UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 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 March 28, 1999 Commission File Number 1-4949 ______________ ______ Indiana 35-0257090 _______ __________ (State or Other Jurisdiction of (I.R.S. 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 March 28, 1999, the number of shares outstanding of the registrant's only class of common stock was 42.2 million. TABLE OF CONTENTS _________________ Page No. ________ PART I. FINANCIAL INFORMATION ______________________________ Item 1. Financial Statements Consolidated Statement of Earnings for the First 3 Quarter Ended March 28, 1999 and March 29, 1998 Consolidated Statement of Financial Position at 4 March 28, 1999 and December 31, 1998 Consolidated Statement of Cash Flows for the First 5 Quarter Ended March 28, 1999 and March 29, 1998 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of 8 Operations, Cash Flow and Financial Condition PART II. OTHER INFORMATION ___________________________ Item 4. Submission of Matters to a Vote of Security Holders 13 Item 6. Exhibits and Reports on Form 8-K 13 Index to Exhibits 15 CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF EARNINGS Unaudited __________________________________ First Quarter Ended Millions, except per share amounts 3/28/99 3/29/98 __________________________________ _______ _______ Net sales $1,505 $1,500 Cost of goods sold 1,204 1,160 Special charge - 43 ______ ______ Gross profit 301 297 Selling & administrative expenses 178 202 Research & engineering expenses 54 67 Net expense from joint ventures & alliances 7 4 Interest expense 19 17 Other expense (income), net 7 (7) ______ ______ Earnings before income taxes 36 14 Provision for income taxes 10 4 Minority interest 2 3 ______ ______ Net earnings $ 24 $ 7 ______ ______ Basic earnings per share $ .63 $ .18 Diluted earnings per share .63 .18 Cash dividends declared per share .275 .275 CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF FINANCIAL POSITION Unaudited ____________________________________________ Millions, except per share amounts 3/28/99 12/31/98 __________________________________ _______ ________ Assets Current assets: Cash and cash equivalents $ 45 $ 38 Receivables 962 833 Inventories 733 731 Other current assets 283 274 ______ ______ 2,023 1,876 Investments and other assets 294 280 Property, plant & equipment less accumulated depreciation of $1,464 and $1,424 1,655 1,671 Goodwill, net of amortization of $20 and $17 380 384 Other intangibles, deferred taxes & deferred charges 339 331 ______ ______ Total assets $4,691 $4,542 ______ ______ Liabilities and shareholders' investment Current liabilities: Loans payable $ 21 $ 64 Current maturities of long-term debt 27 26 Accounts payable 381 340 Other current liabilities 684 641 ______ ______ 1,113 1,071 ______ ______ Long-term debt 1,213 1,137 ______ ______ Other liabilities 1,003 1,000 ______ ______ Minority interest 67 62 ______ ______ Shareholders' investment: Common stock, $2.50 par value, 48.3 and 48.1 shares issued 121 120 Additional contributed capital 1,126 1,121 Retained earnings 660 648 Accumulated other comprehensive income (166) (167) Common stock in treasury, at cost, 6.1 shares (240) (240) Common stock held in trust for employee benefit plans, 3.6 shares (171) (172) Unearned compensation (ESOP) ( 35) ( 38) ______ ______ 1,295 1,272 ______ ______ Total liabilities & shareholders' investment $4,691 $4,542 ______ ______ CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Unaudited ____________________________________ First Quarter Ended Millions 3/28/99 3/29/98 ________ _______ _______ Cash flows from operating activities: Net earnings $ 24 $ 7 _____ _____ Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 56 47 Restructuring actions ( 5) ( 6) Accounts receivable (130) (113) Inventories ( 2) ( 54) Accounts payable and accrued expenses 95 120 Income taxes payable ( 5) ( 7) Equity in losses of joint ventures and alliances 11 7 Other ( 12) 20 _____ _____ Total adjustments 8 14 _____ _____ Net cash provided by operating activities 32 21 _____ _____ Cash flows from investing activities: Property, plant and equipment: Additions ( 37) ( 83) Disposals 4 2 Investments in joint ventures and alliances ( 19) ( 20) Acquisition and disposition of businesses 7 (453) Other ( 1) - _____ _____ Net cash used in investing activities ( 46) (554) _____ _____ Net cash flows used for operating and investing activities ( 14) (533) _____ _____ Cash flows from financing activities: Proceeds from borrowings 88 710 Payments on borrowings ( 11) (103) Net payments under credit agreements ( 43) ( 62) Dividend payments ( 12) ( 12) Other ( 1) ( 1) _____ _____ Net cash provided from financing activities 21 532 _____ _____ Net change in cash and cash equivalents 7 ( 1) Cash & cash equivalents at beginning of the year 38 49 _____ _____ Cash & cash equivalents at the end of the quarter $ 45 $ 48 _____ _____ CUMMINS ENGINE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited ______________________________________________ Note 1. Accounting Policies: The Consolidated Financial Statements for the interim