cummins 99 AR2

20

Highlights

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

44 Officers and Executives

45 Cummins’ Worldwide Locations

46 Shareholder Information

Cummins Engine Company, Inc.

$ Millions, except per share amounts 1998 1997

Net sales $6,266) $5,625Gross profit 1,249) 1,280Selling and administrative expenses 787) 744Research and engineering expenses 255) 260Other income, net 13) 26Earnings before interest and taxes:

Before unusual charges 282) 312As reported 65) 312

Net earnings (loss) (21) 212Basic earnings (loss) per share (0.55) 5.55Diluted earnings (loss) per share (0.55) 5.48Dividends per share 1.10) 1.075

Click on the page number for desired topic:

Cummins Engine Company is the leading worldwide designerand manufacturer of diesel engines ranging from 60 to 6,000horsepower and the largest producer of diesel engines over 200 horsepower. These engines are used by customers in a widevariety of automotive and industrial markets and for powergeneration. The company also provides filtration systems andnatural gas engines as well as engine components and electronicsystems. Cummins’ 1998 sales were $6.3 billion and it employed28,300 people.

Cummins

Annual Report

1998

Left: Jim Henderson, Chairman and Chief Executive OfficerRight: Tim Solso, President and Chief Operating Officer

about European markets, butNorth American automotive andconstruction markets remain gen-erally strong. While forecasting in our business is difficult, wecurrently expect relatively levelrevenues in the next two-yearperiod. That could change rapidly.

An economic slowdown thatincluded Europe and NorthAmerica would inevitably affectthe timing by which we will hitour targets. Regardless of eco-nomic conditions, however, weanticipate steady progress overthe next two years as we work tomeet the needs of customers inall our markets, to reduce costsand to improve gross margin andcash flow.

We are confident that theactions we are taking will put usin a position to meet our targetsconsistently in the future.

Because motivated, capablepeople are vital to taking care ofthe customer in cost-effectiveways, they are central to ourachievement of shareholdervalue. Sustained profitable growththat meets the expectations ofshareholders will give our peopleopportunities for personal growth,bring value to our suppliers, andprovide resources that permit us to contribute value to thecountries and communities inwhich we operate.

The Year 1998We had solid accomplishments in 1998. Our revenues were arecord $6.266 billion, compared to $5.625 billion in 1997. In NorthAmerica, automotive, construc-tion, power generation andfiltration markets were strong,offsetting sales declines in Asiaand in our agricultural and othercommodity-based markets aroundthe world. We completed ouracquisition of Nelson Industriesand successfully integrated it into our Filtration Business. Welaunched a record six new enginesand two new fuel systems. OurPower Generation Business madesignificant progress towardimproved profitability.

Excluding special charges, earn-ings were $282 million beforeinterest and taxes. Reportedresults included special chargesfor restructuring, product cover-age and our settlement with theU.S. Environmental ProtectionAgency (EPA), resulting in a netloss of $21 million or 55 cents per share. Settling with the EPAavoided costly litigation and dis-ruption in the marketplace, eventhough we believe firmly we wereand are in full compliance with allfederal and state regulations.

Actions we are taking to improveprofitability are described in moredetail later in this letter. Theyinclude restructuring and majorinitiatives to reduce the costs ofthe materials and services we buy.

Overall, 1998 was a year inwhich we brought more valueto customers in each of ourmarkets and laid the foundationfor improvements in earningsand cash flow to bring morevalue to our shareholders.

Value for our CustomersCustomer value derives fromthree principal elements.

• Products that provide our cus-tomers with the most cost-effective performance

• Information that enables our customers to run their businessesmore efficiently

• Responsive support for allaspects of customer need

Cummins made substantialprogress in all three areas in 1998.

Cummins is the world leader in diesel engine productionover 200 horsepower and is thesecond largest producer ofengines above 50 horsepower.We have achieved this positionby designing and producingproducts that meet the needsof our customers better thanour competitors’ products.

We emerged from the early1990s with improving financialperformance, but recognized that electronics and informationtechnology had opened a wholenew horizon for our industry. Also,we knew tougher emissions

3

Value Vision

Dear Fellow Shareholders:The theme of this 1998 report to shareholders is VALUE — the fundamental on which anyendeavor is judged by thoseinvolved or affected. For a business enterprise, this startswith the value brought to its shareholders.

If shareholder value is to be sustained over any period of time, it must be linked to the value customers and partners of thatenterprise receive from doingbusiness with it.

Clearly, companies that deliversuperior value to their share-holders over time are the onesthat deliver superior value totheir customers and partnersover time.

We at Cummins firmly believe we can deliver superior value toboth shareholders and customersand partners. In 1998, while ourfinancial results fell short of our goals, we took important

steps towards delivering superiorvalue to our customers and part-ners and towards meeting ourfinancial objectives.

We believe meeting thoseobjectives will deliver superiorvalue to our shareholders.

Our financial objectives are toachieve earnings before interestand taxes (EBIT) of 9 percent inyears when a majority of our mar-kets are healthy. This will equateto a return on average net assetsof approximately 25 percent and astrong free cash flow.

Our engine-related products areassociated with capital purchasesby our customers and are, there-fore, affected significantly byeconomic slowdowns. In reces-sion years our earnings targetbefore interest and taxes is atleast 3 percent.

We begin 1999 with continuedeconomic difficulties in Asia andLatin America and some concern

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Back to Table of Contents

Sales by Segment

1998 Sales $6.3 Billion

Engine BusinessPower Generation BusinessFiltration Business and Other

63%

20%

17%

0 100 200 300 400 500 600

Units in thousandsSource: Rhein & Associates, modified

CumminsOthers

1997 Worldwide 50 HP+ Diesel

Engine Production by Manufacturer

502

422

361

325

300

0 50 100 150 200 250 300

Units in thousandsSource: Rhein & Associates, modified

CumminsOthers

1997 Worldwide 200 HP+ Diesel

Engine Production by Manufacturer

260

198

115

83

58

Letter to the Shareholders

Our success in creating value for our customers has madeCummins a highly desirablealliance partner for many lead-ing companies around theworld.

We have pursued two kinds ofpartnerships. First, we havealliances with strong technicalpartners with whom we canshare expertise and the costs of developing new products.

Our technical alliance partnersinclude Case, IVECO, Komatsu,New Holland, Scania and Wartsila,and we are working collaborativelywith them to develop the nextgeneration of products for the21st century. The second type ofbusiness alliance partnership iswith leading equipment producersin important markets for futuregrowth like China, India, Turkeyand Japan. Our partners provideinvaluable knowledge and con-tacts in the local business andpolitical communities, as well asmarket leadership.

In October, Cummins and fiveother diesel engine manufacturersended nearly a year of intensenegotiations with the U.S.Environmental Protection Agencyand the Department of Justice by signing consent decrees. The settlement requires dieselengines to meet some new emis-sions standards immediately.Substantially tougher standardsoriginally set for 2004 must bemet 15 months earlier, in October2002. The major impact is on ourheavy-duty, line-haul engines.

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CumminsKomatsuEngine Co.

Cummins-ScaniaHigh PressureInjection, L.L.C.

ConsolidatedDieselCompany(Case)

Cummins WartsilaSAS

European Engine Alliance(IVECO - New Holland)

Komatsu Cummins EngineCompany, Ltd.

Cummins India Ltd.

Fleetguard Filters Ltd.

Tata Cummins Ltd.

Tata Holset Ltd.

Dongfeng CumminsEngine Co. Ltd.

Wuxi NewageAlternators Ltd.

Chongqing CumminsEngine Company Ltd.

Product Programs (Volume, Shared Cost/Expertise)Geographic (Volume/Local Market Expansion)

Wuxi Holset Ltd.

Industrial Power Alliance

FleetguardShanghai

Cummins Alliances

Valuable Alliancesstandards were likely to emergeafter the year 2000. In order tocontinue as the industry’s techni-cal leader, we needed to respondboldly. And we did. In the yearssince 1994, we have beenupgrading or replacing enginesacross our entire product line —incorporating advanced electroniccontrols, combustion and airhandling technology — andadding new engines on both theupper and lower ends of thehorsepower range.

1998 was the year of peak expensein this program. We introduced arecord six new engines togetherwith two entirely new fuel sys-tems. New midrange engineswere the ISB and ISC, whichincorporate full-authority elec-tronic controls and software. The ISC uses our new CAPS fuelsystem. Industrial versions ofthese midrange engines are beingintroduced in 1999.

For our customers in heavy-dutymarkets, we introduced the ISMand the revolutionary Signature600 engine with our HPI fuel sys-tem. In addition, we introducedtwo new high-horsepowerengines, the 3200-horsepowerCW170, part of our CumminsWartsila joint venture, and the2700-horsepower QSK60.

Both of these high-horsepowerengines are designed to increaseour penetration in the primepower generation market and toestablish leadership in miningequipment markets.

All of the new engines are meet-ing marketplace objectives, and customers report that theyare delighted with the engines’responsiveness, power and fuel economy.

This year, 1999, will see the releaseof four more new engines: aversion of the Signature series forautomotive fleet customers andindustrial markets; a new 9-litreengine based on advanced elec-tronic C-series technology; theQSK45 — a lower horsepowerversion of the QSK60; and a 3.3litre engine to be produced at theKomatsu Cummins EngineCompany in Oyama, Japan.

The acquisition of NelsonIndustries — a major producer ofair and liquid filtration products,and exhaust and emissions con-trol systems — enables us tobring more product value to ourOEMs. Nelson is the leadingproducer of exhaust systems fordiesel-powered equipment inNorth America and ranks secondin air intake systems. Combinedwith Fleetguard, this acquisitionmakes us an integrated first tiersupplier of three critical enginesubsystems: air intake, fluids and exhaust. These subsystemsare required for every engine,regardless of market or applica-tion, so we can bring additionalbusiness to Nelson from our other businesses.

Closely related to the valuesuperior products bring to ourcustomers is the informationwe can provide.

Electronics and information tech-nology are an integral part of theoperation of our engines. We arealso using information technologyto enable our customers to man-age more efficiently by integratingvehicles into their business opera-tions and into the supply chain.We are the principal owners of Innovative Computing Corporation,which provides fleet managementsolutions and Internet-basedproducts, enabling customers toexchange data throughout theentire supply chain.

Providing support is the thirdcritical part of creating value forour customers. This goes beyondtechnology and information sys-tems to what we call PowerCare —powerful care for our customers.Our 31 North American and 110international distributors are ourpartners in delivering superiorsupport to our customers throughprograms such as QuickServe,which offers one-hour diagnosisand completion of most repairswithin six hours, and SupportPlus, which guarantees instantparts access with no servicepremiums.

We continue to rely on customercouncils as we develop new sup-port programs and new productsfor our heavy-duty automotive,construction, mining and powergeneration markets.

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Value for Our Customers

7

The Cummins Policy Committee providesleadership and a real commitment tobuilding our business and value for you.Members of the Committee, clockwisefrom lower left: Kiran Patel, Jean Blackwell,Tim Solso, Joe Loughrey, Jim Henderson,Jack Edwards, Dave Jones, RobertoCordaro, Mark Gerstle and Pamela Carter.

Because Cummins has laid atechnical foundation unequaledin our industry, we are confi-dent of our ability to meet thenew standards.

In the markets in which weparticipate, the goal of cleaner aircoexists with the goal of durableand cost-effective products. Webelieve these goals are notmutually exclusive, and we havethe technology to deliver on both.

We expect to continue as theindustry leader in an environ-ment of more demandingemission controls.

Value for Our Shareholders The second area of accomplish-ment in 1998 was laying the foun-dation for future improvement inearnings and cash flow. Free cashflow provides the opportunity toreward the shareholder throughshare repurchase, dividendincreases and/or investment infuture growth.

We have simplified our financialobjectives based on an analysis of the nature of our business aswell as on benchmarking theworld’s best. The objectivesreflect profitable performanceover the business cycle.

In order to hit our financial objec-tive of 9 percent EBIT in goodyears, our cost structure targetsare 25 percent gross margin and16 percent selling, administrative,research and engineering (SAR)expense. We believe our goalsare realistic and attainable, and

we are pursuing them on threefronts: gross margin improve-ment, lower SAR expense andcash flow improvement.

Gross Margin. In 1994 and earlyin 1995, Cummins achieved agross margin of 25 percent. Asthe costs of the new productdevelopment program increased,the percentage of gross margindeclined to just above 20 percentin the fourth quarter of 1998. Weintend to return to the 25-percentgross margin level by improvingproduct coverage costs, loweringstart-up costs, restructuring andachieving lower material cost.

Our gross margin was lower thanplanned in 1998 and below ourtarget. A key factor was highercosts for launching our newengines. Because of learningcurves and inevitable reliabilityproblems associated with anynew product launch, new prod-ucts cost more than the onesthey replace for some period oftime. Then, as volume builds,initial problems are corrected,manufacturing becomes moreefficient and costs come down.

We are confident productioncosts for our new engines willeventually be lower than forthe products replaced.

While we will be introducing fournew engines in 1999, the risksare considerably lower. Three arederivatives of engines released in1998, so the work to improvetheir cost and quality is alreadyunderway. The fourth, the 3.3 litreengine, is based upon proventechnology.

Gross margin will also be improvedas a result of the actions announcedin the third quarter when we tooka charge of $114 million forrestructuring Cummins operationsand those of our joint venturesaround the world. Restructuring is underway and includes consoli-dating both office and manufac-turing operations and outsourcingproduction of non-strategiccomponents. Cummins staffinglevels will fall by over 1,100, andemployment in joint ventures willdecline by an additional 1,200people. Benefits began modestlyin 1998, will grow in 1999 and are expected to reach more than$50 million annually beginning in2000, with most of these savingscontributing to gross marginimprovement.

