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 September 26, 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 September 26, 1999, the number of shares outstanding of the
registrant's only class of common stock was 41.4 million.
<PAGE> 2
TABLE OF CONTENTS
_________________
Page No.
________
PART I. FINANCIAL INFORMATION
______________________________
Item 1. Financial Statements
Consolidated Statement of Earnings for the Third 3
Quarter and Nine Months Ended September 26, 1999
and September 27, 1998
Consolidated Statement of Financial Position at 4
September 26, 1999 and December 31, 1998
Consolidated Statement of Cash Flows for the Nine 5
Months Ended September 26, 1999 and September 27, 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 THIRD QUARTER AND NINE MONTHS
ENDED SEPTEMBER 26, 1999 AND SEPTEMBER 27, 1998
_______________________________________________
Unaudited
_________
Third Quarter Nine Months
Millions, except per share amounts 1999 1998 1999 1998
__________________________________ ______ ______ ______ ______
Net sales $1,631 $1,525 $4,803 $4,660
Cost of goods sold 1,270 1,218 3,770 3,644
Special charges - 49 - 92
______ ______ ______ ______
Gross profit 361 258 1,033 924
Selling and administrative expenses 192 191 570 592
Research and engineering expenses 67 61 181 193
Net expense from joint ventures
and alliances 8 8 20 18
Interest expense 18 17 56 52
Other expense (income), net 3 (1) 13 ( 8)
Restructuring and other non-recurring
charges - 125 - 125
_____ ______ _____ ______
Earnings (loss) before income taxes 73 (143) 193 (48)
Provision (benefit) for income taxes 19 ( 35) 54 (7)
Minority interest 1 2 4 9
______ ______ _______ _______
Net earnings (loss) $ 53 $ (110) $ 135 $ (50)
______ ______ _______ _______
______ ______ _______ _______
Basic earnings (loss) per share $ 1.37 $(2.86) $ 3.50 $ (1.30)
Diluted earnings (loss) per share 1.35 (2.86) 3.48 (1.30)
Cash dividends declared per share $ .275 $ .275 $ .825 $ .825
<PAGE> 4
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
____________________________________________
Unaudited
_________
Millions, except per share amounts 9/26/99 12/31/98
__________________________________ _______ ________
Assets
Current assets:
Cash and cash equivalents $ 60 $ 38
Receivables, net of allowances of $14 & $12 1,104 833
Inventories 799 731
Other current assets 279 274
______ ______
2,242 1,876
Investments and other assets 289 280
Property, plant and equipment, net of accumulated
depreciation of $1,504 & $1,424 1,616 1,671
Goodwill, net of amortization of $27 and $17 377 384
Other intangibles, deferred taxes and deferred
charges 354 331
______ ______
Total assets $4,878 $4,542
______ ______
______ ______
Liabilities and shareholders' investment
Current liabilities:
Loans payable $ 90 $ 64
Current maturities of long-term debt 24 26
Accounts payable 453 340
Other current liabilities 728 641
______ ______
1,295 1,071
______ ______
Long-term debt 1,166 1,137
______ ______
Other liabilities 1,003 1,000
______ ______
Minority interest 72 62
______ ______
Shareholders' investment:
Common stock, $2.50 par value, 48.1 and 48.1
shares issued 120 120
Additional contributed capital 1,118 1,121
Retained earnings 748 648
Accumulated other comprehensive income (174) (167)
Common stock in treasury, at cost, 6.7 & 6.1 shares (270) (240)
Common stock held in trust for employee
benefit plans, 3.4 and 3.6 shares (165) (172)
Unearned compensation (ESOP) ( 35) (38)
______ ______
1,342 1,272
______ ______
Total liabilities & shareholders' investment $4,878 $4,542
______ ______
______ ______
<PAGE> 5
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
____________________________________
Unaudited
_________
Nine Months Ended
Millions 9/26/99 9/27/98
________ _______ _______
Cash flows from operating activities:
Net earnings (loss) $ 135 $( 50)
_____ _____
Adjustments to reconcile net earnings (loss)
to net cash from operating activities:
Depreciation and amortization 172 148
Restructuring & other non-recurring actions (23) 121
Accounts receivable (277) (118)
Inventories ( 70) ( 79)
Accounts payable and accrued expenses 216 155
Income taxes payable 12 (55)
Equity in (earnings) losses of joint
ventures and alliances 24 24
Other (19) 18
_____ _____
Total adjustments 35 214
_____ _____
Net cash provided by operating activities 170 164
_____ _____
Cash flows from investing activities:
Property, plant and equipment:
Additions (121) (199)
Disposals 27 3
Investments in joint ventures & alliances ( 40) ( 21)
Acquisition and disposition of businesses 3 (467)
Other 6 2
_____ _____
Net cash used in investing activities (125) (682)
_____ _____
Net cash flows provided by (used in)
operating and investing activities 45 (518)
_____ _____
Cash flows from financing activities:
Proceeds from borrowings 53 711
Payments on borrowings ( 26) ( 83)
Net payments under short-term credit
agreements 26 ( 55)
Repurchase of common stock ( 30) ( 11)
Dividend payments ( 35) ( 35)
Other ( 11) 6
_____ _____
Net cash (used in) provided by financing
activities ( 23) 533
_____ _____
Effect of exchange rate changes on cash - ( 1)
_____ _____
Net change in cash and cash equivalents 22 14
Cash & cash equivalents at the beginning of year 38 49
_____ _____
Cash & cash equivalents at the end of quarter $ 60 $ 63
_____ _____
_____ _____
<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 September 26, 1999 and September 27, 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 Charges: In the third quarter of 1998, the Company
recorded a special charge of $35 million related to a revised estimate
of product coverage cost liability primarily for extended warranty
programs. The third quarter special charge also included $14 million
for inventory write-downs associated with the Company's restructuring
and exit activities. This write-down relates 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.
