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 24, 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 September 24, 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 Third 3 Quarter and Nine Months Ended September 24, 2000 and September 26, 1999 Consolidated Statement of Financial Position at 4 September 24, 2000 and December 31, 1999 Consolidated Statement of Cash Flows for the Nine 5 Months Ended September 24, 2000 and September 26, 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 THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 24, 2000 AND SEPTEMBER 26, 1999 _______________________________________________ Unaudited _________ Third Quarter Nine Months Millions, except per share amounts 2000 1999 2000 1999 __________________________________ ______ ______ ______ ______ Net sales $1,572 $1,631 $4,989 $4,803 Cost of goods sold 1,262 1,270 3,993 3,770 ______ ______ ______ ______ Gross profit 310 361 996 1,033 Selling and administrative expenses 195 192 579 570 Research and engineering expenses 62 67 180 181 Net (income) expense from joint ventures and alliances (3) 8 (7) 20 Interest expense 22 18 62 56 Other (income) expense, net (5) 3 (5) 13 _____ ______ _____ ______ Earnings before income taxes 39 73 187 193 Provision for income taxes 9 19 48 54 Minority interest 5 1 11 4 ______ ______ _______ _______ Net earnings $ 25 $ 53 $ 128 $ 135 ______ ______ _______ _______ ______ ______ _______ _______ Basic earnings per share $ .66 $ 1.37 $ 3.36 $ 3.50 Diluted earnings per share .66 1.35 3.36 3.48 Cash dividends declared per share $ .30 $ .275 $ .90 $ .825 CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF FINANCIAL POSITION ____________________________________________ Unaudited _________ Millions, except per share amounts 9/24/2000 12/31/1999 __________________________________ _________ __________ Assets Current assets: Cash and cash equivalents $ 94 $ 74 Receivables, net of allowance of $10 and $9 1,097 1,026 Inventories 797 787 Other current assets 292 293 ______ ______ 2,280 2,180 Investments and other assets 375 274 Property, plant and equipment less accumulated depreciation of $1,555 and $1,490 1,595 1,630 Goodwill, net of amortization of $36 and $28 360 364 Other intangibles, deferred taxes and deferred charges 264 249 ______ ______ Total assets $4,874 $4,697 ______ ______ ______ ______ Liabilities and shareholders' investment Current liabilities: Loans payable $ 125 $ 113 Current maturities of long-term debt 9 10 Accounts payable 417 411 Other current liabilities 681 780 ______ ______ 1,232 1,314 ______ ______ Long-term debt 1,313 1,092 ______ ______ Other liabilities 802 788 ______ ______ Minority interest 68 74 ______ ______ Shareholders' investment: Common stock, $2.50 par value, 48.7 and 48.3 shares issued 122 121 Additional contributed capital 1,139 1,129 Retained earnings 851 760 Accumulated other comprehensive income (176) (109) Common stock in treasury, at cost, 7.2 & 6.8 shares (290) (274) Common stock held in trust for employee benefit plans, 3.2 and 3.4 shares (154) (163) Unearned compensation (ESOP) ( 33) (35) ______ ______ 1,459 1,429 ______ ______ Total liabilities & shareholders' investment $4,874 $4,697 ______ ______ ______ ______ CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF CASH FLOWS ____________________________________ Unaudited _________ Nine Months Ended Millions 9/24/2000 9/26/1999 ________ _________ _________ Cash flows from operating activities: Net earnings $ 128 $ 135 _____ _____ Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 180 172 Restructuring & other non-recurring actions (16) (23) Accounts receivable (115) (277) Inventories (28) (70) Accounts payable and accrued expenses (47) 216 Income taxes payable (24) 12 Equity in losses of joint ventures and alliances 7 24 Other (11) (19) _____ _____ Total adjustments (54) 35 _____ _____ Net cash provided by operating activities 74 170 _____ _____ Cash flows from investing activities: Property, plant and equipment: Additions (130) (121) Disposals 10 27 Investments in joint ventures & alliances (76) (40) Acquisition and disposition of businesses (42) 3 Other - 6 _____ _____ Net cash used in investing activities (238) (125) _____ _____ Net cash flows (used in) provided by operating and investing activities (164) 45 _____ _____ Cash flows from financing activities: Proceeds from borrowings 226 53 Payments on borrowings (8) (26) Net borrowings under short-term credit agreements 22 26 Repurchase of common stock (16) (30) Dividend payments (37) (35) Other (1) (11) _____ _____ Net cash provided by (used in) financing activities 186 (23) _____ _____ Effect of exchange rate changes on cash (2) - _____ _____ Net change in cash and cash equivalents 20 22 Cash & cash equivalents at the beginning of year 74 38 _____ _____ Cash & cash equivalents at the end of quarter $ 94 $ 60 _____ _____ _____ _____ CUMMINS ENGINE COMPANY, INC. ____________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS __________________________________________ Unaudited _________ Note 1. Accounting Policies: The Consolidated Financial Statements for the interim periods ended September 24, 2000 and September 26, 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. 