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cummins ARv2000


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cummins ARv2000

  1. 1. 2000 Annual Report
  2. 2. Cummins Inc. Cummins Inc. is a leading worldwide designer and manufacturer of diesel engines from 55 to 3,500 horsepower and the world’s largest producer of commercial diesel engines above 50 horsepower. The company provides products and services for customers in markets worldwide for engines, power generation and filtration, including engine components, natural gas engines, filtration systems and information products and services. In 2000, Cummins reported sales of $6.6 billion and employed 28,000 people.
  3. 3. Highlights Financial Highlights $ Millions, except per share amounts 2000 1999 Net sales $6,597 $6,639 Gross profit 1,259 1,418 Selling and administrative expenses 776 781 Research and engineering expenses 244 245 Net (income) expense from joint ventures and alliances (9) 28 Other (income) expense, net (1) 8 Earnings before interest and taxes (EBIT): Before special charges 249 356 As reported 89 296 Net earnings 8 160 Basic earnings per share .20 4.16 Diluted earnings per share .20 4.13 Dividends per share 1.20 1.125 Business Unit Products Customers & Markets 2000 Highlights Power Generation Global supplier of diesel and s s s Public- and investor-owned For the second consecutive Power Systems natural gas-powered generator Diesel and natural gas- utilities; telecommunications year, EBIT increased by almost sets and generator set powered generator providers; self-generating 100 percent. components from five kilowatt sets – rental and installed; manufacturers; any business to multi-megawatt installations. s digital control systems; or public facility with a Power Rent, offering temporary North American market leader paralleling switchgear. need for self-generated or rental generator sets, expanded in auxiliary generator sets for standby power. coverage across all of North recreational vehicles (RVs) and s America through our distributor Mobile Systems recreational marine applications. s Onan gasoline, liquified RV, specialty vehicle and marine network. propane, and diesel-fueled pleasurecraft original equipment s auxiliary generator sets manufacturers (OEMs). Launched from 3 kW to 12.5 kW and for our RV customers. s associated controls. Alternators and engines for s industrial, marine, commercial, Participated in advanced s construction, telecommunica- research on ten kW fuel Alternators and Engines Newage synchronous AC tions, mining, generator drive cells in conjunction with the alternators and associated markets and other standby or US Department of Energy. control systems. Generator continuous power applications. s drive engines and digital Increased penetration into control systems. fast growing Internet and telecommunications markets where our digital control systems and ready standby power are critical.
  4. 4. Business Unit Products Customers & Markets 2000 Highlights Filtration and Other s Global leader of advanced Heavy-Duty Systems s OEMs, distributors, dealers and s integrated filtration systems for Air intake filtration, emission and Identified by an independent end users of heavy-duty on- and heavy-duty equipment, both noise reduction, engine filtration survey as number one in off-highway diesel-powered on- and off-highway. Leading and mobile hydraulic filtration brand preference for oil, air, equipment. North American supplier of systems. fuel and coolant filters in the filtration and silencing systems United States. s OEMs of small engine systems, s for gas turbine, industrial, small Small Engine Systems both gasoline- and diesel- s engine and passenger car Air intake filtration and exhaust Remained solidly profitable powered, for recreational, lawn applications. systems. as synergy among Cummins and garden equipment. engines, filters, and exhaust “Other” includes Holset s systems took hold with OEMs. Other Systems s OEMs of gas turbine generators, turbochargers and company- Air intake and silencing industrial machinery, passenger s owned distributorships. systems for gas turbine First to market with variable cars and industrial hydraulic applications, in-tank filtration geometry turbocharger equipment including for passenger cars and from Holset. distribution. hydraulic filtration for s industrial applications. Led aftertreatment research s Turbochargers for Cummins, in support of future exhaust Cummins’ joint ventures and s All integrated systems sold emissions requirements. other diesel engine manu- under the Fleetguard and facturers. s Nelson brand names. Released new air-intake technology that provides for s Cummins’ ownership of 16 s smaller and lighter, yet longer Turbochargers distributorships links us closely Holset variable geometry, lasting, air filter elements thus to our end-use customers in variable wastegate, power reducing cost to the end user. strategic locations worldwide. turbine, high pressure ratio s and multi-stage solutions. Introduced multiple new filtration and exhaust products that have favorable environmental impacts by reducing used product disposal and providing cleaner exhaust emissions. Business Unit Products Customers & Markets 2000 Highlights Engine Business s s s Leading global supplier of diesel Medium-duty engines Two broad classes of Signed a long-term exclusive ISB and ISC for light and alternate fuel engines for customers: OEMs who install supply agreement with Volvo commercial automotive, truck, heavy-duty trucks, medium-duty Cummins engines in their Trucks of North America for transit bus, RVs and specialty trucks, buses and RVs. Exclusive vehicles and equipment; and heavy-duty truck engines vehicles. Automotive supplier of diesel engines for the end-use customers who use s applications are available in Dodge Ram pickup truck. Cummins-powered equipment Set another record for engine diesel and alternate-fueled in their business endeavors. shipments to Chrysler for the versions from 175 horsepower A leading global supplier of Dodge Ram pickup truck. to 350 horsepower. B3.3, B3.9, engines for the agriculture, s B5.9, QSB, QSC for agriculture, construction, government, mining, Established the ISX engine as construction and marine rail and marine markets. the fuel economy and per- applications from 60 to 340 formance leader in its class. horsepower. s Introduced the 78 liter engine s Heavy-duty engines which was jointly designed by ISL, ISM, N14, ISX and Cummins and Komatsu. It is the Signature Series for trucking world’s largest diesel engine applications from 280 to 650 used for mobile off-highway horsepower. QSM, M11, N14 equipment. and QSX15 for construction, s mining, marine and agriculture An exclusivity agreement was applications from 225 to 600 signed between Cummins and horsepower. Komatsu Mining Systems. s s High horsepower engines Marine engine sales dollars QSK19, V903, QST30, K38/50, grew by 18 percent over 1999. QSK45, QSK60 and QSK78 for s marine, rail, mining and govern- Record sales in commercial ment applications from 295 to workboats (oilfield / tugs / 3,500 horsepower. fishing) with KV38/50 engines.
