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 27, 1999 Commission File Number 1-4949 _____________ ______ Indiana 35-0257090 _______ __________ (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 500 Jackson Street, Box 3005, ____________________________ Columbus, Indiana 47202-3005 _________________ __________ (Address of Principal Executive Offices) (Zip Code) 812-377-5000 ____________ (Registrant's Telephone Number) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months and (2) has been subject to such filing requirements for the past 90 days: Yes [x] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of June 27, 1999, the number of shares outstanding of the registrant's only class of common stock was 41.9 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 27, 1999 and June 28, 1998 Consolidated Statement of Financial Position at 4 June 27, 1999 and December 31, 1998 Consolidated Statement of Cash Flows for the First 5 Half Ended June 27, 1999 and June 28, 1998 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of 9 Operations, Cash Flow and Financial Condition PART II. OTHER INFORMATION ___________________________ Item 6. Exhibits and Reports on Form 8-K 14 Index to Exhibits 15 CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF EARNINGS FOR THE SECOND QUARTER AND FIRST HALF ENDED JUNE 27, 1999 AND JUNE 28, 1998 Unaudited _____________________________________ Second Quarter First Half ________________ ________________ Millions, except per share amounts 1999 1998 1999 1998 __________________________________ ______ ______ ______ ______ Net sales $1,667 $1,635 $3,172 $3,135 Cost of goods sold 1,296 1,266 2,500 2,426 Special charge - - - 43 ______ ______ ______ ______ Gross profit 371 369 672 666 Selling & administrative expenses 200 199 378 401 Research & engineering expenses 60 65 114 132 Net expense from joint ventures and alliances 5 6 12 10 Interest expense 19 18 38 35 Other expense (income), net 3 - 10 (7) ______ ______ ______ ______ Earnings before income taxes 84 81 120 95 Provision for income taxes 25 24 35 28 Minority interest 1 4 3 7 ______ ______ ______ ______ Net earnings $ 58 $ 53 $ 82 $ 60 ______ ______ ______ ______ ______ ______ ______ ______ Basic earnings per share $ 1.51 $ 1.39 $ 2.14 $ 1.57 Diluted earnings per share 1.50 1.38 2.13 1.55 Cash dividends declared per share .275 .275 .55 .55 CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF FINANCIAL POSITION Unaudited ____________________________________________ Millions, except per share amounts 6/27/99 12/31/98 __________________________________ _______ ________ Assets Current assets: Cash and cash equivalents $ 67 $ 38 Receivables 1,015 833 Inventories 760 731 Other current assets 274 274 ______ ______ 2,116 1,876 Investments and other assets 303 280 Property, plant & equipment less accumulated depreciation of $1,469 and $1,424 1,626 1,671 Goodwill, net of amortization of $24 and $17 380 384 Other intangibles, deferred taxes and deferred charges 345 331 ______ ______ Total assets $4,770 $4,542 ______ ______ ______ ______ Liabilities and shareholders' investment Current liabilities: Loans payable $ 54 $ 64 Current maturities of long-term debt 26 26 Accounts payable 415 340 Other current liabilities 751 641 ______ ______ 1,246 1,071 ______ ______ Long-term debt 1,118 1,137 ______ ______ Other liabilities 1,008 1,000 ______ ______ Minority interest 71 62 ______ ______ Shareholders' investment: Common stock, $2.50 par value, 48.2 and 48.1 shares issued 121 120 Additional contributed capital 1,124 1,121 Retained earnings 707 648 Accumulated other comprehensive income (173) (167) Common stock in treasury, at cost, 6.3 and 6.1 shares (250) (240) Common stock held in trust for employee benefit plans, 3.5 and 3.6 shares (167) (172) Unearned compensation (ESOP) ( 35) ( 38) _____ _____ 1,327 1,272 ______ ______ Total liabilities and shareholders' investment $4,770 $4,542 ______ ______ ______ ______ CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Unaudited ____________________________________ First Half Ended ______________________ Millions 6/27/99 6/28/98 ________ _______ _______ Cash flows from operating activities: Net earnings $ 82 $ 60 ____ ____ Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 114 98 Restructuring actions ( 11) ( 11) Accounts receivable (188) (165) Inventories ( 28) ( 48) Accounts payable and accrued expenses 200 115 Income taxes payable 8 ( 6) Equity in losses of joint ventures and alliances 16 16 Other ( 10) 17 ____ ____ Total adjustments 101 16 ____ ____ Net cash provided by operating