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 _________________ ________ _______ ______ ________ _______ ______ 2000 ____ Basic $ 25 38.2 $ .66 $128 38.2 $ 3.36 Options - - - - ___ ____ ____ ____ Diluted $ 25 38.2 $ .66 $128 38.2 $ 3.36 ____ ____ ____ ____ ____ ____ ____ ____ 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 ____ ____ ____ ____ ____ ____ ____ ____ Note 4. 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 9/24/2000 9/26/1999 9/24/2000 9/26/1999 ________ _________ _________ _________ _________ Net income $ 25 $ 53 $128 $ 135 Unrealized (loss) gain on securities, net of tax (1) 1 (1) 2 Translation loss, net of tax (17) (2) (66) (9) ____ ____ ____ _____ Comprehensive income $ 7 $ 52 $ 61 $ 128 ____ ____ ____ _____ ____ ____ ____ _____ Note 5. Segment Information: Operating segment information is as follows: Power Filtration Millions Engine Generation And Other Total ________ ______ __________ __________ ______ Third Quarter Ended Sept. 24, 2000 __________________________________ Net sales $ 962 $ 334 $ 276 $1,572 Earnings before interest and income taxes 6 25 30 61 Net assets 1,213 576 866 2,655 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 Nine Months Ended Sept. 24, 2000 ________________________________ Net sales $3,114 $1,031 $ 844 $4,989 Earnings before interest and income taxes 76 78 95 249 Nine Months Ended Sept. 26, 1999 ________________________________ Net sales $3,127 $ 908 $ 768 $4,803 Earnings before interest and income taxes 131 28 90 249 Reconciliation to Consolidated Financial Statements: Third Quarter Ended Nine Months Ended Millions 9/24/2000 9/26/1999 9/24/2000 9/26/1999 ________ _________ _________ _________ _________ Earnings before interest & income taxes for reportable segments $ 61 $ 91 $249 $249 Interest expense 22 18 62 56 Income tax expense 9 19 48 54 Minority interest 5 1 11 4 ______ ______ ____ ____ Net earnings $ 25 $ 53 $128 $135 ______ ______ ____ ____ ______ ______ ____ ____ Net assets for reportable segments $2,655 $2,383 Liabilities deducted in arriving at net assets 1,880 2,139 Deferred tax assets not allocated to segments 320 334 Debt-related costs not allocated to segments 19 22 ______ ______ Total assets $4,874 $4,878 ______ ______ ______ ______ 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. In the third quarter of 2000, the Company reversed excess accruals of $7 million and recorded $7 million of charges related to new actions committed to during the quarter. As of September 24, 2000, approximately $100 million has been charged against the liabilities associated with restructuring actions. The Company has funded the 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 complete in early 2001. Activity in the major components of these charges is as follows: Charges Reversal Q3 Original ________________ Of 2000 Balance $ Millions Provision 1998 1999 2000 Excess Provision 9/24/00 __________ _________ ____ ____ ____ ______ _________ _______ Restructuring of majority-owned operations: Workforce reductions $ 38 $(12) $(14) $ (5) $(4) $ 2 $ 5 Asset impairment loss 22 - (7) (8) (3) 3 7 Facility consolida- tions and other 17 (8) (4) (6) - 2 1 ____ ___ ___ ____ ___ ___ ___ 77 (20) (25) (19) (7) 7 13 ____ ___ ___ ____ ___ ___ ___ Restructuring of joint venture operations: Workforce reductions 11 - (10) - - - 1 Tax asset impairment loss 7 - (7) - - - - Facility and equip- ment-related costs 5 - (5) - - - - ____ ___ ___ ___ ___ ___ ___ 23 - (22) - - - 1 ____ ___ ___ ___ ___ ___ ___ Inventory write-downs associated with restructuring actions 14 (5) ( 9) - - - - ____ ___ ___ ___ ___ ___ ___ Total restructuring charges 114 (25) (56) (19) (7) 7 14 EPA penalty 25 - (8) (9) - - 8 ____ ____ ____ ____ ___ ___ ___ Total $139 $(25) $(64) $(28) $(7) $ 7 $22 ____ ____ ____ ____ ___ ___ ___ ____ ____ ____ ____ ___ ___ ___ CUMMINS ENGINE COMPANY, INC. ____________________________ MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, CASH FLOW AND FINANCIAL CONDITION _____________________________________________________________ Overview ________ Net sales were $1.57 billion in the third