Finally, we have embarked on aprogram to reduce the costs ofmaterials that go directly into ourproducts. Those materials repre-sent the largest single item onour income statement, so theopportunity for savings is substan-tial. A parallel program is in placefor goods and services like officesupplies, computers, freight,travel and health care, with someof the savings affecting grossmargin and the balance loweringSAR costs.

6


Increasing Shareholder Value

As we work to create value forour customers and our share-holders, we recognize the valueadded by our own people aroundthe world — in our technicalcenters, plants, offices anddistributorships. People are thesource of innovation in our prod-ucts, care for our customers andoperational improvements. Wedepend on their commitment,their hard work and their ideas.

We thank our people for helpingCummins meet the challengesof 1998, and we will continue torely on them in the years ahead.

Board Changes. Another valuableasset for Cummins is its diverseBoard of Directors. We have hadtwo changes to the Board sinceour last Annual Report. First, DonPerkins, former Chairman of theJewel Companies and a memberof Cummins’ Board of Directorsfor 25 years, reaches the manda-tory retirement age for Boardmembers in 1999 and is not,therefore, being nominated for re-election to the Board. Over hisyears with us, Don has served the Board in many roles, mostrecently as Chair of the AuditCommittee. Don’s experience, his understanding of worldwidebusiness, and his leadership inimproving corporate governanceare unmatched, and we havebenefited greatly from hisperspective and insight.

Don has been steadfast in hiscommitment to the interests ofour shareholders, and all of ushave learned immeasurably fromhim. We will miss him.

Second, we are pleased towelcome a new Board member,Jim Johnson, Chairman of theExecutive Committee of theBoard of Directors of the FederalNational Mortgage Association(FNMA or “Fannie Mae”), thelargest non-bank financial servicescompany in the world. Jim has an outstanding record of effec-tiveness in creating shareholdervalue while chairman and chiefexecutive officer of Fannie Maefrom 1991 through 1998 as wellas a thorough understanding ofpublic policy issues.

OutlookThe future for Cummins and its shareholders is bright. Ourpeople are focused on deliveringsuperior value to shareholders bydelivering superior value to ourcustomers and partners.

Our investment in innovationoffers our customers advancedtechnology and puts Cumminsin a better position than any-one else in the industry to meet tough new emissionsstandards, increase marketshare around the world andgrow profitably.

We have clear targets for financialreturn. We are confident that wewill make significant progresstoward these targets in the nextfew years despite a continuedunsettled world economic situa-tion. While we are not anticipatingsubstantial growth in our marketsfor 1999, we expect to gainmarket share as our new productsmake their mark and as growthsynergies resulting from ourNelson acquisition are realized.

We thank you, the owners ofCummins, for your continuedsupport. We remain dedicated to increasing the value of yourinvestment and look forward to sharing our progress andprospects with you at our Annual Shareholders’ Meeting on Tuesday, April 6, in Columbus Indiana.

James A. HendersonChairman and Chief Executive Officer

Theodore M. SolsoPresident and Chief Operating Officer

Cummins Engine Company, Inc.March 3, 1999

9

Corporate Values

Selling, Administrative andResearch (SAR) Costs. A majorsuccess in 1998 has been thesteady reduction of selling, admini-strative and research costs. In 1994,these costs totaled 18.5 percentof sales. In the first quarter of 1998they were just below 18 percent.In the fourth quarter they werereduced to 16 percent, which isour target. Compared to the firstquarter, fourth-quarter administra-tive costs were lower by $9 million,a full point as a percent of sales.Fourth-quarter research costswere below 4 percent.

We will pursue opportunities to move below 16 percent in the future.

Cash Flow. The prospect for ourbusiness to generate increasedfree cash flow in the future isexcellent, even with relatively levelrevenues in the next two years.First, major capital expendituresfor this cycle of new productdevelopment are behind us. Second,improving overall profitabilitythrough restructuring and purchas-ing and supply management, as we have described above, willalso contribute to cash flow.Finally, we have a major programto improve our management of working capital – specifically,inventory and receivables – providing another opportunity forcash flow improvement.

The cash generated will giveCummins the flexibility to main-tain a prudent capital structureand provide a return to share-holders through dividends andbuying back Cummins shares.Over the past four years, sharerepurchases have resulted in adecrease in shares outstandingfrom 41.6 million to 38.4 million.

Business Results. Our EngineBusiness, made up of a broadvariety of automotive and indus-trial markets, is the one in whichwe have made the investment in new products. Therefore, itsresults have been impacted signif-icantly in the last year.

We expect to see the improve-ment we have described abovereflected in returns from thesemarkets in the next two years.

The Power Generation Businesshas been making progress towardsits financial objectives primarilythrough restructuring and costreduction to date. Much of therestructuring announced in thethird quarter is directed towardsfurther improving Power Generationresults. A continuing challenge isthe release of the Cummins-Wartsila engines in the face ofAsian market weakness. Theengines will, however, permit usto compete more effectively in themore profitable prime power market.

Our Filtration Business and Otherincludes our filtration companies,Fleetguard and Nelson, as well as our turbocharger company,Holset, and 14 distributorshipsowned by Cummins. The acquisi-tion of Nelson Industries hasproven to be very successful,adding approximately 6 cents pershare to corporate results. Inaddition, the filtration and exhaustsystems business enables us to benefit from marketplace synergies with customers of ourEngine and Power Generationbusinesses.

Corporate ValuesAt Cummins, our commitment to providing value for our share-holders and customers goes handin hand with our commitment tocorporate responsibility. Webelieve firmly that acting withhonesty and integrity is soundbusiness — absolutely essential if we are to attract the very bestpeople, customers, suppliers,partners and distributors.

We are also convinced that it is in Cummins’ best interest tobe concerned about the com-munities and the society inwhich we do business, becausea healthy society provides the best foundation for business success.

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Valuable Improvements

IndustrialCummins engines power virtuallyevery type of equipment madefor construction, agricultural, min-ing, logging, rail, military, com-mercial marine and pleasure boatmarkets. Continuing allianceswith our delivery partners world-wide, as well as closer relation-ships with our end customers,offer us significant market sharein most of these markets.

Through a joint venture manufac-turing agreement with KomatsuLtd., Cummins offers its latestmidrange engine, the B3.3. Alongwith the addition of the B3.3 andthe release of the high horsepowerQSK60 engine, the Industrial Groupoffers the complete Cumminsengine power range to its marketsfrom 60 to 2700 horsepower.

Power Generation BusinessThe Power Generation Businessprovides a wide range of equip-ment and services for the gener-ation and control of electricalpower for both standby andprime power customers through-out the world. Customers includemajor utilities, independent powerproviders, hospitals and commer-cial office towers, manufacturingplants, telecommunicationscompanies, equipment rentalhouses, as well as manufacturersof mobile recreation vehicles.

The Power Generation Business,together with Cummins Wartsila,offers products that span a broadpower output from 2 kilowatts to 4 megawatts, and a choice ofdiesel, natural gas or gasoline-firedpower generator sets. Cumminsalso offers a range of servicesincluding turnkey power plantsolutions and long-term operationand maintenance contracts.

Filtration Business and OtherThe Filtration Business serves a broad base of customers inmore than 100 countries with awide range of filtration andexhaust systems. Productsinclude filters for engine applica-tions and hydraulic and air intake systems for both engineand industrial applications.

Cummins owns 14 distributor-ships, most of them outside theUnited States, with the largestbeing in Australia, India and theUnited Kingdom.

Holset is a Cummins subsidiarythat designs and produces turbochargers for worldwideengine markets.

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Power systemsMobileAlternators11%

16%

3%


Filtration Company-owneddistributorsTurbochargers

74%

7%

19%


Heavy-dutytrucksIndustrialproductsBus and lightcommercialvehiclesMedium-dutytrucks

21%

27%

39%

13%

Engine BusinessAutomotiveThe automotive business com-prises three primary markets:heavy-duty truck, medium-dutytruck, and bus and light commercialvehicles. Products in thesemarkets include a full range ofdiesel and alternate-fueled enginesfrom 135 to 600 horsepower. In1998, Cummins launched majornew engine platforms as part of the “Interact System” ofelectronically controlled productsincluding the ISB, ISC, ISM, andSignature engines.

For the past twenty-six years,Cummins has been the NorthAmerican market leader in heavy-duty trucks, which represents the largest portion of the EngineBusiness sales. Cummins alsoleads the market in Mexico,Australia, South Africa and is amajor presence in the UnitedKingdom and in many other countries.

The Signature 600, introduced in1998, continues to generateunprecedented excitement anddemand in the market, providing

600 horsepower of high-torqueperformance as well as 600horsepower of braking powerwith the new Cummins’ Intebrake.The N14, recognized as theindustry leader in durability andperformance, remains the founda-tion of the heavy-duty product line.

Introduced in late 1998, the ISMbuilds upon the industry-leadingfuel economy of the M11 Plusengine while providing the latestelectronics technology and fea-tures. The ISM provides the bestfuel economy and power-to-weightperformance in the industry.

The ISB and ISC electronic four-valve-head engines provide theprimary power for the medium-duty truck segment, ranging from175 to 300 horsepower. Keyterritories in the medium-dutytruck segment include NorthAmerica, Latin America, Europe,China, India, Turkey and Australiawhere Cummins powers a widevariety of medium-duty trucksand other on-road vehicles. In1998, shipments of ISB and ISCengines surpassed all previouscompany records.

In the bus and light commercialsegment, the ISB powers theDodge Ram pickup. The busmarket, including shuttle, transit,coach, school bus, and the recre-ational vehicle market, utilizesdiesel engines throughout the ISBto N14 product range. Cumminscontinues to enjoy strong marketshare in this growing business inNorth America, Europe, Mexicoand Asia. Bus customers world-wide remain interested in naturalgas engines from 150 to 300horsepower. In 1998, Cumminsachieved record sales in the NorthAmerican transit bus market andhas over 75 percent share in the Class A motor home market.Cummins entered the pickuptruck market in Brazil with the ISB,further expanding our presence inthis market segment internationally.

With the most modern productrange in the industry, Cumminsdelivers engine hardware, elec-tronic systems and information,and business support as part ofour Interact System of products,which deliver exceptional value to each of our customers.

Cummins’

Worldwide Business

Sales, Markets

and Products

10


13

performance with reduced emis-sions. In late 1998, we began aseries of new product introduc-tions with the limited introductionof the new fully electronic 2700-horsepower QSK60 engine formining applications and the new635-horsepower M11 engine forpleasure boat applications. Thesewill be followed in 1999 by theQSK45 and the industrial versionsof the new Signature, ISB and ISCengines (called the QSX15, QSB5.9and QSC8.3 respectively). The

B3.3 engine, developed with ourjoint-venture partner Komatsu, is scheduled for release in thesecond half of 1999.

Industrial markets were mixed in 1998. Construction salesremained strong in the U.S. andEurope, but economic problemsaffected sales of construction andcommercial marine equipment inAsia. Outside Asia, marine salesgrew. Agricultural sales weredown worldwide because of

lower commodity prices, whichalso affected some miningmarkets during the second half of the year. We are confident,however, that new products andprograms like mobile QuickServeposition us for a strong reboundwhen these markets recover.

13

Over two million customers a daydepend on FedEx for timely, depend-able delivery of their packages andfreight to locations worldwide.

Cummins delivers that same level ofworld-class service and value to FedExwith a broad line of automotive andindustrial engines.

Engine Business

With $4.0 billion in annual sales,our engine business is Cummins’largest. Our customers — bothoriginal equipment manufacturers(OEMs) and end users — buyengines and parts produced inCummins plants around theworld, and our worldwide distri-butor network plays a prominentrole in both sales and customersupport.

Our overall strategy in the enginebusiness is to give end-user customers comparative advan-tage through a ‘value package’ of technically advanced products,customer-focused informationand support. We rely heavily onend-user customer councils toidentify emerging product andsupport needs.

A partnership between Cumminsand its distributor network,Cummins PowerCare is designedto earn customer loyalty andrepeat business through superiorsupport. One innovative PowerCareprogram is QuickServe, promisingone-hour diagnosis and rapidrepair. QuickServe is now avail-able in over 150 distributorlocations, and mobile QuickServe,designed to bring support to the customer’s construction ormine site, is being piloted inChina and the U.S., with wide-spread deployment to begin inlate 1999.

Our engine business serves abroad variety of Automotive andIndustrial markets. Automotivemarkets include buses and trucksof all sizes — from the Dodge

Ram pickup to the heavy-dutytrucks that are the backbone ofthe freight delivery system.Industrial customers use ourengines for construction, mining,and agriculture and also in marine,rail and military applications.

AutomotiveWith the 1998 introduction ofthree new engines and two newfuel systems, our automotiveproduct line-up has positioned usfirmly as the leader in performance,fuel economy, emissions control,electronics and informationtechnology. In 1999, the ISX andthe ISL engines will be released,rounding out our completelyredesigned product line. Productleadership attracted new andrepeat business in 1998 frommany U.S. fleet customers suchas FedEx, Wal-Mart, UPS and J. B. Hunt. In October, two large original equipment manu-facturers, Mack and Volvo,announced that Cummins wouldbe their key outside enginesupplier for North America and Australia.

Business was strong in NorthAmerican automotive markets in1998, particularly in the highlycompetitive heavy-duty market,where Cummins remained themarket share leader for the 26thconsecutive year. Heavy-dutyshipments grew by 20 percent.We increased our share of light-and medium-duty engine sales inbus markets by 24 percent, andwe shipped a record 98,700 ISBengines to our largest customer,DaimlerChrysler, for the DodgeRam pickup truck. Outside theU.S., automotive sales slowed

during 1998 in Mexico and Brazil,and towards the end of the year there were signs of a slow-down in the United Kingdom and Turkey.

