cummins 99 AR2

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cummins 99 AR2

  1. 1. Highlights Cummins Cummins Engine Company is the leading worldwide designer and manufacturer of diesel engines ranging from 60 to 6,000 Annual Report horsepower and the largest producer of diesel engines over 1998 200 horsepower. These engines are used by customers in a wide variety of automotive and industrial markets and for power generation. The company also provides filtration systems and natural gas engines as well as engine components and electronic systems. Cummins’ 1998 sales were $6.3 billion and it employed 28,300 people. Cummins Engine Company, Inc. $ Millions, except per share amounts 1998 1997 Net sales $6,266) $5,625 Gross profit 1,249) 1,280 Selling and administrative expenses 787) 744 Research and engineering expenses 255) 260 Other income, net 13) 26 Earnings before interest and taxes: Before unusual charges 282) 312 As reported 65) 312 Net earnings (loss) (21) 212 Basic earnings (loss) per share (0.55) 5.55 Diluted earnings (loss) per share (0.55) 5.48 Dividends per share 1.10) 1.075 Click on the page number for desired topic: Contents 2 Letter to the Shareholders 10 Cummins’ Worldwide Business 18 Management’s Discussion and Analysis 24 Statement of Earnings 25 Statement of Financial Position 26 Statement of Cash Flows 27 Statement of Shareholders’ Investment 28 Notes to Consolidated Financial Statements 40 Responsibility for Financial Statements 40 Report of Independent Public Accountants 41 Five-Year Supplemental Data 43 Board of Directors Left: Jim Henderson, Chairman 44 Officers and Executives and Chief Executive Officer 45 Cummins’ Worldwide Locations Right: Tim Solso, President 46 Shareholder Information and Chief Operating Officer 20
  2. 2. Letter to the Shareholders Value Vision Dear Fellow Shareholders: steps towards delivering superior about European markets, but The Year 1998 Overall, 1998 was a year in Sales by Segment The theme of this 1998 report value to our customers and part- North American automotive and We had solid accomplishments which we brought more value 1998 Sales $6.3 Billion to shareholders is VALUE — ners and towards meeting our construction markets remain gen- in 1998. Our revenues were a to customers in each of our the fundamental on which any financial objectives. erally strong. While forecasting record $6.266 billion, compared markets and laid the foundation 20% endeavor is judged by those in our business is difficult, we to $5.625 billion in 1997. In North for improvements in earnings involved or affected. For a We believe meeting those currently expect relatively level America, automotive, construc- and cash flow to bring more business enterprise, this starts objectives will deliver superior revenues in the next two-year tion, power generation and value to our shareholders. 63% 17% with the value brought to value to our shareholders. period. That could change rapidly. filtration markets were strong, its shareholders. offsetting sales declines in Asia Value for our Customers Our financial objectives are to An economic slowdown that and in our agricultural and other Customer value derives from If shareholder value is to be achieve earnings before interest included Europe and North commodity-based markets around three principal elements. sustained over any period of time, and taxes (EBIT) of 9 percent in America would inevitably affect the world. We completed our Engine Business Power Generation Business it must be linked to the value years when a majority of our mar- the timing by which we will hit acquisition of Nelson Industries • Products that provide our cus- Filtration Business and Other customers and partners of that kets are healthy. This will equate our targets. Regardless of eco- and successfully integrated it tomers with the most cost- enterprise receive from doing to a return on average net assets nomic conditions, however, we into our Filtration Business. We effective performance business with it. of approximately 25 percent and a anticipate steady progress over launched a record six new engines strong free cash flow. the next two years as we work to and two new fuel systems. Our • Information that enables our Clearly, companies that deliver meet the needs of customers in Power Generation Business made customers to run their businesses superior value to their share- Our engine-related products are all our markets, to reduce costs significant progress toward more efficiently holders over time are the ones associated with capital purchases and to improve gross margin and improved profitability. that deliver superior value to by our customers and are, there- cash flow. • Responsive support for all their customers and partners fore, affected significantly by Excluding special charges, earn- aspects of customer need over time. economic slowdowns. In reces- We are confident that the ings were $282 million before sion years our earnings target actions we are taking will put us interest and taxes. Reported Cummins made substantial We at Cummins firmly believe before interest and taxes is at in a position to meet our targets results included special charges progress in all three areas in 1998. we can deliver superior value to least 3 percent. consistently in the future. for restructuring, product cover- both shareholders and customers age and our settlement with the Cummins is the world leader and partners. In 1998, while our We begin 1999 with continued Because motivated, capable U.S. Environmental Protection in diesel engine production financial results fell short of economic difficulties in Asia and people are vital to taking care of Agency (EPA), resulting in a net over 200 horsepower and is the our goals, we took important Latin America and some concern the customer in cost-effective loss of $21 million or 55 cents second largest producer of ways, they are central to our per share. Settling with the EPA engines above 50 horsepower. achievement of shareholder avoided costly litigation and dis- We have achieved this position value. Sustained profitable growth ruption in the marketplace, even by designing and producing 1997 Worldwide 200 HP+ Diesel 1997 Worldwide 50 HP+ Diesel that meets the expectations of though we believe firmly we were products that meet the needs Engine Production by Manufacturer Engine Production by Manufacturer shareholders will give our people and are in full compliance with all of our customers better than opportunities for personal growth, federal and state regulations. our competitors’ products. 