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 25, 2000 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 25, 2000, the number of shares outstanding of the registrant's only class of common stock was 41.5 million. 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 25, 2000 and June 27, 1999 Consolidated Statement of Financial Position at 4 June 25, 2000 and December 31, 1999 Consolidated Statement of Cash Flows for the First 5 Half Ended June 25, 2000 and June 27, 1999 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 13 Index to Exhibits 14 CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF EARNINGS FOR THE SECOND QUARTER AND FIRST HALF ENDED JUNE 25, 2000 AND JUNE 27, 1999 Unaudited _____________________________________ Second Quarter First Half ________________ ________________ Millions, except per share amounts 2000 1999 2000 1999 __________________________________ ______ ______ ______ ______ Net sales $1,769 $1,667 $3,417 $3,172 Cost of goods sold 1,418 1,296 2,731 2,500 ______ ______ ______ ______ Gross profit 351 371 686 672 Selling & administrative expenses 190 200 384 378 Research & engineering expenses 59 60 118 114 Net (income) expense from joint ventures and alliances (3) 5 (4) 12 Interest expense 21 19 40 38 Other (income) expense, net (2) 3 - 10 ______ ______ ______ ______ Earnings before income taxes 86 84 148 120 Provision for income taxes 22 25 39 35 Minority interest 3 1 6 3 ______ ______ ______ ______ Net earnings $ 61 $ 58 $ 103 $ 82 ______ ______ ______ ______ ______ ______ ______ ______ Basic earnings per share $ 1.62 $ 1.51 $ 2.71 $ 2.14 Diluted earnings per share 1.62 1.50 2.70 2.13 Cash dividends declared per share .30 .275 .60 .55 CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF FINANCIAL POSITION Unaudited ____________________________________________ Millions, except per share amounts 6/25/2000 12/31/1999 __________________________________ _________ __________ Assets Current assets: Cash and cash equivalents $ 74 $ 74 Receivables, net of allowance of $9 1,138 1,026 Inventories 822 787 Other current assets 294 293 ______ ______ 2,328 2,180 Investments and other assets 346 274 Property, plant & equipment less accumulated depreciation of $1,542 and $1,490 1,602 1,630 Goodwill, net of amortization of $33 and $28 359 364 Other intangibles, deferred taxes and deferred charges 258 249 ______ ______ Total assets $4,893 $4,697 ______ ______ ______ ______ Liabilities and shareholders' investment Current liabilities: Loans payable $ 68 $ 113 Current maturities of long-term debt 9 10 Accounts payable 463 411 Other current liabilities 770 780 ______ ______ 1,310 1,314 ______ ______ Long-term debt 1,255 1,092 ______ ______ Other liabilities 788 788 ______ ______ Minority interest 79 74 ______ ______ Shareholders' investment: Common stock, $2.50 par value, 48.7 and 48.3 shares issued 121 121 Additional contributed capital 1,140 1,129 Retained earnings 839 760 Accumulated other comprehensive income (158) (109) Common stock in treasury, at cost, 7.2 and 6.8 shares (290) (274) Common stock held in trust for employee benefit plans, 3.4 shares (158) (163) Unearned compensation (ESOP) ( 33) ( 35) _____ _____ 1,461 1,429 ______ ______ Total liabilities and shareholders' investment $4,893 $4,697 ______ ______ ______ ______ CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Unaudited ____________________________________ First Half Ended _______________________ Millions 6/25/2000 6/27/1999 ________ _________ _________ Cash flows from operating activities: Net earnings $103 $ 82 ____ ____ Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 117 114 Restructuring actions (5) (11) Accounts receivable (144) (188) Inventories (38) (28) Accounts payable and accrued expenses 55 200 Income taxes payable (5) 8 Equity in losses of joint ventures and alliances 4 16 Other (28) (10) ____ ____ Total adjustments (44) 101 ____ ____ Net cash provided by operating activities 59 183 ____ ____ Cash flows from investing activities: Property, plant and equipment: Additions (84) (80) Disposals 16 21 Investments in joint ventures and alliances (36) (37) Acquisition and disposition of businesses (35) 3 Other - 2 ____ ____ Net cash used in investing activities (139) (91) ____ ____ Net cash flows (used in) provided by operating and investing activities (80) 92 ____ ____ Cash flows from financing activities: Proceeds from borrowings 168 - Payments on borrowings (7) (17) Net payments under short-term credit agreements (40) (10) Repurchases of common stock (16) (10) Dividend payments (25) (23) Other 1 (3) ____ ____ Net cash provided by (used in) financing activities 81 (63) ____ ____ Effect of exchange rate changes on cash (1) - ____ ____ Net change in cash and cash equivalents - 29 Cash & cash equivalents at beginning of the year 74 38 ____ ____ Cash & cash equivalents at end of the first half $ 74 $ 67 ____ ____ ____ ____ CUMMINS ENGINE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited __________________________________________ Note 1. Accounting Policies: The Consolidated Financial Statements for the interim periods ended June 25, 2000 and June 27, 1999 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. 