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. Comprehensive Income: Comprehensive income, which includes
net income and all other nonowner changes in equity during a period, is
as follows:
Third Quarter Ended Nine Months Ended
Millions 9/26/99 9/27/98 9/26/99 9/27/98
________ _______ _______ _______ _______
Net income (loss) $ 53 $(110) $135 $( 50)
Unrealized gain (loss) on securities,
net of tax 1 - 2 ( 1)
Translation adjustment, net of tax (2) 3 (9) ( 49)
___ _____ ____ _____
Comprehensive income $ 52 $(107) $128 $(100)
___ _____ ____ _____
___ _____ ____ _____
<PAGE> 7
Note 7. 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.
Third Quarter Nine Months
_____________________________ ___________________________
Weighted Per- Weighted Per-
Millions, except Net Average Share Net Average Share
per share amounts Earnings Shares Amount Earnings Shares Amount
_________________ ________ _______ ______ ________ _______ ______
1999
____
Basic $ 53 38.3 $ 1.37 $135 38.4 $3.50
Options - .6 - .4
____ ____ ____ ____
Diluted $ 53 38.9 $ 1.35 $135 38.8 $3.48
_____ ____ ____ ____
_____ ____ ____ ____
1998
____
Basic $(110) 38.5 $(2.86) $(50) 38.5 $(1.30)
Options - - - -
____ ____ ____ ____
Diluted $(110) 38.5 $(2.86) $(50) 38.5 $(1.30)
_____ ____ ____ ____
_____ ____ ____ ____
Note 8. Restructuring and Other Non-Recurring Charges: In the third
quarter of 1998, the Company recorded charges of $125 million,
comprised of $100 million for costs to reduce the worldwide workforce
by approximately 1,100 people, as well as costs associated with
streamlining certain majority-owned and international joint venture
operations and $25 million for a civil penalty to be paid by the
Company as a result of an agreement reached with the U.S. Environmental
Protection Agency (EPA) regarding diesel engine emissions.