periods ended March 28, 1999 and March 29, 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. Weighted Per- Net Average Share Millions, except per share amounts Earnings Shares Amount __________________________________ ________ ________ ______ 1999 ____ Basic $24 38.5 $ .63 Options - - ___ ____ Diluted $24 38.5 $ .63 ___ ____ 1998 ____ Basic $ 7 38.5 $ .18 Options - .4 ___ ____ Diluted $ 7 38.9 $ .18 ___ ____ Note 7. Comprehensive Income: Comprehensive income, which includes net income and all other nonowner changes in equity during a period, is as follows: First Quarter Ended Millions March 28, 1999 March 29, 1998 ________ ______________ ______________ Net income $ 24 $ 7 Unrealized gain on securities 1 - Translation loss - (19) ____ ____ Comprehensive income $ 25 $(12) ____ ____ Note 8. Segment Information: Operating segment information is as follows: Power Filtration Millions Engine Generation And Other Total ________ ______ __________ __________ ______ Quarter Ended March 28, 1999 ____________________________ Net sales $1,000 $251 $254 $1,505 Earnings before interest and income taxes 27 2 26 55 Net assets 976 523 799 2,298 Quarter Ended March 29, 1998 ____________________________ Net sales $ 953 $291 $256 $1,500 Earnings before interest, income taxes & special charges 48 2 24 74 Special charges 43 - - 43 Earnings before interest and income taxes 5 2 24 31 Net assets 1,170 540 814 2,524 Reconciliation to Consolidated Financial Statements: First Quarter Ended Millions 3/28/99 3/29/98 ________ _______ _______ Earnings before interest and income taxes for reportable segments $ 55 $ 31 Interest expense 19 17 Income tax expense 10 4 Minority interest 2 3 ______ ______ Net earnings $ 24 $ 7 ______ ______ Net assets for reportable segments $2,298 $2,524 Liabilities deducted in arriving at net assets 2,037 1,693 Deferred tax assets not allocated to segments 334 257 Debt-related costs not allocated to segments 22 22 ______ ______ Total assets $4,691 $4,496 ______ ______ CUMMINS ENGINE COMPANY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, CASH FLOW AND FINANCIAL CONDITION _____________________________________________________________ Overview ________ Net sales were $1.5 billion in the first quarter of 1999, essentially flat with the first quarter of 1998. Earnings before interest and taxes in the first quarter of 1999 were $55 million or 3.7 percent of sales. Net earnings were $24 million or 63 cents per share compared to $7 million or 18 cents per share in the first quarter of 1998. Excluding the special charge for product coverage costs, net earnings in the first quarter of 1998 were $37 million or 96 cents per share. Results of Operations _____________________ Net Sales: __________ Revenues from sales of engines were 58 percent of the Company's net sales in the first quarter of 1999, with engine revenues 6 percent higher than first-quarter 1998 and unit shipments 10 percent higher. This variance reflected a shift from heavy-duty and high-horsepower engines to more mid-range engines in certain industrial markets and a mix shift within the Company's medium-duty truck sales to lower unit revenue engines. First Quarter Unit Shipments 1999 1998 ________________ ______ ______ Midrange Engines 73,700 65,000 Heavy-duty Engines 26,800 26,900 High-horsepower Engines 2,000 2,200 _______ ______ 102,500 94,100 _______ ______ Revenues from non-engine products, which were 42 percent of net sales in the first quarter of 1999, were 6 percent lower than the first quarter of 1998. This decrease was primarily due to the continued softening of the power generation business in Asia. The Company's sales for each of its key businesses during the comparative first quarters were: First Quarter $ Millions 1999 1998 __________ ______ ______ Automotive markets $ 760 $ 684 Industrial markets 240 269 _____ _____ Engine Business 1,000 953 Power Generation Business 251 291 Filtration Business and Other 254 256 ______ ______ $1,505 $1,500 ______ ______ In the first quarter of 1999, engine business revenues of $1 billion increased 5 percent as compared to the first quarter of 1998, primarily due to the strength of the North American automotive market. Sales of $760 million in the first quarter of 1999 for automotive markets were 11 percent higher than the first quarter of 1998. Heavy- duty truck revenues increased 8 percent from the first quarter of 1998 due to the strong market in North America, partially offset by reduced demand in Mexican and European automotive markets. Medium-duty truck revenues increased 14 percent from the first quarter of 1998 due to higher sales of engines combined with lower kits and parts sales. Revenues from the sales of engines for medium-duty trucks in the first quarter of 1999 were 26 percent higher than the prior year's quarter on a 43-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 15 percent higher than the first quarter of 1998. In the first quarter of 1999, Cummins shipped 25,300 engines to DaimlerChrysler, 14 percent higher than the first-quarter 1998 level. Bus and recreational vehicle volumes increased 27 percent from the year-ago quarter due to growth