  5. 5. Contents 2 Letter to the Shareholders 6 Power Generation Business 8 Filtration Business and Other 10 Engine Business 12 Financial Overview 13 Management’s Discussion and Analysis 18 Responsibility for Financial Statements 18 Report of Independent Public Accountants 19 Statement of Earnings 20 Statement of Financial Position 21 Statement of Cash Flows 22 Statement of Shareholders’ Investment 23 Notes to Consolidated Financial Statements 37 Five-Year Supplemental Data 38 Directors and Committees 40 Executives and Officers 41 Shareholder Information 42 Cummins Worldwide Locations
  6. 6. Fellow Shareholders 2000 was a distinctly different year In past years, this kind of downturn from the first to the second half. In the would have meant large losses for the first half of the year, we posted profit Company. However, we broke even in after taxes of $103 million and earned the fourth quarter on an EBIT* basis. $2.70 per share; in the second half, We are a much different company profit after taxes was $8 million and than we were even a year ago, and earnings per share fell to 21 cents, are now seeing the benefits of the excluding a pre-tax charge of $160 diversification and cost reduction million in the fourth quarter. The erosion strategies we have pursued. The in profit was due to a sudden and businesses and markets which pronounced downturn in a number account for over 80 percent of our of markets, reflecting the overall revenues are profitable and growing, uncertainty of today’s economy. and we are working to ensure that the remaining 20 percent will be Heavy-duty engine shipments in profitable in the future. Let me review North America fell 39 percent from our businesses with you. the first to the second half of the year. In the fourth quarter, shipments of our Business Overview midrange engine to DaimlerChrysler s Power Generation (21 percent of were 25,000 units, down from an revenue, 41 percent of EBIT*) has average of 31,000 units for the first moved from a break-even business three quarters of the year, as just three years ago to one that was DaimlerChrysler cut production of its able to nearly double its profits over Dodge Ram pickup truck. In North 1999. We project 10 to 15 percent America, shipments of medium-duty growth in Power Generation over the truck engines declined 24 percent next few years, fueled by rising global from the first to the second half of demand for power from ready sources. the year. During that same period, The energy issues in California highlight shipments of engines to the North even more the need for reliable power American construction market and full service support. declined 28 percent, and sales of engines to the recreational vehicle s market were down 18 percent. Filtration and Other Business The decline in the heavy-duty engine (18 percent of revenue, 49 percent business also affected exhaust systems of EBIT*) remained solidly profitable, sales in our Filtration Business, which despite being affected by a depressed fell 13 percent from the first to the heavy-duty engine market. We are second half. gaining market share as original equipment manufacturers (OEMs) respond favorably to the natural synergy among our engine, filtration, Sales and exhaust products. $8000 Million 7000 6000 * Earnings Before Interest and Taxes (EBIT), 5000 excluding special charges. 4000 2 1999 1998 2000
  7. 7. Sales by Segment 2000 Sales $6.6 Billion Power Generation Business 21% Filtration Engine Business Business and Other 61% 18% - The “Other” in this category refers to - Although down in the second half, our 16 company-owned distributors shipments to construction, agriculture across the globe, which represent and marine markets were still four strategic growth opportunities for percent higher than a year ago. Cummins. This year, we added three - Shipments of heavy-duty and medium- new distributors, two in Latin America and one in South Africa. As a group, duty truck engines in international we expect them to continue to grow markets increased 18 percent. by 10 percent each year over the next several years. - This brings us to the heavy-duty truck engine market in North America, which - Also included in this category is our fell 39 percent in 2000. The Engine turbocharger business, Holset. It grew Business worked diligently throughout 26 percent in sales and doubled in the year to mitigate the effects of the profits over the year. Holset continues downturn in that market by consoli- to play a critical role in our emissions dating facilities, reducing its workforce, technology research and development. and continuing to reduce costs. - Together, these two businesses 2001 and Beyond As I write this letter, we’ve had only provide the best return on assets a few weeks to view our performance of all of our businesses. for 2001. We expect the first quarter of 2001 to be worse than the fourth s The Engine Business (61 percent quarter of 2000. The truck market will of revenue, 10 percent of EBIT*) likely be down another 20 percent, posted operating earnings of $24 and other consumer markets are also million for the full year, reflecting softening. To address this immediate strong segments in the group: issue, we will continue to reduce our costs through streamlining and con- - High-horsepower engine sales for solidating production and reducing mining, rail equipment and govern- our workforce. ment applications are 18 percent higher than a year ago, and growing. - Despite the recent slump in the light- duty automotive business, our 13-year relationship with DaimlerChrysler has never been better. DaimlerChrysler acknowledges that Cummins is one of its best suppliers. We have also con- Earnings Before tinued to improve our performance in Interest & Tax* quality and in reducing costs. $400 Million 300 200 100 0 3 1998 1999 2000 *Excludes special charges
  8. 8. For more than a decade, we have Over the next several years, our focus will be on improving cash flow, imple- been caught between discounts in menting our restructuring plan in the pursuit of market share and the need heavy-duty truck market, and growing for significant investment in technology our profitable businesses. over shorter and shorter product cycles driven by increasingly stringent This focus will position us for strong emissions standards. Late in 2000 and financial performance as we emerge early in 2001 Cummins concluded from the economic slump. three long term strategic agreements as part of a strategy that will enable us To improve our cash flow, we continue to remove redundant selling costs, to reduce our direct and indirect material improve our installed quality and costs, and have already delivered reduce the technical and manufacturing approximately $275 million worth of cost of proliferation over time. improvements in our gross purchase costs since our work began in 1998. I am confident of our future as we Reducing the amount we pay for move into 2001, despite the challenges quality issues associated with some of 2000. Our strengths remain. We are a of our new products is also a focus, diversified company. We continue to lead and we have implemented a quality the industry in emissions technology improvement program