IndustrialWe build value for our industrialcustomers by providing cleanlydesigned engines that requireless maintenance. These engines,featuring high pressure injectionsystems and electronic controls,deliver increased power and

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Delivering Value

15

Power Generation Business

Cummins Power Generationoffers value to customers by pro-viding integrated power solutionsto users of prime and standbyelectrical power. This integrationis made possible becauseCummins is the only company tomake all elements of a generatorset — engines, alternators andadvanced electronic controls.

1998 Power Generation saleswere $1.2 billion, 2 percent above1997. Profitability improvedbecause of our success in reduc-ing costs. Lower costs allowed us to hold prices level despiteincreases by our competition,enhancing our competitive posi-tion and the value of Cumminspower solutions for our customers.

In the Americas, 1998 was a very successful year in sales andimproved profitablity. We com-pleted our restructuring program,closing our Huntsville, Alabamaengine plant. Huntsville’s manufac-turing operations were success-fully integrated into our Fridley,Minnesota facility, which nowproduces generator sets rangingfrom 2 megawatts at the top enddown to the 2.8-kilowatt Onangenerator sets used for recre-ational vehicles. The RV marketremained buoyant in 1998, andwe continued to dominate, with a market share in excess of 80 percent.

Economic conditions affectedsales throughout Asia and tosome European customers for G-drive engines. Recognizing the trend early, we launched a

second round of restructuring,closing and downsizing plants inAsia and streamlining productionat Newage, our alternator com-pany. Lower Asian sales alsomeant a difficult and challengingyear for our Cummins Wartsilajoint venture. In response, weannounced major restructuring to enable the joint venture to besuccessful in spite of less favor-able near-term sales volumes.

In addition to improving our sharein the market for larger industrialgenerator sets used for standbypower, the Power GenerationBusiness took a major step for-ward in the emerging market forprime power when we receivedour largest single order ever, for $17 million from the Governmentof Ghana. Cummins PowerGeneration supplied 39 diesel-powered generator sets tooperate in parallel at a singlepower station, connecting seam-lessly into the utility grid. Thismarks the first time that CumminsPower Generation has taken onresponsibility for building, oper-ating and maintaining an entirepower plant.

Our focus on prime power hasgiven us the ability to move tointegrated power solutions thatgo beyond hardware. In additionto selling generator sets, we canoffer value-adding services suchas extended warranty, mainte-nance and service contracts, and‘Uptime’ guarantees. At CumminsPower Generation, we continueto increase our value to customersby selling kilowatts — providingreliable energy at reasonable costaround the world.

Generating Value

14


The largest multi-set installation in Africais in Tema, where Cummins provides 24 hour energy peace of mind for thegovernment and people of Ghana.

The Filtration Group enhancesvalue by designing an integratedsystem that includes air intake,engine filtration and exhaustsystems. Our customers receiveimproved performance at lowercost from a single supplier.

17

ExhaustSystems

Engine:Air Handling, Fluid Filtration and Conditioning Systems

Filtration Business and Other

At $1.1 billion, Filtration Businessand Other sales set a record,exceeding the $1-billion mark for the first time. The revenuecomes from sales of our filtrationcompanies — Fleetguard, Nelson,Kuss and Universal Silencer; ourturbocharger company, Holset;and company-owned distributors,most of them outside the United States.

Our filtration companies worktogether to provide customerswith an integrated system for airintake and filtration, fluid filtrationand conditioning, air handling and exhaust. We offer value byenhancing equipment perfor-mance, reducing operating costsand controlling emissions and noise.

Early in 1998, Cummins com-pleted the acquisition of NelsonIndustries, North America’s lead-ing producer of exhaust systemsand its number two supplier of air intake systems for dieselpowered equipment. The integra-tion of Nelson with Fleetguardhas gone exceptionally well;organizations have been merged;overlaps have been eliminated;and complementary product linesare attracting new customersaround the world. The acquisitionwas accretive to earnings in itsfirst year.

Fleetguard and Nelson are contin-uing on the path to global leader-ship by offering customers thebest technical solutions availablein the industry. We lead the worldin providing filtration and exhausttechnology for heavy-duty diesel

engines. Together, we rank sixthin the world among filtrationcompanies and first in the heavy-duty market.

Fuel filters made by Kuss Corporation were installed in over 60 percent of automobilesmade in North America and inalmost 20 percent of those madein Europe. Universal Silencer,which supplies air filtration andexhaust silencing for gas turbinesand other plant and equipmentoperations, had a record year insales and profits in 1998.

Fleetguard’s commitment to quality was recognized in 1998when it was the only manufac-turing company awarded theTennessee Quality Governor’sAward. Fleetguard was the firstcompany ever to win the GlobalExcellence Award for demon-strating leadership in the interna-tional marketplace.

Cummins’ ownership of 14 dis-tributorships links us closely toour end-user customers in strate-gic locations worldwide.

Holset has restructured its operations to focus on its corecompetence in turbocharging.Breakthrough variable geometrytechnology enables Holset turbo-chargers to improve performancefor the driver while loweringoperating costs for the truckowner. Closely integrated withCummins’ advanced fuel systems,Holset’s air handling technology isat the heart of Cummins’ strategyto meet emissions requirementsfor the year 2002 and beyond.

16


Enhancing ValueAir IntakeSystems

Integrated System

18


Overview

Net sales were a record $6.3 billion in 1998, 11 percent higher than in 1997, and 19 percenthigher than in 1996. Nelson Industries, Inc.,acquired in January 1998, and Cummins IndiaLimited, which was first consolidated in the fourth quarter of 1997, added sales of $428 million. Without these additional sales, net sales for 1998 would have been $5.8 billion, an increase of 4 percent over 1997.

As disclosed in Notes 3 and 4 to the ConsolidatedFinancial Statements, the Company recordedcharges in 1998 totaling $217 million, com-prised of $78 million for revised estimates ofadditional product coverage liability for bothbase and extended warranty programs, $114million of costs associated with the Company’splan to restructure, consolidate and exit certainbusiness activities and $25 million for a civilpenalty resulting from an agreement reachedwith the U.S. Environmental Protection Agencyand the Department of Justice regarding dieselengine emissions. Excluding these charges,earnings before interest and taxes were $282 million in 1998, compared to $312 millionin 1997 and $232 million in 1996. Including the charges, the Company’s net loss was $21 million or $(.55) per share in 1998. Netearnings in 1997 were $212 million or $5.48 pershare and $160 million or $4.01 per share in 1996.

To maintain Cummins’ technological leader-ship, the Company has been in the process ofupgrading or replacing engines across allproduct lines. This new product developmentprogram peaked in 1998 with a record six newengine introductions. While this investment in product development offers competitiveadvantages, it resulted in a temporary increasein product costs and a decrease in profitabilityin 1998.

Results of Operations

Net Sales:In 1998, the Company achieved its seventhconsecutive year of record sales, totaling $6.3 billion. Revenues from sales of engineswere 55 percent of the Company’s net sales in1998, with engine revenues and unit shipments8 percent and 9 percent higher, respectively,

than in 1997. The Company shipped a record403,300 engines in 1998, compared to 369,800in 1997 and 332,300 in 1996 as follows:

Unit shipments 1998 1997 1996

Midrange engines 287,400 264,300 237,400Heavy-duty engines 106,100 94,900 85,000High-horsepower

engines 9,800 10,600 9,900

403,300 369,800 332,300

Revenues from non-engine products, whichwere 45 percent of net sales in 1998, were 16 percent higher than in 1997. The majorchanges within non-engine revenues were infiltration, with the sales of Nelson includedfrom the date of acquisition by Cummins, andPowerCare (which includes new parts andremanufactured engines and parts). Sales ofthe remaining non-engine products, in theaggregate, were essentially level with 1997.

The Company’s sales for each of its keysegments during the last three years were:

$ Millions 1998 1997 1996

Automotive markets $2,928 $2,622 $2,447Industrial markets 1,054 1,044 863

Engine Business 3,982 3,666 3,310Power Generation

Business 1,230 1,205 1,213Filtration Business

and Other 1,054 754 734

$6,266 $5,625 $5,257

Cummins’ engine business is the Company’slargest business segment, producing enginesand parts for sale to customers in bothautomotive and industrial markets. Enginebusiness customers are each serviced throughthe Company’s worldwide distributor network.The engines are used in trucks of all sizes,buses and recreational vehicles, as well as avariety of industrial applications includingconstruction, mining, agriculture, marine, railand military. Engine business revenues were$4.0 billion in 1998, a 9 percent increase over1997 and 20 percent over 1996.

Sales of $2.9 billion in 1998 for automotivemarkets were 12 percent higher than in 1997and 20 percent higher than in 1996. In 1998,heavy-duty truck engine revenues were 19 percent higher than in 1997 on a 20 percentincrease in units. Within the North Americanheavy-duty truck market, unit shipments wereup 20 percent over 1997, and Cummins contin-ued to be the market leader with a 32-percent

market share. In 1998, the Company beganlimited production of the Signature 600, a newelectronic engine designed to capture a largershare of this market. International unit ship-ments for the heavy-duty market in 1998 were20 percent higher than in 1997 due to con-tinued strong demand in European andMexican automotive markets.

Revenues from the sales of engines formedium-duty trucks in 1998 were 13 percentlower than in 1997 on a 12-percent decrease inunits. In North America, the Company wasaffected by Ford’s relocation of its productionfacilities, partially offset by increased sales ininternational markets, primarily Brazil.

For the bus and light commercial vehicle mar-ket, engine revenues in 1998 were 26 percenthigher than in 1997, on a 22-percent increase inunit shipments. In January, Cummins jointlyannounced with DaimlerChrysler a new, fullyelectronic engine — the ISB — for the DodgeRam pickup. The increase in 1998 was dueprimarily to record unit shipments to Daimler-Chrysler for the Dodge Ram pickup, whichwere 26 percent higher than in 1997 and 37 percent higher than in 1996, and continuedstrong demand in bus markets.

In 1998, revenues from industrial markets were1 percent higher than in 1997. Revenues fromsales of engines decreased, while parts salesincreased. Engine revenues in 1998 were 1 percent lower than in 1997 on an 8-percentincrease in unit shipments. The variancebetween revenues and units resulted fromlower heavy-duty and high-horsepower enginesales and a shift in product mix of midrangeengine sales. The increased level of shipmentswas due to continued strong construction vol-umes in North America and Europe, partiallyoffset by declines in worldwide agriculturalmarkets. Sales of engines and parts into themarine market in 1998 were 6 percent lowerthan in 1997, due primarily to the economicturmoil in Asia. Sales into the mining marketwere 21 percent lower than the prior year. In1998, Cummins announced an agreement withKomatsu, a joint venture partner, to develop a3.3 liter engine targeted for the constructionmarket, scheduled for release in the secondhalf of 1999.

Revenues of $1.2 billion in 1998 for powergeneration were 2 percent higher than in 1997and 1 percent higher than in 1996, with salescontinuing to be impacted by the economic

conditions in Asia and lower sales in Europe.Without the consolidation of Cummins IndiaLimited, power generation sales would havedecreased 4 percent from 1997. Sales of theCompany’s generator sets continued to reflectgrowth in North America, which offset declinesin demand for generator sets in Asia. Enginesales to generator set assemblers were down12 percent from the prior year and sales ofalternators were down 11 percent, due pri-marily to lower demand in Asia and theCompany’s change in strategy, emphasizingsales of generator sets. Sales of small genera-tor sets for recreational vehicles and otherconsumer markets remained strong in NorthAmerica, increasing 12 percent from 1997.

Sales of $1.1 billion in 1998 for filtration andother were 40 percent higher than in 1997 and44 percent higher than in 1996, with Nelson,acquired in January 1998, contributing sales of$311 million. International distributor salesincreased 12 percent from 1997 due to the con-solidation of Cummins India Limited in thefourth quarter of 1997.

Net sales by marketing territory for each of thelast three years were:

$ Millions 1998 1997 1996

United States $3,595 $3,123 $2,925Asia/Australia 806 898 868Europe/CIS 791 796 759Mexico/Latin America 468 364 260Canada 459 318 313Africa/Middle East 147 126 132

$6,266 $5,625 $5,257

In total, international markets accounted for 43 percent of the Company’s revenues in 1998.Europe and the CIS, representing 13 percent ofthe Company’s sales in 1998, were 1 percentlower than in 1997 and 4 percent higher than in1996. Sales to Canada, representing 7 percentof sales in 1998, were 44 percent higher than in1997 due to the acquisition of Nelson and therelocation of certain customer production facil-ities. Asian and Australian markets, in total,represented 13 percent of the Company’s salesin 1998, as compared to 16 percent in 1997 and 17 percent in 1996. In Asia, sales to Chinawere essentially flat compared to 1997, whilerevenues in Korea decreased 64 percent,Southeast Asia declined 47 percent and salesto Japan and India were 19 percent below 1997levels, excluding the effect of Cummins IndiaLimited consolidation.