activities 183 76 ____ ____ Cash flows from investing activities: Property, plant and equipment: Additions ( 80) (154) Disposals 21 4 Investments in joint ventures and alliances ( 37) ( 6) Acquisition and disposition of businesses 3 (466) Other 2 1 ____ ____ Net cash used in investing activities ( 91) (621) ____ ____ Net cash flows provided by (used in) operating and investing activities 92 (545) ____ ____ Cash flows from financing activities: Proceeds from borrowings - 711 Payments on borrowings ( 17) (117) Net payments under credit agreements ( 10) ( 37) Repurchases of common stock ( 10) - Dividend payments ( 23) ( 23) Other ( 3) 3 ____ ____ Net cash (used in) provided by financing activities ( 63) 537 ____ ____ Effect of exchange rate changes on cash - ( 1) ____ ____ Net change in cash and cash equivalents 29 ( 9) Cash & cash equivalents at beginning of the year 38 49 ____ ____ Cash & cash equivalents at end of the first half $ 67 $ 40 ____ ____ ____ ____ CUMMINS ENGINE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited __________________________________________ Note 1. Accounting Policies: The Consolidated Financial Statements for the interim periods ended June 27, 1999 and June 28, 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. Second Quarter ________________________________ Weighted Per- Net Average Share Millions, except per share amounts Earnings Shares Amount __________________________________ ________ ________ ______ 1999 ____ Basic $58 38.5 $1.51 Options - .2 ___ ____ Diluted $58 38.7 $1.50 ___ ____ ___ ____ 1998 ____ Basic $53 38.5 $1.39 Options - .3 ___ ____ Diluted $53 38.8 $1.38 ___ ____ ___ ____ First Half ________________________________ Weighted Per- Net Average Share Millions, except per share amounts Earnings Shares Amount __________________________________ ________ ________ ______ 1999 ____ Basic $82 38.5 $2.14 Options - .2 ___ ____ Diluted $82 38.7 $2.13 ___ ____ ___ ____ 1998 ____ Basic $60 38.5 $1.57 Options - .3 ___ ____ Diluted $60 38.8 $1.55 ___ ____ ___ ____ Note 7. Comprehensive Income: Comprehensive income, which includes net income and all other nonowner changes in equity during a period, is as follows: Second Quarter Ended Millions June 27, 1999 June 28, 1998 ________ _____________ _____________ Net income $ 58 $ 53 Unrealized gain (loss) on securities, net of tax - ( 1) Translation loss, net of tax (7) (33) ____ ____ Comprehensive income $ 51 $ 19 ____ ____ ____ ____ First Half Ended Millions June 27, 1999 June 28, 1998 ________ _____________ _____________ Net income $ 82 $ 60 Unrealized gain (loss) on securities, net of tax 1 ( 1) Translation loss, net of tax (7) (52) ____ ____ Comprehensive income $ 76 $ 7 ____ ____ ____ ____ Note 8. Segment Information: Operating segment information is as follows: Power Filtration Millions Engine Generation And Other Total ________ ______ __________ __________ ______ 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 Second Quarter Ended June 28, 1998 __________________________________ Net sales $1,049 $313 $273 $1,635 Earnings before interest and income taxes 56 10 33 99 Net assets 1,191 534 809 2,534 First Half Ended June 27, 1999 ______________________________ Net sales $2,095 $556 $521 $3,172 Earnings before interest and income taxes 86 13 59 158 First Half Ended June 28, 1998 ______________________________ Net sales $2,002 $604 $529 $3,135 Earnings before interest, income taxes & special charges 104 12 57 173 Special charges 43 - - 43 Earnings before interest and income taxes 61 12 57 130 Reconciliation to Consolidated Financial Statements: Second Quarter Ended Millions 6/27/99 6/28/98 ________ _______ _______ Earnings before interest and income taxes for reportable segments $ 103 $ 99 Interest expense 19 18 ______ ______ Earnings before income taxes $ 84 $ 81 ______ ______ ______ ______ Net assets for reportable segments $2,298 $2,534 Liabilities deducted in arriving at net assets 2,116 1,716 Deferred tax assets not allocated to segments 334 256 Debt-related costs not allocated to segments 22 22 ______ ______ Total assets $4,770 $4,528 ______ ______ ______ ______ First Half Ended Millions 6/27/99 6/28/98 ________ _______ _______ Earnings before interest and income taxes for reportable segments $ 158 $ 130 Interest expense 38 35 ______ ______ Earnings before income taxes $ 120 $ 95 ______ ______ ______ ______ Note 9. Investments to Joint Ventures and Alliances: Summary financial information for the joint ventures and alliances was as follows: Year Ended December 31 ______________________ $ Millions 1998 1997 1996 __________ ______ ______ ______ Net sales $1,245 $1,307 $1,328 Gross profit 25 111 84 Net earnings (loss) (105) 5 3 Cummins' share ( 52) 2 2 Current assets $ 527 $ 447 Noncurrent assets 613 533 Current liabilities (406) (258) Noncurrent liabilities (455) (305) ______ ______ Net assets $ 279 $ 417 ______ ______ ______ ______ Cummins' share $ 136 $ 204 ______ ______ ______ ______ Note 10. Restructuring and Other Non-Recurring Charges: The Company is continuing the restructuring plan implemented in the third quarter of 1998. As of June 27, 1999, approximately $60 million has been charged against the liabilities associated with these actions. The Company does not currently anticipate any material changes in the original charges recorded for these actions. Activity in the major components of these charges is as follows: Charges __________________ Original Q1 Q2 Balance $ Millions Provision 1998 1999 1999 6/27/99 __________ _________ _____ _____ _____ _______ Restructuring of majority-owned operations: Workforce reductions $ 38 $(12) $( 5) $( 5) $16 Asset impairment loss 22 - ( 1) ( 4) 17 Facility consolidations & other 17 ( 8) ( 2) - 7 ____ ____ ____ ____ ___ 77 (20) ( 8) ( 9) 40 ____ ____ ____ ____ ___ Restructuring of joint venture operations: Workforce reductions $ 11 $ - $ - $( 2) $ 9 Tax asset impairment loss 7 - - ( 7) - Facility & equipment-related costs 5 - - - 5 ____ ____ ____ ____ ___ 23 - - ( 9) 14 ____ ____ ____ ____ ___ Inventory write-downs associated with exit activities 14 ( 5) ( 4) ( 5) - ____ ____ ____ ____ ___ Total $114 $(25) $(12) $(23) $54 ____ ____ ____ ____ ___ ____ ____ ____ ____ ___ CUMMINS ENGINE COMPANY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, CASH FLOW AND FINANCIAL CONDITION ________________________________________________________ Overview ________ Net sales were a record $1.67 billion in the second quarter of 1999, 2 percent higher than the second quarter of 1998. Earnings before interest and taxes in the second quarter of 1999 were also a record, totaling $103 million or 6.2 percent of sales. Net earnings were $58 million or $1.50 per share compared to $53 million or $1.38 per share in the second quarter of 1998. Net earnings for the first half of 1999 were $82 million or $2.13 per share compared to $60 million or $1.55 per share in the first half of 1998. Results of Operations _____________________ Net Sales: __________ Revenues from sales of engines were 56 percent of the Company's net sales in the second quarter of 1999, with engine revenues 3 percent higher than second-quarter 1998 and unit shipments 2 percent higher. Revenue increased more than unit shipments due to higher heavy-duty engine sales, primarily in the North American heavy-duty truck market. Second Quarter First Half _______________ ________________ Unit Shipments 1999 1998 1999 1998 ______________ ______ ______ _______ _______ Midrange Engines 76,600 77,300 150,300 142,300 Heavy-duty Engines 30,600 27,400 57,400 54,300 High-horsepower Engines 2,200 2,700 4,200 4,900 _______ _______ _______ _______ 109,400 107,400 211,900 201,500 _______ _______ _______ _______ _______ _______ _______ _______ Revenues from non-engine products, which were 44 percent of net sales in the second quarter of 1999, were essentially flat compared to the second quarter of 1998. The Company's sales for each of its key businesses during the comparative periods were: Second Quarter First Half _______________ _______________ $ Millions 1999 1998 1999 1998 __________ ______ ______ ______ ______ Automotive markets $ 820 $ 755 $1,580 $1,439 Industrial markets 275 294 515 563 ______ ______ ______ ______ Engine Business 1,095 1,049 2,095 2,002 Power Generation Business 305 313 556 604 Filtration Business & Other 267 273 521 529 ______ ______ ______ ______ $1,667 $1,635 $3,172 $3,135 ______ ______ ______ ______ ______ ______ ______ ______ In the second quarter of 1999, engine business revenues of $1.1 billion increased 4 percent as compared to the second quarter of 1998, primarily due to the strength of the North American automotive market. Sales of $820 million in the second quarter of 1999 for automotive markets were 9 percent higher than the second quarter of 1998. Heavy- duty truck revenues increased 17 percent from the second quarter of 1998 due to the strong market in North America, partially offset by reduced demand in Mexican automotive markets. Medium-duty truck revenues decreased 3 percent from the second quarter of 1998 due to lower sales of kits into Turkey, where the truck market has declined 90 percent from the prior