260 502 bring value to our suppliers, and provide resources that permit Actions we are taking to improve We emerged from the early 198 422 us to contribute value to the profitability are described in more 1990s with improving financial countries and communities in detail later in this letter. They performance, but recognized 115 361 which we operate. include restructuring and major that electronics and information initiatives to reduce the costs of technology had opened a whole 83 325 the materials and services we buy. new horizon for our industry. Also, Cummins Cummins we knew tougher emissions 58 300 Others Others 0 50 100 150 200 250 300 0 100 200 300 400 500 600 Units in thousands Units in thousands Source: Rhein & Associates, modified Source: Rhein & Associates, modified 2 3 Back to Table of Contents
  3. 3. Value for Our Customers Valuable Alliances standards were likely to emerge Both of these high-horsepower Closely related to the value Our success in creating value Our technical alliance partners In October, Cummins and five after the year 2000. In order to engines are designed to increase superior products bring to our for our customers has made include Case, IVECO, Komatsu, other diesel engine manufacturers continue as the industry’s techni- our penetration in the prime customers is the information Cummins a highly desirable New Holland, Scania and Wartsila, ended nearly a year of intense cal leader, we needed to respond power generation market and to we can provide. alliance partner for many lead- and we are working collaboratively negotiations with the U.S. boldly. And we did. In the years establish leadership in mining ing companies around the with them to develop the next Environmental Protection Agency since 1994, we have been equipment markets. Electronics and information tech- world. generation of products for the and the Department of Justice upgrading or replacing engines nology are an integral part of the 21st century. The second type of by signing consent decrees. across our entire product line — All of the new engines are meet- operation of our engines. We are We have pursued two kinds of business alliance partnership is The settlement requires diesel incorporating advanced electronic ing marketplace objectives, also using information technology partnerships. First, we have with leading equipment producers engines to meet some new emis- controls, combustion and air and customers report that they to enable our customers to man- alliances with strong technical in important markets for future sions standards immediately. handling technology — and are delighted with the engines’ age more efficiently by integrating partners with whom we can growth like China, India, Turkey Substantially tougher standards adding new engines on both the responsiveness, power and vehicles into their business opera- share expertise and the costs and Japan. Our partners provide originally set for 2004 must be upper and lower ends of the fuel economy. tions and into the supply chain. of developing new products. invaluable knowledge and con- met 15 months earlier, in October horsepower range. We are the principal owners of tacts in the local business and 2002. The major impact is on our Innovative Computing Corporation, political communities, as well as heavy-duty, line-haul engines. This year, 1999, will see the release 1998 was the year of peak expense which provides fleet management market leadership. of four more new engines: a in this program. We introduced a solutions and Internet-based version of the Signature series for record six new engines together products, enabling customers to automotive fleet customers and with two entirely new fuel sys- exchange data throughout the industrial markets; a new 9-litre Cummins Wartsila Komatsu Cummins Engine SAS Company, Ltd. tems. New midrange engines entire supply chain. engine based on advanced elec- Cummins Alliances European Engine Alliance were the ISB and ISC, which Industrial Power Alliance tronic C-series technology; the (IVECO - New Holland) incorporate full-authority elec- Providing support is the third QSK45 — a lower horsepower tronic controls and software. critical part of creating value for version of the QSK60; and a 3.3 The ISC uses our new CAPS fuel our customers. This goes beyond litre engine to be produced at the system. Industrial versions of technology and information sys- Komatsu Cummins Engine tems to what we call PowerCare — these midrange engines are being Company in Oyama, Japan. introduced in 1999. powerful care for our customers. Cummins-Scania Our 31 North American and 110 The acquisition of Nelson High Pressure Cummins Wuxi Newage For our customers in heavy-duty international distributors are our Injection, L.L.C. Industries — a major producer of Komatsu Alternators Ltd. Engine Co. markets, we introduced the ISM partners in delivering superior air and liquid filtration products, Wuxi Holset Ltd. and the revolutionary Signature support to our customers through and exhaust and emissions con- programs such as QuickServe, 600 engine with our HPI fuel sys- trol systems — enables us to tem. In addition, we introduced which offers one-hour diagnosis bring more product value to our two new high-horsepower and completion of most repairs OEMs. Nelson is the leading within six hours, and Support engines, the 3200-horsepower producer of exhaust systems for Consolidated Diesel Plus, which guarantees instant CW170, part