19

Management’s Discussion and Analysis

of Results of Operations and Financial Condition

18


21

Business in Mexico and Latin America, repre-senting 8 percent of sales, was 29 percenthigher than in 1997, but began to decline in the latter part of 1998. Sales to Latin America,including Brazil, represented 4 percent of theCompany’s sales in 1998 and were 28 percenthigher than in 1997. Brazil individuallyaccounted for 2 percent of sales in 1998. Therecent economic events in Brazil have resultedin increased interest rates and devalued cur-rencies in the region. Many of the Company’scustomers are sensitive to interest rates, whichwill affect sales demand. The devaluation oflocal currencies also could have an impact onoperations, as certain of the Company’s trans-actions are based in Brazilian currency, andcould result in currency gains or losses. Sales to Mexico, representing approximately 4 percent of the Company’s sales in 1998, couldalso potentially be affected by the economicuncertainty in Brazil. These events couldreasonably be expected to have an adverseeffect on the Company’s business, however,the extent cannot be estimated reasonablybased upon presently available information.

Gross Margin:As disclosed in Note 3 to the ConsolidatedFinancial Statements, the Company recordedspecial charges in 1998 of $92 million forproduct coverage costs and inventory write-downs. The product coverage special chargesof $78 million include $43 million primarilyattributable to base warranty costs and $35 million for extended warranty programs.These charges relate to a revised estimate of product coverage liability for engines manu-factured in previous years. The special chargesrecorded in 1998 also include $14 million forinventory write-downs associated with theCompany’s restructuring and exit activities.These write-downs reflect amounts of inven-tory rendered excess or unusable due to theclosing or consolidation of facilities.

The Company’s gross margin percentagebefore the product coverage and inventoryspecial charges was 21.4 percent in 1998, com-pared to 22.8 percent in 1997 and 22.5 percentin 1996. The Company’s gross margin per-centage declined due to a temporary increasein product coverage costs from ISB and ISCengines and higher new product costs attribut-able to the production ramp-up of the ISB, ISC and Signature 600 engines. This decreasewas partially offset by the benefit from highervolume and pricing. The acquisition of Nelsonand consolidation of Cummins India Limitedadded $124 million. Gross margin percentageafter the special charges was 19.9 percent.

Product coverage costs, excluding the specialcharges, were 3.3 percent of net sales in 1998, compared to 2.6 percent in 1997 and 2.7 percent in 1996.

Operating Expenses:Selling and administrative expenses were 12.5 percent of net sales in 1998, compared to13.2 percent in 1997 and 13.8 percent in 1996.On the 11-percent sales increase in 1998, theseexpenses, which include volume-variablecomponents, were up less than 6 percent inabsolute dollars. Net benefits of the Company’scost reduction and restructuring actions werepartially offset by increases in expenses associ-ated with new product launches and informa-tion systems during 1998.

Research and engineering expenses were 4.1 percent of net sales in 1998, compared to4.6 percent in 1997 and 4.8 percent in 1996.This is a result of a reduction in technicalspending and certain product developmentsmoving to the production stage.

The Company’s losses from joint ventures andalliances were $30 million in 1998, compared to income of $10 million in 1997. The differencewas due primarily to the consolidation ofCummins India Limited and losses at theCompany’s joint venture with Wartsila. CumminsWartsila is being affected by lower sales, pri-marily due to decreased demand in Asia, andhigher product coverage expenses.

In an effort to address the decline in theCompany’s business in Asia, to leverage over-head costs for all operations and to improvejoint venture operating performance, theCompany established a restructuring programin 1998. As a result of this program, theCompany recorded a charge of $100 million for costs to reduce the worldwide workforce by approximately 1,100 people, as well as costs associated with streamlining certainmajority-owned and international joint venture operations.

The charges for majority-owned operationsincluded $38 million for severance and relatedcosts associated with workforce reductions inthe engine and power generation businesses,primarily for administrative positions. The esti-mated costs of these reductions were based onamounts pursuant to benefit programs andcontractual provisions or statutory require-ments at the affected operations. Approximatelyone-half of these 1,100 employees left the

Company prior to December 31, 1998. An assetimpairment loss of $22 million, calculatedaccording to the provisions of SFAS No. 121,was recorded primarily for engine manufactur-ing equipment to be disposed of upon theclosure or consolidation of facilities or theoutsource of production. The recovery valuefor the equipment to be disposed of was basedon estimated liquidation value. The carryingvalue of assets held for disposal and the effecton earnings from suspending depreciation onsuch assets is immaterial. Facility consolida-tion and other costs of $17 million includedlease termination and facility exit costs of $10 million, product support costs of $3 million, and litigation and other costs of $4 million. As the restructuring consists primarily of the closing or consolidation ofsmaller operations, the Company does notexpect these actions to have a material effecton future revenues.

The charges for restructuring joint ventureoperations totaled $23 million, the majority ofwhich relates to actions being taken at theCompany’s joint venture with Wartsila, which ispart of the Company’s power generation busi-ness. The charges included $11 million foremployee severance and related benefits forapproximately 1,200 people, $7 million for a taxasset impairment loss and $5 million for otherfacility and equipment-related charges.

Approximately $25 million, primarily related toemployee severance, has been charged to therestructuring liabilities as of December 31,1998. Of the total charges associated withrestructuring activities, cash outlays will approxi-mate $60 million. The program is expected tobe essentially complete by the end of 1999 andyield approximately $50 million in annual savings at completion.

In 1998, the Company recorded a charge of $25 million for a civil penalty to be paid by theCompany as a result of an agreement reachedwith the U.S. Environmental Protection Agency,the Department of Justice and the CaliforniaAir Resources Board regarding diesel engineemissions. In addition to the civil penalty, theagreement provides a schedule for dieselengines to meet certain emission standardsand requires manufacturers to continue toinvest in environmental projects to furtherreduce oxides of nitrogen (NOx) emissions. TheCompany has developed extensive corporateaction plans to comply with all aspects of theagreement. Additionally, three separate courtactions have been filed as a result of allega-tions of the diesel emissions matter. The NewYork Supreme Court ruled in favor of the

Company. This matter is now on appeal. ACalifornia State Court recently ruled in favor ofthe Company. A recent action was just filed inthe U.S. District Court, the District of Columbia.

Year 2000:The Company continues to address the impactof the Year 2000 issue on its businesses world-wide. This issue affects computer systems thathave date-sensitive programs that may notproperly recognize the year 2000. With respectto the Company, this issue affects not onlycomputer systems but also machinery andequipment used in production that may con-tain embedded computer technology.

Following a review and assessment of informa-tion systems and technology used in its inter-nal business operations and production, theCompany inventoried and identified those sys-tems and products that the Company believesmay be vulnerable to Year 2000 failures andestablished a program to address Year 2000issues. The Company’s Year 2000 efforts arebeing carried out by the Company’s Year 2000Team under the leadership of the Director ofYear 2000 Compliance. A Year 2000 programoffice has been established at each of theCompany’s facilities and is overseen by a Year2000 coordinator. The Year 2000 Team main-tains a reporting structure to ensure thatprogress is made and tracked on Year 2000issues. In addition to internal resources, theCompany has retained external resources toassist with the implementation of its Year 2000 program.

The Company’s program consists of the reme-diation, replacement or retirement of affectedsystems. Remediation is the alteration of anon-compliant application to make it com-pliant, replacement is the substitution of a non-compliant application with a compliantupgrade or product and retirement is the dis-carding of non-compliant applications thathave been determined to be dispensable.

The Company completed a substantial portion ofits remediation efforts and testing in 1998, andexpects to complete that process by the end ofthe second quarter of 1999.

The Year 2000 Team will remain in placethrough January 1, 2000, and beyond asneeded. Their role is to ensure that complianceis maintained once it is attained. The Companymaintains contact with its key suppliers toobtain information relating to the status ofsuch suppliers with respect to Year 2000 issues,placing particular emphasis on determining theYear 2000 readiness of its critical suppliers.

20


22


The Company expects to incur total expen-ditures of approximately $45 million in connection with its Year 2000 program andremediation efforts. To date, the Company hasincurred approximately $30 million in costsrelating to its Year 2000 efforts.

There can be no assurances that the systemsor products of third parties, which theCompany relies upon, will be timely convertedor that a failure by a third party, or a conver-sion that is incompatible with the Company’ssystems, would not have a material adverseeffect on the Company. This is particularly truebecause the Company utilizes sole suppliers forcertain products. The high level of skill andexpertise required to develop certain compo-nents makes it impossible to change suppliersquickly. The failure of a sole supplier may leadto a delay in production.

The Company continues to develop contin-gency plans in the event that its operations aredisrupted on January 1, 2000. Such contingencyplans include the stockpiling of certain busi-ness critical inventory, and identifying alterna-tive suppliers where possible.

The estimated time of completion of theCompany’s Year 2000 program and complianceefforts, and the expenses related to theCompany’s Year 2000 compliance efforts arebased upon management’s best estimates,which were based on assumptions of futureevents, including the availability of certainresources, third party modification plans andother factors. There can be no assurances thatthese results and estimates will be achieved,and the actual results could materially differfrom those anticipated. Specific factors thatmight cause such material differences include,but are not limited to, the availability ofpersonnel trained in this area and the ability tolocate and correct all relevant computer codes.

Other:Interest expense of $71 million was $45 millionhigher than in 1997 and $53 million higher thanin 1996 due to the increased level of borrowingsto support working capital on the higher saleslevel and to complete the acquisition of Nelson.Other income decreased $13 million in 1998 ascompared to the year-ago period, primarily dueto the Nelson goodwill amortization and lowerroyalty income.

Provision for Income Taxes:The Company’s effective income tax ratenormally is below the 35% U.S. federal corpo-rate tax rate. The lower tax rate is a result oftax benefits on export sales and tax credits on

research expenses. These benefits in 1998 weremore than offset by the unfavorable tax effectsof nondeductible losses in foreign joint ven-tures and nondeductible EPA penalty andgoodwill amortization. The combined effectwas a 1998 income tax provision of $4 million.

Cash Flow and Financial Condition

Key elements of cash flows were:

$ Millions 1998 1997 1996

Net cash used in operating and investing activities $(481) $(154) $(66)

Net cash from financing activities 471 96 110

Effect of exchange rate changes on cash ( 1) (1) 4

Net change in cash $1(11) $1(59) $(48

During 1998, net cash used for operating andinvesting activities was $481 million. Thehigher level of net cash requirements in 1998was due primarily to the acquisition of Nelson,planned capital expenditures ($271 million in1998, compared to $405 million in 1997 and$304 million in 1996) for investments in newproducts and for working capital. Net workingcapital in 1998 was 12.8 percent of sales, com-pared to 11.6 percent in 1997. Investments injoint ventures and alliances of $22 millionreflected the net effect of capital contributionsand cash generated by certain joint ventures.

Net cash provided from financing activities was$471 million in 1998. As disclosed in Note 6,the Company issued $765 million face amountof notes and debentures under a $1 billion reg-istration statement filed with the Securities andExchange Commission in December 1997. Netproceeds were used to finance the acquisitionof Nelson and pay down other indebtednessoutstanding at December 31, 1997. Based onthe Company’s projected cash flow from opera-tions and existing credit facilities, managementbelieves that sufficient liquidity is available tomeet anticipated capital and dividend require-ments in the foreseeable future.

Market Risk:The Company is exposed to financial riskresulting from volatility in foreign exchangerates, interest rates and commodity prices. Thisrisk is closely monitored and managed throughthe use of derivative contracts. As clearlystated in the Company’s policies and proce-dures, financial derivatives are used expresslyfor hedging purposes, and under no circum-

23

stances are they used for speculating or fortrading. Transactions are entered into only withbanking institutions with strong credit ratings,and thus the credit risk associated with thesecontracts is considered immaterial. Hedgingprogram results and status are reported tosenior management on a periodic basis.

Due to its international business presence, the Company transacts extensively in foreigncurrencies. As a result, corporate earningsexperience some volatility related to move-ments in exchange rates. In order to exploit thebenefits of global diversification and naturallyoffsetting currency positions, foreign exchangebalance sheet exposures are aggregated andhedged at the corporate level through the useof foreign exchange forward contracts. Theobjective of the foreign exchange hedging pro-gram is to reduce earnings volatility resultingfrom the translation of net foreign exchangebalance sheet positions. A hypothetical 10%adverse change in the foreign currencyexchange rates would decrease earnings byapproximately $4 million. This calculation doesnot reflect the impact of the gains and losses inthe underlying exposures that would be offset,in part, by the results of the derivative instru-ments. The sensitivity analysis also ignores theimpact of foreign exchange movements onCummins’ competitive position as well as theremoteness of the likelihood that all foreigncurrencies will move in tandem against theU.S. dollar.

The Company currently has in place an interestrate swap that effectively converts fixed-ratedebt into floating-rate debt. The objective ofthe swap is to lower the cost of borrowedfunds. A hypothetical 100 basis-point increasein the floating interest rate from the currentlevel would correspond to a $2 million increasein interest expense over a one-year period. Thissensitivity analysis does not account for thechange in the Company’s competitive environ-ment indirectly related to change in interestrates and the potential managerial action takenin response to these changes.

The Company is exposed to fluctuation incommodity prices through the purchase of rawmaterials as well as contractual agreementswith component suppliers. Given the histori-cally volatile nature of commodity prices, thisexposure can significantly impact productcosts. The Company uses commodity swapagreements to partially hedge exposures tochanges in copper and aluminum prices. Theeffect of a hypothetical 10% depreciation of theunderlying commodity price would be a loss ofapproximately $5 million. This amount

excludes the offsetting impact of the pricechanges in commodity costs.

Forward-looking Statements:This Management’s Discussion and Analysis ofResults of Operations and Financial Conditionand other sections of this Annual Report containforward-looking statements that are based oncurrent expectations, estimates and projectionsabout the industries in which Cummins oper-ates, management’s beliefs and assumptionsmade by management. Words, such as“expects,” “anticipates,” “intends,” “plans,”“believes,” “seeks,” “estimates,” variations of such words and similar expressions areintended to identify such forward-looking state-ments. These statements are not guarantees offuture performance and involve certain risks,uncertainties and assumptions (“FutureFactors”) which are difficult to predict.Therefore, actual outcomes and results maydiffer materially from what is expressed orforecasted in such forward-looking statements.Cummins undertakes no obligation to updatepublicly any forward-looking statements,whether as a result of new information, futureevents or otherwise.