The Company is continuing the restructuring plan implemented in the third
quarter of 1998. As of September 26, 1999, approximately $66 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 Q3 Balance
$ Millions Provision 1998 1999 1999 1999 9/26/99
__________ _________ _____ _____ _____ _____ _______
Restructuring of majority-
owned operations:
Workforce reductions $ 38 $(12) $( 5) $( 5) $(2) $14
Asset impairment loss 22 - ( 1) ( 4) (2) 15
Facility consolidations
and other 17 ( 8) ( 2) - - 7
____ ____ ____ ____ ____ ___
77 (20) ( 8) ( 9) (4) 36
____ ____ ____ ____ ____ ___
Restructuring of joint
venture operations:
Workforce reductions 11 - - ( 2) (2) 7
Tax asset impairment loss 7 - - ( 7) - -
Facility and equipment-
related costs 5 - - - - 5
____ ____ ____ ____ ___ ___
23 - - ( 9) (2) 12
____ ____ ____ ____ ___ ___
Inventory write-downs
associated with exit
activities 14 ( 5) ( 4) ( 5) - -
____ ____ ____ ____ ___ ___
Total $114 $(25) $(12) $(23) $(6) $48
____ ____ ____ ____ ___ ___
____ ____ ____ ____ ___ ___
<PAGE> 8
Note 9. Segment Information: Operating segment information is as follows:
Power Filtration
Millions Engine Generation And Other Total
________ ______ __________ __________ ______
Third Quarter Ended Sept. 26, 1999
__________________________________
Net sales $1,032 $352 $247 $1,631
Earnings before interest and
income taxes 45 15 31 91
Net assets 996 557 830 2,383
Third Quarter Ended Sept. 27, 1998
__________________________________
Net sales $ 978 $296 $251 $1,525
Earnings before interest, income
taxes and special charges 13 5 30 48
Special charges 122 50 2 174
Earnings (loss) before interest
and income taxes (109) (45) 28 (126)
Net assets 1,047 528 811 2,386
Nine Months Ended Sept. 26, 1999
________________________________
Net sales $3,127 $908 $768 $4,803
Earnings before interest and
income taxes 131 28 90 249
Nine Months Ended Sept. 27, 1998
________________________________
Net sales $2,980 $900 $780 $4,660
Earnings before interest, income
taxes and special charges 117 17 87 221
Special charges 165 50 2 217
Earnings (loss) before interest
and income taxes (48) (33) 85 4
Reconciliation to Consolidated Financial Statements:
Third Quarter Ended Nine Months Ended
Millions 9/26/99 9/27/98 9/26/99 9/27/98
________ _______ _______ _______ _______
Earnings (loss) before interest and
income taxes for reportable segments $ 91 $ (126) $249 $ 4
Interest expense 18 17 56 52
______ ______ ____ ____
Earnings (loss) before income taxes $ 73 $ (143) $193 $(48)
______ ______ ____ ____
______ ______ ____ ____
Net assets for reportable segments $2,383 $2,386
Liabilities deducted in arriving at
net assets 2,139 1,824
Deferred tax assets not allocated
to segments 334 296
Debt-related costs not allocated to
to segments 22 22
______ ______
Total assets $4,878 $4,528
______ ______
______ ______
<PAGE> 9
CUMMINS ENGINE COMPANY, INC.
____________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS,
CASH FLOW AND FINANCIAL CONDITION
_____________________________________________________________
Overview
________
Net sales were $1.63 billion in the third quarter of 1999, 7 percent
higher than the third quarter of 1998. Earnings before interest and
taxes in the third quarter of 1999 were $91 million or 5.6 percent of
sales. Net earnings were $53 million or $1.35 per share compared to a
loss of $110 million or $(2.86) per share in the third quarter of 1998,
including special charges of $174 million pretax. Net earnings for the
first nine months of 1999 were $135 million or $3.48 per share compared
to a loss of $50 million or $(1.30) per share in the first nine months
of 1998, including special charges of $217 million pretax recorded in
the first and third quarters of 1998.
Results of Operations
_____________________
Net Sales:
__________
Revenues from sales of engines were 54 percent of the Company's net
sales in the third quarter of 1999, with engine revenues 7 percent
higher than third-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.
Third Quarter Nine Months
Unit Shipments 1999 1998 1999 1998
______________ _______ ______ _______ _______
Midrange Engines 68,400 71,300 218,700 213,600
Heavy-duty Engines 30,500 25,500 87,900 79,800
High-horsepower Engines 2,500 2,400 6,700 7,300
_______ ______ _______ _______
101,400 99,200 313,300 300,700
_______ ______ _______ _______
_______ ______ _______ _______
Revenues from non-engine products, which were 46 percent of net sales
in the third quarter of 1999, were 7 percent higher than the third
quarter of 1998.
The Company's sales for each of its key businesses during the
comparative periods were:
Third Quarter Nine Months
$ Millions 1999 1998 1999 1998
__________ ______ ______ ______ ______
Automotive markets $ 792 $ 733 $2,372 $2,172
Industrial markets 240 245 755 808
______ ______ ______ ______
Engine Business 1,032 978 3,127 2,980
Power Generation Business 352 296 908 900
Filtration Business and Other 247 251 768 780
______ ______ ______ ______
$1,631 $1,525 $4,803 $4,660
______ ______ ______ ______
______ ______ ______ ______
In the third quarter of 1999, engine business revenues of $1.0 billion
increased 6 percent as compared to the third quarter of 1998, primarily
due to the strength of the North American automotive market.
Sales of $792 million in the third quarter of 1999 for automotive
markets were 8 percent higher than the third quarter of 1998. Heavy-
duty truck revenues increased 20 percent from the third 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 in the third quarter of 1999 were $121
million, a 14-percent decrease from the third quarter of 1998.