called Six Sigma. with expertise in: fuel systems, filtration, Led by project leaders called Black exhaust systems, turbochargers, Belts and Green Belts, Six Sigma uses electronics and combustion research. statistical tools and a disciplined, We have manufacturing, engineering logical approach to drive rapid and marketing alliances that not only process improvement. We now have cross our organizational structure, but more than 100 Black Belts and 170 which cross the globe, including ten Green Belts working on improvement businesses in India and eight in China. projects. The completed projects have We have the strongest distribution already resulted in an additional $27 system among any of our competitors, million to the bottom line, exceeding which enables us to be first to market our first-year goal by $2 million. with the best products. We intend to capitalize and build upon these Throughout 2000, I have highlighted strengths. the need to change the way we participate in the North American heavy-duty truck engine market. The problems in the business are inherent in the structure and are not only the result of the current downturn. 4
  9. 9. Members of the Policy Committee: (from left to right) John Wall, Christine Vujovich, Rick Mills, Jack Edwards, Tim Solso, Jean Blackwell, Joe Loughrey, Tom Linebarger, Mark Gerstle, Frank McDonald The year 2000 was an important year for Cummins. We took action to address the short-term financial issues facing us, worked to strengthen our Tim Solso growth businesses and established a Chairman and Chief Executive Officer new vision and mission which resulted Cummins Inc. in changing our name to Cummins February 28, 2001 Inc. to reflect the true nature of the company. These actions, combined with a focus on our strengths over the long term, mean that we are well poised to deliver on our promise to perform for all our stakeholders in 2001 and beyond. 5
  10. 10. Power Generation Business Cummins Power Generation enjoyed In addition to providing traditional Earnings Before another great year with EBIT* almost prime power to developing countries, Interest & Tax* doubling for the second consecutive the demand has increased for year on modest sales growth. Cummins to provide entire power $100 Million plants which includes all facets of the 80 60 Continued strong growth is expected process from building…to operating 40 as the “new economy” of high tech and maintenance. 20 companies, heavily reliant on uninter- 0 rupted sources of power, rapidly Sales from our Power Rent business, 1998 1999 2000 increases its demand for electrical providing temporary rental generator *Excludes special charges consumption. The fast growing Internet sets to a wide range of customers, and telecommunication sectors more than tripled in 2000. Product is continue to rely on our unmatched available across all of North America. high technology in the form of digital control systems and sophisticated was launched back-up power for immediate, to offer our recreational vehicle (RV) seamless solutions. customers, with whom we enjoy an 80 percent market share, a variety The growth in distributed power of information and services from generation, which is a move to put campgrounds to cookbooks. electrical generating capacity closer to utility customers rather than solely Newage, our United Kingdom-based in large, centralized utility plants, also alternator subsidiary, enjoyed another creates new business opportunities, impressive performance with strong especially in North America. profits and improved market share. Newage’s successful joint venture in Our growth is diversified across many China has expanded to serve as a fronts with special emphasis on low cost, regional export base for Asia. increasing our value-added services. Major process changes were other Cummins is participating in a important contributors to Power U.S. Department of Energy project Generation's improved performance. for advanced research on ten In 2000, we capped a three-year effort kilowatt fuel cells, another emerging to change how we deal with suppliers technology. This segment of the which resulted in lower costs and fuel cell market complements improved quality. We also initiated a Cummins’ small genset business. three-year Six Sigma quality effort and the first year's results were even better than we expected. Sales $1400 Million 1200 1000 800 600 400 200 0 6 1998 1999 2000
  11. 11. The explosion in Internet traffic has created new opportunities for Cummins Power Generation to provide back-up power to Internet infrastructure facilities, such as this Cable & Wireless Network Center in Birmingham, England. The Cummins Power Generation Business has emerged from our major restructuring as an agile and profitable business, well positioned, and taking advantage of the rapidly growing global demand for cost effective, reliable power. 2000 Sales $1.4 Billion Jack K. Edwards Mobile Executive Vice President Systems 16% President, Power Generation Alternators 9% Power Systems 75% 7
  12. 12. Filtration Business and Other New technologies from Fleetguard and Holset offer unique market opportunities for products that contribute to a cleaner environment. The Filtration Business and Other Growth in international markets had a Sales ended a challenging year with solid positive impact on overall sales, growth and profitability. Sales rose supported by new plants in Brazil $1400 Million by nine percent while EBIT* remained and Mexico as well as the completion 1200 strong, approaching nearly 11 percent of a Nelson exhaust system joint 1000 for the year. venture in India. These results were 800 600 achieved despite the adverse effects 400 In North America, the Fleetguard of a strong U.S. currency. 200 filtration business continued to see 0 1998 1999 2000 growth even as the heavy-duty truck Our three subsidiaries—Kuss, market turned down in the second half Universal Silencer and Separation of 2000. The Nelson exhaust business, Technologies—operate in related which is more sensitive to OEM market markets such as automotive fuel cycles, was directly affected by the filtration, noise control and air filtration truck market slowdown and softness for power generation equipment and in some other key markets caused by industrial hydraulic filtration. Together, a slowing economy. they grew sales and earnings in excess of 25 percent. 8