Future Factors include increasing price andproduct competition by foreign and domesticcompetitors, including new entrants; rapidtechnological developments and changes; theability to continue to introduce competitivenew products on a timely, cost-effective basis;the mix of products; the achievement of lowercosts and expenses; domestic and foreigngovernmental and public policy changes,including environmental regulations; protectionand validity of patent and other intellectualproperty rights; reliance on large customers;technological, implementation and cost/financialrisks in increasing use of large, multi-yearcontracts; the cyclical nature of Cummins’ busi-ness; the outcome of pending and futurelitigation and governmental proceedings; andcontinued availability of financing, financialinstruments and financial resources in theamounts, at the times and on the termsrequired to support Cummins’ future business.

These are representative of the Future Factorsthat could affect the outcome of the forward-looking statements. In addition, such state-ments could be affected by general industryand market conditions and growth rates,general domestic and international economicconditions, including interest rate and currencyexchange rate fluctuations, and other Future Factors.

22


24


Millions, except per share amounts December 31, 1998 1997

Assets

Current assets:

Cash and cash equivalents $4,538 $4,549Receivables 833 771Inventories 731 677Other current assets 274 213

1,876 1,710

Investments and other assets:

Investments in joint ventures and alliances 136 204Other assets 144 142

280 346

Property, plant and equipment:

Land and buildings 590 495Machinery, equipment and fixtures 2,320 2,079Construction in process 185 392

3,095 2,966Less accumulated depreciation 1,424 1,434

1,671 1,532

Goodwill, net of amortization of $17 and $5 384 12

Other intangibles, deferred taxes and deferred charges 331 165

Total assets $4,542 $3,765

Liabilities and shareholders’ investment

Current liabilities:

Loans payable $4,564 $4,590Current maturities of long-term debt 26 42Accounts payable 340 386Accrued salaries and wages 99 87Accrued product coverage and marketing expenses 209 120Income taxes payable 13 18Other accrued expenses 320 312

1,071 1,055

Long-term debt 1,137 522

Other liabilities 1,000 713

Minority interest 62 53

Shareholders’ investment:

Common stock, $2.50 par value, 48.1 shares issued 120 120Additional contributed capital 1,121 1,119Retained earnings 648 715Accumulated other comprehensive income (167) (70)Common stock in treasury, at cost, 6.1 and 6.0 shares (240) (245)Common stock held in trust for employee benefit plans,

3.6 and 3.7 shares (172) (175)Unearned compensation (38) (42)

1,272 1,422

Total liabilities and shareholders’ investment $4,542 $3,765

Millions, except per share amounts 1998 1997 1996

Net sales $6,266 $5,625 $5,257Cost of goods sold 4,925 4,345 4,072Special charges 92 — —

Gross profit 1,249 1,280 1,185Selling and administrative expenses 787 744 725Research and engineering expenses 255 260 252Net expense (income) from joint ventures and alliances 30 (10) —Interest expense 71 26 18Other income, net (13) (26) (24)Restructuring and other non-recurring charges 125 — —

Earnings (loss) before income taxes (6) 286 214Provision for income taxes 4 74 54Minority interest 11 — —

Net earnings (loss) $ (21) $ 212 $ 160

Basic earnings (loss) per share $ (.55) $ 5.55 $ 4.02Diluted earnings (loss) per share (.55) 5.48 4.01

25


Consolidated Statement of Financial Position


Consolidated Statement of Earnings

The accompanying notes are an integral part of this statement.The accompanying notes are an integral part of this statement.

26


Millions, except per share amounts 1998 1997 1996

Common stock:

Balance at beginning of year $1,120 $1,110 $1,110Issued to trust for employee benefit plans — 9 —Other — 1 —

Balance at end of year 120 120 110

Additional contributed capital:

Balance at beginning of year 1,119 929 926Issued to trust for employee benefit plans — 171 —Other 2 19 3

Balance at end of year 1,121 1,119 929

Retained earnings:

Balance at beginning of year 715 548 428Net earnings (loss) (21) $1(21) 212 $212 160 $160Cash dividends (46) (45) (40)

Balance at end of year 648 715 548

Accumulated other comprehensive income:

Balance at beginning of year (70) (60) (95)Foreign currency translation adjustments (43) (21) 26Minimum pension liability adjustments (54) 12 9Unrealized losses on securities — (1) —

Other comprehensive income (97) (97) (10) (10) 35 35

Comprehensive income $(118) $202 $195

Balance at end of year (167) (70) (60)

Common stock in treasury:

Balance at beginning of year (245) (169) (135)Repurchased (14) (76) (34)Issued 19 — —


Common stock held in trust for employee

benefit plans:

Balance at beginning of year (175) — —Issued — (180) —Shares allocated to benefit plans 3 5 —

Balance at end of year (172) (175) —

Unearned compensation:

Balance at beginning of year (42) (46) (51)Shares allocated to participants 4 4 5


Shareholders’ investment $1,272 $1,422 $1,312

Shares of stockCommon stock, $2.50 par value, 150.0 shares authorized

Balance at beginning of year 48.1 43.9 43.9Shares issued — 4.2 —

Balance at end of year 48.1 48.1 43.9

Common stock in treasuryBalance at beginning of year 6.0 4.5 3.7Shares repurchased .4 1.5 .8Shares issued (.3) — —

Balance at end of year 6.1 6.0 4.5

Common stock held in trust for employee benefit plansBalance at beginning of year 3.7 — —Shares issued — 3.8 —Shares allocated to benefit plans (.1) (.1) —

Balance at end of year 3.6 3.7 —

Millions 1998 1997 1996

Cash flows from operating activities:

Net earnings (loss) $1(21) $(212 $(160

Adjustments to reconcile net earnings (loss) to net cash from operating activities:

Depreciation and amortization 199 158 149Restructuring actions 110 (24) (42)Equity in (earnings) losses of joint ventures

and alliances 38 (1) 11Receivables (10) (80) (56)Inventories (26) (65) (62)Accounts payable and accrued expenses 56 (18) 28Deferred income taxes (65) 22 17Other (10) (4) (12)

Total adjustments 292 (12) 33

271 200 193

Cash flows from investing activities:

Property, plant and equipment:Additions (271) (405) (304)Disposals 7 21 26

Investments in joint ventures and alliances (22) (47) (5)Acquisitions and dispositions of business activities (468) 76 10Other 2 1 14

(752) (354) (259)

Net cash used in operating and investing activities (481) (154) (66)

Cash flows from financing activities:

Proceeds from borrowings 711 281 200Payments on borrowings (161) (50) (47)Net (payments) borrowings under credit agreements (30) (12) 32Repurchases of common stock (14) (75) (34)Dividend payments (46) (45) (40)Other 11 (3) (1)

471 96 110

Effect of exchange rate changes on cash (1) (1) 4

Net change in cash and cash equivalents (11) (59) 48Cash and cash equivalents at beginning of year 49 108 60

Cash and cash equivalents at end of year $(138 $(149 $(108

Cash payments during the year for:Interest $(156 $(121 $(116Income taxes 73 42 40

27


Consolidated Statement of Shareholders’ Investment


Consolidated Statement of Cash Flows

The accompanying notes are an integral part of this statement. The accompanying notes are an integral part of this statement.

28


Note 1. Accounting Policies:

Principles of Consolidation: The consolidatedfinancial statements include all significantmajority-owned subsidiaries. Affiliated com-panies in which Cummins does not have acontrolling interest, or for which control isexpected to be temporary, are accounted forusing the equity method. Use of estimatesand assumptions as determined by manage-ment is required in the preparation of consoli-dated financial statements in conformity withgenerally accepted accounting principles.Actual results could differ from these esti-mates and assumptions.

Revenue Recognition: The Company recog-nizes revenues on the sale of its products, netof estimated costs of returns, allowances and sales incentives, when the products areshipped to customers. The Company gener-ally sells its products on open account undercredit terms customary to the region of dis-tribution. The Company performs ongoingcredit evaluations of its customers and gener-ally does not require collateral to secure itscustomers’ receivables.

Foreign Currency: Assets and liabilities of foreign entities, where the local currency isthe functional currency, have been translatedat year-end exchange rates, and income andexpenses have been translated to US dollarsat average-period rates. Adjustments result-ing from translation have been recorded inshareholders’ investment and are included innet earnings only upon sale or liquidation ofthe underlying foreign investment.

For foreign entities where the US dollar is thefunctional currency, including those operatingin highly inflationary economies, inventory,property, plant and equipment balances andrelated income statement accounts have beentranslated using historical exchange rates.The resulting gains and losses have beencredited or charged to net earnings.

Derivative Instruments: The Company makesuse of derivative instruments in its foreignexchange, commodity price and interest ratehedging programs. Derivatives currently inuse are commodity and interest rate swaps,as well as foreign currency forward contracts.These contracts are used strictly for hedging,and not for speculative purposes. Refer toNote 8 for more information on derivativefinancial instruments.

The Company enters into commodity swapsto offset the Company’s exposure to pricevolatility for certain raw materials used in themanufacturing process. As the Company hasthe discretion to settle these transactionseither in cash or by taking physical delivery,these contracts are not considered financialinstruments for accounting purposes. Thesecommodity swaps are accounted for as hedges.

Other Costs: Estimated costs of commitmentsfor product coverage programs are charged to earnings at the time the Company sells its products.

Research & development expenditures, net of contract reimbursements, are expensedwhen incurred and were $228 million in 1998, $250 million in 1997 and $235 million in 1996.

Maintenance and repair costs are charged toearnings as incurred.

Cash Equivalents: Cash equivalents includeall highly liquid investments with an originalmaturity of three months or less at time of purchase.

Inventories: Inventories are generally statedat cost or net realizable value. Approximately25 percent of domestic inventories (primarilyheavy-duty and high-horsepower engines andengine parts) are valued using the last-in,first-out (LIFO) cost method. Inventories atDecember 31 were as follows:

$ Millions 1998 1997

Finished products $400 $351Work-in-process and raw materials 387 388

Inventories at FIFO cost 787 739Excess of FIFO over LIFO (56) (62)

$731 $677

Property, Plant and Equipment: Property,plant and equipment are stated at cost. Amodified units-of-production method, whichis based upon units produced subject to aminimum level, is used to depreciate substan-tially all engine production equipment. Thestraight-line depreciation method is used forall other equipment. The estimated depre-ciable lives range from 20 to 40 years forbuildings and 3 to 20 years for machinery,equipment and fixtures.

29

Software: Internal and external software costs(excluding research, reengineering and train-ing) are capitalized and amortized generallyover 5 years. Effective January 1, 1998, theCompany adopted SOP 98-1 on accountingfor internal use software costs. Internal soft-ware costs capitalized in 1998 in accordancewith this new rule were $9 million. Capitalizedsoftware, net of amortization, was $75 millionat December 31, 1998 and $32 million atDecember 31, 1997.

Earnings Per Share: Effective January 1, 1997,the Company adopted SFAS No. 128, a newaccounting rule on calculating earnings pershare. Under the new rule, basic earnings pershare of common stock are computed by divid-ing net earnings by the weighted-averagenumber of shares outstanding for the period.Diluted earnings per share are computed bydividing net earnings by the weighted-average number of shares, assuming theexercise of stock options when the effect oftheir exercise is dilutive. Shares of stock heldby the employee benefits trust are notincluded in outstanding shares for EPS untildistributed from the trust. Years prior to 1997have been restated to reflect this new rule.

Net WeightedMillions, except Earnings Average per share amounts (Loss) Shares Per share

1998Basic $ (21) 38.5 $ (.55)Options –– ––

Diluted $ (21) 38.5 $ (.55)

1997Basic $ 212 38.2 $5.55Options –– .5

Diluted $ 212 38.7 $5.48

1996Basic $ 160 39.8 $4.02Options –– .1

Diluted $ 160 39.9 $4.01

Note 2. Acquisition: In January 1998, theCompany completed the acquisition of thestock of Nelson Industries, Inc., for $453 million.Nelson, a filtration and exhaust systems man-ufacturer, was consolidated from the date ofits acquisition. On a pro forma basis, if theCompany had acquired Nelson on January 1,1997, consolidated net sales for 1997 wouldhave been $5.9 billion and consolidated earn-ings would not have been materially different.In accordance with APB Opinion No. 16,Nelson’s net assets were recorded at fairvalue at the date of acquisition. The purchaseprice in excess of net assets will be amortizedover 40 years.

Note 3. Special Charges: In 1998, the Companyrecorded special charges of $92 million forproduct coverage costs and inventory write-downs. The product coverage special chargesof $78 million included $43 million primarilyattributable to the recent experience ofhigher-than-anticipated base warranty coststo repair certain automotive engines manu-factured in previous years, and $35 millionrelated to a revised estimate of productcoverage cost liability primarily for extendedwarranty programs. The Company believed itwas necessary to make these special chargesto accrue for such product coverage costsexpected to be incurred in the future on theseengines currently in the field. The specialcharges also included $14 million for inventorywrite-downs associated with the Company’srestructuring and exit activities. These write-downs relate to amounts of inventory ren-dered excess or unusable due to the closingor consolidation of facilities. The Companyhas committed to these facility closures andconsolidations as part of a plan to reducecosts and improve operating performance.


