SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 19961997
CUMMINS ENGINE COMPANY, INC.
Commission File Number 1-4949
Incorporated in the State of Indiana I.R.S. Employer Identification
No. 35-0257090
500 Jackson Street, Box 3005, Columbus, Indiana 47202-3005
(Principal Executive Office)
Telephone Number: (812) 377-5000
Securities registered pursuant to Section 12(b) of the Act: Common
Stock, $2.50 par value, which is registered on the New York Stock
Exchange and on the Pacific Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90
days. Yes [x] No [ ]
Indicate by check mark if disclosures of delinquent filers pursuant to
Item 405 of Regulation S-K are not contained herein and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates
was approximately $2.1$2.2 billion at January 26, 1997.30, 1998.
As of January 26, 1997,30, 1998, there were outstanding 41.942.1 million shares of
the only class of common stock.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement filed with the
Securities and Exchange Commission pursuant to Regulation 14A are
incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENTS
_________________
Part Item Description Page
____ ____ _________________________________________________ ____
I 1 Business 3
2 Properties 1511
3 Legal Proceedings 1611
4 Submission of Matters to Vote of Security Holders 1611
II 5 Market for the Registrant's Common Equity and
Related Stockholder Matters 1611
6 Selected Financial Data 1712
7 Management's Discussion & Analysis of Results
of Operations and Financial Condition 1813
8 Financial Statements & Supplemental Data 2417
9 Disagreements on Accounting & Financial
Disclosure 2517
III 10 Directors & Executive Officers of the Registrant 2518
11 Executive Compensation 2619
12 Security Ownership of Certain Beneficial Owners
and Management 2719
13 Certain Relationships & Related Transactions 2719
IV 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 2719
Index to Financial Statements 2820
Signatures 5235
Exhibit Index 5437
PART I
______
ITEM 1. BUSINESS
_______ ________
OVERVIEW
________
Cummins Engine Company, Inc. ("Cummins" or "the Company") is a
leading worldwide designer and manufacturer of diesel engines,
ranging from 76 to 6,000 horsepower and the largest producer of
diesel engines over 200 horsepower. The Company also produces
alternate fuelednatural gas engines and engine components and subsystems. Cummins
provides power and components for a wide variety of equipment in
its key markets: automotive, power generation, industrial and
filtration.
Cummins sells its products to original equipment manufacturers
("OEMs"), distributors and other customers worldwide and conducts
manufacturing, sales, distribution and service activities in most
areas of the world. Sales of products to major international
firms outside North America are transacted by exports directly
from the United States and shipments from foreign facilities
(operated through subsidiaries, affiliates, joint ventures or
licensees) which manufacture and/or assemble Cummins' products.
In 1996,1997, approximately 56 percent of net sales were in the United
States. Major international markets include Asia the Far East and Australia
(17(16 percent of net sales); Europe and the CIS (14 percent of net
sales); CanadaMexico and Latin America (6 percent of net sales); and
Mexico and South America (5Canada (6 percent of net sales).
BUSINESS MARKETS
________________
Automotive
__________
Heavy-duty Truck
________________
Cummins has a complete line of 8-, 10-, 11- and 14-litre14-liter diesel
engines that range from 260 to 525 horsepower serving the heavy-dutyheavy-
duty truck market. The Company's heavy-duty diesel engines are
offered as standard or optional power by most major heavy-duty
truck manufacturers in North America. The seven largest US heavy-dutyheavy-
duty truck OEMs produced
approximately 97 percent of the heavy-duty trucks sold
in the United States and Canada in 1996.1997. The Company's largest
customer for heavy-
dutyheavy-duty truck engines in 19961997 was FreightlinerNavistar
International Corporation, which represented approximately 5 percent of the
Company's net sales.
In 1996,1997, factory retail sales of North American heavy-duty trucks
were approximately 2314 percent lowerhigher than the previous year's level. Factory
retail sales were 201,000 units in 1997, compared to 176,000 units
in 1996 compared toand 227,000 units in 1995, and 207,000 in 1994.1995. The Company's share of the
North American heavy-duty truck engine market was 3532 percent in
19961997 based on data published by the American Automotive
Manufacturers Association. The Company's share of the North
American heavy-duty truck engine market was 35 percent in 19951996 and
34 percent in 1994.1995.
Based on data published by the Society of Motor Manufacturers and
Traders, the Company's share of engines for trucks sold in the
United Kingdom was 12 percent in 1997 and 11 percent in 1996 and 15 percent in 1995.1996.
Based on data published by the National Association of Truck and
Bus Manufacturers, Cummins remained the leader of the heavy-duty
truck market in Mexico, where the economy continued the recovery
which began to recover in 1996.
In 1995, the Company introduced new versions of its M11 and N14
engines, both of which have advanced electronic controls and
information technology. In 1995, the Company also began to ship
alternate fuelednatural gas engines for urban special-purpose truck markets and
regional haul operations. In 1998, the Company will begin
production of a 600 horsepower engine with the first electronic
dual cam in automotive history.
In the heavy-duty truck market, the Company competes with independent
engine manufacturers as well as truck producers who manufacture diesel
engines for their own products. Certain of these integrated
manufacturers also are customers of the Company. In North America,
the Company's primary competitors in the heavy-duty truck engine
market are Caterpillar, Inc., Detroit Diesel Corporation and Mack
Trucks, Inc. The Company's principal competitors in international
markets vary from country to country, with local manufacturers
generally predominant in each geographic market. Other diesel engine
manufacturers in international markets include Mercedes Benz, AB
Volvo, Renault Vehicles Industriels, Iveco Diesel Engines, Hino
Motors, Ltd., Mitsubishi Heavy Industries, Ltd., Isuzu Motors, Ltd.,
DAF Trucks N.V., Scania A.B., Nissan Diesel and Perkins Engines.
MidrangeMedium-duty Truck
_______________________________
The Company has a line of diesel engines ranging from 130 to 300
horsepower serving midrangemedium-duty and intercity delivery truck customers
worldwide. In 1996, theThe Company beganhas begun introducing its next generation of
midrange diesel engines, with higher horsepower and electronic controls.four-valve-head versions which
bring Interact technology to medium-duty trucks.
The Company entered the North American midrange diesel enginemedium-duty truck market in
1990. Based upon data published by R. L. Polk, the Company's share of
the market for diesel-powered medium-duty trucks in 19961997 was 3125
percent, compared to 31 percent in 1996 and 35 percent in 1995 and 34 percent in
1994.1995. Ford
Motor Company was the Company's largest customer for midrange engines for this market in
1996,1997, representing approximately 4 percent of the Company's net sales.
The Company sells its B and C Series engines and engine components
outside North America to midrangemedium-duty truck markets in Asia, Europe,
South America and India. In 1996, operations in China at DongfengDong Feng
were expanded from a license for B Series engines to include a joint
venture for production of C Series engines.
In the midrangemedium-duty truck market, the Company competes with independent
engine manufacturers as well as truck producers who manufacture diesel
engines for their own products. Certain of these integrated
manufacturers also are customers of the Company. Primary engine
competitors in the midrangemedium-duty truck market in North America are
Navistar International Corporation and Caterpillar, Inc. The
Company's principal competitors in international markets vary from
country to country, with local manufacturers generally predominant in
each geographic market. Other diesel engine manufacturers in
international markets include Mercedes Benz, AB Volvo, Renault
Vehicles Industriels, Iveco Diesel Engines, Hino Motors Ltd.,
Mitsubishi Heavy Industries, Ltd., Isuzu Motors, Ltd., DAF Group N.V.,
Scania A.B., Perkins Engines Ltd., Nissan Diesel and MWM Brazil.