  13. 13. Earnings Before Interest & Tax* $125 Million 100 75 50 25 0 1998 1999 2000 *Excludes special charges In 2000, our Kuss subsidiary achieved In 2000, a leading independent market high level recognition in the Ohio research company surveyed 2,000 Quality Excellence Award. fleets in North America for brand preference. Fleetguard ranked The launch of Six Sigma was a key highest among industry competitors focus area for the Filtration Business for air, coolant, fuel and lube filtration. in 2000, with annualized savings from current projects likely to reach $4.5 The Filtration Business is well positioned million. In response to a slowing for increased growth and profitability economy, we have implemented as well as consistent year-over-year several cost reduction initiatives performance. Its balanced approach focused on direct and indirect material in filtration, exhaust and related sub- cost reductions, manufacturing and sidiaries provides customers with an distribution facility consolidations and unmatched range of product and workforce reductions. service solutions. Our diversification – across technologies, products, The synergies from the combination of markets and geographies – is a Nelson, Fleetguard and Cummins have source of strength that points to a provided us with unique market oppor- bright future. tunities for products that contribute to a cleaner environment. For example, we are applying filtration to exhaust 2000 Sales $1.2 Billion systems in aftertreatment solutions that remove soot from diesel exhaust to Company- Owned meet increasingly stringent emissions Rick Mills Distributors 22% standards. In addition, our new high Vice President efficiency closed crankcase ventilation President, Filtration & Fleetguard, Inc. Holset systems significantly reduce oil aerosol 9% emissions to the atmosphere. Filtration Distributors and Holset 69% We also lead the industry in innovative Cummins’ 16 international distributors technologies that meet end user needs allow us to interface with our end user for extended service life and reduced customers worldwide. Total retail sales waste. Our new centrifugal filtration exceeded plan for the year. Asian and system with the patented ConeStaC™ South American outlets in particular inner element offers longer service achieved superior results. The Holset intervals and an incinerable plastic turbocharger business continued filter element. Our next generation air profitable growth. Holset was first intake system – Openflow™ – provides to market with heavy-duty variable longer air filter life while using less geometry turbochargers, power turbines component material. and titanium compressors for ultra-high pressure ratio applications. The development of new products was focused on improving engine perform- ance to meet higher environmental emission standards. 9
  14. 14. Engine Business Komatsu and Cummins jointly developed the world’s largest diesel engine for mining trucks, which is being launched in 2001. In 2000, Komatsu Mining Systems chose Cummins as its exclusive diesel engine supplier. In 2000, the Engine Business posted supplier of engines to its mining 2000 Sales $4.0 Billion earnings before interest and tax* of equipment division. By the end of the $24 million. Even before market con- year, the success of the 2700 horse- Construction, Heavy-duty ditions declined mid-year, we initiated power QSK60 helped increase our Ag, Marine Truck 22% 35% actions to redefine our participation in penetration from 26 percent in 1999 the North American heavy-duty truck to 47 percent for mining applications market in order to improve profitability above 2000 horsepower. Dodge Ram, RV over the business cycle. By first 20% HHP/Mining quarter 2001, we had negotiated Dodge Ram, Recreational Vehicles 6% Medium-duty three long-term supply agreements Cummins shipped 119,000 engines Truck, Bus 17% with original equipment manufacturers for the Dodge Ram, setting another (OEMs) as part of that strategy. record despite DaimlerChrysler’s production slowdown in all vehicle categories at the end of the year. Mining The QSK engine has increased our A decline in consumer demand was success in the mining market. The reflected in lower shipments of engines engine’s outstanding 98 percent for recreational vehicles, but Cummins availability rating led to an agreement continued to be the market share leader. with Komatsu to be the exclusive 10
  15. 15. Earnings Before Interest & Tax* $ 300 Million 250 200 150 100 50 0 1998 1999 2000 *Excludes special charges We also benefited from the work of Medium-duty Truck & Bus Overall, shipments of engines for direct and indirect purchasing teams, medium-duty trucks declined five which helped us reduce costs signifi- percent from 1999 levels, as stronger cantly by consolidating purchases and European and Latin American sales negotiating deeper discounts. offset the weakened North American With more stringent environmental markets. Ford recognized our product rules on the horizon, we invested in quality with its Q1 supplier designation research for advanced solutions to for the engines we shipped to its plant emissions control. One such investment in Mexico. is a minority interest in a privately held Cummins maintained its #1 position in manufacturer and developer of catalytic Sales the transit bus market, and Blue Bird products for air pollution control and $4250 Million Corporation selected the ISB engine fuel cell systems. as standard power in its conventional 4000 We also invested in a common infor- school bus. mation technology platform across 3750 all our distributors in North America. Construction, Agriculture, Marine 3500 That platform gives us greater inventory Sales for these industrial markets control, customer satisfaction and 3250 were up four percent over last year. productivity measurement, as well 1999 1998 2000 The QSM11 marine engine continued as a database of best practices in to draw excellent reviews throughout customer care. 2000. Worldwide construction markets softened slightly through the year, as Looking ahead North American business declined but We are leveraging our OEM partner- Asian markets improved. ships, new product lines, technical strength, production scale, global Heavy-duty Truck network and exceptional people to The North American market for heavy- attract new customers. With these duty engines declined dramatically assets, and a strategy to reshape from the record levels of 1999—driven our approach to the global truck by an oversupply of new and used engine market, we can effectively trucks and a general economic slow- meet the challenges and capture down. The falling volumes forced the opportunities ahead. significant reductions in our work force. Outside of the U.S. and Canadian markets, sales of truck engines grew steadily, most notably in Mexico, Europe and Latin America. Cummins is the market leader in the United Joe Loughrey Kingdom, Australia and Mexico. Executive Vice President President, Engine Business Improvements and Investments The corporate-wide Six Sigma process improvement program was central to efforts to address quality issues. In 2000, our participants completed projects with an annualized value of almost $16 million. 11
  16. 16. Financial Overview Net sales were $6.6 billion in 2000, essentially flat with $6.6 billion reported in 1999 and 5 percent higher than in 1998. Earnings before interest and taxes in 2000 were $249 million, or 3.8 percent of sales, excluding a $160 million pretax charge in connection with certain restructuring actions and asset impairment write-downs. This compares to $356 million in 1999, excluding charges of $60 million pretax in connection with the dissolution of the Cummins Wartsila joint venture. As reported, earnings before interest and taxes were $89 million in 2000, $296 million in 1999 and $65 million in 1998. Net earnings in 2000 were $8 million or $.20 per share compared to $160 million or $4.13 per share in 1999 and a net loss of $21 million or $(.55) per share in 1998.
