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 26, 2000 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 26, 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 First 3 Quarter Ended March 26, 2000 and March 28, 1999 Consolidated Statement of Financial Position at 4 March 26, 2000 and December 31, 1999 Consolidated Statement of Cash Flows for the First 5 Quarter Ended March 26, 2000 and March 28, 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 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Exhibits and Reports on Form 8-K 12 Index to Exhibits 14 CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF EARNINGS Unaudited __________________________________ First Quarter Ended Millions, except per share amounts 3/26/2000 3/28/99 __________________________________ _________ _______ Net sales $1,648 $1,505 Cost of goods sold 1,313 1,204 ______ ______ Gross profit 335 301 Selling & administrative expenses 194 178 Research & engineering expenses 59 54 Net (income) expense from joint ventures and alliances (1) 7 Interest expense 19 19 Other expense, net 2 7 ______ ______ Earnings before income taxes 62 36 Provision for income taxes 17 10 Minority interest 3 2 ______ ______ Net earnings $ 42 $ 24 ______ ______ ______ ______ Basic earnings per share $ 1.09 $ .63 Diluted earnings per share 1.09 .63 Cash dividends declared per share .30 .275 CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF FINANCIAL POSITION Unaudited ____________________________________________ Millions, except per share amounts 3/26/2000 12/31/99 __________________________________ _________ ________ Assets Current assets: Cash and cash equivalents $ 68 $ 74 Receivables, net of allowance of $9 1,159 1,026 Inventories 840 787 Other current assets 283 293 ______ ______ 2,350 2,180 Investments and other assets 335 274 Property, plant & equipment less accumulated depreciation of $1,533 and $1,490 1,617 1,630 Goodwill, net of amortization of $30 and $28 362 364 Other intangibles, deferred taxes & deferred charges 251 249 ______ ______ Total assets $4,915 $4,697 ______ ______ ______ ______ Liabilities and shareholders' investment Current liabilities: Loans payable $ 66 $ 113 Current maturities of long-term debt 9 10 Accounts payable 523 411 Other current liabilities 774 780 ______ ______ 1,372 1,314 ______ ______ Long-term debt 1,227 1,092 ______ ______ Other liabilities 794 788 ______ ______ Minority interest 78 74 ______ ______ Shareholders' investment: Common stock, $2.50 par value, 48.7 and 48.3 shares issued 122 121 Additional contributed capital 1,140 1,129 Retained earnings 790 760 Accumulated other comprehensive income (124) (109) Common stock in treasury,at cost,7.2 & 6.8 shares (290) (274) Common stock held in trust for employee benefit plans, 3.4 shares (161) (163) Unearned compensation (ESOP) (33) (35) ______ ______ 1,444 1,429 ______ ______ Total liabilities & shareholders' investment $4,915 $4,697 ______ ______ ______ ______ CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Unaudited ____________________________________ First Quarter Ended Millions 3/26/2000 3/28/99 ________ _________ _______ Cash flows from operating activities: Net earnings $ 42 $ 24 _____ _____ Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 57 56 Restructuring actions (2) (5) Accounts receivable (141) (130) Inventories (42) (2) Accounts payable and accrued expenses 100 95 Income taxes payable (5) (5) Equity in losses of joint ventures and alliances 2 11 Other (2) (12) _____ _____ Total adjustments (33) 8 _____ _____ Net cash provided by operating activities 9 32 _____ _____ Cash flows from investing activities: Property, plant and equipment: Additions (31) (37) Disposals 7 4 Investments in joint ventures and alliances (18) (19) Acquisition and disposition of businesses (35) 7 Other - (1) _____ _____ Net cash used in investing activities (77) (46) _____ _____ Net cash flows used in operating and investing activities (68) (14) _____ _____ Cash flows from financing activities: Proceeds from borrowings 138 88 Payments on borrowings (4) (11) Net payments under short-term credit agreements (46) (43) Repurchases of common stock (16) - Dividend payments (12) (12) Other 2 (1) _____ _____ Net cash provided by financing activities 62 21 _____ _____ Net change in cash and cash equivalents (6) 7 