of our Cummins diesel-powered equipment in Company (Case) Wartsila joint venture, and the parts access with no service North America and ranks second 2700-horsepower QSK60. premiums. in air intake systems. Combined with Fleetguard, this acquisition We continue to rely on customer makes us an integrated first tier Fleetguard councils as we develop new sup- supplier of three critical engine Fleetguard Filters Ltd. Shanghai port programs and new products Cummins India Ltd. Dongfeng Cummins subsystems: air intake, fluids Engine Co. Ltd. Tata Holset Ltd. for our heavy-duty automotive, and exhaust. These subsystems Tata Cummins Ltd. Chongqing Cummins Product Programs (Volume, Shared Cost/Expertise) construction, mining and power are required for every engine, Engine Company Ltd. Geographic (Volume/Local Market Expansion) generation markets. regardless of market or applica- tion, so we can bring additional business to Nelson from our other businesses. 4 5 Back to Table of Contents
  4. 4. The Cummins Policy Committee provides leadership and a real commitment to building our business and value for you. Members of the Committee, clockwise from lower left: Kiran Patel, Jean Blackwell, Tim Solso, Joe Loughrey, Jim Henderson, Jack Edwards, Dave Jones, Roberto Cordaro, Mark Gerstle and Pamela Carter. Increasing Shareholder Value Because Cummins has laid a we are pursuing them on three Gross margin will also be improved technical foundation unequaled fronts: gross margin improve- as a result of the actions announced in our industry, we are confi- ment, lower SAR expense and in the third quarter when we took dent of our ability to meet the cash flow improvement. a charge of $114 million for new standards. restructuring Cummins operations Gross Margin. In 1994 and early and those of our joint ventures In the markets in which we in 1995, Cummins achieved a around the world. Restructuring participate, the goal of cleaner air gross margin of 25 percent. As is underway and includes consoli- coexists with the goal of durable the costs of the new product dating both office and manufac- and cost-effective products. We development program increased, turing operations and outsourcing believe these goals are not the percentage of gross margin production of non-strategic mutually exclusive, and we have declined to just above 20 percent components. Cummins staffing the technology to deliver on both. in the fourth quarter of 1998. We levels will fall by over 1,100, and intend to return to the 25-percent employment in joint ventures will We expect to continue as the gross margin level by improving decline by an additional 1,200 industry leader in an environ- product coverage costs, lowering people. Benefits began modestly ment of more demanding start-up costs, restructuring and in 1998, will grow in 1999 and emission controls. achieving lower material cost. are expected to reach more than $50 million annually beginning in Value for Our Shareholders Our gross margin was lower than 2000, with most of these savings The second area of accomplish- planned in 1998 and below our contributing to gross margin ment in 1998 was laying the foun- target. A key factor was higher improvement. dation for future improvement in costs for launching our new earnings and cash flow. Free cash engines. Because of learning Finally, we have embarked on a flow provides the opportunity to curves and inevitable reliability program to reduce the costs of reward the shareholder through problems associated with any materials that go directly into our share repurchase, dividend new product launch, new prod- products. Those materials repre- increases and/or investment in ucts cost more than the ones sent the largest single item on future growth. they replace for some period of our income statement, so the time. Then, as volume builds, opportunity for savings is substan- We have simplified our financial initial problems are corrected, tial. A parallel program is in place objectives based on an analysis manufacturing becomes more for goods and services like office of the nature of our business as efficient and costs come down. supplies, computers, freight, well as on benchmarking the travel and health care, with some world’s best. The objectives We are confident production of the savings affecting gross reflect profitable performance costs for our new engines will margin and the balance lowering over the business cycle. eventually be lower than for SAR costs. the products replaced. In order to hit our financial objec- tive of 9 percent EBIT in good While we will be introducing four years, our cost structure targets new engines in 1999, the risks are 25 percent gross margin and are considerably lower. Three are 16 percent selling, administrative, derivatives of engines released in research and engineering (SAR) 1998, so the work to improve expense. We believe our goals their cost and quality is already are realistic and attainable, and underway. The fourth, the 3.3 litre engine, is based upon proven technology. 6 7 Back to Table of Contents
  5. 5. Corporate Values Valuable Improvements Selling, Administrative and The cash generated will give Our Filtration Business and Other As we work to create value for Don has been steadfast in his We have clear targets for financial Research (SAR) Costs. A major Cummins the flexibility to main- includes our filtration companies, our customers and our share- commitment to the interests of return. We are confident that we success in 1998 has been the tain a prudent capital structure Fleetguard and Nelson, as well holders, we recognize the value our shareholders, and all of us will make significant progress steady reduction of selling, admini- and provide a return to share- as our turbocharger company, added by our own people around have learned immeasurably from toward these targets in the next strative and research costs. In 1994, holders through dividends and Holset, and 14 distributorships the world — in our technical him. We will miss him. few