  17. 17. Management’s Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Sales of $2.1 billion in the bus and truck markets were 13 percent lower than in 1999 and 5 percent lower than in 1998. Net Sales: In 2000, heavy-duty truck engine revenues of $1.4 billion were In 2000, the Company’s sales totaled $6.6 billion. Revenues 19 percent lower than 1999 and 7 percent lower than 1998, from sales of engines were 52 percent of the Company’s net reflecting the downturn in the North American heavy-duty truck sales in 2000, with engine revenues 5 percent lower than in market, where shipments were down 35 percent from 1999. 1999 and flat compared to 1998. The Company shipped This was partially offset by increases in international heavy-duty 421,800 engines in 2000, compared to 426,100 engines in markets, where shipments increased 34 percent from 1999. 1999 and 403,300 in 1998 as follows: Medium-duty truck and bus engine revenues of $662 million Unit shipments 2000 1999 1998 were 4 percent higher than in 1999 and flat compared to Midrange engine 318,200 298,400 287,400 1998. In 2000, medium-duty truck engine volumes were 5 Heavy-duty engines 91,900 117,900 106,100 percent lower than in 1999 and reflect a 29 percent decline in High-horsepower engines 11,700 9,800 9,800 North American volumes. This decline was partially offset by a 421,800 426,100 403,300 14 percent shipment increase in international medium-duty truck markets. Bus engine shipments were 41 percent higher Revenues from non-engine products, which were 48 percent than in 1999. of net sales in 2000, were 5 percent higher than in 1999 and 11 percent higher than in 1998. The major increases within non- Sales of $830 million in the light commercial vehicle market engine revenues were achieved in parts sales, company-owned were 7 percent higher than in 1999 and 16 percent higher than distributors and the Holset turbocharger operations. Sales of in 1998, reflecting an increase in engine shipments from 1999. the remaining non-engine products, in the aggregate, were Record unit shipments in 2000 to Daimler-Chrysler for the essentially level with 1999. Dodge Ram pickup, while including a sharp downturn in the fourth quarter, were 16 percent higher than in 1999 for The Company’s net sales for each of its key segments during the full year. the last three years were: Sales of $873 million to the construction, agriculture and marine $ Millions 2000 1999 1998 markets were 4 percent higher than in 1999 and 3 percent Automotive markets $2,936 $3,203 $2,928 higher than in 1998. In 2000, shipments were 4 percent higher Industrial markets 1,114 1,022 1,054 than in 1999, driven by increases in the construction and marine Engine Business 4,050 4,225 3,982 markets. Shipment declines in North America were more than Power Generation Business 1,395 1,356 1,230 offset by increases in international markets. Filtration Business and Other 1,152 1,058 1,054 $6,597 $6,639 $6,266 Sales of $241 million to the high horsepower/mining market were 32 percent higher than in 1999 and 16 percent higher than Cummins’ Engine Business, the Company’s largest business in 1998. Engine shipments were 36 percent higher than in 1999, segment, produces engines and parts for sale to customers in with higher demand in international markets accounting for both automotive and industrial markets. Engine Business much of the increase. customers are serviced through the Company’s worldwide distributor network. The engines are used in trucks of all sizes, buses and recreational vehicles, as well as a variety of industrial applications including construction, mining, agriculture, marine, rail and military. Engine Business revenues were $4.0 billion in 2000, a 4 percent decrease from 1999 and a 2 percent increase over 1998. The 2000 discussion and analysis of results has been aligned to reflect the organization structure of the Engine Business in addressing its markets. 13
  18. 18. Revenues of $1.4 billion in 2000 for the Power Generation Gross Margin: Business were 3 percent higher than in 1999 and 13 percent The Company’s gross margin percentage was 19.1 percent higher than in 1998. Sales of the Company’s generator sets in in 2000, 21.4 percent in 1999 and 21.4 percent in 1998, 2000 were flat compared to 1999. Engine sales to generator set excluding the special charges recorded for product coverage assemblers were up 17 percent from the prior year. Alternator and inventory write-downs in 1998. The gross margin percent in sales decreased 7 percent as compared to 1999. Sales of small 1998 including the special charges was 19.9 percent. Gross generator sets for recreational vehicles and other consumer margins in 2000 were impacted by lower cost absorption in applications were flat compared to last year. the Company’s heavy-duty plants, changes in product mix, foreign exchange and higher product coverage costs. Product Sales of $1.2 billion in 2000 for the Filtration Business and coverage costs were 4.2 percent of net sales in 2000, Other were 9 percent higher than in 1999 and 1998. In 2000, compared to 3.7 percent in 1999, and 3.3 percent in 1998, Fleetguard/Nelson revenues increased 2 percent, but reflected excluding the special charges. Including special charges, a drop in demand for OEM truck and construction equipment product coverage costs were 4.5 percent of net sales in 1998. products as well as reduced sales to consumer-oriented small engine and equipment manufacturers. International distributor Operating Expenses: sales included in this segment increased 13 percent from 1999, Selling and administrative expenses were 11.8 percent of net while sales of Holset turbochargers increased 26 percent as sales in 2000, compared to 11.8 percent in 1999 and 12.5 compared to a year ago. percent in 1998. Net sales by marketing territory for each of the last three Research and engineering expenses were 3.7 percent of net years were: sales in 2000, compared to 3.7 percent in 1999 and 4.1 percent in 1998. $ Millions 2000 1999 1998 United States $3,775 $4,064 $3,595 The Company’s income from joint ventures and alliances was Asia/Australia 905 818 806 $9 million in 2000, compared to losses of $28 million in 1999 Europe/CIS 860 800 791 and losses of $30 million in 1998. This improvement resulted Mexico/Latin America 451 375 468 from the dissolution of the Wärtsilä joint venture at the end Canada 418 473 459 of 1999. Africa/Middle East 188 109 147 $6,597 $6,639 $6,266 In the past three years, Cummins has recorded restructuring and other charges to reflect business improvement initiatives committed to by the Company’s management. In total, international markets accounted for 43 percent of the Company’s revenues in 2000. Europe and the CIS, representing As disclosed in Note 4 to the Consolidated Financial 13 percent of the Company’s sales in 2000, were 8 percent Statements, the Company recorded charges of $160 million higher than in 1999 and 9 percent higher than in 1998. Sales ($103 million after tax, or $2.71 per share) reflecting restructur- to Canada, representing 6 percent of sales in 2000, were 12 ing actions, asset impairments and other activities largely percent lower than in 1999. Asian and Australian markets, in focused in the Engine Business. These actions