Cash & cash equivalents at the beginning of the year 74 38 _____ _____ Cash & cash equivalents at the end of the quarter $ 68 $ 45 _____ _____ _____ _____ CUMMINS ENGINE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited ______________________________________________ Note 1. Accounting Policies: The Consolidated Financial Statements for the interim periods ended March 26, 2000 and March 28, 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. Weighted Per- Net Average Share Millions, except per share amounts Earnings Shares Amount __________________________________ ________ ________ ______ 2000 ____ Basic $42 38.2 $1.09 Options - .1 ___ ____ Diluted $42 38.3 $1.09 ___ ____ ___ ____ 1999 ____ Basic $24 38.5 $ .63 Options - - ___ ____ Diluted $24 38.5 $ .63 ___ ____ ___ ____ Note 4. 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 26, 2000 March 28, 1999 ________ ______________ ______________ Net income $ 42 $ 24 Unrealized (loss) gain on securities (1) 1 Translation loss (14) - ____ ____ Comprehensive income $ 27 $ 25 ____ ____ ____ ____ Note 5. Segment Information: Operating segment information is as follows: Power Filtration Millions Engine Generation And Other Total ________ ______ __________ __________ ______ Quarter Ended March 26, 2000 ____________________________ Net sales $1,045 $329 $274 $1,648 Earnings before interest and income taxes 28 23 30 81 Net assets 1,108 565 854 2,527 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 Reconciliation to Consolidated Financial Statements: First Quarter Ended Millions 3/26/2000 3/28/99 ________ _________ _______ Earnings before interest and income taxes for reportable segments $ 81 $ 55 Interest expense 19 19 Income tax expense 17 10 Minority interest 3 2 ______ ______ Net earnings $ 42 $ 24 ______ ______ ______ ______ Net assets for reportable segments $2,527 $2,298 Liabilities deducted in arriving at net assets 2,049 2,037 Deferred tax assets not allocated to segments 320 334 Debt-related costs not allocated to segments 19 22 ______ ______ Total assets $4,915 $4,691 ______ ______ ______ ______ 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 March 26, 2000, approximately $88 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 Balance $ Millions Provision 1998 1999 2000 3/26/2000 __________ _________ _____ _____ _____ _________ Restructuring of majority- owned operations: Workforce reductions $ 38 $(12) $(14) $ (3) $ 9 Asset impairment loss 22 - (7) (2) 13 Facility consolidations and other 17 (8) (4) (2) 3 ____ ____ ____ ____ ____ 77 (20) (25) (7) 25 ____ ____ ____ ____ ____ Restructuring of joint venture operations: Workforce reductions 11 - (10) - 1 Tax asset impairment loss 7 - (7) - - Facility and 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) 26 ____ ____ ____ ____ ___ EPA penalty 25 - (8) - 17 ____ ____ ____ ____ ___ Total $139 $(25) $(64) $ (7) $43 ____ ____ ____ ____ ___ ____ ____ ____ ____ ___ CUMMINS ENGINE COMPANY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, CASH FLOW AND FINANCIAL CONDITION _____________________________________________________________ Overview ________ Net sales were $1.65 billion in the first quarter of 2000, an increase of 10 percent from the first quarter of 1999. Earnings before interest and taxes in the first quarter of 2000 were $81 million or 4.9 percent of sales compared to $55 million or 3.7 percent of sales in the first quarter of 1999. Net earnings were $42 million or $1.09 per share compared to $24 million or 63 cents per share in the first quarter of 1999. Results of Operations _____________________ Net Sales: __________ Revenues from sales of engines, which were 55 percent of the Company's net sales in the first quarter of 2000, were 4 percent higher than first-quarter 1999. Revenues from non-engine products, which were 45 percent of net sales in the first quarter of 2000, were 16 percent higher than the first quarter of 1999. This increase was primarily due to growth in the power generation and filtration businesses and higher parts sales. First Quarter Unit Shipments 2000 1999 ________________ _______ _______ Midrange Engines 78,900 73,700 Heavy-duty Engines 27,400 26,800 High-horsepower Engines 2,500 2,000 _______ _______ 108,800 102,500 _______ _______ _______ _______ All three of the Company's business segments had higher