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 3. 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 __________________________________ ________ ________ ______ 2000 ____ Basic $61 38.1 $1.62 Options - - ___ ____ Diluted $61 38.1 $1.62 ___ ____ ___ ____ 1999 ____ Basic $58 38.5 $1.51 Options - .2 ___ ____ Diluted $58 38.7 $1.50 ___ ____ ___ ____ First Half ________________________________ Weighted Per- Net Average Share Millions, except per share amounts Earnings Shares Amount __________________________________ ________ ________ ______ 2000 ____ Basic $103 38.2 $2.71 Options - - ____ ____ Diluted $103 38.2 $2.70 ____ ____ ____ ____ 1999 ____ Basic $82 38.5 $2.14 Options - .2 ___ ____ Diluted $82 38.7 $2.13 ___ ____ ___ ____ Note 4. Comprehensive Income: Comprehensive income, which includes net income and all other non-owner changes in equity during a period, is as follows: Second Quarter Ended Millions June 25, 2000 June 27, 1999 ________ _____________ _____________ Net income $ 61 $ 58 Unrealized gain on securities 1 - Translation loss, net of tax (35) (7) ____ ____ Comprehensive income $ 27 $ 51 ____ ____ ____ ____ First Half Ended Millions June 25, 2000 June 27, 1999 ________ _____________ _____________ Net income $103 $ 82 Unrealized gain on securities - 1 Translation loss, net of tax (49) (7) ____ ____ Comprehensive income $ 54 $ 76 ____ ____ ____ ____ Note 5. Segment Information: Operating segment information is as follows: Power Filtration Millions Engine Generation And Other Total ________ ______ __________ __________ ______ Second Quarter Ended June 25, 2000 __________________________________ Net sales $1,107 $368 $294 $1,769 Earnings before interest and income taxes 42 30 35 107 Net assets 1,160 578 845 2,583 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 First Half Ended June 25, 2000 ______________________________ Net sales $2,152 $697 $568 $3,417 Earnings before interest and income taxes 70 53 65 188 First Half Ended June 27, 1999 ______________________________ Net sales $2,095 $556 $521 $3,172 Earnings before interest and income taxes 86 13 59 158 Reconciliation to Consolidated Financial Statements: Second Quarter Ended Millions 6/25/2000 6/27/1999 ________ _________ _________ Earnings before interest and income taxes for reportable segments $ 107 $ 103 Interest expense 21 19 Income tax expense 22 25 Minority interest 3 1 ______ ______ Net earnings $ 61 $ 58 ______ ______ ______ ______ Net assets for reportable segments $2,583 $2,298 Liabilities deducted in arriving at net assets 1,971 2,116 Deferred tax assets not allocated to segments 320 334 Debt-related costs not allocated to segments 19 22 ______ ______ Total assets $4,893 $4,770 ______ ______ ______ ______ First Half Ended Millions 6/25/2000 6/27/1999 ________ _________ _________ Earnings before interest and income taxes for reportable segments $ 188 $ 158 Interest expense 40 38 Income tax expense 39 35 Minority interest 6 3 ______ ______ Net earnings $ 103 $ 82 ______ ______ ______ ______ Note 6. 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. In addition, the Company recorded special charges of $14 million for inventory write-downs associated with restructuring actions. The Company is continuing the restructuring plan implemented in the third quarter of 1998. As of June 25, 2000, approximately $91 million has been charged against the liabilities associated with these actions. The Company has funded the restructuring actions using cash generated from operations. The remaining actions to be completed consist primarily of the outsourcing of certain manufacturing operations and payment of severance commitments to terminated employees. The program is expected to be essentially complete in 2000, and 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 2000 2000 6/25/00 __________ _________ _____ _____ ____ ____ _______ Restructuring of majority- owned operations: Workforce reductions $ 38 $(12) $(14) $(3) $(1) $ 8 Asset impairment loss 22 - ( 7) (2) (1) 12 Facility consolidations and other 17 ( 8) ( 4) (2) (1) 2 ____ ____ ____ ___ ___ ___ 77 (20) (25) (7) (3) 22 ____ ___ ____ ___ ___ ___ Restructuring of joint venture operations: Workforce reductions 11 - (10) - - 1 Tax asset impairment loss 7 - (7) - - - Facility & equipment-related costs 5 - (5) - - - ____ ____ ____ ___ __ ___ 23 - (22) - - 1 ____ ____ ____ ___ __ ___ Inventory write-downs associated with restructuring actions 14 (5) (9) - - - ____ ____ ____ ___ __ ___ Total restructuring charges 114 (25) (56) (7) (3) 23 EPA penalty 25 - (8) - - 17 ____ ____ ____ ___ ___ ___ Total $139 $(25) $(64) $(7) $(3) $40 ____ ____ ____ ___ ___ ___ ____ ____ ____ ___ ___ ___ CUMMINS ENGINE COMPANY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, CASH FLOW AND FINANCIAL CONDITION ________________________________________________________ Overview ________ Net sales were $1.77 billion in the second quarter of 2000, the second highest sales quarter ever, and 6 percent higher than the second quarter of 1999. Earnings before interest and taxes in the second quarter of 2000 matched an all-time record for the Company of $107 million, or 6.0 percent of sales. This compares to $103 million, or 