Bus and Light Commercial Vehicles
_________________________________
For this market, Cummins has both diesel and alternate fuelednatural gas engines for
pickup trucks, school buses, transit buses, delivery trucks and
recreational vehicles.
In North America, Chrysler, which offers the Cummins B Series engines
in its Dodge Ram pickup truck, was the Company's largest customer for
midrange engines in this market, representing approximately 8 percent of the
Company's net sales in 1996.1997. The Company's new 5.9 litreliter engine will
be introduced first into the recreational vehicle market and, by early
1998, into the Dodge Ram pickup truck. This engine will increase
horsepower from 215 to 235 in the manual transmission option.
The Company's C Series and M11 diesel engines and L10 natural gas
engine are available for the US transit bus market. The demand for
alternate fueled products continues to grow. At the 1996 Olympics in
Atlanta, 95 of the 100 alternate fueled buses were equipped with the
Company's engines. In 1994,1995, Cummins
introduced its BC Series alternate
fuelednatural gas engine for school buses in the
United States and, in 1995,
introduced the C Series.States.
In these markets, the Company competes with both independent
manufacturers of diesel engines and with vehicle producers who
manufacture diesel engines for their own products. Primary
competitors who manufacture diesel engines for the bus and light
commercial vehicle markets are Detroit Diesel Corporation, General
Motors Corporation, Navistar International Corporation, Perkins
Engines Ltd., MAN, AB Volvo, Mercedes Benz, Scania A.B. and MWM
Brazil.
Power Generation
________________
In 1996,1997, power generation sales represented 2321 percent of the
Company's net sales. Products include Cummins engines, Onan and
Petbow branded generator sets and Newage alternators.
In stationary power, electrical power generation products and services
are provided to major markets worldwide. The Company's joint venture
with Wartsila Diesel of Finland to produce high-horsepower engines is
proceeding on schedule.has
been expanded to include customer engineering, marketing and service
support worldwide. The QSZCW 200 series engine family was introduced in
1996 with initial deliveries in Europe and Asia. The QSWCW 170 series
engine family will be introduced in 1997.1998. Providing power generation
products for the utility industry has become an increasingly important
market, with utilities turning to generator sets to manage peak and
seasonal demands in lieu of making capital investments in additional capacity.demands. In the mobile business, generator sets and gasoline engines are produced
for a wide variety of applications, with Onan a leading supplier of power
generation sets for recreational vehicles in the United States.
Newage is a leading manufacturer of alternators in its product range.
During 1996, plans were initiated to expand manufacturing capacity at
Newage's joint venture in India, andIndia. Production at a joint venture was announced in
China with production scheduled to commence(WUXI Newage) began in the first half of 1997.
In Power Generation, Cummins competes on a global scale with a variety
of engine manufacturers and generator set assemblers. Caterpillar,
Inc., with an investment in FG Wilson and its recent purchase of
Perkins Engines, provides the main competition. Detroit Diesel
Corporation Perkins Engines and AB Volvo are theother major engine manufacturers with a
presence in the high-speed segment of the market. Onan competes with
Caterpillar, F G Wilson and Kohler, among others, in the generator set
business. Newage competes globally with Leroy Somer, Marathon and
Meccalte, among others. In recent years, Emerson Electric, which
already owned Leroy Somer, has become a major player with its
acquisition of F G Wilson.
Caterpillar also has
an investment in F G Wilson.
Industrial
__________
During 1996, the first full year of US emissions standards for
industrial engines,1997, the Company's comprehensive product line, currently
ranging from 76 to 6,0002,000 horsepower, madecontinued to make strong
advances. Cummins' engines power more than 3,000 models of equipment
for the construction, logging, mining, agricultural, petroleum, rail,
marine and government markets throughout the world. In 1996, engine shipments to these markets were
a record 72,500 engines, an increase of approximately 8 percent,
compared to 1995. In addition, the Company shipped 5,300 engines for
marine applications in 1996.
In construction markets, the Company's relationship with Komatsu
continued to expand. Cummins and Komatsu formed joint ventures in
1993 to produce Cummins B Series engines in Japan and Komatsu's 30-
litreliter engine in the United States. Production at both joint venture
sites began on schedule. CoupledIn 1997, a third joint venture with Cummins' relationshipKomatsu
to design next generation industrial engines was announced. During
1997, Cummins and Case jointly launched a financing program for
manufacturers, dealers, and customers of Cummins powered industrial
equipment. Cummins relationships with Komatsu and Case
in North America, these alliances provide a
strong base in the Company's construction and agriculture markets.
The Company's first high-horsepower QUANTUM engine was introduced in
19951995. Additional high-horsepower QUANTUM engines will be introduced
through 1999 increasing the Company's offering and enhancedcompetitiveness in late 1996 with the announcement of two new products
for
the mining market.and related markets.
Marine product applications include recreational and commercial
markets. The Company's joint venture with Wartsila will expand
commercial product offerings to 6,000 horsepower for the marine
market, significantly higher than the 1,800 horsepower currently
available.
Filtration and Other
____________________
Fleetguard, Cummins' filtration subsidiary, is a leading designer and
manufacturer of filtration products for the North American heavy-duty
filter industry. Its products are also are produced and sold in international
markets, including Europe, Mexico,South America, India, China, Australia, and
the Far East. A new
distribution centerFleetguard produces products for the specialty
filtration market with its Kuss subsidiary located in South Africa openedFindley, Ohio.
The Company purchased the stock of Nelson Industries, Inc., in 1996. A manufacturing
facility also was openedJanuary
1998. Nelson designs and manufactures air filtration products and
exhaust systems in ShanghaiNorth America and Europe.
The Company owns 14 distributorships, most of them outside of the
United States. Distributors sell loose engines and service parts as
part of a joint venture with
Shenlong Auto Accessories Corporation of China, a majority-owned
subsidiary of Dongfeng Motor Corporation.well as perform service and repair activities on Cummins products.
Holset's turbochargers and vibration dampers also are sold worldwide. In 1994, Holset introduced
a variable geometry turbocharger design for truck powertrains.
Holset's joint venture with TELCO assembled and shipped its first
turbochargers in 1996. A joint venture with Wuxi in China also began
production in 1996. During 1997, the vibration attenuation business
was sold to Simpson Industries. An alliance with Mitsubishi Heavy
Industries of Japan will beginhas begun limited production of its jointly developed
turbochargers, with full production beginning in 1997.1998.
BUSINESS OPERATIONS
___________________
International
_____________
The Company has manufacturing facilities worldwide, including major
operations in Europe, India, Mexico and Brazil. Cummins has entered
into license agreements that provide for the manufacture and sale of
the Company's products in Turkey, China, Pakistan, South Korea,
Indonesia and other countries.
A license agreement was entered in late 1996 with PT
Perkasa Heavyndo of Indonesia to produce the B Series engines.
In addition, theThe Company has entered into alliances with business partners in
various areas of the world.
AIn 1997, the Company acquired an additional 1% of the outstanding
shares of Kirloskar Cummins Limited, becoming the majority owner, and
changed the name to Cummins India Limited. Also, it was announced
that the joint venture with Wartsila will be expanded to include
worldwide marketing and service activities in addition to design,
development and manufacturing. The Company entered this joint venture
in 1995 to manufacture both diesel and natural gas engines above 2,500
horsepower.
In 1996, a joint venture was formed in
1996 with two of the Fiat Group
companies --- Iveco (trucks and buses) and New Holland (agricultural
equipment) --- to design and manufacture the next generation of 4-,5-,
5- and 6-litre6-liter engines based on Cummins'Cummins 4- and 6-
litre6-liter B Seriesseries engines.