sales in the first quarter of 2000 than in the year-ago quarter. The Company's sales for each of its key businesses during the comparative first quarters were: First Quarter $ Millions 2000 1999 __________ ______ ______ Automotive markets $ 776 $ 760 Industrial markets 269 240 _____ _____ Engine Business 1,045 1,000 Power Generation Business 329 251 Filtration Business and Other 274 254 ______ ______ $1,648 $1,505 ______ ______ ______ ______ In the first quarter of 2000, engine business revenues of $1.05 billion increased 5 percent as compared to the first quarter of 1999, primarily due to the strength of the bus and light commercial vehicle market. Sales of $776 million in the first quarter of 2000 for automotive markets were 2 percent higher than the first quarter of 1999. Heavy- duty truck revenues were essentially flat compared to the first quarter of 1999, with the decline in sales of engines in North America offset by an increase in international heavy-duty truck revenues and parts sales. Medium-duty truck revenues decreased 13 percent from the first quarter of 1999 with sales declines in both North American and international markets. Revenues from the sales of engines for medium-duty trucks in the first quarter of 2000 were 8 percent lower than the prior year's quarter on a 15-percent de-crease in units. This variance reflected a decline in sales of engines with a lower selling price and margin. Revenues of the bus and light commercial vehicle market were 14 percent higher than the first quarter of 1999. In the first quarter of 2000, Cummins shipped 30,000 engines to DaimlerChrysler, 18 percent higher than the first-quarter 1999 level. Shipments for the bus market in the first quarter of 2000 were up 38 percent in North America and 13 percent in international markets, primarily in Mexico. Sales of engines for recreational vehicles were 13 percent higher than the year- ago quarter. Sales to industrial markets were 12 percent higher than the first quarter of 1999, due to increased volume and a shift in product mix. Engine revenues for this market were up 15 percent on a 10-percent increase in units. Construction equipment business increased 6 percent compared to first quarter 1999, while agricultural equipment demand remained flat with the prior year's quarter. Sales to marine markets increased 19 percent from the first quarter of 1999, with improvement in both Asia and North America. Mining market sales increased 25 percent as compared to the first quarter of 1999, reflecting some recovery in this market. In the first quarter of 2000, sales for the Company's power generation business increased 31 percent compared to the first quarter of 1999. Sales of the Company's generator sets were 39 percent higher than first quarter last year due to increased sales in North America. Engine sales to generator set assemblers were up 40 percent and sales of alternators increased 25 percent from the first quarter of 1999, with growth in most international markets. Generator set sales for the recreational vehicle and mobile markets were 14 percent above the year- ago quarter. Filtration business and other sales of $274 million in the first quarter of 2000 were 8 percent higher than the first quarter of 1999. Within the filtration business, the sales increase was broadly distributed across markets worldwide, reflecting both new business penetration and market growth. Sales at company-owned distributors and Holset, the Company's turbocharger business, also increased as compared to the first quarter of 1999. In total, international markets represented 41 percent of the Company's revenues in the first quarter of 2000. The Company experienced gains in all of the international markets in which it participates. Sales to Europe and the CIS, representing 13 percent of the Company's sales in the first quarter of 2000, were 15 percent higher than the prior year's quarter. Business in Mexico, Brazil and Latin America represented 6 percent of sales in the first quarter of 2000, with revenues 41 percent above the year-ago levels. Asia and Australian markets, in total, represented 12 percent of sales in the first quarter of 2000, increasing 23 percent from the prior year's quarter. Sales to Canada, representing 8 percent of sales in the first quarter of 2000, were 33 percent higher than