6.2% of sales, in the second quarter of 1999. Net earnings were $61 million, or $1.62 per share, compared to $58 million, or $1.50 per share, in the second quarter of 1999. Net earnings for the first half of 2000 were $103 million, or $2.70 per share, compared to $82 million, or $2.13 per share, in the first half of 1999. Results of Operations _____________________ Net Sales: __________ Revenues from sales of engines were 54 percent of the Company's net sales in the second quarter of 2000, with engine revenues 2 percent higher than second-quarter 1999 and unit shipments 8 percent higher. Unit shipments increased more than revenue due to lower heavy-duty engine sales, primarily in the North American heavy-duty truck market. Second Quarter First Half _______________ ________________ Unit Shipments 2000 1999 2000 1999 ______________ ______ ______ _______ _______ Midrange Engines 89,100 76,600 168,000 150,300 Heavy-duty Engines 25,800 30,600 53,200 57,400 High-horsepower Engines 3,000 2,200 5,500 4,200 _______ _______ _______ _______ 117,900 109,400 226,700 211,900 _______ _______ _______ _______ _______ _______ _______ _______ Revenues from non-engine products, which were 46 percent of net sales in the second quarter of 2000, were 12 percent higher than the second quarter of 1999. The major increases included higher sales of gensets and filtration products and revenues from international distributors. The Company's sales for each of its key businesses during the comparative periods were: Second Quarter First Half _______________ _______________ $ Millions 2000 1999 2000 1999 __________ ______ ______ ______ ______ Automotive markets $ 810 $ 820 $1,586 $1,580 Industrial markets 297 275 566 515 ______ ______ ______ ______ Engine Business 1,107 1,095 2,152 2,095 Power Generation Business 368 305 697 556 Filtration Business & Other 294 267 568 521 ______ ______ ______ ______ $1,769 $1,667 $3,417 $3,172 ______ ______ ______ ______ ______ ______ ______ ______ In the second quarter of 2000, engine business revenues of $1.1 billion increased 1 percent as compared to the second quarter of 1999, despite a 28 percent decrease in shipments to the North American heavy-duty truck market. The Company expects a further decline in the North American heavy-duty truck market during the second half of 2000 as compared to the first half of the year. Sales of $810 million in the second quarter of 2000 for automotive markets were 1 percent lower than the second quarter of 1999. Heavy- duty truck revenues decreased 14 percent from the second quarter of 1999, with the market decline in North America partially offset by increased demand in Mexican automotive markets. Medium-duty truck revenues were essentially flat with the second quarter of 1999, despite an 11 percent increase in unit shipments. This variance reflected a mix shift towards engines with a lower selling price and margin. Unit shipments to North America declined 19 percent, while international shipments increased 38 percent, primarily in Brazil. Revenues of the bus and light commercial vehicle market were 26 percent higher than the second quarter of 1999. In the second quarter of 2000, Cummins shipped a record 32,100 engines to DaimlerChrysler, 36 percent higher than the second-quarter 1999 level. Shipments to the North American bus and recreational vehicle market were 11 percent higher than the year-ago quarter, and shipments for international bus markets increased 92 percent from the second quarter of 1999, due to higher sales into China and Mexico. Sales to industrial markets were 8 percent higher than the second quarter of 1999, due to increased volume and a shift in product mix. Engine revenues for this market were up 9 percent on a 3-percent increase in units. Construction equipment business was flat compared to second quarter 1999, while agricultural equipment demand declined 11 percent from the prior year's quarter. Sales to marine markets increased 11 percent from second quarter 1999, with growth in Europe and North America. Mining market sales increased 38 percent as compared to the second quarter of 1999, reflecting higher high- horsepower engine volumes. In the second quarter of 2000, sales for the Company's power generation business increased 21 percent compared to second quarter 1999. Sales of the Company's generator sets were 37 percent above second quarter last year with continued strength in North American markets. Engine sales to generator set assemblers were up 24 percent from the second quarter of 1999, primarily in Europe and Turkey. Generator set sales for the recreational vehicle market in North America were essentially flat with the year-ago quarter. Filtration business and other sales were $294 million in the second quarter of 2000, an increase of 10 percent from the second quarter of 1999. Sales of filtration products reflected gains in North America and Europe and strong increases in Latin America, Mexico and Asia. Sales of international company-owned distributors and the Holset turbocharger business included in this segment also increased compared to the second quarter of 1999. In total, international markets represented 41 percent of the Company's revenues in