________________________
The Company's income tax provision in the second quarter of 1999 was
$25 million, reflecting an effective tax rate of 29 percent for the
year.
Cash Flow and Financial Condition
_________________________________
Key elements of cash flows were:
First Half
_________________
$ Millions 1999 1998
__________ _____ _____
Net cash provided by operating activities $ 183 $( 76)
Net cash used in investing activities (91) (621)
Net cash (used in) provided by
financing activities (63) 537
Effect of exchange rate changes on cash - ( 1)
_____ _____
Net change in cash and cash equivalents $ 29 $( 9)
_____ _____
_____ _____
In the first half of 1999, net cash provided by operating activities
was $183 million. The high level of net cash requirements for
investing activities in the first half of 1998 was due primarily to the
acquisition of Nelson and planned capital expenditures of $154 million.
In the first quarter of 1998, the Company issued $765 million face
amount of notes and debentures to support working capital and to
complete the acquisition of Nelson.
FORWARD-LOOKING STATEMENTS
__________________________
When used herein, the terms "expect, plan, anticipate, believe" or
similar expressions, as they relate to the Company or its management,
are intended to identify forward-looking statements.
The Company has included certain forward-looking statements in this
Management's Discussion and Analysis of Results of Operations, Cash
Flow and Financial Condition and in the Company's press releases,
teleconferences and other external communications. These statements
are based on current expectations, estimates and projections about the
industries in which the Company operates, management's beliefs and
various assumptions made by management which are difficult to predict.
Among the factors that could affect the outcome of the statements are
general industry and market conditions and growth rates. Therefore,
actual outcomes and their impact on the Company may differ materially
from what is expressed or forecasted. The Company undertakes no
obligation to update publicly any forward-looking statements, whether
as a result of new information, future events or otherwise.
<PAGE> 14
PART II. OTHER INFORMATION
___________________________
Item 6. Exhibits and Reports on Form 8-K:
__________________________________________
(a) See the Index to Exhibits on page 15 for a list of exhibits filed
herewith.
(b) The Company was not required to file a Form 8-K during the second
quarter of 1999.
Signatures
__________
Pursuant to the requirements 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/Rick J. Mills
_________________
Rick J. Mills
Vice President - Corporate Controller
(Chief Accounting Officer) August 10, 1999
<PAGE> 15
CUMMINS ENGINE COMPANY, INC.
____________________________
INDEX TO EXHIBITS
_________________
27 Financial Data Schedule (filed herewith)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-27-1999
<CASH> 67
<SECURITIES> 0
<RECEIVABLES> 1,015
<ALLOWANCES> 0
<INVENTORY> 760
<CURRENT-ASSETS> 2,116
<PP&E> 3,095
<DEPRECIATION> 1,469
<TOTAL-ASSETS> 4,770
<CURRENT-LIABILITIES> 1,246
<BONDS> 1,118
0
0
<COMMON> 121
<OTHER-SE> 1,206
<TOTAL-LIABILITY-AND-EQUITY> 4,770
<SALES> 3,172
<TOTAL-REVENUES> 3,172
<CGS> 2,500
<TOTAL-COSTS> 2,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> 120
<INCOME-TAX> 35
<INCOME-CONTINUING> 82
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82
<EPS-BASIC> 2.14
<EPS-DILUTED> 2.13
</TABLE>