In 1996, operations at Dongfeng Motor
CorporationOperations on Dong Feng in China were expanded to form a joint venture
for production of a C Series enginesseries engine in addition to the license for B
Series engines.
Cummins and Scania of Sweden have a joint venture to develop a fuel
system for heavy-duty diesel engines. Cummins has a joint venture
with TELCO of India to manufacture the Cummins B Series engines in
India for TELCO trucks. Cummins and Komatsu Ltd. of Japan have formed
joint ventures to manufacture the B Series engines in Japan and high-
horsepower Komatsu-designed engines in the United States.
In 1995, the Company formed a joint venture with China National Heavy
Duty Truck Corporation in Chongqing, previously a Cummins' licensee,
to manufacture a broad line of diesel engines in China.
In 1995, the
CompanyCummins and Scania of Sweden have a joint venture to develop a fuel
system for heavy-duty diesel engines. Cummins also entered intohas a joint
venture with Wartsila Diesel
International of FinlandTELCO to manufacture both dieselthe Cummins B Series engines in
India for TELCO trucks. Cummins and natural gasKomatsu have formed joint
ventures to manufacture the B Series engines above 2,500 horsepower.in Japan and high-
horsepower Komatsu designed engines in the United States. In 1997, a
third joint venture to design next generation industrial engines was
announced.
Several of the Company's subsidiaries have venturesoperations throughout the
world.
Because of the Company's increasingly global business activities, its operations
are subject to risks, such as currency controls and fluctuations,
import restrictions and changes in national governments and policies.
Research and Development
________________________
Cummins conducts an extensive research and engineering program to
achieve product improvements, innovations and cost reductions for its
customers, as well as to satisfy legislated emissions requirements.
The Company is in the midst of a program to refurbish and extend its
engine range. Cummins has introduced a variety of concepts in the
diesel industry that combine electronic controls, computing capability
and information technology. The Company also offers alternate fueled
engines for certain of its markets. As disclosed in Note 1 to the
Consolidated Financial Statements, research and development
expenditures approximated $250 million in 1997, $235 million in 1996,
and $230 million in 1995
and $200 million in 1994.1995.
Sales and Distribution
______________________
While the Company has supply agreements with some customers for
Cummins engines in both on- and off-highway markets, most of the
Company's business is done on open purchase orders. These purchase
orders usually may be canceled on reasonable notice without
cancellation charges. Therefore, while incoming orders generally are
indicative of anticipated future demand, the actual demand for the
Company's products may change at any time. While the Company
typically does not measure backlog, customers provide information
about future demand, which is used by the Company for production
planning. Lead times for the Company's engines are dependent upon the
customer, market and application.
Historically, during the third quarter of the year, the Company has
experiencedWhile individual product lines may experience modest seasonal declines
in production, which have had anthere is no material effect on the demand for Cummins'
products during that quarter of each
year.on a quarterly basis.
The Company's products compete on a number of factors, including
performance, price, delivery, quality and customer support. Cummins
believes that its continued focus on cost, quality and delivery,
extensive technical investment, full product line and customer-led
support programs are key elements of its competitive position.
Cummins warrants its engines, subject to proper use and maintenance,
against defects in factory workmanship or materials for either a
specified time period or mileage or hours of use. Warranty periods
vary by engine family and market segment.
There are approximately 6,5007,800 locations in North America, primarily
owned and operated by OEMs or their dealers, at which Cummins-trained
service personnel and parts are available to maintain and repair
Cummins engines. The Company's parts distribution centers are located
strategically throughout the world.
Cummins also sells engines, parts and related products through
distributorships worldwide. The Company believes its distribution
system is an important part of its marketing strategy and competitive
position. Most of its North American distributors are independently
owned and operated. The Company has agreements with each of these
distributors, which typically are for a term of three years, subject
to certain termination provisions. Upon termination or expiration of
the agreement, the Company is obligated to purchase various assets of
the distributorship. The purchase obligation of the Company relates
primarily to inventory of the Company's products, which can be resold
by the Company over a reasonable period of time. In the event the
Company had been required to fulfill its obligations to purchase
assets from all distributors simultaneously at December 31, 1996,1997, the
aggregate cost would have been approximately $240$255 million. Management
believes it is unlikely that a significant number of distributors
would terminate their agreements at the same time, requiring the
Company to fulfill its purchase obligation.
Supply
______
The Company machines many of the components used in its engines,
including blocks, heads, rods, turbochargers, crankshafts and fuel
systems. Cummins has adequate sources of supply of raw materials and
components required for its operations. The Company has arrangements
with certain suppliers who are the sole sources for specific products.
While the Company believes it has adequate assurances of continued
supply, the inability of a supplier to deliver could have an adverse
effect on production at certain of the Company's manufacturing
locations.
Employment
__________
At December 31, 1996,1997, Cummins employed 23,50026,300 persons worldwide,
approximately 8,80010,200 of whom are represented by various unions. The
Company has labor agreements covering employees in North America,
South America, and the United Kingdom.Kingdom, and India. In 1995, members of the
Diesel Workers Union and the Office Committee Union at the Company's
midrange engine plant in Southern Indiana ratified 5-year agreements.
In 1995, members of the Office Committee Union ratified an early
agreement which extends until 1999 for offices and plants in Southern
Indiana and the Company's Technical Center. In 1993, members of the
Diesel Workers Union reached an agreement that extends until the year
2004. In 1995, members of the United Auto Workers at the Company's
crankshaft plant in Fostoria, Ohio, reached an agreement which extends
for five years.
In January 1997, negotiations were completed with
members of the United Auto Workers on the closure of the Company's
facility in Huntsville, Alabama.
ENVIRONMENTAL COMPLIANCE
________________________
Product Environmental Compliance
________________________________
Cummins engines are subject to extensive statutory and regulatory
requirements that directly or indirectly impose standards with respect
to emissions and noise. Cummins' products comply with emissions
standards that the US Environmental Protection Agency ("EPA") and
California Air Resources Board ("CARB") have established for heavy-
duty on-highway diesel and gas engines and off-highway engines
produced through 1997.1998. Cummins' ability to comply with these and
future emissions standards is an essential element in maintaining its
leadership position in the North American regulated markets. The
Company will make significant capital and research expenditures to
comply with these standards. Failure to comply could result in
adverse effects on future financial results.
Cummins has successfully completed the certification of its 19961998 on-
highway products, which include both midrange and heavy-duty engines.
All of these products underwent extensive laboratory and field testing
prior to their release.
The Environmental Protection Agency, the U. S. Department of Justice
and the California Air Resources Board (collectively, the "government
agencies") have raised concerns with diesel engine manufacturers,
including Cummins, about the level of Nitrogen Oxide (NOx) emissions
from diesel engines under certain driving conditions. The government
agencies also have raised concerns about the strategies that diesel
manufacturers have employed to maximize fuel economy, while also
meeting Clean Air Act standards for NOx emissions. The government
agencies have indicated that they may conclude that diesel
manufacturers have been in violation of the Clean Air Act and have,
therefore, issued conditional certificates of conformity on the 1998
heavy-duty, on-highway diesel engine models. Cummins believes that it
is in full compliance with all laws and regulations regarding
emissions. The government agencies have not made any final
determinations or allegations. The industry and Cummins are engaged
in confidential discussions regarding these emissions, the technical
challenges confronted if new emissions standards are imposed, the
commercial impact of the government's policy and legal positions and
related issues. Both the industry and the government agencies are
taking these concerns and discussions very seriously and are working
diligently toward an amicable resolution. It is premature to predict
the outcome of the discussions or whether the outcome will have a
material effect on Cummins.