the second quarter of 2000, with increases in most of the international markets in which the Company participates. Sales to Europe and the CIS, representing 13 percent of the Company's sales in the second quarter of 2000, were 12 percent higher than the prior year's quarter. Business in Mexico, Brazil and Latin America represented 7 percent of sales in the second quarter of 2000, with revenues 32 percent above the year-ago levels. Asia and Australian markets, in total, representing 13 percent of sales in the second quarter of 2000, were 20 percent higher than the prior year's quarter. Sales to Canada, representing 6 percent of sales in the second quarter of 2000, were 25 percent lower than the second quarter of 1999 due to the decline in the heavy-duty truck market. Gross Margin: _____________ The Company's gross margin percentage was 19.8 percent in the second quarter of 2000, compared to 22.3 percent in the prior year's quarter. The decreased margin in 2000 was due to higher product coverage costs and changes in product mix. Contributing to the increased product coverage costs is the ISX engine family, which continues to have higher coverage costs that the N14 product it replaces. The Company currently anticipates this increased level of product coverage expense to continue for the next three to four quarters. The impact on gross margin from changes in product mix resulted from the mix shift from the N14 to the ISX engines, as well as mix changes in the power generation business and in the Company's international distributor revenue. For the first half of 2000, gross margin percentage was 20.1 percent, compared to 21.2 percent in the first half of 1999. Operating Expenses: ___________________ Selling and administrative expenses as a percent of sales were 10.8 percent in the second quarter of 2000, compared to 12.0 percent in the second quarter of 1999, with total spending decreasing $10 million on a 6-percent increase in sales. Research and engineering expenses declined from 3.6 percent of sales in the second quarter of 1999 to 3.3 percent in the second quarter of 2000. 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. During the second quarter of 2000, $3 million was charged against the liabilities associated with these actions. The Company expects to complete the restructuring in 2000 and does not currently anticipate any material changes in the original charges recorded for these actions. The Company's income from joint ventures and alliances was $3 million in the second quarter of 2000 as compared to losses of $5 million in the second quarter of 1999 due to the termination of the Company's joint venture with Wartsila, which had losses of $7 million in the second quarter of 1999. Other: ______ Interest expense was $21 million in the second quarter of 2000, compared to $19 million in the prior year's quarter due to increased levels of borrowings and lower interest capitalization. Other income was $2 million in the second quarter of 2000 compared to expense of $3 million in the second quarter of 1999, with the variance resulting primarily from increased earnings from distributors and from non- recurring transactions recorded in the prior year. Provision for Income Taxes: ___________________________ In the second quarter, the estimated effective tax rate for 2000 was reduced to 26 percent for the year. The Company's tax rate for the second quarter was 25 percent to reflect the year-to-date adjustment to the lower 2000 effective tax rate. The effective tax rate for the second quarter and first half of 1999 was 29 percent. Cash Flow and Financial Condition _________________________________ Key elements of cash flows were: First Half _________________ $ Millions 2000 1999 __________ _____ _____ Net cash provided by operating activities $ 59 $183 Net cash used in investing activities (139) (91) Net cash provided by (used in) financing activities 81 (63) Effect of exchange rate changes on cash (1) - _____ ____ Net change in cash and cash equivalents $ - $ 29 _____ ____ _____ ____ In the first half of 2000, net cash provided by operating activities was $59 million, reflecting the Company's strong net earnings and the non-cash effect of depreciation and amortization, reduced by increases in working capital. Net cash requirements for investing activities of $139 million included capital expenditures of $84 million in the first half of 2000, compared to capital expenditures of $80 million in the first half of 1999. Net cash provided by financing activities was $81 million in the first half of 2000. This included proceeds from increased borrowings, reduced by cash used for dividend payments and repurchases of the Company's stock. 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 14 for a list of exhibits filed herewith. (b) The Company was not required to file a Form 8-K during the second quarter of 2000. 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/Robert C. Crane _________________ Robert C. Crane Vice President - Corporate Controller (Chief Accounting Officer) July 31, 2000 CUMMINS ENGINE COMPANY, INC. ____________________________ INDEX TO EXHIBITS _________________ 27 Financial Data Schedule (filed herewith)