years despite a continued these costs totaled 18.5 percent buying back Cummins shares. owned by Cummins. The acquisi- centers, plants, offices and unsettled world economic situa- of sales. In the first quarter of 1998 Over the past four years, share tion of Nelson Industries has distributorships. People are the Second, we are pleased to tion. While we are not anticipating they were just below 18 percent. repurchases have resulted in a proven to be very successful, source of innovation in our prod- welcome a new Board member, substantial growth in our markets In the fourth quarter they were decrease in shares outstanding adding approximately 6 cents per ucts, care for our customers and Jim Johnson, Chairman of the for 1999, we expect to gain reduced to 16 percent, which is from 41.6 million to 38.4 million. share to corporate results. In operational improvements. We Executive Committee of the market share as our new products our target. Compared to the first addition, the filtration and exhaust depend on their commitment, Board of Directors of the Federal make their mark and as growth Business Results. Our Engine quarter, fourth-quarter administra- systems business enables us their hard work and their ideas. National Mortgage Association synergies resulting from our tive costs were lower by $9 million, Business, made up of a broad to benefit from marketplace (FNMA or “Fannie Mae”), the Nelson acquisition are realized. a full point as a percent of sales. variety of automotive and indus- synergies with customers of our We thank our people for helping largest non-bank financial services Fourth-quarter research costs trial markets, is the one in which Engine and Power Generation Cummins meet the challenges company in the world. Jim has We thank you, the owners of were below 4 percent. we have made the investment businesses. of 1998, and we will continue to an outstanding record of effec- Cummins, for your continued in new products. Therefore, its rely on them in the years ahead. tiveness in creating shareholder support. We remain dedicated Corporate Values We will pursue opportunities results have been impacted signif- value while chairman and chief to increasing the value of your At Cummins, our commitment Board Changes. Another valuable to move below 16 percent in icantly in the last year. executive officer of Fannie Mae investment and look forward to providing value for our share- the future. asset for Cummins is its diverse from 1991 through 1998 as well to sharing our progress and holders and customers goes hand We expect to see the improve- Board of Directors. We have had as a thorough understanding of prospects with you at our in hand with our commitment to Cash Flow. The prospect for our ment we have described above two changes to the Board since public policy issues. Annual Shareholders’ Meeting corporate responsibility. We business to generate increased reflected in returns from these our last Annual Report. First, Don on Tuesday, April 6, in believe firmly that acting with free cash flow in the future is markets in the next two years. Perkins, former Chairman of the Outlook Columbus Indiana. honesty and integrity is sound excellent, even with relatively level Jewel Companies and a member The future for Cummins and business — absolutely essential revenues in the next two years. The Power Generation Business of Cummins’ Board of Directors its shareholders is bright. Our if we are to attract the very best First, major capital expenditures has been making progress towards for 25 years, reaches the manda- people are focused on delivering people, customers, suppliers, for this cycle of new product its financial objectives primarily tory retirement age for Board superior value to shareholders by partners and distributors. development are behind us. Second, through restructuring and cost members in 1999 and is not, delivering superior value to our James A. Henderson improving overall profitability reduction to date. Much of the therefore, being nominated for customers and partners. Chairman and Chief Executive Officer We are also convinced that it through restructuring and purchas- restructuring announced in the re-election to the Board. Over his is in Cummins’ best interest to ing and supply management, third quarter is directed towards years with us, Don has served Our investment in innovation be concerned about the com- as we have described above, will further improving Power Generation the Board in many roles, most offers our customers advanced munities and the society in also contribute to cash flow. results. A continuing challenge is recently as Chair of the Audit technology and puts Cummins which we do business, because Finally, we have a major program the release of the Cummins- Committee. Don’s experience, in a better position than any- a healthy society provides to improve our management Wartsila engines in the face of his understanding of worldwide one else in the industry to Theodore M. Solso the best foundation for of working capital – specifically, Asian market weakness. The business, and his leadership in meet tough new emissions President and Chief Operating Officer business success. inventory and receivables – engines will, however, permit us improving corporate governance standards, increase market Cummins Engine Company, Inc. providing another opportunity for to compete more effectively in the are unmatched, and we have share around the world and March 3, 1999 cash flow improvement. more profitable prime power market. benefited greatly from his grow profitably. perspective and insight. 8 9 Back to Table of Contents