Revenues from the sales of engines for medium-duty trucks in the third
quarter of 1999 were 14 percent lower than the prior year's quarter on
a 6-percent decrease in units. This variance was primarily a result of
the devaluation of the Brazilian Real, which significantly reduced
revenues in this market as compared to the year-ago quarter. In North
America, unit shipments were 19 percent lower than the third quarter of
1998, partially offset by a 9-percent increase in international
shipments.
Revenues of the bus and light commercial vehicle market were flat with
the third quarter of 1998. In the third quarter of 1999, Cummins
shipped 23,000 engines to DaimlerChrysler, 7 percent lower than the
third-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 36 percent higher than the year-ago
quarter. Shipments for international bus markets declined 19 percent
from the third quarter of 1998, due to lower sales into Mexico.
Sales to industrial markets were 2 percent lower than the third quarter
of 1998, due to decreased volume and a shift in product mix. Engine
revenues for this market were down 4 percent on a 10-percent decrease
in units. Agricultural equipment demand decreased 43 percent compared
to third quarter 1998, and construction equipment business declined 2
percent from the prior year's quarter. Sales to marine markets
increased 28 percent from third quarter 1998, with a shift to more mid-
range engines in recreational applications. Mining market sales were
flat with the third quarter of 1998.
In the third quarter of 1999, sales for the Company's power generation
business increased 19 percent compared to third quarter 1998. Sales of
the Company's generator sets were 33 percent above third quarter last
year with increased sales in North America, Mexico and Europe. Engine
and alternator sales to generator set assemblers increased 7 percent
from the third quarter of 1998. Generator set sales for the
recreational vehicle market in North America continued to be strong,
with revenues 8 percent above the year-ago quarter.
Filtration business and other sales were $247 million in the third
quarter of 1999, a decrease of 2 percent from the third quarter of
1998. Within the filtration business, sales were flat with the year-
ago quarter, with the global decline in agricultural equipment sales
being offset by new business gained in North American and international
truck markets and sales to small-equipment original equipment
manufacturers. Sales of international company-owned distributors
included in this segment reflected modest declines compared to the
third quarter of 1998.
In total, international markets represented 38 percent of the Company's
revenues in the third quarter of 1999. Sales to Europe and the CIS,
representing 11 percent of the Company's sales in the third quarter of
1999, were flat with the prior year's quarter. Business in Mexico, Brazil
and Latin America represented 6 percent of sales in the third quarter of
1999, with revenues 16 percent below the year-ago levels. Asia and
Australian markets, in total, represented 13 percent of sales in the third
quarter of 1999, with revenues 9 percent higher than the prior year's
quarter. Sales to Canada, representing 6 percent of sales in the third
quarter of 1999, were flat with the third quarter of 1998.
Gross Margin:
_____________
The Company's gross margin percentage was 22.1 percent in the third
quarter of 1999, compared to 20.1 percent in the prior year's quarter
excluding the special charges for product coverage and inventory write-
downs. Gross margin percentage including the special charges was 16.9
percent in the third quarter of 1998. The increased margin in 1999 was
primarily due to lower product coverage costs, a shift in product mix
to higher margin heavy-duty and high-horsepower engines and product
cost improvements. For the first nine months of 1999, gross margin
percentage was 21.5 percent, as compared to 21.8 percent in the first
nine months of 1998 excluding the special charges recorded for product
coverage and inventory write-downs. Gross margin percentage including
the special charges was 19.8 percent in the first nine months of 1998.
<PAGE> 11
Operating Expenses:
___________________
Selling and administrative expenses as a percent of sales were 11.8
percent in the third quarter of 1999, compared to 12.5 percent in the
third quarter of 1998, with total spending remaining essentially flat
on a 7-percent higher sales level. Research and engineering expenses
increased from 4.0 percent of sales in the third quarter of 1998 to 4.1
percent in the third quarter of 1999. This increase reflects a catch-
up from the low level of spending in the first half of 1999. Research
and engineering expenses as a percent of sales for the first nine
months were 3.8 percent for 1999 as compared to 4.1 percent for 1998.
The Company is continuing the restructuring plan implemented in the
third quarter of 1998. As of September 26, 1999, approximately $66
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 $8 million
in the third quarter of 1999, equal to the third quarter of 1998,
primarily due to losses at the Company's joint venture with Wartsila.
Other:
______
Interest expense was $18 million in the third quarter of 1999, compared
to $17 million in the prior year's quarter. Other expense increased $4
million from the third quarter of 1998, with the variance resulting
primarily from lower interest income and certain tax refunds recorded
in the prior year.