year. Revenues from the sales of engines for medium-duty trucks in the second quarter of 1999 remained flat with the prior year's quarter on a 10-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 1 percent higher than the second quarter of 1998. In the second quarter of 1999, Cummins shipped 23,700 engines to DaimlerChrysler, 7 percent lower than the second-quarter 1998 level. The decrease in sales to DaimlerChrysler was offset by record shipments to the North American bus and recreational vehicle market, where volumes were 34 percent higher than the year-ago quarter. Shipments for international bus markets declined 25 percent from the second quarter of 1998, due to lower sales into Mexico. Sales to industrial markets were 6 percent lower than the second quarter of 1998, due to decreased volume and a shift in product mix. Engine revenues for this market were down 10 percent on an 8-percent decrease in units. Construction equipment business increased 8 percent compared to second quarter 1998, while agricultural equipment demand declined 57 percent from the prior year's quarter. Sales to marine markets increased 33 percent from second quarter 1998, with a shift to more mid-range engines in recreational applications. Mining market sales decreased 27 percent as compared to the second quarter of 1998, reflecting lower high-horsepower engine volumes. In the second quarter of 1999, sales for the Company's power generation business decreased 3 percent compared to second quarter 1998. Sales of the Company's generator sets were 1 percent above second quarter last year with increased sales in North America largely offset by declines in China and Latin America. Engine sales to generator set assemblers were down 19 percent from the second 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 9 percent above the year-ago quarter. Filtration business and other sales were $267 million in the second quarter of 1999, a decrease of 2 percent from the second quarter of 1998. Within the filtration business, the Company was impacted by the global decline in agricultural equipment sales, offset by new business gained in truck, agricultural and construction markets. Sales of international company-owned distributors included in this segment decreased 14 percent compared to the second quarter of 1998. In total, international markets represented 39 percent of the Company's revenues in the second quarter of 1999. The Company experienced declines in many of the international markets in which it participates. Sales to Europe and the CIS, representing 12 percent of the Company's sales in the second quarter of 1999, were 3 percent lower than the prior year's quarter. Business in Mexico, Brazil and Latin America represented 5 percent of sales in the second quarter of 1999, with revenues 28 percent below the year-ago levels. Asia and Australian markets, in total, represented 12 percent of sales in the second quarter of 1999 as compared to 13 percent in the prior year's quarter. Sales to Canada, representing 9 percent of sales in the second quarter of 1999, were 22 percent higher than the second quarter of 1998. Gross Margin: _____________ The Company's gross margin percentage was 22.3 percent in the second quarter of 1999, compared to 22.6 percent in the prior year's quarter. The decreased margin in 1999 was due to higher product coverage costs and a change in product mix, mitigated by a reduction in product cost and higher sales volume. For the first half of 1999, gross margin percentage was 21.2 percent, equal to the first half of 1998 including the special charge recorded for product coverage. Gross margin percentage excluding the special charge was 22.6 percent in the first half of 1998. Operating Expenses: ___________________ Selling and administrative expenses as a percent of sales were 12.0 percent in the second quarter of 1999, compared to 12.2 percent in the second quarter of 1998, with total spending remaining flat. Research and engineering expenses declined from 4.0 percent of sales in the second quarter of 1998 to 3.6 percent in the second quarter of 1999. 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. As of June 27, 1999, approximately $60 million has been charged against the liabilities associated with these actions. The Company does not currently anticipate any material changes in the original charges recorded for these actions. The Company's losses from joint ventures and alliances were $1 million lower in the second quarter of 1999 as compared to the second quarter of 1998 due to a decrease in losses at the Company's joint venture with Wartsila. 