Notes to Consolidated Financial Statements

30


Note 5. Investments in Joint Ventures and

Alliances: Investments in joint ventures andalliances at December 31 were as follows:


Consolidated Diesel $139 $ 32Tata Cummins 22 16Komatsu alliances 17 10Chongqing Cummins 15 16Behr America, Inc 14 14Dong Feng 8 7Cummins Wartsila (6) 88Other 27 21

$136 $204

Net sales of the joint ventures and allianceswere $1.2 billion in 1998 and $1.3 billion in1997 and 1996. Summary balance sheet infor-mation for the joint ventures and allianceswas as follows:

$ Millions December 31, 1998 1997

Current assets $527 $447Noncurrent assets 613 533Current liabilities (406) (258)Noncurrent liabilities (455) (305)

Net assets $279 $417

Cummins’ share $136 $204

The Company has guaranteed $79 million inoutstanding debt of the Cummins Wartsilajoint venture as of December 31, 1998.

In connection with various joint ventureagreements, Cummins is required to pur-chase products from the joint ventures inamounts to provide for the recovery ofspecified costs of the ventures. Under theagreement with Consolidated Diesel,Cummins’ purchases were $535 million in1998 and $538 million in 1997.

Note 6. Long-Term Debt: Long-term debt atDecember 31 was:


7.125% debentures due 2028 $1,249 $5––6.45% notes due 2005 224 ––Commercial paper 142 2425.65% debentures due 2098, net of

unamortized discount of $40(effective interest rate 7.48%) 125 ––

6.25% notes due 2003 125 ––6.75% debentures due 2027 120 1208.2% notes through 2003 79 96Guaranteed notes of

ESOP Trust due 2010 63 6510.35%-10.65% medium-

term notes through 1998 –– 14Other 36 27

Total 1,163 564Current maturities (26) (42)

Long-term debt $1,137 $522

Maturities of long-term debt for the five years subsequent to December 31, 1998 are$26 million, $26 million, $25 million, $27 millionand $141 million. At both December 31, 1998and 1997, the weighted-average interest rateon loans payable and current maturities oflong-term debt approximated 7 percent.

The Company maintains a $500 million revolv-ing credit agreement, maturing in 2003, underwhich there were no outstanding borrowingsat December 31, 1998 or 1997. The revolvingcredit agreement supports the Company’scommercial paper borrowings. In February1998, the Company issued $765 million faceamount of notes and debentures under a $1 billion Registration Statement filed withthe Securities and Exchange Commission in1997. Net proceeds were used to finance theacquisition of Nelson and pay down otherindebtedness outstanding at December 31, 1997.The Company also has other domestic andinternational credit lines with approximately$193 million available at December 31, 1998.

Note 4. Restructuring and Other Non-

Recurring Charges: In 1998, the Companyrecorded charges of $125 million, comprisedof $100 million for costs to reduce the world-wide workforce, as well as costs associatedwith streamlining certain majority-owned andinternational joint venture operations and $25 million for a civil penalty to be paid bythe Company as a result of an agreementreached with the U.S. Environmental ProtectionAgency (EPA), the Department of Justice(DOJ) and the California Air Resources Board(CARB) regarding diesel engine emissions.The major components of these charges areas follows:

$ Millions

Restructuring of majority-owned operations:Workforce reductions $138Asset impairment loss 22Facility consolidations and other 17

77

Restructuring of joint venture operations:Workforce reductions 11Tax asset impairment loss 7Facility and equipment-related costs 5

23

EPA penalty 25

Total $125

The restructuring program was undertaken toaddress the decline in the Company’s busi-ness in Asia, to leverage overhead costs forall operations and to improve joint ventureoperating performance.

The charges for majority-owned operationsinclude $38 million for severance and relatedcosts associated with workforce reductions ofapproximately 1,100 people. These reductionsare in the engine and power generation busi-nesses and are primarily for administrativepositions. Costs for workforce reductionswere based on amounts pursuant to benefitprograms and contractual provisions or statu-tory requirements at the affected operations.Approximately one-half of these employeesleft the Company prior to December 31, 1998.

The asset impairment loss, calculated accord-ing to the provisions of SFAS 121, wasrecorded primarily for engine manufacturingequipment to be disposed of upon the closureor consolidation of facilities or the outsourceof production. The recovery value for the

equipment to be disposed of was based onestimated liquidation value. The carryingvalue of assets held for disposal and theeffect from suspending depreciation on suchassets is immaterial.

Facility consolidation and other costs of $17 million include lease termination andfacility exit costs of $10 million, product sup-port costs of $3 million and litigation andother costs of $4 million. As the restructuringconsists primarily of the closing or consolida-tion of smaller operations, the Company doesnot expect these actions to have a materialeffect on future revenues.

The charges for restructuring joint ventureoperations totaled $23 million, the majority ofwhich relates to actions being taken at theCompany’s joint venture with Wartsila, whichis part of the Company’s power generationbusiness. The charges include $11 million foremployee severance and related benefits forapproximately 1,200 people, $7 million for atax asset impairment loss and $5 million forother facility and equipment-related charges.

Approximately $25 million, primarily relatedto employee severance, has been charged tothe restructuring liabilities as of December 31,1998. Of the total charges associated withrestructuring activities, cash outlays willapproximate $60 million. The program isexpected to be essentially complete by theend of 1999 and yield approximately $50 million in annual savings at completion.

In addition to the civil penalty, the agreementwith the EPA/DOJ/CARB provides a schedulefor diesel engines to meet certain emissionstandards and requires manufacturers to con-tinue to invest in environmental projects tofurther reduce oxides of nitrogen (NOx) emis-sions. The Company has developed extensivecorporate action plans to comply with allaspects of the agreement. Additionally, threeseparate court actions have been filed as aresult of allegations of the diesel emissionsmatter. The New York Supreme Court ruled infavor of the Company. This matter is now onappeal. A California State Court recently ruledin favor of the Company. A recent action wasjust filed in the U.S. District Court, the Districtof Columbia.

31

32


In 1997, the Company issued $120 million of 6.75 percent debentures that mature in 2027.Holders have a one-time option in 2007 toredeem the debentures and Cummins has a recall right after ten years.

The Company has guaranteed the outstand-ing borrowings of its ESOP Trust. The noteswere refinanced in July 1998. Cash contribu-tions to the Trust, together with the dividendsaccumulated on the common stock held bythe Trust, are used to pay interest and princi-pal. Cash contributions and dividends to theTrust and the Company’s compensationexpense approximated $10 million in eachyear. The unearned compensation, which isreflected as a reduction to shareholders’investment, represents the historical cost ofthe shares of common stock that have not yetbeen allocated by the Trust to participants.

Note 7. Other Liabilities: Other liabilities atDecember 31 included the following:


Accrued retirement and post-employment benefits $1,720 $487

Accrued product coverageand marketing expenses 156 111

Accrued compensation 38 34Deferred income taxes 17 25Other 69 56

$1,000 $713

Note 8. Financial Instruments and Risk

Management: The Company is exposed tofinancial risk resulting from volatility in for-eign exchange rates and interest rates. Thisrisk is closely monitored and managedthrough the use of financial derivative con-tracts. As clearly stated in the Company’s poli-cies and procedures, financial derivatives areused expressly for hedging purposes, andunder no circumstances are they used forspeculating or trading. Transactions areentered into only with banking institutionswith strong credit ratings, and thus the creditrisk associated with these contracts is consid-ered immaterial. Hedging program resultsand status are reported to senior manage-ment on a periodic basis.

Foreign Exchange Rates

Due to its international business presence, the Company uses foreign exchange forwardcontracts to manage its exposure to exchangerate volatility. Foreign exchange balancesheet exposures are aggregated and hedged

at the corporate level. Maturities on theseinstruments generally fall within the one-month and six-month range. The objective ofthe hedging program is to reduce earningsvolatility resulting from the translation of netforeign exchange balance sheet positions.The total notional amount of these forwardcontracts outstanding at December 31, 1998,and December 31, 1997, were $174 millionand $257 million, respectively.

Interest Rates

The Company manages its exposure tointerest rate fluctuations through the use ofinterest rate swaps. Currently the Companyhas in place one interest rate swap that effec-tively converts fixed-rate debt into floating-rate debt. The objective of this swap is tolower the cost of borrowed funds. The con-tract was established during October 1998with a notional value of $225 million. Therewere no interest rate swap contracts out-standing at December 31, 1997.

Fair Value of Financial Instruments

Based on borrowing rates currently availableto the Company for bank loans with similarterms and average maturities, the fair valueof total debt, including current maturities, atDecember 31, 1998, approximated $1,214 million.The carrying value at that date was $1,227million. At December 31, 1997, the fair andcarrying values of total debt, including currentmaturities, were $664 and $654 million,respectively. The carrying values of all otherreceivables and liabilities approximated fair values.

Note 9. Income Taxes: The provision forincome taxes was as follows:

$ Millions 1998 1997 1996

Current:U. S. Federal and state $16 $16 $22Foreign 41 32 15

57 48 37

Deferred:U. S. Federal and state (34) 26 ––Foreign (19) –– 17

(53) 26 17

$14 $74 $54

The Company expects to realize all of its taxassets, including the use of all carryforwards,before any expiration.

Significant components of net deferred taxassets related to the following tax effects ofdifferences between financial and tax report-ing at December 31:


Employee benefit plans $300 $266Product coverage

and marketing expenses 106 64Restructuring charges 14 9US plant & equipment (176) (139)Net foreign taxable differences,

primarily plant and equipment 6 (23)US Federal carryforward benefits:

General business tax credits, expiring 2009 to 2013 43 31Minimum tax credits, no expiration 12 10

Other net differences 12 13

$317 $231

Balance Sheet Classification

Current assets $203 $129Noncurrent assets 131 127Noncurrent liabilities (17) (25)

$317 $231

Earnings before income taxes and differencesbetween the effective tax rate and US Federalincome tax rate were:

$ Millions 1998 1997 1996

Earnings (loss) before income taxes:US $(21) $205 $134Foreign 15 81 80

$2(6) $286 $214

Tax at 35 percent US statutory rate $2(2) $100 $275

Nondeductible EPA penalty 9 –– ––Nondeductible goodwill

amortization 3 –– ––Research tax credits (10) (11) (6)Foreign sales corporation

benefits (9) (11) (11)Differences in rates and

taxability of foreign subsidiaries 15 (3) ––

All other, net (2) (1) (4)

$(24 $274 $254

Note 10. Retirement Plans: The Company hasvarious contributory and noncontributorypension plans covering substantially allemployees. Cummins common stock repre-sented 9 percent of pension plan assets atDecember 31, 1998.

Cummins also provides various health careand life insurance benefits to eligible retireesand their dependents but reserves the right to change benefits covered under these plans.The plans are contributory with retirees’contributions adjusted annually, and theycontain other cost-sharing features, such asdeductibles, coinsurance and spousal contri-butions. The general policy is to fund benefitsas claims and premiums are incurred.

The projected benefit obligation, accumulatedbenefit obligation and fair value of plan assetsfor plans with accumulated benefit obligationsin excess of plan assets were $1,296 million,$1,251 million, and $999 million, respectivelyas of December 31, 1998, and $418 million,$381 million, and $339 million, respectively,as of December 31, 1997. The assumed long-term rate of compensation increase forsalaried plans was 4.25% in 1998 and 5.0% in1997. Other significant assumptions for theCompany’s principal plans were:

Pension Benefits Other Benefits1998 1997 1998 1997

Weighted-average discount rate 6.5% 7.5% 6.5% 7.5%

Long-term rate of return on plan assets 10.0% 10.0%

For measurement purposes a 7% annualincrease in health care costs was assumed for1999, decreasing gradually to 4.25% in tenyears and remaining constant thereafter.

Increasing the health care cost trend rate by one percent would increase the obligationby $42 million and annual expense by $3 million. Decreasing the health care costtrend rate by one percent would decrease theobligation by $38 million and annual expenseby $3 million.

33

34


Pension Benefits Other Benefits$ Millions 1998 1997 1998 1997

Change in benefit obligation:Benefit obligation at beginning of year $1,693 $1,491 $(596 $(545Service cost 47 41 8 8Interest cost 123 115 44 41Plan participants’ contributions 7 6 1 1Amendments 2 4 –– ––Experience (gain) loss 161 128 20 26Benefits paid (123) (96) (29) (25)Other (3) 4 –– ––

Benefit obligation at end of year $1,907 $1,693 $(640 $(596

Change in plan assets:Fair value of plan assets at beginning of year $1,905 $1,555 $(5–– $5––Actual return on plan assets (129) 414 –– ––Employer contribution 34 23 28 24Plan participants’ contributions 7 6 1 1Benefits paid (123) (96) (29) (25)Other (2) 3 –– ––

Fair value of plan assets at end of year $1,692 $1,905 $(5–– $(5––

Funded status $ (215) $,1212 $(640) $(596)Unrecognized:

Experience (gain) loss (a) 172 (269) 80 62Prior service cost (b) 55 63 (11) (12)Transition asset (c) (7) (11) –– ––

Net amount recognized $1,565 $65 ,(5) $(571) $(546)

Amounts recognized in the statement of financial position:Prepaid benefit cost $1,550 $6,919 $(5–– $(5––Accrued benefit liability (232) (14) (571) (546)Intangible asset 104 –– –– ––Accumulated other comprehensive income 83 –– –– ––

Net amount recognized $1,565 $65 ,(5) $(571) $(546)

35

Note 11. Common Stock: The Companyincreased its quarterly common stock divi-dend from 25 cents per share to 27.5 cents,effective with the dividend payment in June 1997.