the first quarter of 1999. Gross Margin: _____________ The Company's gross margin percentage was 20.3 percent in the first quarter of 2000, compared to 20.0 percent in the prior year's quarter. The increased margin in 2000 was due to higher volume and reduced costs related to new products, partially offset by higher product coverage costs. Operating Expenses: ___________________ Selling and administrative expenses as a percent of sales were 11.8 percent in the first quarters of 2000 and 1999. Research and engineering expenses were 3.6 percent of sales in the first quarter of 2000 compared to 3.5 percent in the first quarter of 1999. The Company is continuing the restructuring plan implemented in the third quarter of 1998. During the first quarter of 2000, $7 million was charged against the liabilities associated with these actions. The Company expects to complete the restructuring in 2000 and does not anticipate any material changes in the original charges recorded for these actions. The Company had income from joint ventures and alliances of $1 million in the first quarter of 2000, compared to losses of $7 million in the first quarter of 1999. This improvement resulted from the termination of the Company's joint venture with Wartsila at the end of 1999. Other: ______ Interest expense was $19 million in the first quarter of 2000, flat with the prior year's quarter. Other expense decreased $5 million from the first quarter of 1999, due to Brazilian currency translation losses and losses on various asset dispositions recorded in the first quarter of 1999. Provision for Income Taxes: __________________________ The Company's income tax provision in the first quarter of 2000 was $17 million, reflecting an effective tax rate of 27 percent for the year. Cash Flow and Financial Condition _________________________________ Key elements of cash flows were: First Quarter $ Millions 2000 1999 __________ _____ _____ Net cash provided by operating activities $ 9 $ 32 Net cash used in investing activities (77) (46) Net cash provided by financing activities 62 21 ____ ____ Net change in cash and cash equivalents $ (6) $ 7 ____ ____ ____ ____ In the first quarter of 2000, net cash provided by operating activities was $9 million, with the Company's earnings and the non-cash effect of depreciation and amortization reduced by increases in working capital. Net cash used in investing activities included $31 million of planned capital expenditures and $35 million related to the business assumed by the Company following the termination of the Cummins Wartsila joint venture. Net cash provided by financing activities in the first quarter of 2000 included net borrowings of $88 million primarily to fund increases in working capital, partially offset by cash used to pay dividends and repurchase shares 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 4. Submission of Matters to a Vote of Security Holders ____________________________________________________________ The Company held its annual meeting of security holders on April 4, 2000 at which security holders elected 10 directors of the Company for the ensuing year and ratified the appointment of Arthur Andersen LLP as auditors for the year 2000. Results of the voting in connection with each of the items were as follows: Voting on Directors: ____________________ For Withheld __________ ________ R. Darnall 38,044,402 1,181,968 J. M. Deutch 37,803,520 1,422,850 W. Y. Elisha 37,956,865 1,269,505 H. H. Gray 37,915,804 1,310,566 J. A. Johnson 38,087,243 1,139,127 W. I. Miller 38,069,076 1,157,294 W. D. Ruckelshaus 37,912,621 1,313,749 T. M. Solso 37,704,868 1,521,502 F. A. Thomas 37,955,056 1,271,314 J. L. Wilson 38,142,414 1,083,956 Ratify Appointment of Auditors: _______________________________ For Against Abstain __________ _________ _______ 37,490,483 1,370,007 365,880 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 14 for a list of exhibits filed herewith. (b) The Company was not required to file a Form 8-K during the first 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 April 25, 2000 __________________ Robert C. Crane Vice President - Corporate Controller (Chief Accounting Officer) CUMMINS ENGINE COMPANY, INC. ____________________________ INDEX TO EXHIBITS _________________ 27 Financial Data Schedule (filed herewith)