Emissions Averaging, Banking and Trading regulations were promulgated
by the EPA in July 1990. By selling 1994, 1995, 1996 and 19961997 model year
engines with emissions levels below applicable standards, Cummins
generated oxides of nitrogen and particulate matter credits. Those
credits generated in 1995 expire on December 31, 19971998 if not used
before this date. While a portion of the Company's 19971998 products will
use some of these credits as part of an effort to achieve cost-effectivecost-
effective compliance, the Company does not believe that the cost of
compliance without relying on these credits would be material. The
Company closely manages credit generation and use, and believes that
engines currently using credits will be brought into compliance during
the course of normal engineering improvements or will be replaced by
engines meeting future emissions standards without any material
financial effect.
The nextModel year 1998 marked the latest major change in emissions
requirements for heavy-duty on-
highwayon-highway diesel engines occurs in 1998, when the oxides
of nitrogen standard iswas lowered from 5.0 to 4.0 g/bhp-hr. 1998 is also the
effective date for the Clean Fuel Fleet Vehicle program. Beginning
January 1, 1998, fifty percent of new vehicles purchased by certain
centrally fueled fleets in 22 ozone non-attainment areas in the United
States must be powered by engines which meet a combined oxides of
nitrogen plus non-methane hydrocarbon standard of 3.8 g/bhp-hr.
Design and development activities aimed at meeting these standards are
well underway.
Contained in the environmental regulations are several means for the
EPA to ensure and verify compliance with emissions standards. Two of
the principal means are tests of new engines as they come off the
assembly line, referred to as selective enforcement audits ("SEA"),
and tests of field engines, commonly called in-use compliance tests.
The SEA provisions have been used by the EPA to verify the compliance
of heavy-duty engines for several years. In 1996, three1997, one such audit tests weretest
was performed on Cummins engines; all wereit was passed. The failure of an
SEA could result in cessation of production of the noncompliant
engines and the recall of engines produced prior to the audit. In the
product development process, Cummins anticipates SEA requirements when
it sets emissions design targets.
No Cummins engines were chosen for in-use compliance testing in 1996.1997.
It is anticipated that the EPA will increase the in-use test rate in
future years, raising the probability that one or more of the
Company's engines will be selected. As with SEA testing, if an in-use
test is failed, an engine recall may be necessary.
In 1996, EPA raised an issue with the Company relating to the
definition of rated speed, a parameter in engine emissions
certification testing. For years, the Company has been operating under
a long-standing interpretation of this area of the regulations. In 1996, EPA
questioned the Company's interpretation and requested further
information. If the EPA maintains, and ultimately prevails in, its
more stringent position, a small number of the Company's 1996 and
earlier model year on-highway engines would be affected. In this
event, EPA may require a recall of the affected engines and also may
impose penalties. The Company
believes it has a strong legal basis for its regulatory interpretation and, even ifinterpretation;
nevertheless, no 1998 model year engines have been released using the
Company had to pay
penalties, these penalties would have no material financial effect on
the Company.questioned interpretation.
In 1988, CARB promulgated a rule that necessitates the reporting of
failures of emissions-related components when the failure rate reaches
a specified level (25 component failures or one percent of build,
whichever is greater). At somewhat higher failure rates (50
components or four percent of build), a recall may be required. The
Company continues to monitor such failures. In 1996,1997, there were no
emissions-related failures which reached a level that required a
report.
In January 1992, CARB promulgated a regulation for engines rated at or
above 175 horsepower used in mobile off-highway applications. In mid-
1994, the EPA also promulgated regulations for this category. Thecategory although
the EPA regulation covers engines rated at or above 50 horsepower. In
all other material respects these two regulations are the same. The
effective dates are staged according to rated horsepower and began
phasing in on January 1, 1996. Cummins has successfully completed
certification of the majority of its mobile off-highway products which are included in
the first, second, and secondthird phases (those with ratings between 10050 to
750 horsepower). All of these products have undergone extensive
laboratory and field tests prior to their release.
Emissions standards in international markets, including Europe and
Japan, are becoming more stringent. Given the Company's experience in
meeting US emissions standards, it believes that it is well positioned
to take advantage of opportunities in these markets as the need for
emissions-control capability grows.
There are several Federal and state regulations which encourage and,
in some cases, mandate the use of alternate fueled heavy-duty engines.
The Company currently offers natural gas fueled versions of its L10,
C8.3 and B5.9 engines, ranging from 150 to 300 horsepower.
Vehicles and certain industrial equipment in which diesel engines are
installed must meet Federal noise standards. The Company believes
that applications in which its engines are now installed meet those
noise standards and that future installations also will be in
compliance.
Other Environmental Statutes and Regulations
____________________________________________
Cummins believes it is in compliance in all material respects with
laws and regulations applicable to the plants and operations of the
Company and its subsidiaries. During the past five years,
expenditures for environmental control activities and environmental
remediation projects at the Company's operating facilities in the
United States have not been a major portion of annual capital outlays
and are not expected to be material in 1997.1998.
Pursuant to notices received from Federal and state agencies and/or
defendant parties in site environmental contribution actions, the
Company and its subsidiaries have been identified as potentially
responsible parties ("PRPs") under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, or
similar state laws, at a number of waste disposal sites. Under such
laws, PRPs typically are jointly and severally liable for any
investigation and remediation costs incurred with respect to the
sites. Therefore, the Company's ultimate responsibility for such
costs could be a percentage greater than the percentage of waste
actually contributed to the site by the Company.
The sites at which the Company or its subsidiaries are currently named
as a PRP are the following: Old City Landfill, Columbus, Indiana;
Purity Oil Site, Fresno, California; Oak Grove Sanitary Landfill,
Anoka County, Minnesota; Waste Disposal Engineering Landfill, Andover,
Minnesota; White House Waste Oil Pits, Jacksonville, Florida; Seaboard
Chemical, Jamestown, North Carolina; Double Eagle Refinery, Oklahoma
City, Oklahoma; Wastex Research, East St. Louis, Illinois; North
Hollywood Dump, Memphis, Tennessee; Commercial Oil, Oregon, Ohio;
Berliner & Ferro, Swartz Creek, Michigan; Schnitzer Iron & Metal, St.
Paul, Minnesota; Four County Landfill, Culver, Indiana; Schumann Site,
South Bend, Indiana; Great Lakes Asphalt, Zionsville, Indiana; Third
Site, Zionsville, Indiana; Auto-Ion, Kalamazoo, Michigan; PCB
Treatment Inc., Kansas City, Kansas; ENRx, Buffalo, New York;
Uniontown Landfill, Uniontown, Indiana; Sand Springs, Oklahoma; United
Steel Drum, East St. Louis, Illinois; Putnam County Landfill,
Cookeville, Tennessee; Enterprise Oil, Detroit, Michigan; and Wayne
Reclamation & Recycling, Ft. Wayne, Indiana. The Company presently is
contesting its status as a PRP at several of these sites. At some of
these sites, the Company will be released from liability at the site
as a de minimis PRP for a nominal amount.
While the Company is unable at this time to determine the aggregate
cost of remediation at these sites, it has attempted to analyze its
proportionate and actual liability by analyzing the amounts of waste
contributed to the sites by the Company, the estimated costs for total
remediation at the sites, the number ofand identities of other PRPs and
the level of insurance coverage. The results of that analysis are
described below.