In 1998, the Company repurchased 0.4 millionshares on the open market at an aggregatepurchase price of $14 million. In 1997, theCompany repurchased 1.3 million sharesfrom Ford Motor Company and another 0.2 million shares on the open market at anaggregate purchase price of $75 million. TheCompany repurchased 0.8 million shares onthe open market at an aggregate purchaseprice of $34 million in 1996. All of the acquiredshares are held as common stock in treasury.

In 1997, the Company issued 3.75 millionshares of its common stock to an employeebenefits trust to fund obligations of employeebenefit and compensation plans, principallyretirement savings plans. Shares of the stockheld by this trust are not used in the calcula-tion of earnings per share until allocated to abenefit plan.

Note 12. Shareholders’ Rights Plan: TheCompany has a Shareholders’ Rights Planwhich it first adopted in 1986. The Rights Planprovides that each share of the Company’scommon stock has associated with it a stockpurchase right. The Rights Plan becomesoperative when a person or entity acquires 15 percent of the Company’s common stockor commences a tender offer to purchase 20 percent or more of the Company’s com-mon stock without the approval of the Boardof Directors.

Note 13. Employee Stock Plans: Under theCompany’s stock incentive and option plans,officers and other eligible employees may beawarded stock options, stock appreciationrights and restricted stock. Under the provi-sions of the stock incentive plan, up to onepercent of the Company’s outstanding shares

of common stock at the end of the precedingyear is available for issuance under the planeach year. At December 31, 1998, there wereno shares of common stock available forgrant and 1,234,875 options exercisable underthe plans.

The Company accounts for stock options inaccordance with APB Opinion No. 25 andrelated interpretations. No compensationexpense has been recognized for stockoptions since the options have exercise pricesequal to the market price of the Company’scommon stock at the date of grant.

Number of Weighted-averageOptions Shares exercise price

Dec. 31, 1995 1,183,275 $38.45Granted 394,150 40.13Exercised (47,475) 32.43Cancelled (19,800) 41.00

Dec. 31, 1996 1,510,150 38.88Granted 766,500 60.61Exercised (294,025) 35.85Cancelled (61,775) 42.66

Dec. 31, 1997 1,920,850 46.08Granted 703,660 45.34Exercised (54,075) 36.36Cancelled (27,425) 53.80

Dec. 31, 1998 2,543,010 48.08

Options outstanding at December 31, 1998,have exercise prices between $15.94 and$79.81 and a weighted-average remaining lifeof 8 years. The weighted-average fair value ofoptions granted was $18.61 per share in 1998and $14.94 per share in 1997. The fair value of each option was estimated on the date of grant using a risk-free interest rate of 5.6 percent in 1998 and 6.4 percent in 1997,current annual dividends, expected lives of 10 years and expected volatility of 34 percent.A fair-value method of accounting for awardssubsequent to January 1, 1996, would have had no material effect on results of operations.

Pension Benefits Other Benefits$ Millions 1998 1997 1996 1998 1997 1996

Service cost $(147 $(141 $(145 $58 $18 $19Interest cost 123 115 104 40 41 36Expected return on plan assets (153) (134) (116) –– –– ––Amortization of transition asset (4) (9) (9) –– –– ––Other 12 13 16 4 9 10

$(125 $(126 $(140 $52 $58 $55

The Company’s net periodic benefit cost under these plans was as follows:

(a)The net deferred gain (loss) resulting from investments, other experience and changes in assumptions.(b)The prior service effect of plan amendments deferred for recognition over remaining service.(c) The balance of the initial difference between assets and obligations deferred for recognition over a 15-year period.

37

Note 14. Comprehensive Income: EffectiveJanuary 1, 1998, the Company adopted SFASNo. 130, a new accounting rule whichrequires companies to report comprehensive

income. Comprehensive income includes netincome and all other nonowner changes inequity during a period.

Note 15. Segments of the Business: Effectivefor 1998 annual reporting, the Companyadopted SFAS No. 131 on segment reporting.Under the provisions of the new standard,Cummins has three reportable segments:Engine, Power Generation, and Filtration andOther. The engine segment produces enginesand parts for sale to customers in automotiveand industrial markets. The engines are usedin trucks of all sizes, buses and recreationalvehicles, as well as various industrial applica-tions including construction, mining,agriculture, marine, rail and military. Thepower generation segment is the Company’spower systems supplier, selling engines, gen-erator sets and alternators. The filtration andother segment includes sales of filtrationproducts and exhaust systems, turbochargersand company-owned distributors.

The Company’s reportable segments areorganized according to products and themarkets they each serve. This business struc-ture was designed to focus efforts onproviding enhanced service to a wide rangeof customers.

The accounting policies of the segments arethe same as those described in the summaryof significant accounting policies except thatthe Company evaluates performance basedon earnings before interest and income taxesand on net assets, and, therefore, no alloca-tion of debt-related items and income taxes ismade to the individual segments.

Operating segment information is as follows:

36


The tax effect on other comprehensive income is as follows:

Foreign Currency TotalTranslation Unrealized Losses on Minimum Pension Other Comprehensive

Adjustments Securities Liability Adjustments Income

1998Pre-tax amount $(44) $ (1) $(83) $(128)Tax (expense) benefit 1 1 29 31

Net amount $(43) $ –– $(54) $1(97)

1997Pre-tax amount $(21) $ (1) $(12 $1(10)Tax (expense) benefit –– –– –– ––

Net amount $(21) $ (1) $(12 $1(10)

1996Pre-tax amount $(26 $ –– $1(9 $1(35Tax (expense) benefit –– –– –– ––

Net amount $(26 $ –– $1(9 $1(35

The components of accumulated other comprehensive income are as follows:

Foreign Currency AccumulatedTranslation Unrealized Losses on Minimum Pension Other Comprehensive

Adjustments Securities Liability Adjustments Income

Balance at December 31, 1995 $1(73) $ –– $(22) $1(95)Change in 1996 26 –– 9 35

Balance at December 31, 1996 (47) –– (13) (60)Change in 1997 (21) (1) 12 (10)

Balance at December 31, 1997 (68) (1) (1) (70)Change in 1998 (43) –– (54) (97)

Balance at December 31, 1998 $(111) $ (1) $(55) $(167)

Power Filtration1998 Engine Generation and Other Total

Net sales $3,982 $1,230 $1,054 $6,266Depreciation and amortization 120 40 39 199Income (expense) from joint ventures

and alliances (4) (25) (1) (30)Earnings before interest, income taxes

and special charges 136 25 121 282Special charges 165 50 2 217Earnings (loss) before interest and income taxes (29) (25) 119 65Net assets 946 511 803 2,260Investment in joint ventures and alliances 132 3 1 136Capital expenditures 172 67 32 271Additions to goodwill 12 2 370 384

1997


and alliances 12 (2) –– 10Earnings (loss) before interest and income taxes 207 (2) 107 312Net assets 1,074 531 312 1,917Investment in joint ventures and alliances 133 65 6 204Capital expenditures 304 79 22 405

1996


and alliances (2) 2 –– ––Earnings before interest and income taxes 160 14 58 232Net assets 784 459 249 1,492Investment in joint ventures and alliances 114 89 4 207Capital expenditures 242 44 18 304

38


Reconciliation to Consolidated FinancialStatements:

1998 1997 1996

Earnings before interest and income taxes for reportable segments $4,565 $4,312 $4,232

Interest expense 71 26 18Income tax expense 4 74 54Minority interest 11 –– ––

Net earnings (loss) $45(21) $4,212 $4,160

Net assets for reportable segments $2,260 $1,917 $1,492

Liabilities deducted in arriving at net assets 1,926 1,583 1,586

Deferred tax assets not allocated to segments 334 256 284

Debt-related costs not allocated to segments 22 9 7

Total assets $4,542 $3,765 $3,369

Summary geographic information is listedbelow:

All $ Millions US UK Canada Other Total

1998

Net sales (a) $3,595 $389 $459 $1,823 $6,266

Long-lived assets $1,470 $209 $3–– $1,272 $1,951

1997

Net sales (a) $3,123 $384 $318 $1,800 $5,625


1996

Net sales (a) $2,925 $348 $313 $1,671 $5,257


(a) Net sales are attributed to countries based on location of customer.

Revenues from the Company’s largest cus-tomer represent approximately $1.1 billion ofthe Company’s net sales in 1998. These salesare included in the engine and filtration andother segments.

Note 16. Guarantees, Commitments and

Other Contingencies: At December 31, 1998,the Company had the following minimumrental commitments for noncancelable oper-ating leases: $41 million in 1999, $38 millionin 2000, $30 million in 2001, $25 million in2002, $21 million in 2003 and $46 millionthereafter. Rental expense under these leasesapproximated $70 million in 1998, $60 millionin 1997 and $55 million in 1996.

Commitments under outstanding letters ofcredit, guarantees and contingencies atDecember 31, 1998, approximated $195 million.

Cummins and its subsidiaries are defendantsin a number of pending legal actions, includ-ing actions related to use and performance ofthe Company’s products. The Company car-ries product liability insurance covering signif-icant claims for damages involving personalinjury and property damage. In the event theCompany is determined to be liable for dam-ages in connection with actions and proceed-ings, the unreserved and uninsured portion ofsuch liability is not expected to be material.The Company also has been identified as apotentially responsible party at several wastedisposal sites under US and related stateenvironmental statutes and regulations. TheCompany denies liability with respect tomany of these legal actions and environmen-tal proceedings and vigorously is defendingsuch actions or proceedings. The Companyhas established reserves that it believes areadequate for its expected future liability insuch actions and proceedings where thenature and extent of such liability can beestimated reasonably based upon presentlyavailable information.

39

Note 17. Quarterly Financial Data (unaudited):

First Second Third Fourth$ Millions, except per share amounts Quarter Quarter Quarter Quarter Full Year

1998Net sales $1,500 $1,635 $1,525 $1,606 $6,266Gross profit 297 369 258 325 1,249Net earnings (loss) 7 53 (110) 29 (21)Basic earnings (loss) per share $00.18 $01.39 $ (2.86) $00.75 $0 (.55) Diluted earnings (loss) per share .18 1.38 (2.86) .75 (.55)

1997Net sales $1,304 $1,396 $1,366 $1,559 $5,625Gross profit 286 324 309 361 1,280Net earnings 41 53 54 64 212Basic earnings per share $01.07 $01.40 $01.41 $01.69 $05.55Diluted earnings per share 1.06 1.38 1.38 1.66 5.48

Earnings per share for the first three quarters of 1997 have been restated to reflect the adoption of SFAS No. 128 as disclosed in Note 1.

(a) Net sales are attributed to countries based on location of customer.

$ Millions, except per share amounts 1998 1997 1996 1995 1994

Net sales $6,266 $5,625 $5,257 $5,245 $4,737Cost of goods sold 4,925 4,345 4,072 3,974 3,551Special charges 92 — — — —Gross profit 1,249 1,280 1,185 1,271 1,186Selling and administrative expenses 787 744 725 692 641Research and engineering expenses 255 260 252 263 238Expense (income) from joint ventures

and alliances 30 (10) — 2 (4)Interest expense 71 26 18 13 17Other (income) expense, net (13) (26) (24) 6 —Restructuring and other non-recurring charges 125 — — 118 —

Earnings (loss) before income taxes (6) 286 214 177 294Provision (benefit) for income taxes 4 74 54 (47) 41Minority interest 11 — — — —

Net earnings (loss) $ (21) $ 212 $ 160 $ 224 $ 253

Net earnings (loss) per share:Basic $ (.55) $ 5.55 $ 4.02 $ 5.53 $ 6.14Diluted (.55) 5.48 4.01 5.52 6.11

Number of shares for EPS:Basic 38.5 38.2 39.8 40.6 41.2Diluted 38.5 38.7 39.9 40.7 41.4

Cash dividends per share $ 1.10 $1.075 $ 1.00 $ 1.00 $ .625Shareholders’ investment per share 33.11 37.05 33.24 29.39 25.79

Working capital $ 805 $ 655 $ 532 $ 335 $ 458Property, plant and equipment, net 1,671 1,532 1,286 1,148 1,090Total assets 4,542 3,765 3,369 3,056 2,706Total debt 1,227 654 415 219 233Shareholders’ investment 1,272 1,422 1,312 1,183 1,072

Property, plant and equipment additions $ 271 $ 405 $ 304 $ 223 $ 238Depreciation and amortization 199 158 149 143 128

Shareholders of record 5,200 4,700 4,800 5,000 4,800Number of employees (a) 28,300 26,300 23,500 24,300 25,600

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Five-Year Supplemental Data

Responsibility for Financial Statements

Management is responsible for the prepara-tion of the Company’s consolidated financialstatements and all related informationappearing in this Report. The statements andnotes have been prepared in conformity withgenerally accepted accounting principles andinclude some amounts which are estimatesbased upon currently available informationand management’s judgment of current con-ditions and circumstances. The Companyengaged Arthur Andersen LLP, independentpublic accountants, to examine the consoli-dated financial statements. Their reportappears on this page.

To provide reasonable assurance that assetsare safeguarded against loss from unautho-rized use or disposition and that accountingrecords are reliable for preparing financialstatements, management maintains a systemof accounting and controls, including an inter-nal audit program. The system of accountingand controls is improved and modified inresponse to changes in business conditionsand operations and recommendations madeby the independent public accountants andthe internal auditors.

The Board of Directors has an Audit Committeewhose members are not employees of theCompany. The committee meets periodicallywith management, internal auditors and rep-resentatives of the Company’s independentpublic accountants to review the Company’sprogram of internal controls, audit plans andresults, and the recommendations of theinternal and external auditors and manage-ment’s responses to those recommendations.