  6. 6. Cummins’ 1998 Sales $1.2 Billion 1998 Sales $1.1 Billion 1998 Sales $4.0 Billion Worldwide Business 16% Sales, Markets Power systems Filtration Heavy-duty 19% Mobile Company- trucks 27% and Products Alternators owned Industrial 11% 39% distributors products 7% 3% Turbochargers Bus and light commercial vehicles 74% 21% Medium-duty trucks 13% 600 horsepower of high-torque In the bus and light commercial Industrial Power Generation Business Filtration Business and Other Engine Business performance as well as 600 segment, the ISB powers the Cummins engines power virtually The Power Generation Business The Filtration Business serves Automotive horsepower of braking power Dodge Ram pickup. The bus every type of equipment made provides a wide range of equip- a broad base of customers in The automotive business com- with the new Cummins’ Intebrake. market, including shuttle, transit, for construction, agricultural, min- ment and services for the gener- more than 100 countries with a prises three primary markets: The N14, recognized as the coach, school bus, and the recre- ing, logging, rail, military, com- ation and control of electrical wide range of filtration and heavy-duty truck, medium-duty industry leader in durability and ational vehicle market, utilizes mercial marine and pleasure boat power for both standby and exhaust systems. Products truck, and bus and light commercial performance, remains the founda- diesel engines throughout the ISB markets. Continuing alliances prime power customers through- include filters for engine applica- vehicles. Products in these tion of the heavy-duty product line. to N14 product range. Cummins with our delivery partners world- out the world. Customers include tions and hydraulic and air markets include a full range of continues to enjoy strong market wide, as well as closer relation- major utilities, independent power intake systems for both engine diesel and alternate-fueled engines Introduced in late 1998, the ISM share in this growing business in ships with our end customers, providers, hospitals and commer- and industrial applications. from 135 to 600 horsepower. In builds upon the industry-leading North America, Europe, Mexico offer us significant market share cial office towers, manufacturing 1998, Cummins launched major fuel economy of the M11 Plus and Asia. Bus customers world- in most of these markets. plants, telecommunications Cummins owns 14 distributor- new engine platforms as part engine while providing the latest wide remain interested in natural companies, equipment rental ships, most of them outside the of the “Interact System” of electronics technology and fea- gas engines from 150 to 300 Through a joint venture manufac- houses, as well as manufacturers United States, with the largest electronically controlled products tures. The ISM provides the best horsepower. In 1998, Cummins turing agreement with Komatsu of mobile recreation vehicles. being in Australia, India and the including the ISB, ISC, ISM, and fuel economy and power-to-weight achieved record sales in the North Ltd., Cummins offers its latest United Kingdom. Signature engines. performance in the industry. American transit bus market and midrange engine, the B3.3. Along The Power Generation Business, has over 75 percent share in with the addition of the B3.3 and together with Cummins Wartsila, Holset is a Cummins subsidiary For the past twenty-six years, The ISB and ISC electronic four- the Class A motor home market. the release of the high horsepower offers products that span a broad that designs and produces Cummins has been the North valve-head engines provide the Cummins entered the pickup QSK60 engine, the Industrial Group power output from 2 kilowatts turbochargers for worldwide American market leader in heavy- primary power for the medium- truck market in Brazil with the ISB, offers the complete Cummins to 4 megawatts, and a choice of engine markets. duty trucks, which represents duty truck segment, ranging from further expanding our presence in engine power range to its markets diesel, natural gas or gasoline-fired the largest portion of the Engine 175 to 300 horsepower. Key this market segment internationally. from 60 to 2700 horsepower. power generator sets. Cummins Business sales. Cummins also territories in the medium-duty also offers a range of services leads the market in Mexico, truck segment include North With the most modern product including turnkey power plant Australia, South Africa and is a America, Latin America, Europe, range in the industry, Cummins solutions and long-term operation major presence in the United China, India, Turkey and Australia delivers engine hardware, elec- and maintenance contracts. Kingdom and in many other where Cummins powers a wide tronic systems and information, countries. variety of medium-duty trucks and business support as part of and other on-road vehicles. In our Interact System of products, The Signature 600, introduced in 1998, shipments of ISB and ISC which deliver exceptional value 1998, continues to generate engines surpassed all previous to each of our customers. unprecedented excitement and company records. demand in the market, providing 10 11 Back to Table of Contents
  7. 7. Over two million customers a day Cummins delivers that same level of depend on FedEx for timely, depend- world-class service and value to FedEx able delivery of their packages and with a broad line of automotive and freight to locations worldwide. industrial engines. Delivering Value Engine Business Ram pickup to the heavy-duty trucks that are the backbone of With $4.0 billion in annual sales, the freight delivery system. our engine business is Cummins’ Industrial customers use our largest. Our customers — both engines for construction, mining, original equipment manufacturers and agriculture and also in marine, (OEMs) and end users — buy rail and military applications. engines and parts produced in Cummins plants around the Automotive world, and our worldwide distri- With the 1998 introduction of butor network plays a prominent three new engines and two new role in both sales and customer fuel systems, our automotive support. product line-up has positioned us firmly as the leader in performance, Our overall strategy in the engine fuel economy, emissions control, business is to give end-user electronics and information customers comparative advan- technology. In 