The Company and its subsidiaries have entered into administrative
agreements at certain of these sites to perform remedial actions. At
the Old City Landfill, the Company and two other PRPs have entered
into a Consent Order with the Indiana Department of Environmental
Management to implement the Record of Decision issued by EPA in 1992.
The cost to implement the Consent Order is estimated to be
approximately $300,000, of which the Company will pay 50 percent.
At the Purity Oil Site, a subsidiary of the Company has been
identified as a PRP and is one of several PRPs who have been issued an
order by EPA to undertake remedial action at the site. The Company's
subsidiary has contributed $282,000 toward the first phase of the
remedial action at the site. Through the Alternative Dispute
Resolution process conducted in 1996, the Company's subsidiary has
agreed to fund in the range from $225,000 to $275,000 of the total
estimated $12 million for a final remediation at this site. The
Company has reserved these funds.
Onan Corporation, a subsidiary of the Company, has entered into an
administrative agreement to participate in remediation of the Waste
Disposal Engineering Landfill. The cost of remediation at this site
is estimated to range from $10 million to $15 million, of which Onan
expects to contribute approximately $600,000, which has been reserved
fully. Construction of the major remedies at the site have been
completed, leaving only treatment and periodic sampling to be
accomplished. Onan also has entered into an administrative agreement
for the Oak Grove Landfill. The estimated cost to remediate this site
is approximately $6 million. Onan has contributed $127,000 to cover
its share of the costs of remediation. Construction is complete at
this site, and only treatment and periodic sampling remain. Onan has
filed litigation against its insurer at Oak Grove and Waste Disposal
in order to enforce its contract of insurance for both the remedial
costs and all related defense costs at those sites. This litigation
is in its early stages. In addition, the Steering Committees for both
sites have submitted each site for reimbursement under the Minnesota
Landfill Cleanup Program, a legislative initiative that would
reimburse parties for remediating hazardous waste landfills. To date,
Onan has been reimbursed in excess of $150,000 for both sites and
anticipates further recoveries. With respect to other sites at which
the Company or its subsidiaries have been named as PRPs, the Company
cannot accurately estimate the future remediation costs. At several
sites, the remedial action to be implemented has not been determined
for the site. In other cases, the Company or its subsidiary has only
recently been named as a PRP and is collecting information on the
site. Finally, in some cases, the Company believes it has no
liability at the site and is actively contesting designation as a PRP.
Based upon the Company's prior experiences at similar sites,
however, the aggregate future cost to all PRPs to remediate these
sites is not likely to be significant. In each of these cases,
the Company believes that it has good defenses at several of the
sites, that its percentage contribution at other sites is likely
to be de minimis or that other PRPs will bear most of the future
remediation costs. However, the environmental laws impose joint
and several liability and, consequently, the Company's ultimate
responsibility may be based upon many factors outside the
Company's control and could be material in the event that the
Company becomes obligated to pay a significant portion of these
expenses. Based upon information presently available, the
Company believes that such an outcome is unlikely and that its
actual and proportionate costs of participating in the
remediation of these sites will not be material.
In 1996, the Company and all of its subsidiaries completed appropriate
permit applications for the new Title V Air Permitting requirements
under the Clean Air Act of 1990. While the review of the applications
by respective state and Federal agencies will take some months, the
Company believes that appropriate permits will be issued. Additionally,
the Company has not been required to undertake any significant capital
or expense projects in order to meet the Title V requirements.
ITEM 2. PROPERTIES
_______ __________
Cummins' worldwide manufacturing facilities occupy approximately 1615
million square feet, including approximately 76 million square feet
outside the United States. Principal manufacturing facilities in the
United States include the Company's plants in Southern Indiana;
Jamestown, New York; Lake Mills, Iowa; Cookeville, Tennessee; and
Fridley, Minnesota, as well as an engine plant in Rocky Mount, North
Carolina, which is operated in partnership with Case Corporation.
Countries of manufacture outside of the United States include England,
Brazil, Mexico, France and Australia. In addition, engines and engine
components are manufactured by joint ventures or independent licensees
at plants in England, France, China, India, Japan, Pakistan, South
Korea, Turkey and Indonesia.
Cummins believes that all of its plants have been maintained
adequately, are in good operating condition and are suitable for its
current needs through productive utilization of the facilities.
ITEM 3. LEGAL PROCEEDINGS
_______ _________________
The information appearing in Note 13 to the Consolidated Financial
Statements is incorporated herein by reference. The material in Item
1 "Other Environmental Statutes and Regulations" also is incorporated
herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
_______ _________________________________________________
None.
PART II
_______
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
_______ _____________________________________________________
The Company's common stock is listed on the New York Stock Exchange
and the Pacific Stock Exchange under the symbol "CUM". The following
table sets forth, for the calendar quarters shown, the range of high
and low composite prices of the common stock and the cash dividends
declared on the common stock.
High Low Dividends Declared
______ _______ __________________
1997
____
First quarter $55 5/8 $44 1/4 $.25
Second quarter 72 3/4 47 3/4 .275
Third quarter 83 67 7/8 .275
Fourth quarter 82 1/2 55 5/16 .275
1996
____
First quarter $42 7/8 $34 1/2 $.25
Second quarter 47 3/4 40 1/4 .25
Third quarter 41 7/8 36 7/8 .25
Fourth quarter 47 3/4 39 .25
1995
____
First quarter $46 7/8 $41 1/2 $.25
Second quarter 48 5/8 42 1/4 .25
Third quarter 47 1/4 36 5/8 .25
Fourth quarter 39 3/4 34 .25
At December 31, 1996,1997, the approximate number of holders of record of
the Company's common stock was 4,800.4,700.
The Board of Directors in 1994 authorized repurchase by the Company of
up to 2.5has repurchased 3.9 million shares of its common stock.stock
since 1994. In 1996,1997, the Company completed this program withrepurchased 1.3 million shares from
Ford Motor Company and another .3 million shares on the repurchaseopen market at
an aggregate purchase price of $75 million. The Company repurchased
.8 million shares of stock in the open market at an aggregate purchase
price of $34 million or average price of $41.35 per share. The Company
repurchasedin 1996 and 1.6 million shares at an aggregate
purchase price of $69 million or average price of $43.57 per share, in 1995 and .1 million
shares at an aggregate purchase price of $5 million, or average price
of $42.47 per share, in 1994.1995. All of the acquired shares are
held as common stock in treasury.
In January 1997, the Company announced that it will issueissued 3.75 million shares of its common stock to
an employee benefits trust to fund obligations of employee benefit and
compensation plans, principally retirement savings plans. Shares of
the common stock held by this trust will not be used in the
calculation of the Company's earnings per share until distributed from
the trust and allocated to a benefit plan.
The Company also announced in January 1997 repurchase of 1.3
million shares of its common stock from Ford Motor Company and that
the Board of Directors has authorized the repurchase of an additional
1.7 million shares in the open market.
Certain of the Company's loan indentures and agreements contain
provisions which permit the holders to require the Company to
repurchase the obligations upon a change of control of the Company, as
defined in the applicable debt instruments.