Provision for Income Taxes:
___________________________
In the third quarter, the estimated effective tax rate for 1999 was
reduced to 28 percent for the year. The Company's tax rate for the
third quarter was 26 percent to reflect the year-to-date adjustment to
the lower 1999 effective tax rate.
Year 2000:
__________
The Company experienced no issues on the 9-9-99-date horizon.
Preparation for Year 2000 continues to be a priority for Cummins into
and after January 1, 2000. While the Company substantially met its
goal of Year 2000 readiness by June 30, 1999, a few outstanding issues
remain. Plans to resolve such issues 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 assigned to 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.
<PAGE> 12
Mainframe, Distributed Computing:
The Company completed the inventory, analysis and prioritization phases
of its mainframe and distributed computing in 1998. The inventory
process led to the packaging of mainframe programs into remediation
groups to facilitate testing. Testing began in 1998 and will continue
through 1999. Quality assurance checks resulted in the review, repair,
testing and re-installation of some programs. Tests of software
applications using the 9-9-99 and 1-1-2000 dates were successfully
executed. Some outstanding issues remain. About 5 of the Company's
142 sites continue to address Year 2000 issues. One issue involves the
"ALPS" (Aftermarket Logistics and Planning System) software program
used by the Company's aftermarket and distributor locations. The
outstanding issues are known and monitored. The remainder of the year
will be used to address these and any other outstanding issues that
emerge, and also 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.
Products:
During the first quarter of 1999, the Company announced that its
commercial products met the Company's Year 2000 compliance standards.
A posting on the Company's Internet website provides this information
to customers and other stakeholders.
Suppliers:
The greatest area of potential risk is the supply chain. This is
particularly true because the Company utilizes global, 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 potential risk, 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. Using survey data and other input where
required, the Company has developed contingency plans for suppliers
that have been identified as "high-risk." The Company's plants are
also developing site-specific contingency plans for critical suppliers.
Business Readiness and Contingency Planning (BRCP):
As previously stated, 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. The objective of our
BRCP is to assure that the Company retains the ability to sustain
acceptable operations despite the Year 2000 failures of third parties
or failures induced by them. The process for BRCP is process design,
business impact analysis, contingency planning and auditing, testing
and monitoring. Our model is consistent with the recommendations of
the U.S. General Accounting Office. In the following months, the
Company will finalize its business readiness and contingency planning
to address possible external Year 2000 problems. A significant part of
this effort has been 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.
<PAGE> 13
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
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 of Company's Year 2000 issues:
The Company expects to incur total expenditures of approximately $45
million in connection with its Year 2000 program and remediation
efforts. The Company is funding its Year 2000 costs with cash flows
from operations. To date, the Company has incurred $42 million in
costs relating to its Year 2000 efforts. The Company has forecasted a
temporary increase in inventory levels per year-end contingency plans
for high-risk suppliers.
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 the failure by third parties to address their Year
2000 problems.
Cash Flow and Financial Condition
_________________________________
Key elements of cash flows were:
Nine Months
$ Millions 1999 1998
__________ ______ ______
Net cash provided by operating activities $ 170 $ 164
Net cash used in investing activities (125) (682)
Net cash (used in) provided by financing
activities ( 23) 533
Effect of exchange rate changes on cash - ( 1)
_____ _____
Net change in cash and cash equivalents $ 22 $ 14
_____ _____
_____ _____
In the first nine months of 1999, net cash provided by operating
activities was $170 million. The high level of net cash requirements
for investing activities in the first nine months of 1998 was due
primarily to the acquisition of Nelson and planned capital expenditures
of $199 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.
<PAGE> 14
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.
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 third
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) October 28, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-26-1999
<CASH> 60
<SECURITIES> 0
<RECEIVABLES> 1,118
<ALLOWANCES> 14
<INVENTORY> 799
<CURRENT-ASSETS> 2,242
<PP&E> 3,120
<DEPRECIATION> 1,504
<TOTAL-ASSETS> 4,878
<CURRENT-LIABILITIES> 1,295
<BONDS> 1,166
0
0
<COMMON> 120
<OTHER-SE> 1,222
<TOTAL-LIABILITY-AND-EQUITY> 4,878
<SALES> 4,803
<TOTAL-REVENUES> 4,803
<CGS> 3,770
<TOTAL-COSTS> 3,770
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56
<INCOME-PRETAX> 193
<INCOME-TAX> 54
<INCOME-CONTINUING> 135
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 135
<EPS-BASIC> 3.50
<EPS-DILUTED> 3.48
</TABLE>