are taken in total, represented 14 percent of the Company’s sales in 2000, response to the downturn in the North American heavy-duty with increases in sales to Asia from 1999. In Asia, sales to truck market and related conditions. The charges include Southeast Asia increased 14 percent, sales to Korea increased $42 million attributable to employee severance actions, 23 percent, sales to China increased 25 percent and sales to $72 million for impairment of equipment and other assets, Japan and India were slightly higher than 1999 levels. Business $30 million for impairment of software developed for internal in Mexico and Latin America, representing 7 percent of use where the programs were cancelled prior to implemen- sales in 2000, was 20 percent higher than in 1999. Sales to tation and $16 million associated with exit costs to close or Africa/Middle East, representing 3 percent of sales in 2000, consolidate a number of smaller business operations. Of the increased 72 percent from 1999. $160 million charge, $131 million was assigned to the Engine Business, $19 million to the Power Generation Business and $10 million to the Filtration Business and Other. 14
  19. 19. Workforce reduction actions included overall cutbacks in Approximately $73 million, primarily related to the write-down of staffing levels plus the impacts of closing and consolidating impaired equipment and software and employee severance operations. Restructuring charges for workforce reductions payments, has been charged to the restructuring liabilities as included the severance costs and related benefits of of December 31, 2000. Of the total charges associated with terminating 600 salaried employees and 830 hourly employees. the restructuring activities, cash outlays will approximate $54 Costs for workforce reductions were based on amounts million. The actions will be completed in 2001 and 2002 with pursuant to benefit programs or statutory requirements of the the majority of the cash outlays in 2001. The associated affected operations. annual savings are estimated at $55 million upon completion of the actions. The asset impairment loss of $72 million was calculated in accordance with the provisions of SFAS 121. Asset impairment In December 1999, the Company recorded a charge of $60 of equipment from discontinuing operations was primarily for million in connection with the dissolution of the Cummins engine assembly and fuel system manufacturing equipment to Wärtsilä joint venture. The joint venture termination was be disposed of upon the closure or consolidation of production effective December 31, 1999, with the Company taking over operations.The asset impairment charge included a write-down the operations and assets of the product line manufactured of $38 million for manufacturing equipment that will continue in Daventry, England. to be used for approximately two years. Depreciation will continue on these assets over that period of time. The expected The Company recorded charges in 1998 totaling $125 million, recovery value of equipment to be disposed of was based comprised of $100 million of costs associated with the on estimated salvage value and was excluded from the write- Company’s plan to restructure, consolidate and exit certain down. The charge also included $11 million for equipment business activities and $25 million for a civil penalty resulting available for disposal, $6 million for properties available for from an agreement reached with the U.S. Environmental disposal, $10 million for investments and $7 million for intangi- Protection Agency (EPA) and the Department of Justice bles and minority interest positions related to divesting smaller regarding diesel engine emissions. In addition, the Company operations and investments. The carrying value of assets held recorded special charges of $14 million for inventory write- for disposal and the effect from suspending depreciation on downs associated with restructuring actions. such assets is immaterial. The Company is concluding the restructuring plan implemented The asset impairment charge of $30 million consisted of in the third quarter of 1998. In the third quarter of 2000, the capitalized software-in-process being developed for internal Company reversed excess accruals from 1998 of $7 million use. The charge was related to manufacturing, financial and and recorded $7 million of charges related to new actions administrative information technology programs cancelled committed to during the quarter. Inclusive of the third quarter during program development and prior to implementation. action, as of December 31, 2000, approximately $127 million has been charged against the liabilities associated with these Exit costs of $16 million to close or consolidate a number of actions. The Company funded the restructuring actions using small businesses and operations included $6 million for cash generated from operations. The remaining actions to be equipment removal costs, $5 million to satisfy contractual completed consist primarily of the payment of severance com- obligations and $5 million for other exit costs. As the restruc- mitments to terminated employees in early 2001 and the final turing actions consist primarily of the closing or consolidation EPA payment to be made in July 2001. of smaller operations, the Company does not expect these actions to have a material effect on future revenues. Other: Interest expense of $86 million was $11 million higher than in 1999 and $15 million higher than in 1998. Higher borrowing levels in 2000 accounted for the increase from 1999. Increased borrowings and lower capitalization of interest accounted for the increase as compared to 1998. As disclosed in Note 5 to the Consolidated Financial Statements, other income and expense went from $8 million of expense in 1999 to $1 million of income in 2000, primarily due to non-recurring transactions recorded in both years. 15
  20. 20. Provision for Income Taxes: Net cash used in financing activities was $86 million in 2000. The Company’s income tax provision in 2000 was a benefit of This cash was used for dividend payments, repurchases of the $19 million, combining an effective tax rate of 23 percent from Company’s stock and payments on borrowings. As disclosed in operations and an effective tax rate of 35 percent from special Note 7 to the Consolidated Financial Statements, the Company charges. The effective tax rate from operations in 2000 reflected issued $765 million face amount of notes and debentures in reduced taxes on export sales and research tax credits. In 1998 under a $1 billion registration statement filed with the 1999, the Company’s tax provision was $55 million, reflecting Securities and Exchange Commission in December 1997. The an effective tax rate of 25 percent. In 1998, the Company’s net proceeds were used to finance the acquisition of Nelson tax provision was $4 million, with the tax benefits from export and to pay down other indebtedness outstanding at December sales and the research credit more than offset by the unfavor- 31, 1997. Based on the Company’s projected cash flows from able tax effects of nondeductible losses in foreign joint ventures operations and existing credit facilities, management believes and