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 substantially met its goal of Year 2000 readiness by June 30, 1999. Outstanding issues and plans to resolve them are addressed below. The Company's Year 2000 program is a centrally coordinated, enterprise- wide effort which is carried out by the Company's Year 2000 Program Office under the leadership of the Director of the Year 2000 Program. The Year 2000 program is implemented at each of the Company's facilities and is overseen by a Year 2000 coordinator located at each site. The Company's Year 2000 Program Office monitors the progress and compliance of its facilities through audits and reports by the Year 2000 coordinators. In addition to internal resources, the Company continues to retain external resources to assist with its Year 2000 program. The Company believes that it is taking full advantage of its internal resources and all necessary external resources to understand, identify, and correct all Year 2000 issues within its control. The Company's Year 2000 program involves: 1) mainframe (legacy systems); 2) distributed computing (includes manufacturing and warehousing systems, end user computing, facility systems, laboratory equipment, technical infrastructure and remote business systems); 3) products; 4) suppliers; 5) business readiness and contingency planning and 6) communication. The general phases of the program are: a) inventory; b) analyze and prioritize; c) determine compliance; d) remediate, replace, or retire and e) test, implement, audit and maintain. Mainframe, Distributed Computing: The Company completed the inventory, analysis and prioritization phases of its mainframe and distributed computing in 1998. Testing began in 1998 and will continue through 1999. Virtually all outstanding remediation and implementation work was completed by the end of the second quarter of 1999. Some outstanding issues remain. These were discovered through the Company's quality assurance activities and also through the regular testing and review process. Approximately 15 of the Company's 142 sites continue to resolve Year 2000 issues. Some of the issues currently being addressed involve software programs such as the "ALPS" program (Aftermarket Logistics and Planning System) used by the Company's aftermarket and distributor locations. The next six months will be used to address these and any other outstanding issues that emerge and to complete related contingency plans. The Company will use its best efforts to ensure that any outstanding Year 2000 item will be completed before the end of 1999. Products: During the first quarter of 1999, the Company announced that its commercial products met the Company's Year 2000 compliance standards. Suppliers: 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 and sometimes impossible to change such suppliers quickly. The failure of a sole supplier may lead to a delay in production and/or business interruption. To mitigate this, the Company initiated a global effort in 1997 to evaluate its business critical suppliers. The Company continues its efforts to review the Year 2000 readiness of key suppliers through a formal program of prioritization and communication using questionnaires and /or follow up contacts, as appropriate. To further the Company's efforts with suppliers, the Company continues to be a member of the Automotive Industry Action Group (AIAG). The Company completed the identification of high-risk suppliers in April 1999 and has continued to update this information as additional AIAG surveys are completed. Contingency plans for suppliers that have been identified as "high- risk" are being developed. Business Readiness and Contingency Planning: The Company believes that its "reasonably likely worst case scenarios" may involve the failure of third parties with whom the Company does business to address Year 2000 issues. As a result, the Company is taking steps to minimize the impact of its exposure to Year 2000 risks outside its control. In the following months, the Company will continue 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, setting up work-arounds and adjusting inventory levels. The Company's contingency planning also covers the identification and evaluation of risk areas at the Company's international locations and international independent distributors, particularly at countries that have been identified as behind in their Year 2000 readiness efforts. The Company is providing information on country and industry risk to its international locations, and is also