Report of Independent Public Accountants

To the Shareholders and Board of Directors ofCummins Engine Company, Inc.:

We have audited the accompanying consoli-dated statement of financial position ofCummins Engine Company, Inc., (an Indianacorporation) and subsidiaries as of December31, 1998 and 1997, and the related consoli-dated statements of earnings, cash flows andshareholders’ investment for each of the three years in the period ended December 31,1998. These financial statements are theresponsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance withgenerally accepted auditing standards. Thosestandards require that we plan and performthe audit to obtain reasonable assuranceabout whether the financial statements arefree of material misstatement. An auditincludes examining, on a test basis, evidencesupporting the amounts and disclosures inthe financial statements. An audit alsoincludes assessing the accounting principlesused and significant estimates made by man-agement, as well as evaluating the overallfinancial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, the financial statementsreferred to above present fairly, in all materialrespects, the financial position of CumminsEngine Company, Inc., and subsidiaries as ofDecember 31, 1998 and 1997, and the resultsof their operations and their cash flows foreach of the three years in the period endedDecember 31, 1998, in conformity with generally accepted accounting principles.

Chicago, IllinoisJanuary 26, 1999

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(a) Represents the number of employees at year-end. At December 31, 1998, number of employees included 2,600 employeesof Nelson Industries, Inc., which was acquired in January 1998. At December 31, 1997, number of employees included2,800 employees of Cummins India Limited, which was consolidated in the fourth quarter of 1997.

(a) Earnings per share for 1994 through 1996 have been restated to reflect the adoption of SFAS No. 128 as disclosed in Note 1to the Consolidated Financial Statements.

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Directors and Committees

Directors

James A. Henderson Chairman and Chief Executive Officer of Cummins

Theodore M. Solso President and Chief Operating Officer of Cummins

Harold Brown d,e Counselor, Center for Strategic & International Studies; Partner, Warburg,

Pincus & Co., venture banking firm

Robert J. Darnall a,e President and Chief Executive Officer, ISPAT North America Inc., steel manufacturing

John M. Deutch d,e Institute Professor, Massachusetts Institute of Technology

Walter Y. Elisha a,e Retired Chairman, Springs Industries, Inc.,

manufacturer of home furnishings, industrial and specialty fabrics

Hanna H. Grayc,e President Emeritus and Professor of History, University of Chicago

James A. Johnsona,e Chairman of the Executive Committee of the Board of Directors of the

Federal National Mortgage Association (FNMA)

William I. Miller b,e Chairman, Irwin Financial Corporation, financial services company

Donald S. Perkins a,e Retired Chairman, Jewel Companies, Inc., diversified retailing

William D. Ruckelshaus c,e Principal, Madrona Investment Group, L.L.C.

Henry B. Schacht b,e Senior Advisor and Former Chairman, Lucent Technologies, Inc., communication industry products

Franklin A. Thomas c,e,f Consultant, TFF Study Group, non-profit initiative to assist the development process in South Africa

J. Lawrence Wilson b,e Chairman and Chief Executive Officer, Rohm and Haas Company, chemical manufacturing

J. Irwin Miller Honorary Chairman

a Audit Committee d Technology Committeeb Finance Committee e Nominating and Organization Committeec Compensation Committee f Lead Director

Key to Opposite Page 1 Franklin A. Thomas

2 Donald S. Perkins

3 Henry B. Schacht

4 Walter Y. Elisha

5 J. Lawrence Wilson

6 Robert J. Darnall

7 Theodore M. Solso

8 Hanna H. Gray

9 James A. Henderson

10 William D. Ruckelshaus

11 Harold Brown

12 John Deutch

13 William I. Miller

Not pictured: James A. Johnson

Officers and Executives

Executive Officers

Senior Management

James A. Henderson Chairman and Chief Executive OfficerTheodore M. Solso President and Chief Operating Officer

Policy Committee

Jean S. Blackwell Vice President - Human ResourcesPamela F. Carter Vice President, General Counsel and SecretaryC. Roberto Cordaro Executive Vice President, Group President - AutomotiveJohn K. Edwards Executive Vice President, Group President - Power GenerationMark R. Gerstle Vice President - Cummins Business ServicesM. David Jones Vice President - Filtration Business, President - Fleetguard, Inc.F. Joseph Loughrey Executive Vice President, Group President - IndustrialKiran M. Patel Vice President and Chief Financial Officer

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4 6

7

8

9 10

11

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The Cummins Board of Directors ispictured outside the new Signature600 Plant entrance where customerservice for heavy-duty users hasshaped a new approach to enginemanufacturing.

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Engine Business

Martha F. Brooks Vice President Worldwide Marketing for Medium-Duty and Heavy-Duty TrucksCharles J. Bumb Vice President National AccountsKeith E. Chambers Vice President Heavy-Duty Engine ProgramPedro N. Ferro Vice President Automotive Information BusinessRichard M. Gold Vice President PowerCare BusinessDale F. Good Vice President North American Automotive Sales and ServiceJeffrey D. Jones Vice President National AccountsJames D. Kelly Vice President Industrial MarketingFrank J. McDonald Vice President Worldwide Midrange OperationsPeter V. McDowell Vice President European Automotive BusinessLarry O. Moore Vice President Worldwide Operations, Automotive BusinessJohn H. Stang Vice President Automotive EngineeringBryan W. Swank Vice President Worldwide Midrange EngineeringBharat S. Vedak Vice President Industrial Customer EngineeringChristine M. Vujovich Vice President Worldwide Marketing for Bus and Light Commercial Automotive,

and Environmental ManagementRobert J. Weimer Vice President PowerCare Customer Support William H. Wolpert General Manager Worldwide Marine Business

Power Generation Business

R. Siisi Adu-Gyamfi Vice President Marketing, Power GenerationIain M. Barrowman President and Cummins Wartsila SAS

Director GeneralSamuel D. Hires Vice President High-Horsepower Engine DevelopmentJerry E. Johnson Vice President and Power Generation Americas

General ManagerMichael F. Mitchell Vice President, Power Generation

OperationsTony Satterthwaite Executive Director Power Generation, Asia PacificSteven L. Zeller Vice President and Newage International Ltd.

Managing Director

International

Mark A. Levett Vice President InternationalDerek Boulton General Manager JapanSteven M. Chapman Vice President China and Southeast AsiaRicardo Chuahy General Manager Latin America

President Cummins BrasilJ. Thompson Dewing Vice President and Central Area Business Organization

Managing DirectorMichael Green Managing Director South PacificJong S. Kim Managing Director KoreaSteven P. Knaebel Vice President Mexico

President CUMMSA S.C.Ronald L. Moore Vice President and India

General Manager

Technology and Operations Support

John M. Crowther Vice President Information Technology and Chief Information OfficerAlan R. Dohner Vice President Fuel SystemsPatrick F. Flynn Vice President ResearchJeffrey C. Hamilton Vice President Advanced Engineering and DesignTom Linebarger Vice President Supply Chain ManagementDavid S. Moorhouse Managing Director Holset Engineering Company, Ltd.George L. Muntean Vice President Fuel Systems EngineeringRichard B. Stoner, Jr. Group Vice President Technology BusinessesRonald H. Temple Vice President Electronic TechnologyJohn C. Wall Vice President Research and Development

Corporate Support

George Fauerbach Vice President Business DevelopmentRick J. Mills Vice President Corporate ControllerBrenda S. Pitts Vice President Corporate Responsibility and DiversityJohn A. Swaim Vice President QualityDonald W. Trapp Vice President Treasurer

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Cummins Worldwide Locations

■ International Offices▲ Parts Distribution Centers▼ Technical Centers* Joint Venture** Licensee

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Operations Production

BMC Sanayi veTicaret A.S.** Izmir, Turkey B3.9/5.9 C8.3 •Chongqing Cummins Engine Company Ltd.* Chongqing, China NT K19/38/50 L10/M11 • • •Columbus Engine Plant Columbus, Indiana N14/NT Signature 600 • • •Columbus Midrange Engine Plant Columbus, Indiana B5.9 ISB •Consolidated Diesel Company* Rocky Mount, North Carolina B3.9/5.9 C8.3 ISB ISC • • •Cummins Brasil Ltda. Sao Paulo, Brazil B3.9/5.9 C8.3 NT/N14 • • •Cummins India Limited Pune, India C8.3 NT/N14 V28 K38/50 • •Cummins Industrial Center Seymour, Indiana K19 V903 QSK19 • •Cummins Komatsu Engine Co.* Seymour, Indiana QST30 • •Cummins Marine Division Charleston, South Carolina Marine product development and upfit •Cummins Natural Gas Engines, Inc. Fort Worth,Texas G-NT G-K19 G-V28 • •Cummins Wartsila SAS* Mulhouse, France QSZ – 200 • •Cummins Wartsila SAS* Daventry, England QSW – 170 • •Darlington Engine Plant Darlington, England B3.9/5.9 C8.3 • • •Daventry Engine Plant Daventry, England K38/50 QSK60 • •Dongfeng Cummins Engine Co. Ltd.* Xiangfan, Hubei, China C8.3 • • •Dongfeng Motor Corporation** Xiangfan, Hubei, China B3.9/5.9 •Jamestown Engine Plant Jamestown, New York M11 L10 G-L10 • • •Komatsu Cummins Engine Company, Ltd.* Oyama, Japan B3.9/B5.9 • •Onan Corporation Fridley, Minnesota Generator sets and electronic controls •Cummins Power Generation UK Ramsgate, England Generator sets and electronic controls •SsangYong Heavy Industries Co., Ltd.** Seoul, South Korea K19 V903 • •Tata Cummins Ltd.* Jamshedpur, India B3.9/B5.9 •ComponentsAtlas Inc. Fostoria, Ohio Crankshafts and camshafts • • •Cummins S.A. San Luis Potosi, Mexico Engine components and

remanufactured engines • • • •Diesel ReCon Company Memphis, Tennessee Remanufactured engines and components • • •European Engine Alliance* High Wycombe, England B engine components B2.8/B3.9/B4.9/B5.9 • • •Fleetguard Filters Ltd.* Pune, India Filtration systems •Fleetguard, Inc. Nashville, Tennessee Filtration systems •Fleetguard Shanghai* Shanghai, China Filtration systems •Fuel Systems Division Columbus, Indiana Fuel system design and manufacture • • •Holset Engineering Company Ltd. Charleston, South Carolina Turbochargers • • •Holset Engineering Company Ltd. Huddersfield, England Turbochargers • • •Nelson Industries, Inc. Stoughton, Wisconsin Filtration and exhaust systems •Newage International Ltd. Stamford, England Alternators •Tata Holset Ltd.* Dewas, India Turbochargers •Wuxi Holset Ltd.* Wuxi, China Turbochargers • • •Wuxi Newage Alternators Ltd.* Wuxi, China Alternators •Technical CentersColumbus, Indiana Fridley, Minnesota Darlington, England Research, technology, and engine and otherPune, India Sao Paulo, Brazil product development44


Shareholder Information

Annual Meeting:

Shareholders are invited to attend the Company’sAnnual Meeting on April 6, 1999 at 10:30 a.m.(Eastern Standard Time) in Columbus, Indiana.The meeting will be held in the RobbinsAuditorium of Columbus East High School.

Stock Transfer Agent, Registrar

and Dividend Disbursing Agent:

The First Chicago Trust Company, a division of EquiServe, is the Company’s common stocktransfer agent and registrar. The bank main-tains the Company’s shareholder records and is responsible for disbursing dividend checks.Changes of address and questions should beaddressed as follows:

General Shareholder CorrespondenceFirst Chicago Trust CompanyP. O. Box 2500, Jersey City, NJ 07303-2500

Questions concerning transfers of stock owner-ship should be directed to The First ChicagoTrust Company of New York, P. O. Box 2506,Jersey City, NJ 07303-25060. Cummins’Shareholder Representatives at the bank maybe called at 800-446-2617 from inside the U.S.,or at 201-324-0498 from outside the U.S. They also are available on the Internet athttp://www.equiserve.com and for the hearingimpaired at TDD @ 201-222-4955.

Dividend Distribution:

Common stock dividends are payable quar-terly, upon authorization of the Board ofDirectors, on or about the fifteenth of March,June, September and December.

Dividend Reinvestment:

As an added service to shareholders, Cumminshas a Dividend Reinvestment Plan, adminis-tered by First Chicago Trust Company of NewYork. This plan gives shareholders of record theoption of having their cash dividends andoptional cash payments applied toward thepurchase of additional shares. Commissionsand other expenses of the plan are paid byCummins so that participants’ funds are usedsolely for the purchase of additional shares.

Shareholders wishing information about thisplan may call 800-446-2617 or write to:First Chicago Trust Company of New YorkP. O. Box 2598, Jersey City, NJ 07303-2598

Exchange Listings:

The common stock of Cummins EngineCompany, Inc., was listed on the New YorkStock Exchange in 1964 and the Pacific StockExchange in 1988. The stock is listed under thesymbol CUM.

Inquiries:Shareholders or others desiring a copy of the Company’s 1998 Form10-K filed with the Securities andExchange Commission, quarterlyresults or other information about theCompany may contact:

Chip WochomurkaExecutive Director-Investor Relations and Strategic Planning Cummins Engine Company, Inc.Box 3005 (Mail Code 60118)Columbus, IN [email protected]: 812-377-3121Fax: 812-377-4937

General information, the AnnualReport, quarterly results and otherfinancial information also are available on Cummins’ home page on the Internet.

http://www.cummins.com

The Company’s press releases by faxmay be requested by calling News onDemand at 888-329-2305.

Corporate HeadquartersCummins Engine Company, Inc.Columbus, Indiana 47202-3005

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cummins 99 AR2

Economy & Finance

Transcript of cummins 99 AR2