quarter of 2000, 4 percent lower than the third quarter of 1999. Earnings before interest and taxes in the third quarter of 2000 were $61 million, or 3.9 percent of sales, compared to $91 million, or 5.6 percent of sales, in the third quarter of 1999. Net earnings were $25 million, or $.66 per share, compared to $53 million, or $1.35 per share, in the third quarter of 1999. Net earnings for the first nine months of 2000 were $128 million, or $3.36 per share, compared to $135 million, or $3.48 per share, in the first nine months of 1999. Results of Operations _____________________ Net Sales: __________ Revenues from sales of engines were 51 percent of the Company's net sales in the third quarter of 2000, with engine revenues 9 percent lower than third-quarter 1999 and unit shipments flat compared to the year-ago quarter. Revenue decreased due to lower heavy-duty engine sales, primarily in the North American heavy-duty truck market. Third Quarter Nine Months Unit Shipments 2000 1999 2000 1999 ______________ _______ ______ _______ _______ Midrange Engines 79,000 68,400 247,000 218,700 Heavy-duty Engines 19,600 30,500 72,800 87,900 High-horsepower Engines 2,800 2,500 8,300 6,700 _______ _______ _______ _______ 101,400 101,400 328,100 313,300 _______ _______ _______ _______ _______ _______ _______ _______ Revenues from non-engine products, which were 49 percent of net sales in the third quarter of 2000, were 3 percent higher than the third quarter of 1999. The major increases included higher revenues from international distributors and parts sales, partially offset by a decrease in genset sales. The Company's sales for each of its key businesses during the comparative periods were: Third Quarter Nine Months $ Millions 2000 1999 2000 1999 __________ ______ ______ ______ ______ Automotive markets $ 693 $ 792 $2,279 $2,372 Industrial markets 269 240 835 755 ______ ______ ______ ______ Engine Business 962 1,032 3,114 3,127 Power Generation Business 334 352 1,031 908 Filtration Business and Other 276 247 844 768 ______ ______ ______ ______ $1,572 $1,631 $4,989 $4,803 ______ ______ ______ ______ ______ ______ ______ ______ In the third quarter of 2000, engine business revenues of $962 million decreased 7 percent as compared to the third quarter of 1999, due primarily to a 49-percent decrease in shipments to the North American heavy-duty truck market. Sales of $693 million in the third quarter of 2000 for automotive markets were 13 percent lower than the third quarter of 1999. Heavy- duty truck revenues decreased 33 percent from the third quarter of 1999, due to the market decline in North America. Medium-duty truck revenues were 4 percent higher than the third quarter of 1999 on a 2-percent increase in unit shipments. Unit shipments to North America declined 23 percent, while international shipments increased 23 percent, primarily in Brazil. Revenues of the bus and light commercial vehicle market were 23 percent higher than the third quarter of 1999. In the third quarter of 2000, Cummins shipped 31,000 engines to DaimlerChrysler, 35 percent higher than the third-quarter 1999 level. Shipments to the bus and recreational vehicle market were 9 percent higher than the year-ago quarter, with a 31-percent increase in shipments to the North American bus market and a 77-percent increase in shipments for international bus markets, primarily in China, partially offset by a 31-percent decrease in units for the recreational vehicle market. Sales to industrial markets were 12 percent higher than the third quarter of 1999, due to increased volume and a shift in product mix. Engine revenues for this market were up 16 percent on an 11-percent increase in units. Construction equipment business was 4 percent higher compared to third quarter 1999, and agricultural equipment demand increased 25 percent from the prior year's quarter. Sales to marine markets increased 12 percent from third quarter 1999, with the recovery of business in Southeast Asia. Mining market sales increased 35 percent as compared to the third quarter of 1999, reflecting higher high-horsepower engine volumes. In the third quarter of 2000, sales for the Company's power generation business decreased 5 percent compared to third quarter 1999. Sales of the Company's generator sets were 6 percent below third quarter last year, and engine and alternator sales to generator set assemblers were down 5 percent from the third quarter of 1999. Generator set sales for the recreational vehicle and mobile markets in North America were down 6 percent compared to the year-ago quarter. Filtration business and other sales were $276 million in the third quarter of 2000, an increase