considering country risk in the development of its contingency plans. Contingency plans will also address any potential internal issues that may arise. Communication: The Company continues to receive and respond to customer inquiries regarding the general Year 2000 readiness of the Company, and the Year 2000 compliance of the Company's commercial products. The inquiries and responses take the form of telephone calls, written communication and electronic mail. For the convenience of its customers, the Company also maintains a Year 2000 Internet website at www.cummins.com/custasis/y2k.html. The Company's product compliance information is also included on that website. The Company also maintains an Intranet Year 2000 website for the use of its employees. Costs: 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 $37 million in costs relating to its Year 2000 efforts. There can be no assurances that the systems or products of third parties relied upon by the Company, such as suppliers, vendors or significant customers, will be timely converted or that a failure by such third parties, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. Other undiscovered factors related to the Year 2000 issue may also have potential for an adverse effect on the Company. Such adverse effects may include an adverse effect on the Company's revenues. The estimated time of completion and success of the Company's Year 2000 program and compliance efforts, and the expenses related to the Company's Year 2000 compliance efforts are based upon management's best estimates, which were based on assumptions of future events, including the availability of certain resources, third party modification plans and other factors. There can be no assurances that these results and estimates will be achieved, and the actual results could materially differ from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability of trained personnel, the ability to locate and correct all relevant computer code, and failure by third parties. Other: ______ Interest expense was $19 million in the second quarter of 1999, compared to $18 million in the prior year's quarter. Other expense increased $3 million from the second quarter of 1998, with the variance resulting from non-recurring transactions recorded in the prior year. Provision for Income Taxes: ___________________________ The Company's income tax provision in the second quarter of 1999 was $25 million, reflecting an effective tax rate of 29 percent for the year. Cash Flow and Financial Condition _________________________________ Key elements of cash flows were: First Half _________________ $ Millions 1999 1998 __________ _____ _____ Net cash provided by operating activities $ 183 $( 76) Net cash used in investing activities (91) (621) Net cash (used in) provided by financing activities (63) 537 Effect of exchange rate changes on cash - ( 1) _____ _____ Net change in cash and cash equivalents $ 29 $( 9) _____ _____ _____ _____ In the first half of 1999, net cash provided by operating activities was $183 million. The high level of net cash requirements for investing activities in the first half of 1998 was due primarily to the acquisition of Nelson and planned capital expenditures of $154 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 and in the Company's press releases, teleconferences and other external communications. These statements are based on current expectations, estimates and projections about the industries in which the Company operates, management's beliefs and various assumptions made by management which are difficult to predict. Among the factors that could affect the outcome of the statements are general industry and market conditions and growth rates. Therefore, actual outcomes and their impact on the Company may differ materially from what is expressed or forecasted. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. PART II. OTHER INFORMATION ___________________________ Item 6. Exhibits and Reports on Form 8-K: __________________________________________ (a) See the Index to Exhibits on page 15 for a list of exhibits filed herewith. (b) The Company was not required to file a Form 8-K during the second quarter of 1999. Signatures __________ Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CUMMINS ENGINE COMPANY, INC. By: /s/Rick J. Mills _________________ Rick J. Mills Vice President - Corporate Controller (Chief Accounting Officer) August 10, 1999 CUMMINS ENGINE COMPANY, INC. ____________________________ INDEX TO EXHIBITS _________________ 27 Financial Data Schedule (filed herewith)