nondeductible EPA penalty and goodwill amortization. that sufficient liquidity is available to meet anticipated capital and dividend requirements in the foreseeable future. Minority Interest: Minority interest in net earnings of consolidated entities was Legal/Environmental Matters: $14 million in 2000, an increase of $8 million from 1999 and an The Company and its subsidiaries are defendants in a number increase of $3 million from 1998. The increase from 1999 was of pending legal actions that arise in the normal course of primarily due to higher earnings attributable to minority partners business, including environmental claims and actions related of Cummins India Limited and improved performance of the to use and performance of the Company’s products. Such joint venture with Scania. matters are more fully described in Note 17 to the Consolidated Financial Statements. In the event the Company is determined Cash Flow and Financial Condition to be liable for damages in connection with such actions or Key elements of cash flows were: proceedings, the unreserved portion of such liability is not expected to have a material adverse effect on the Company’s results of operations, cash flows or financial condition. $ Millions 2000 1999 1998 Net cash provided by operating activities $388 $307 $271 Market Risk: Net cash used in The Company is exposed to financial risk resulting from volatility investing activities (312) (166) (752) in foreign exchange rates, interest rates and commodity prices. Net cash (used in) provided by This risk is closely monitored and managed through the use of financing activities (86) (105) 471 derivative contracts. As clearly stated in the Company’s policies Effect of exchange and procedures, financial derivatives are used expressly for rate changes on cash (2) - (1) hedging purposes, and under no circumstances are they used Net change in cash $ (12) $ 36 $ (11) for speculating or for trading. Transactions are entered into only with banking institutions with strong credit ratings, and thus the credit risk associated with these contracts is considered During 2000, net cash provided from operating activities was immaterial. Hedging program results and status are reported $388 million, reflecting the Company’s decline in net earnings to senior management on a monthly and quarterly basis. and the non-cash effect of depreciation and amortization, reduced by increases in working capital. As disclosed in Note 1 The following section describes the Company’s risk exposures to the Consolidated Financial Statements, the Company sold and provides results of sensitivity analyses performed on receivables in 2000 in a securitization program, which yielded December 31, 2000. The sensitivity tests assumed instanta- proceeds of $219 million. The Company is funding the cash neous, parallel shifts in foreign currency exchange rates, requirements for restructuring actions using cash generated commodity prices and interest rate yield curves. from operations with the majority of the cash requirement expected to occur in 2001. Net cash used in investing activities in 2000 was $312 million and included planned capital expendi- tures of $228 million. Capital expenditures were $215 million in 1999 and $271 million in 1998. The higher level of net cash requirements in 1998 was due primarily to the acquisition of Nelson. Acquisitions in 2000 included the South Africa distribu- torship and the purchase of assets from the dissolution of the Wärtsilä joint venture. Investments in joint ventures and alliances in 2000 of $53 million reflected the net effect of capital contribu- tions and cash generated by certain joint ventures. 16
  21. 21. A. Foreign Exchange Rates Forward-looking Statements Due to its international business presence, the Company This Management’s Discussion and Analysis of Results of transacts extensively in foreign currencies. As a result, Operations and Financial Condition, other sections of this corporate earnings experience some volatility related to Annual Report and the Company’s press releases, teleconfer- movements in exchange rates. In order to exploit the benefits ences and other external communications contain of global diversification and naturally offsetting currency forward-looking statements that are based on current expecta- positions, foreign exchange balance sheet exposures are tions, estimates and projections about the industries in which aggregated and hedged at the corporate level through the Cummins operates and management’s beliefs and assump- use of foreign exchange forward contracts. The objective of tions. Words, such as “expects,” “anticipates,” “intends,” the foreign exchange hedging program is to reduce earnings “plans,” “believes,” “seeks,” “estimates,” variations of such volatility resulting from the translation of net foreign exchange words and similar expressions are intended to identify such balance sheet positions. A hypothetical, instantaneous, forward-looking statements. These statements are not guaran- 10 percent adverse movement in the foreign currency tees of future performance and involve certain risks, exchange rates would decrease earnings by approximately uncertainties and assumptions (“Future Factors”) which are $4 million in the current reporting period. The sensitivity difficult to predict. Therefore, actual outcomes and results may analysis ignores the impact of foreign exchange movements differ materially from what is expressed or forecasted in such on Cummins’ competitive position as well as the remoteness of forward-looking statements. Cummins undertakes no obligation the likelihood that all foreign currencies will move in tandem to update publicly any forward-looking statements, whether as against the U.S. dollar. The analysis also ignores the offsetting a result of new information, future events or otherwise. impact on income of the revaluation of the underlying balance sheet exposures. Future Factors include increasing price and product competition by foreign and domestic competitors, including new entrants; B. Interest Rates rapid technological developments and changes; the ability to The Company currently has in place three interest rate swaps continue to introduce competitive new products on a timely, that effectively convert fixed-rate debt into floating-rate debt. cost-effective basis; the mix of products; the achievement of The objective of the swaps is to more efficiently balance lower costs and expenses; domestic and foreign governmental borrowing costs and interest rate risk. A sensitivity analysis and public policy changes, including environmental regulations; assumed a hypothetical, instantaneous, 100 basis-point parallel protection and validity of patent and other intellectual property increase in the floating interest rate yield curve, after which rights; reliance on large customers; technological, implementa- rates remained fixed at the new, higher level for a one-year tion and cost/financial risks in increasing use of large, multi-year period. This change in yield curve would correspond to a contracts; the cyclical nature of Cummins’ business; the $4 million increase in interest expense for the one-year period. outcome of pending and future litigation and governmental This sensitivity