As more fully described in Note 10 to the Consolidated Financial
Statements, which information is incorporated herein by reference, theThe Company has a Shareholders' Rights Plan.Plan which it first adopted in
1986. The Rights Plan provides that each share of the Company's
common stock has associated with it a stock purchase right. The
Rights Plan becomes operative when a person or entity acquires 15
percent of the Company's common stock or commences a tender offer to
purchase 20 percent or more of the Company's common stock without the
approval of the Board of Directors. In the event a person or entity
acquires 15 percent of the Company's common stock, each right, except
for the acquiring person's rights, can be exercised to purchase $400
worth of common stock for $200. In addition, for a period of 10 days
after such acquisition, the Board of Directors can exchange such right
for a new right which permits the holders to purchase one share of the
Company's common stock for $1 per share. If a person or entity
commences a tender offer to purchase 20 percent or more of the
Company's common stock, unless the Board of Directors redeems the
rights within 10 days of the event, each right can be exercised to
purchase one share for $200. The plan also allows holders of the
rights to purchase shares of the acquiring person's stock at a
discount if the Company is acquired or 50 percent of the assets or
earnings power of the Company is transferred to an acquiring person.
The Company's bylaws provide that Cummins is not subject to the
provisions of the Indiana Control Share Act. However, Cummins is
governed by certain other laws of the State of Indiana applicable to
transactions involving a potential change of control of the Company.
ITEM 6. SELECTED FINANCIAL DATA
_______ _______________________
$ Millions, Exceptexcept
per Share Amountsshare amounts 1997 1996 1995 1994 1993 1992
_____________________ ______ ______ ______ ______ ______
Net sales $5,625 $5,257 $5,245 $4,737 $4,248
$3,749
Net earnings (loss)212 160 224 253 177
(190)
Earnings (loss) per share:
Primary 4.01 5.52 6.11 4.79 (6.01)
Fully dilutedBasic 5.55 4.02 5.53 6.14 4.85
Diluted 5.48 4.01 5.52 6.11 4.63
(6.01)
Cash dividends per share 1.075 1.00 1.00 .625 .20
.10
Total assets 3,765 3,369 3,056 2,706 2,390 2,2302,391
Long-term debt 522 283 117 155 190
412Earnings per share for 1993-1996 have been restated to reflect the
adoption of SFAS No. 128 as disclosed in Note 1 to the Consolidated
Financial Statements.
In 1995, the Company's results included restructuring charges of $118
million ($77 million after taxes) to reduce the worldwide work force
and to close or restructure selected operations in Europe, Brazil and
North America. Net earnings in 1995 also included release of the tax
valuation allowance of $68 million.
In 1993, the Company sold 2.6 million shares of its common stock in a
public offering and used a portion of the proceeds to redeem $77
million in principal amount of the Company's outstanding 9 3/4 percent
sinking fund debentures. This early extinguishment of debt resulted
in an extraordinary charge of $6 million.
In 1992, the Company's results included a charge of $251 million for
the cumulative effect of changes in accounting as prescribed by SFAS
Nos. 106, 109 and 112 related to accounting for retirees' health care
and life insurance benefits, income taxes and postemployment benefits.
In 1992, the Company sold 4.6 million shares of its common stock in a
public offering and used a portion of the proceeds to extinguish $71
million of debt of Consolidated Diesel Company, an unconsolidated, 50-
percent owned partnership, $8 million of the Company's 8 7/8 percent
sinking fund debentures and $11 million of a 15-percent note payable
to an insurance company. These early extinguishments of debt resulted
in an extraordinary charge of $6 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
_______ _____________________________________________________________
OVERVIEW
________
Profit before interest and taxes was a record $312 million in 1997, 34
percent higher than in 1996 on a 7 percent increase in sales. This
was accomplished while the Company was in the midst of start-up
activities of its new products and joint ventures and completing
restructuring actions.
Net earnings were $212 million in 1997, $160 million in 1996 and $224
million in 1995.
RESULTS OF OPERATIONS
_____________________
Net Sales:
__________
In 1996,1997, the Company had revenues of $5.6 billion, the sixth
consecutive year of record sales. Revenues from sales of $5.3 billion, $12 million
higher than 1995engines were
56 percent of the Company's net sales in 1997, with engine revenues
and unit shipments 10 percent and 11 percent higher, respectively,
than 1994. This record
performance was achieved despite a 27-percent reduction in engine
shipments to the North American heavy-duty truck market as a result of
the slowdown in that market.1996. The Company shipped 332,300a record 369,800 engines in 1996,1997,
compared to 332,300 in 1996 and 338,900 in 1995 and 304,300 in 1994 as follows:
Engine ShipmentsUnit shipments 1997 1996 1995 1994
________________ _______ _______ _______
Midrange engines 264,300 237,400 222,100
195,600
Heavy-duty engines 94,900 85,000 107,300
99,900
High-horsepower engines 10,600 9,900 9,500 8,800
_______ _______ _______
Total engine shipments369,800 332,300 338,900 304,300
_______ _______ _______
Net earningsRevenues from non-engine products, which were $160 million, or $4.01 per share,44 percent of net sales
in 1997, were 3 percent higher than in 1996. Net
earnings were $224 million, or $5.52 per share,The increase in 19951997 was
due primarily to filtration products and $253
million, or $6.11 per share,PowerCare (which includes new
parts and remanufactured engines and parts) in 1994.
RESULTS OF OPERATIONS
_____________________
The percentage relationship between net salesNorth American and
other elementsEuropean markets. Sales of the Company's Consolidated Statement of Earnings for each ofremaining non-engine products, in the
last
three years was:
Percent of Net Sales 1996 1995 1994
____________________ _____ _____ _____
Net sales 100.0 100.0 100.0
Cost of goods sold 77.5 75.8 75.0
_____ _____ _____
Gross profit 22.5 24.2 25.0
Selling & administrative expenses 13.8 13.2 13.5
Research & engineering expenses 4.8 5.0 5.0
Net expense (income) of joint ventures
and alliances - - (.1)
Interest expense .3 .2 .4
Other (income) expense, net (.5) .2 -
Restructuring charges - 2.2 -
___ ___ ___
Earnings before income taxes 4.1 3.4 6.2
Provision (credit) for income taxes 1.1 (.9) .9
___ ___ ___
Net earnings 3.0 4.3 5.3
___ ___ ___
Sales by Market
_______________aggregate, were essentially level with 1996.
The Company's sales for each of its key markets during the last three
years were:
$ Millions 1997 1996 1995
1994
________________ ________________ ________________
$ Millions Dollars Percent Dollars Percent Dollars Percent
__________ _______ _______ _______ _______ _______ _______
Automotive:
Heavy-duty truck 1,261 24 1,550 30 1,483 31
Midrange truck 587 11 607 11 500 11
Bus and light
commercial vehicles 599 12 532 10 469 10______ ______ ______
Automotive $2,622 $2,447 $2,689
Power generationGeneration 1,205 1,213 23 1,092
21 980 21
Industrial 1,044 863 16 776 15 686 14
Filtration and otherOther 754 734 14 688
13 619 13
_____ ___ _____ ___ _____ ___
Net sales 5,257 100 5,245 100 4,737 100
_____ ___ _____ ___ _____ ___
Automotive
__________
Sales to the heavy-duty truck market were almost 20 percent lower than
in 1995 and 15 percent lower than 1994. The lower level of sales in
1996 was due to a decline in demand for the North American heavy-duty
truck market. In 1996, factory retail sales of heavy-duty trucks in
North America were 23 percent lower than the previous year's level.
This lower market size resulted in the Company's lower level of engine
shipments in North America. Cummins continued to lead this market,
however, with a market share of 35 percent in 1996. The Company's
market share was 35 percent in 1995 and 34 percent in 1994. In the
fourth quarter of 1996, the North American market was stronger,
indicating it may be reaching the bottom of the current down cycle.