1999, the ISX and tage through a ‘value package’ the ISL engines will be released, of technically advanced products, rounding out our completely customer-focused information redesigned product line. Product and support. We rely heavily on leadership attracted new and end-user customer councils to repeat business in 1998 from identify emerging product and many U.S. fleet customers such support needs. as FedEx, Wal-Mart, UPS and J. B. Hunt. In October, two A partnership between Cummins large original equipment manu- and its distributor network, facturers, Mack and Volvo, Cummins PowerCare is designed announced that Cummins would to earn customer loyalty and be their key outside engine repeat business through superior supplier for North America support. One innovative PowerCare and Australia. program is QuickServe, promising one-hour diagnosis and rapid Business was strong in North repair. QuickServe is now avail- American automotive markets in able in over 150 distributor 1998, particularly in the highly during 1998 in Mexico and Brazil, performance with reduced emis- B3.3 engine, developed with our lower commodity prices, which locations, and mobile QuickServe, competitive heavy-duty market, and towards the end of the sions. In late 1998, we began a joint-venture partner Komatsu, also affected some mining designed to bring support to where Cummins remained the year there were signs of a slow- series of new product introduc- is scheduled for release in the markets during the second half the customer’s construction or market share leader for the 26th down in the United Kingdom tions with the limited introduction second half of 1999. of the year. We are confident, mine site, is being piloted in consecutive year. Heavy-duty and Turkey. of the new fully electronic 2700- however, that new products and China and the U.S., with wide- shipments grew by 20 percent. horsepower QSK60 engine for Industrial markets were mixed programs like mobile QuickServe Industrial spread deployment to begin in We increased our share of light- mining applications and the new in 1998. Construction sales position us for a strong rebound late 1999. and medium-duty engine sales in We build value for our industrial 635-horsepower M11 engine for remained strong in the U.S. and when these markets recover. bus markets by 24 percent, and customers by providing cleanly pleasure boat applications. These Europe, but economic problems Our engine business serves a we shipped a record 98,700 ISB designed engines that require will be followed in 1999 by the affected sales of construction and broad variety of Automotive and engines to our largest customer, less maintenance. These engines, QSK45 and the industrial versions commercial marine equipment in Industrial markets. Automotive DaimlerChrysler, for the Dodge featuring high pressure injection of the new Signature, ISB and ISC Asia. Outside Asia, marine sales markets include buses and trucks Ram pickup truck. Outside the systems and electronic controls, engines (called the QSX15, QSB5.9 grew. Agricultural sales were of all sizes — from the Dodge U.S., automotive sales slowed deliver increased power and and QSC8.3 respectively). The down worldwide because of 12 13 Back to Table of Contents
  8. 8. The largest multi-set installation in Africa is in Tema, where Cummins provides 24 hour energy peace of mind for the government and people of Ghana. Generating Value Power Generation Business second round of restructuring, closing and downsizing plants in Cummins Power Generation Asia and streamlining production offers value to customers by pro- at Newage, our alternator com- viding integrated power solutions pany. Lower Asian sales also to users of prime and standby meant a difficult and challenging electrical power. This integration year for our Cummins Wartsila is made possible because joint venture. In response, we Cummins is the only company to announced major restructuring make all elements of a generator to enable the joint venture to be set — engines, alternators and successful in spite of less favor- advanced electronic controls. able near-term sales volumes. 1998 Power Generation sales In addition to improving our share were $1.2 billion, 2 percent above in the market for larger industrial 1997. Profitability improved generator sets used for standby because of our success in reduc- power, the Power Generation ing costs. Lower costs allowed Business took a major step for- us to hold prices level despite ward in the emerging market for increases by our competition, prime power when we received enhancing our competitive posi- our largest single order ever, for tion and the value of Cummins $17 million from the Government power solutions for our customers. of Ghana. Cummins Power Generation supplied 39 diesel- In the Americas, 1998 was a powered generator sets to very successful year in sales and operate in parallel at a single improved profitablity. We com- power station, connecting seam- pleted our restructuring program, lessly into the utility grid. This closing our Huntsville, Alabama marks the first time that Cummins engine plant. Huntsville’s manufac- Power Generation has taken on turing operations were success- responsibility for building, oper- fully integrated into our Fridley, ating and maintaining an entire Minnesota facility, which now power plant. produces generator sets ranging from 2 megawatts at the top end Our focus on prime power has down to the 2.8-kilowatt Onan given us the ability to move to generator sets used for recre- integrated power solutions that ational vehicles. The RV market go beyond hardware. In addition remained buoyant in 1998, and to selling generator sets, we can we continued to dominate, with offer value-adding services such a market share in excess of as extended warranty, mainte- 80 percent. nance and service contracts, and ‘Uptime’ guarantees. At Cummins Economic conditions affected Power Generation, we continue sales throughout Asia and to to increase our value to customers some European customers for by selling kilowatts — providing G-drive engines. Recognizing reliable energy at reasonable cost the trend early, we launched a around the world. 14 15 Back to Table of Contents