analysis does not account for the change in proceedings; and continued availability of financing, financial the Company’s competitive environment indirectly related to instruments and financial resources in the amounts, at the times changes in interest rates and the potential managerial action and on the terms required to support Cummins’ future business. taken in response to these changes. These are representative of the Future Factors that could affect C. Commodity Prices the outcome of the forward-looking statements. In addition, such The Company is exposed to fluctuation in commodity prices statements could be affected by general industry and market through the purchase of raw materials as well as contractual conditions and growth rates, general domestic and international agreements with component suppliers. Given the historically economic conditions, including interest rate and currency volatile nature of commodity prices, this exposure can signifi- exchange rate fluctuations, and other Future Factors. cantly impact product costs. The Company uses commodity swap agreements to partially hedge exposures to changes in copper and aluminum prices. Given a hypothetical, instanta- neous, 10 percent depreciation of the underlying commodity price, with prices then remaining fixed for a 12-month period, the Company would experience a loss of approximately $1 million for the annual reporting period. This amount excludes the offsetting impact of decreases in commodity costs. 17
  22. 22. Responsibility for Financial Statements Report of Independent Public Accountants Management is responsible for the preparation of the To the Shareholders and Board of Directors of Cummins Engine Company’s consolidated financial statements and all related Company, Inc.: information appearing in this Report. The statements and notes have been prepared in conformity with accounting principles We have audited the accompanying consolidated statement generally accepted in the United States and include some of financial position of Cummins Engine Company, Inc., (an amounts, which are estimates based upon currently available Indiana corporation) and subsidiaries as of December 31, 2000 information and management’s judgment of current conditions and 1999, and the related consolidated statements of earnings, and circumstances. The Company engaged Arthur Andersen cash flows and shareholders’ investment for each of the three LLP, independent public accountants, to examine the consoli- years in the period ended December 31, 2000. These financial dated financial statements. Their report appears on this page. statements are the responsibility of the Company’s manage- ment. Our responsibility is to express an opinion on these To provide reasonable assurance that assets are safeguarded financial statements based on our audits. against loss from unauthorized use or disposition and that accounting records are reliable for preparing financial state- We conducted our audits in accordance with auditing ments, management maintains a system of accounting and standards generally accepted in the United States. Those controls, including an internal audit program. The system of standards require that we plan and perform the audit to obtain accounting and controls is improved and modified in response reasonable assurance about whether the financial statements to changes in business conditions and operations and recom- are free of material misstatement. An audit includes examining, mendations made by the independent public accountants and on a test basis, evidence supporting the amounts and the internal auditors. disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant The Board of Directors has an Audit Committee whose estimates made by management, as well as evaluating members are not employees of the Company. The Committee the overall financial statement presentation. We believe that meets periodically with management, internal auditors and rep- our audits provide a reasonable basis for our opinion. resentatives of the Company’s independent public accountants to review the Company’s program of internal controls, audit In our opinion, the financial statements referred to above plans and results and the recommendations of the internal present fairly, in all material respects, the financial position of and external auditors and management’s responses to those Cummins Engine Company, Inc., and subsidiaries as of recommendations. December 31, 2000 and 1999, and the results of their opera- tions and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with account- ing principles generally accepted in the United States. Arthur Andersen LLP Chicago, Illinois January 24, 2001 18
  23. 23. Cummins Engine Company, Inc. Consolidated Statement of Earnings Millions, except per share amounts 2000 1999 1998 $6,597 $6,639 $6,266 Net sales Cost of goods sold 5,338 5,221 4,925 Special charges - - 92 Gross profit 1,259 1,418 1,249 Selling and administrative expenses 776 781 787 Research and engineering expenses 244 245 255 Net (income) expense from joint ventures and alliances (9) 28 30 Interest expense 86 75 71 Other (income) expense, net (1) 8 (13) Restructuring, asset impairment and other special charges 160 60 125 3 221 (6) Earnings (loss) before income taxes (Benefit) provision for income taxes (19) 55 4 Minority interest 14 6 11 $ ,8 $ .160 $ (21) Net earnings (loss) Basic earnings (loss) per share $ .20 $ 4.16 $ (.55) Diluted earnings (loss) per share .20 4.13 (.55) The accompanying notes are an integral part of this statement. 19
  24. 24. Cummins Engine Company, Inc. Consolidated Statement of Financial Position Millions, except per share amounts Dec. 31, 2000 Dec. 31,1999 Assets Current assets: Cash and cash equivalents $ ,62 $ ,74 Receivables, net of allowance of $8 and $9 724 1,026 Inventories 770 787 Other current assets 274 293 1,830 2,180 Investments and other assets: Investments in joint ventures and alliances 201 131 Other assets 137 143 338 274 Property, plant and equipment: Land and buildings 590 577 Machinery, equipment and fixtures 2,417 2,375 Construction in process 189 168 3,196 3,120 Less accumulated depreciation 1,598 1,490 1,598 1,630 Goodwill, net of amortization of $42 and $28 354 364 380 249 Other intangibles, deferred taxes and deferred charges $4,500 $4,697 Total assets Liabilities and shareholders’ investment Current liabilities: Loans payable $ ,156 $ ,113 Current maturities of long-term debt 8 10 Accounts payable 388 411 Accrued salaries and wages 71 88 Accrued product coverage and marketing expenses 280 246 Income taxes payable 11 40 Other accrued expenses 309 406 1,223 1,314 1,032 1,092 Long-term debt 837 788 Other liabilities 72 74 Minority interest Shareholders’ investment: Common stock, $2.50 par value, 48.6 and 48.3 shares issued 122 121 Additional contributed capital 1,137 1,129 Retained earnings 718 760 Accumulated other comprehensive income (167) (109) Common stock in treasury, at cost, 7.2 and 6.8 shares (290) (274) Common stock held in trust for employee benefit plans, 3.1 and 3.4 shares (151) (163) Unearned compensation (33) (35) 1,336 1,429 $4,500 $4,697 Total liabilities and shareholders’ investment The accompanying notes are an integral part of this statement 20