International engine shipments for heavy-duty trucks were 14 percent
lower than in 1995 and 49 percent below 1994. The decline in engine
shipments in 1996 was due primarily to lower demand in European
markets. However, in the fourth quarter, certain international
markets showed signs of improvement, particularly in Mexico.______ ______ ______
$5,625 $5,257 $5,245
______ ______ ______
Sales of engines$2.6 billion in 1997 for the midrange truck market in 1996 were 3 percent
lower than 1995 and 17 percent higher than in 1994. Overall, there
was a decrease in demand for medium-duty trucks in North America
during 1996, which caused a 3-percent decline in the Company's engine
shipments in North America. Midrange engines for internationalautomotive markets were 7 percent
higher than in 1996 and 2 percent lower than in 1995, when North
American heavy-duty truck production was at record levels. In 1997,
heavy-duty truck engine revenues and 16unit shipments were both 11
percent higher than 1994, primarily in Brazil1996, with unit shipments up 6 percent over
1996 for the North American market, where Cummins continued to be the
market leader with a 32-percent market share. The Company announced
in 1997 a new electronic engine (the Signature 600) for this market,
with initial shipments scheduled in 1998. International unit
shipments for the heavy-duty market in 1997 were 55 percent higher
than in 1996 due to the recovery in European automotive markets and
strong demand in Mexico.
InRevenues from the sales of engines for medium-duty trucks in 1997 were
essentially level with the prior year, with sales in international
markets (Brazil, Europe and Mexico) offsetting a lower level of unit
shipments in North America. For the bus and light commercial vehiclesvehicle
market, salesengine revenues in 1997 were 1315 percent higher than 1995 and 28 percent higher than 1994.in 1996,
on a 13-percent increase in unit shipments. The increase in 19961997 was
due to both record demandunit shipments to Chrysler for the Company's midrange engines in the Dodge Ram
pickup, which were 8 percent higher than in 1996 and 22 percent higher
than in 1995, and strong demand in bus markets. In early 1998, the
Company and Chrysler jointly announced production of a new fully
electronic engine for the new Dodge Ram pickup. In November 1997, the
Company introduced the new ISC engine for the premium end of the
medium-duty truck, which was 13bus and recreational vehicle markets.
Revenues of $1.2 billion in 1997 for power generation, while level
with 1996, were 10 percent abovehigher than in 1995.
Power Generation
________________ Sales of the
Company's generator sets continued to reflect growth in Latin American
and most Asian markets during 1997. In addition, sales of alternators
were 4 percent higher than the prior year, despite the effects of the
strong UK pound. Demand for small generator sets that provide
electrical power generationfor recreational vehicles also continued to be strong
in North America where the Company enjoys over an 80-percent market
share. However, 1997 sales were lower than in prior years due to the
Company's exiting the gas engine business in 1996.
In 1997, sales for industrial markets were 21 percent higher than in
1996 and 35 percent higher than in 1995, exceeding $1 billion for the
first time. Sales for construction markets in 1997 were 23 percent
higher than in 1996 with increases in North America and new business
in Europe. Sales for agricultural markets were 45 percent higher than
the prior year, with the increase due to strong markets and sales in
Uzbekistan. Sales for the marine market in 1997 were 9 percent higher
than in 1996 and 39 percent higher than in 1995. The Company's sales
to the mining market also were 9 percent higher than the prior year.
Sales of $754 million in 1997 for filtration and other markets were 3
percent higher than in 1996 and 10 percent higher than in 1995.
Fleetguard continued to enjoy a 9 percent sales growth in 1997. In
January 1998, the Company completed the acquisition of Nelson
Industries, Inc., a manufacturer of filtration and exhaust system
products, which will significantly expand the Company's product line.
Net sales by marketing territory for each of the last three years
were:
$ Millions 1997 1996 1995
__________ ______ ______ ______
United States $3,123 $2,925 $3,018
Asia/Australia 898 868 723
Europe/CIS 796 759 783
Mexico/Latin America 364 260 233
Canada 318 313 384
South Africa/Middle East 126 132 104
______ ______ ______
$5,625 $5,257 $5,245
______ ______ ______
Europe and the CIS, which represented 2314 percent of the Company's
net
sales in 1996. Record sales of $1.2 billion in 19961997, were $121 million
higher, a 11-percent increase compared to 1995, and $233 million, or
235 percent higher than 1994. Thein 1996 as a result of
recovery in automotive markets and increased industrial business.
Business in Mexico and Latin America also was strong in 1997, a 40
percent increase over 1996. In Australia, the Company's sales are
primarily for automotive, power generation and mining markets, and, in
1997, were essentially level with 1996. Asian countries, in total,
represented 12 percent of the Company's sales in 1997 and 1996 and 10
percent in 1995. In Indonesia, Malaysia, Thailand and Korea, the
Company's business is primarily power generation, industrial and
parts. Business in this area in the fourth quarter of 1997 was 9
percent below the third quarter, although, for the year, it exceeded
the 1996 level. Despite the slowdown due to a 20-percent increaseeconomic turmoil in international markets, reflecting strong
demandthese
countries, the Company has experienced no material changes to date in
China, India and Southeastother parts of Asia. Industrial
__________
Record sales of $863 million to industrial markets were 11 percent
higher than 1995 and 26 percent higher than 1994. The increase in
sales in 1996 was primarily due to strong demand for construction
applications in both North American and international markets. In
addition, there was strong demand forWith the awareness that the Company's engines in marine
applications worldwide in 1996, almost 30 percent above 1995 and 55
percent higher than 1994.
Filtration and Other
____________________
Salesbusiness
can change rapidly, it is difficult to forecast the future effect of
$734 million in 1996 for filtration and other products were 7
percent higher than 1995 and 19 percent higher than 1994. The
increase in sales during 1996 was due primarily to strong demand in
international markets.this region's uncertainties.
Gross Profit
____________Margin:
_____________
The Company's gross profitmargin percentage was 22.8 percent of sales in
1997, compared to 22.5 percent in 1996 and 24.2 percent in 1995. The
Company's gross margin percentage benefited from volume and mix in
1997 ($116 million, or 32-percent leverage). In addition, net
benefits from the Company's restructuring actions served to mitigate
higher costs associated with new product introductions. Product
coverage costs were 2.6 percent of net sales in 1996,1997, compared to 24.22.7
percent in 19951996 and 25.02.4 percent in 1994.
The Company's gross profit was affected by several factors in 1996,
the most significant of which was the decline in heavy-duty engine
production that resulted in lower fixed cost absorption. Gross profit
also was affected by the softer market for midrange truck engines,
higher sales of lower margin power generation products,1995.
Operating Expenses:
___________________
Selling and costs
associated with the restructuring actions and new product
introductions. While restructuring activities are proceeding, as
reflected by gains on disposals of certain operations in "other
income",administrative expenses associated with implementation of certain of these
actions adversely affected gross profit. As disclosed in Note 13 to
the Consolidated Financial Statements, the Company has entered into
commodity swap contracts that have the effect of fixing the cost of
certain material purchases.
The cost of product coverage programs was 2.7were 13.2 percent of net sales in
1996,1997, compared to 2.413.8 percent in 1996 and 13.2 percent in 1995. On
the 7-percent sales increase in 1997, these expenses, which include
volume-variable components, were up less than 3 percent in absolute
dollars. Net benefits of the Company's restructuring actions offset
increases in costs associated with new product launches and
information systems during 1997.
The Company has undertaken a program to prepare its computer systems
and applications for the year 2000. This will be accomplished with
the use of existing information technology resources and external
consulting services. The Company expects to incur expenditures of
approximately $43 million to remedy this problem. In 1997, $3 million
was expensed, and the Company estimates an expense of $18 million in
1998.
Research and engineering expenses were 4.6 percent of net sales in
1995 and 2.31997, compared to 4.8 percent of
net sales in 1994.