in sales of midrange engines in North America. Sales to industrial markets were 11 percent lower than the first quarter of 1998, due to decreased volume and a shift in product mix. Engine revenues for this market were down 13 percent on a 9-percent decrease in units. Construction equipment business remained relatively flat compared to first quarter 1998, while agricultural equipment demand declined 51 percent from the prior year's quarter. Sales to marine markets increased 9 percent from first quarter 1998, with a shift to more mid-range engines in recreational applications. Mining market sales decreased 12 percent as compared to the first quarter of 1998, reflecting lower high-horsepower engine volumes. In the first quarter of 1999, sales for the Company's power generation business decreased 14 percent compared to first quarter 1998. Sales of the Company's generator sets were 18 percent below first quarter last year due to declines in Latin America, which offset increased sales in North America. Engine sales to generator set assemblers were down 15 percent and sales of alternators decreased 24 percent from the first 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 11 percent above the year-ago quarter. Filtration business and other sales were $254 million in the first quarter of 1999, essentially flat with the first quarter of 1998. Within the filtration business, the Company was impacted by reduced demand in agricultural and mining markets, offset by market gains in Europe, South Africa and Australia. In total, international markets represented 36 percent of the Company's revenues in the first quarter of 1999. The Company experienced declines in most of the international markets in which it participates. Sales to Europe and the CIS, representing 12 percent of the Company's sales in the first quarter of 1999, were 6 percent lower than the prior year's quarter. Business in Mexico, Brazil and Latin America represented 5 percent of sales in the first quarter of 1999, with revenues 40 percent below the year-ago levels. Asia and Australian markets, in total, represented 11 percent of sales in the first quarter of 1999 as compared to 14 percent in the prior year's quarter. Sales to Canada, representing 6 percent of sales in the first quarter of 1999, were 23 percent lower than the first quarter of 1998. Gross Margin: _____________ The Company's gross margin percentage was 20.0 percent in the first quarter of 1999, compared to 19.8 percent in the prior year's quarter. Gross margin percentage before the special charge for product coverage costs was 22.7 percent in the first quarter of 1998. The decreased margin in 1999 was due to higher product coverage costs, increased costs related to new products, a change in product mix and the effect of the devaluation of the Brazilian Real. Operating Expenses: ___________________ Selling and administrative expenses as a percent of sales were 11.8 percent in the first quarter of 1999, compared to 13.4 percent in the first quarter of 1998, a decrease of $24 million in absolute dollars. This improvement is primarily a result of the Company's cost reduction initiatives. Research and engineering expenses declined from 4.5 percent of sales in the first quarter of 1998 to 3.5 percent in the first quarter of 1999, primarily due to new products moving into production and some delay in the start-up of new programs. The Company is continuing the restructuring plan implemented in the third quarter of 1998. During the first quarter of 1999, $12 million was charged against the liabilities associated with these actions. The Company does not anticipate any material changes in the original charges recorded for these actions. The Company's losses from joint ventures and alliances were $7 million in the first quarter of 1999, compared to $4 million in the first quarter of 1998. This difference resulted from higher losses at the Company's joint venture with Wartsila where business continues to be affected by decreased demand in Asia. 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's Year 2000 efforts are being carried out by the Company's Year 2000 Program Office under the leadership of the Director of the Year 2000 Program. The Year 2000 effort is being implemented at each of the Company's facilities and is overseen by a Year 2000 coordinator. In addition to internal resources, the Company continues to retain external resources to assist with its Year 2000 program. 