of 12 percent from the third quarter of 1999. Sales of filtration products were up slightly compared to the year-ago level due to higher sales in North America. Sales of international company-owned distributors were at record levels in the third quarter and the Holset turbocharger business included in this segment also increased compared to the third quarter of 1999. In total, international markets represented 44 percent of the Company's revenues in the third 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 third quarter of 2000, were 8 percent higher than the prior year's quarter. Business in Mexico, Brazil and Latin America represented 7 percent of sales in the third quarter of 2000, with revenues 13 percent above the year-ago levels. Asia and Australian markets, in total, representing 15 percent of sales in the third quarter of 2000, were 12 percent higher than the prior year's quarter. Sales to Canada, representing 6 percent of sales in the third quarter of 2000, were 13 percent lower than the third quarter of 1999 due to the decline in the heavy-duty truck market. Gross Margin: _____________ The Company's gross margin percentage was 19.7 percent in the third quarter of 2000, compared to 22.1 percent in the prior year's quarter. The decreased margin in 2000 was due primarily to lower volume, higher product coverage costs and lower cost absorption at the Company's heavy- duty engine plants. For the first nine months of 2000, gross margin percentage was 20.0 percent compared to 21.5 percent for the first nine months of 1999. Operating Expenses: ___________________ Selling and administrative expenses as a percent of sales were 12.4 percent in the third quarter of 2000, compared to 11.8 percent in the third quarter of 1999, with total spending increasing $3 million. Research and engineering expenses declined from 4.1 percent of sales in the third quarter of 1999 to 3.9 percent in the third quarter of 2000. The Company is continuing the restructuring plan implemented in the third quarter of 1998. During the third quarter of 2000, the Company reversed $7 million in excess accruals and recorded $7 million of charges related to new actions committed to during the quarter. The Company expects to complete the restructuring in early 2001. The Company's income from joint ventures and alliances was $3 million in the third quarter of 2000 as compared to losses of $8 million in the third quarter of 1999, due to the termination of the Company's joint venture with Wartsila, which had losses of $11 million in the third quarter of 1999. Other: ______ Interest expense was $22 million in the third quarter of 2000, compared to $18 million in the prior year's quarter, due to increased levels of borrowings. Other income was $5 million in the third quarter of 2000 compared to expense of $3 million in the third quarter of 1999, with the variance resulting primarily from interest income on tax refunds and from non-recurring transactions recorded in the prior year. Provision for Income Taxes: ___________________________ In the third quarter, the estimated effective tax rate for 2000 was reduced to 25.5 percent for the year. The Company's tax rate for the third quarter was 23.6 percent to reflect the year-to-date adjustment to the lower 2000 effective tax rate. The effective tax rate was 26 percent for the third quarter of 1999 and 28 percent for the first nine months of 1999. Cash Flow and Financial Condition _________________________________ Key elements of cash flows were: Nine Months $ Millions 2000 1999 __________ ______ ______ Net cash provided by operating activities $ 74 $ 170 Net cash used in investing activities (238) (125) Net cash provided by (used in) financing activities 186 (23) Effect of exchange rate changes on cash (2) - _____ _____ Net change in cash and cash equivalents $ 20 $ 22 _____ _____ _____ _____ In the first nine months of 2000, net cash provided by operating activities was $74 million, with the Company's net earnings and the non- cash effect of depreciation and amortization, reduced by increases in working capital. Net cash requirements for investing activities of $238 million included capital expenditures of $130 million in the first nine months of 2000, compared to capital expenditures of $121 million in the first nine months of 1999. Net cash provided by financing activities was $186 million in the first nine months 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 third 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) November 2, 2000 CUMMINS ENGINE COMPANY, INC. ____________________________ INDEX TO EXHIBITS _________________ 27 Financial Data Schedule (filed herewith)