  9. 9. Integrated System Air Intake Engine: Exhaust Systems Air Handling, Fluid Filtration and Systems Conditioning Systems Enhancing Value The Filtration Group enhances value by designing an integrated system that includes air intake, engine filtration and exhaust systems. Our customers receive Filtration Business and Other engines. Together, we rank sixth improved performance at lower in the world among filtration cost from a single supplier. companies and first in the heavy- At $1.1 billion, Filtration Business duty market. and Other sales set a record, exceeding the $1-billion mark for the first time. The revenue Fuel filters made by Kuss comes from sales of our filtration Corporation were installed in companies — Fleetguard, Nelson, over 60 percent of automobiles Kuss and Universal Silencer; our made in North America and in turbocharger company, Holset; almost 20 percent of those made and company-owned distributors, in Europe. Universal Silencer, most of them outside the which supplies air filtration and United States. exhaust silencing for gas turbines and other plant and equipment operations, had a record year in Our filtration companies work sales and profits in 1998. together to provide customers with an integrated system for air intake and filtration, fluid filtration Fleetguard’s commitment to and conditioning, air handling quality was recognized in 1998 and exhaust. We offer value by when it was the only manufac- enhancing equipment perfor- turing company awarded the mance, reducing operating costs Tennessee Quality Governor’s and controlling emissions Award. Fleetguard was the first and noise. company ever to win the Global Excellence Award for demon- strating leadership in the interna- Early in 1998, Cummins com- tional marketplace. pleted the acquisition of Nelson Industries, North America’s lead- ing producer of exhaust systems Cummins’ ownership of 14 dis- and its number two supplier of tributorships links us closely to air intake systems for diesel our end-user customers in strate- powered equipment. The integra- gic locations worldwide. tion of Nelson with Fleetguard has gone exceptionally well; Holset has restructured its organizations have been merged; operations to focus on its core overlaps have been eliminated; competence in turbocharging. and complementary product lines Breakthrough variable geometry are attracting new customers technology enables Holset turbo- around the world. The acquisition chargers to improve performance was accretive to earnings in its for the driver while lowering first year. operating costs for the truck owner. Closely integrated with Fleetguard and Nelson are contin- Cummins’ advanced fuel systems, uing on the path to global leader- Holset’s air handling technology is ship by offering customers the at the heart of Cummins’ strategy best technical solutions available to meet emissions requirements in the industry. We lead the world for the year 2002 and beyond. in providing filtration and exhaust technology for heavy-duty diesel 16 17 Back to Table of Contents
  10. 10. Management’s Discussion and Analysis of Results of Operations and Financial Condition Overview than in 1997. The Company shipped a record market share. In 1998, the Company began conditions in Asia and lower sales in Europe. Net sales were a record $6.3 billion in 1998, 403,300 engines in 1998, compared to 369,800 limited production of the Signature 600, a new Without the consolidation of Cummins India 11 percent higher than in 1997, and 19 percent in 1997 and 332,300 in 1996 as follows: electronic engine designed to capture a larger Limited, power generation sales would have higher than in 1996. Nelson Industries, Inc., share of this market. International unit ship- decreased 4 percent from 1997. Sales of the Unit shipments 1998 1997 1996 acquired in January 1998, and Cummins India ments for the heavy-duty market in 1998 were Company’s generator sets continued to reflect Midrange engines 287,400 264,300 237,400 Limited, which was first consolidated in 20 percent higher than in 1997 due to con- growth in North America, which offset declines Heavy-duty engines 106,100 94,900 85,000 the fourth quarter of 1997, added sales of tinued strong demand in European and in demand for generator sets in Asia. Engine High-horsepower $428 million. Without these additional sales, Mexican automotive markets. sales to generator set assemblers were down engines 9,800 10,600 9,900 net sales for 1998 would have been $5.8 billion, 12 percent from the prior year and sales of an increase of 4 percent over 1997. Revenues from the sales of engines for alternators were down 11 percent, due pri- 403,300 369,800 332,300 medium-duty trucks in 1998 were 13 percent marily to lower demand in Asia and the As disclosed in Notes 3 and 4 to the Consolidated lower than in 1997 on a 12-percent decrease in Company’s change in strategy, emphasizing Revenues from non-engine products, which Financial Statements, the Company recorded units. In North America, the Company was sales of generator sets. Sales of small genera- were 45 percent of net sales in 1998, were charges in 1998 totaling $217 million, com- affected by Ford’s relocation of its production tor sets for recreational vehicles and other 16 percent higher than in 1997. The major prised of $78 million for revised estimates of facilities, partially offset by increased sales in consumer markets remained strong in North changes within non-engine revenues were in additional product coverage liability for both international markets, primarily Brazil. America, increasing 12 percent from 1997. filtration, with the sales of Nelson included base and extended warranty programs, $114 from the date of acquisition by Cummins, and Sales of $1.1 billion in 1998 for filtration and million of costs