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. The Company completed the inventorying, analyzing and prioritizing phase of its mainframe and distributed computing in 1998. Substantial portions of the Company's remediation and implementation efforts were conducted in 1998, and the Company is on track to complete that process by the end of the second quarter of 1999. Testing began in 1998 and will continue through 1999. The Company's Year 2000 Program Office continues to monitor the progress and compliance of its facilities through audits and reports by the Year 2000 coordinators. The Company's goal is to be Year 2000 ready by June 30, 1999. The Company will use its best efforts to ensure that any Year 2000 item not completed by that date would be completed well before the end of 1999. During the first quarter, the Company announced that its commercial products met the Company's Year 2000 compliance standards. For the convenience of its customers, the Company continues to maintain 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 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 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 continues its efforts to review the Year 2000 readiness of key suppliers through a formal program of prioritization and communication using questionnaires and/or personal follow up, as appropriate. To further the Company's efforts with suppliers, the Company continues to be a member of the Automotive Industry Action Group (AIAG). 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 effect may include an adverse effect on the Company's revenues. 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 $35 million in costs relating to its Year 2000 efforts. The Company believes that its "reasonably likely worst case scenarios" involve the failure of third parties with whom the Company does business to address Year 2000 issues. As a result, in the following months, the Company intends 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, vendors and procedures where possible, conducting employee training and developing communication plans. The Company's contingency planning also covers the identification and evaluation of risk areas at the Company's international locations. 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 is also taking steps to minimize the impact of its exposure to Year 2000 risks outside its control. 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. Other: ______ Interest expense was $19 million in the first quarter of 1999, compared to $17 million in the prior year's quarter. Other income decreased $14 million from the first quarter of 1998, due to Brazilian currency translation losses, loss on various asset dispositions and reduction in royalty income. Provision for Income Taxes: __________________________ The Company's income tax provision in the first quarter of 1999 was $10 million, reflecting an effective tax rate of 29 percent for the year. Cash Flow and Financial Condition _________________________________ Key elements of cash flows were: First Quarter $ Millions 1999 1998 __________ ______ ______ Net cash used for operating and investing activities $ (14) $(533) Net cash from financing activities 21 532 _____ _____ Net change in cash and cash equivalents $ 7 $( 1) _____ _____ In the first quarter of 1999, net cash used for operating and investing activities was $14 million. The high level of net cash requirements in the first quarter of 1998 was due primarily to the acquisition of Nelson and planned capital expenditures of $83 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. 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 4. Submission of Matters to a Vote of Security Holders ____________________________________________________________ The Company held its annual meeting of security holders on April 6, 1999 at which security holders elected 13 directors of the Company for the ensuing year and ratified the appointment of Arthur Andersen LLP as auditors for the year 1999. Results of the voting in connection with each of the items were as follows: Voting on Directors: ____________________ For Withheld __________ ________ H. Brown 36,074,950 1,402,960 R. Darnall 36,258,197 1,219,713 J. M. Deutch 36,247,396 1,230,514 W. Y. Elisha 36,245,001 1,232,909 H. H. Gray 36,148,638 1,329,272 J. A. Henderson 36,121,573 1,356,337 J. A. Johnson 36,249,849 1,228,061 W. I. Miller 36,259,031 1,218,879 W. D. Ruckelshaus 36,206,535 1,271,375 H. B. Schacht 36,235,405 1,242,505 T. M. Solso 36,015,077 1,462,833 F. A. Thomas 36,247,743 1,230,167 J. L. Wilson 36,211,409 1,266,501 Ratify Appointment of Auditors: _______________________________ For Against Abstain __________ _______ _______ 36,684,408 602,364 191,138 With regard to the election of directors, votes were cast in favor of or withheld from each nominee; votes that were withheld were excluded entirely from the vote and had no effect. Abstentions on the ratification of the appointment of Arthur Andersen LLP were counted as present for purposes of determining the existence of a quorum. Under the rules of the New York Stock Exchange, brokers who held shares in street names had the authority to vote on certain items when they did not receive instructions from beneficial owners. Brokers who did not receive instructions were entitled to vote on the election of directors. Under applicable Indiana law, a broker non-vote had no effect on the outcome of the election of directors. 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 first 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 May 4, 1999 ________________ Rick J. Mills Vice President - Corporate Controller (Chief Accounting Officer) CUMMINS ENGINE COMPANY, INC. ____________________________ INDEX TO EXHIBITS _________________ 27 Financial Data Schedule (filed herewith)