associated with the Company’s For the bus and light commercial vehicle mar- PowerCare (which includes new parts and other were 40 percent higher than in 1997 and plan to restructure, consolidate and exit certain ket, engine revenues in 1998 were 26 percent remanufactured engines and parts). Sales of business activities and $25 million for a civil higher than in 1997, on a 22-percent increase in 44 percent higher than in 1996, with Nelson, the remaining non-engine products, in the penalty resulting from an agreement reached unit shipments. In January, Cummins jointly acquired in January 1998, contributing sales of aggregate, were essentially level with 1997. with the U.S. Environmental Protection Agency announced with DaimlerChrysler a new, fully $311 million. International distributor sales and the Department of Justice regarding diesel electronic engine — the ISB — for the Dodge increased 12 percent from 1997 due to the con- The Company’s sales for each of its key engine emissions. Excluding these charges, Ram pickup. The increase in 1998 was due solidation of Cummins India Limited in the segments during the last three years were: earnings before interest and taxes were primarily to record unit shipments to Daimler- fourth quarter of 1997. $282 million in 1998, compared to $312 million Chrysler for the Dodge Ram pickup, which $ Millions 1998 1997 1996 in 1997 and $232 million in 1996. Including were 26 percent higher than in 1997 and Net sales by marketing territory for each of the Automotive markets $2,928 $2,622 $2,447 the charges, the Company’s net loss was 37 percent higher than in 1996, and continued last three years were: Industrial markets 1,054 1,044 863 $21 million or $(.55) per share in 1998. Net strong demand in bus markets. Engine Business 3,982 3,666 3,310 $ Millions 1998 1997 1996 earnings in 1997 were $212 million or $5.48 per Power Generation United States $3,595 $3,123 $2,925 share and $160 million or $4.01 per share In 1998, revenues from industrial markets were Business 1,230 1,205 1,213 Asia/Australia 806 898 868 in 1996. 1 percent higher than in 1997. Revenues from Filtration Business Europe/CIS 791 796 759 sales of engines decreased, while parts sales and Other 1,054 754 734 Mexico/Latin America 468 364 260 To maintain Cummins’ technological leader- increased. Engine revenues in 1998 were $6,266 $5,625 $5,257 Canada 459 318 313 ship, the Company has been in the process of 1 percent lower than in 1997 on an 8-percent Africa/Middle East 147 126 132 upgrading or replacing engines across all increase in unit shipments. The variance $6,266 $5,625 $5,257 Cummins’ engine business is the Company’s product lines. This new product development between revenues and units resulted from program peaked in 1998 with a record six new largest business segment, producing engines lower heavy-duty and high-horsepower engine engine introductions. While this investment and parts for sale to customers in both sales and a shift in product mix of midrange In total, international markets accounted for in product development offers competitive automotive and industrial markets. Engine engine sales. The increased level of shipments 43 percent of the Company’s revenues in 1998. advantages, it resulted in a temporary increase business customers are each serviced through was due to continued strong construction vol- Europe and the CIS, representing 13 percent of in product costs and a decrease in profitability the Company’s worldwide distributor network. umes in North America and Europe, partially the Company’s sales in 1998, were 1 percent in 1998. The engines are used in trucks of all sizes, offset by declines in worldwide agricultural lower than in 1997 and 4 percent higher than in buses and recreational vehicles, as well as a markets. Sales of engines and parts into the 1996. Sales to Canada, representing 7 percent variety of industrial applications including marine market in 1998 were 6 percent lower Results of Operations of sales in 1998, were 44 percent higher than in construction, mining, agriculture, marine, rail than in 1997, due primarily to the economic Net Sales: 1997 due to the acquisition of Nelson and the and military. Engine business revenues were turmoil in Asia. Sales into the mining market In 1998, the Company achieved its seventh relocation of certain customer production facil- $4.0 billion in 1998, a 9 percent increase over were 21 percent lower than the prior year. In consecutive year of record sales, totaling ities. Asian and Australian markets, in total, 1997 and 20 percent over 1996. 1998, Cummins announced an agreement with $6.3 billion. Revenues from sales of engines represented 13 percent of the Company’s sales Komatsu, a joint venture partner, to develop a were 55 percent of the Company’s net sales in in 1998, as compared to 16 percent in 1997 Sales of $2.9 billion in 1998 for automotive 3.3 liter engine targeted for the construction 1998, with engine revenues and unit shipments and 17 percent in 1996. In Asia, sales to China markets were 12 percent higher than in 1997 market, scheduled for release in the second 8 percent and 9 percent higher, respectively, were essentially flat compared to 1997, while and 20 percent higher than in 1996. In 1998, half of 1999. revenues in Korea decreased 64 percent, heavy-duty truck engine revenues were Southeast Asia declined 47 percent and sales Revenues of $1.2 billion in 1998 for power 19 percent higher than in 1997 on a 20 percent to Japan and India were 19 percent below 1997 generation were 2 percent higher than in 1997 increase in units. Within the North American levels, excluding the effect of Cummins India heavy-duty truck market, unit shipments were and 1 percent higher than in 1996, with sales Limited consolidation. up 20 percent over 1997, and Cummins contin- continuing to be impacted by the economic ued to be the market leader with a 32-percent 18 19 Back to Table of Contents 18 Back to Table of Contents

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