Operating Expenses
__________________
Selling and administrative expenses were $725 million (13.8 percent of
net sales) in 1996 comparedand 5.0 percent in 1995. This
is a result of certain product developments moving to $692the production
stage and expense controls.
Income from joint ventures and alliances was $10 million (13.2 percentin 1997. The
increase in income over prior years was due to earnings and royalties
from Kirloskar Cummins and the joint ventures with Komatsu. In the
fourth quarter of net
sales) in 1995 and $641 million (13.5 percent1997, the Company began consolidating the results of
net sales) in 1994.
In 1996, expenditures associated with the restructuring actions,
marketing programs and new product launches offset the decrease in
salaries and wagesKirloskar Cummins, which was renamed Cummins India Limited, as a
result of headcount reductions.
Research and engineering expenses of $252 million in 1996 were 4.8
percent of net sales, comparedincreasing Cummins' ownership interest to $263 million in 1995 and $238
million in 1994, both of which were 5.0 percent of net sales.
In 1996, the Company's share of start-up losses of its joint venture
with Wartsila were offset by earnings from Kirloskar Cummins, due to
strong demand in its markets.
Other Income and Expense
________________________51 percent.
Other:
______
Interest expense of $18$26 million was $5$8 million higher than in 1996 and
$13 million higher than in 1995 due to the higherincreased level of
borrowings.borrowings in 1997 to support higher capital expenditures, working
capital and share repurchases.
In 1996, other income of $24 million
was due to interest income and gains on1995, the disposal of certain
operations and businesses associated with the restructuring actions.
Restructuring Charges
_____________________
As disclosed in Note 2 to the Consolidated Financial Statements,Company's results of operations in 1995 included restructuring charges of $118
million ($77 million after taxes) for costs to consolidate operations and reduce theits worldwide
work force. Approximately 2,300During 1997, restructuring actions included the sale of
the Company's vibration attenuation business, continued workforce
reductions and the culmination of certain plant closings. The
earnings statement effect of this activity was not material. To date,
approximately 3,300 employees have separated from the Company as a
result of thethese restructuring actions.
Provision for Income Taxes
__________________________Taxes:
___________________________
The Company's income tax provision in 19961997 was $54$74 million, an
effective tax rate of 2526 percent, reflecting tax breaks on export
sales and $6 million for reinstatement ofbenefits from the research tax credit incredit. In 1996, the
second half of 1996. Tax provisions ofCompany's effective tax rate was 25 percent. In 1995, the Small Business Job
Protection Act that was signed into law in August 1996 included
reinstatement of this credit for an 11-month period, beginning July 1,
1996.
The Company
reduced its valuation allowance for tax benefit carryforwards $68
million in 1995 and $32 million in 1994.million. The tax provision for 1995 also included a credit of $35
million for additional tax benefits related to the amendment of prior
years' returns.
CASH FLOW AND FINANCIAL CONDITION
_________________________________
Key elements of the Consolidated Statement of Cash Flowscash flows were:
$ Millions 1997 1996 1995 1994
__________ ____ ____ ____
Net cash provided byfrom operating & investing activities $193 $406 $376$(154) $(66) $ 33
Net cash used in investing activities (259) (373) (261)
Net cash (used in) provided by operating _____ _____ _____
and investing activities ( 66) 33 115
Net cash provided from (used for) financing activities 96 110 (121) ( 50)
Effect of exchange rate changes on cash ( 1) 4 1
5
____ ____ _________ ___ _____
Net change in cash & cash equivalents$( 59) $ 48 $(87) $ 70$( 87)
______ ____ ____ __________
During 1996,1997, net cash used infor operating and investing activities was
$66$154 million. The lowerhigher level of net cash provided by operating
activitiesrequirements in 1997 was
due primarily to net cash requirements for the restructuring
activities, including increased inventories at certain locations, and
an increaseplanned capital expenditures ($405 million in accounts receivable. In the second quarter of 1996, an
agreement for the sale of up1997,
compared to $110 million of accounts receivable
was not renewed by the Company, which resulted in the increase in
receivables. Capital expenditures during 1996 were $304 million compared toin 1996 and $223 million in 19951995) for
investments in new products and $238 million in 1994. The
increased level of expenditures in 1996 was related to continued
investments for new products.working capital. The Company
expects a significant
increasedecrease in thesecapital expenditures during 1998 as new engines
move into production. Net working capital, excluding the
consolidation of Cummins India Limited's working capital of $46
million, was 10.8 percent of sales, compared to 10.1 percent in 1997, some of which may be funded
externally.1996.
Investments in joint ventures and alliances of $5$47 million reflected
the net effect of repayment of temporary advances to Consolidated
Diesel at the end of 1995 and capital contributions, of $50 million
during 1996, primarily to the Company's joint
venture with Wartsila.
The Company expects to continue to make investments inWartsila, and cash generated by certain of its
joint ventures during 1997.ventures.
Net cash provided from financing activities was $110$96 million in 1996.1997.
As disclosed in Note 5, to the Consolidated Financial Statements, the
Company issued commercial paper in 1996 to replace a financing
arrangement whereby receivables were previously sold without recourse.
A subsidiary of the Company also issued notes in 1996, which resulted
in net proceeds of $100 million. In February 1997, the Company issued $120 million in debentures
under itsa shelf registration statement.statement in 1997 and filed a registration
statement with the Securities and Exchange Commission in December 1997
for $1 billion. Notes and debentures to be issued initially under
this registration statement will be used to repay interim financing
obtained in early 1998 for the acquisition of Nelson Industries, Inc.,
and to pay down other indebtedness outstanding at December 31, 1997.
As disclosed in Note 9, to the Consolidated Financial Statements, the Company completed a program begun in 1994 to repurchase 2.5 million
shares of its common stock. In January 1997, the Companyhas repurchased 1.33.9 million shares
of its common stock from Ford Motor Company and was
authorized by the Board of Directors to repurchase an additional 1.7
million shares in the open market.since 1994. In January 1997, the Company also announced that it will issueissued 3.75
million shares of its common stock to an employee benefitsbenefit trust.
Shares held by this trust are not used in the calculation of earnings
per share until distributed from the trust and allocated to a benefit
plan.
In April 1997, the Company announced a 10 percent increase in its
quarterly stock dividend from 25 cents per share to 27.5 cents. The
increase was effective with the dividend payment in June 1997.
As more fully disclosed in Note 13, diesel engine manufacturers,
including Cummins, are involved in discussions with the Environmental
Protection Agency, the U. S. Department of Justice and the California
Air Resources Board regarding diesel engine emissions.
Forward-looking Statements
__________________________
This Management's Discussion and Analysis of Results of Operations and
Financial Condition and other sections of this Form 10-K contain
forward-looking statements that are based on current expectations,
estimates and projections about the industries in which Cummins
operates, management's beliefs and assumptions made by management.
Words, such as "expects", "anticipates", "intends", "plans",
"believes", "seeks", "estimates", variations of such words and similar
expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions ("Future Factors") which
are difficult to predict. Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in such forward-
looking statements. Cummins undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
Future Factors include increasing price and product competition by
foreign and domestic competitors, including new entrants; rapid
technological developments and changes; the ability to continue to
introduce competitive new products on a timely, cost-effective basis;
the mix of products; the achievement of lower costs and expenses;
domestic and foreign governmental and public policy changes, including
environmental regulations; protection and validity of patent and other
intellectual property rights; reliance on large customers;
technological, implementation and cost/financial risks in increasing
use of large, multi-year contracts; the cyclical nature of Cummins'
business; the outcome of pending and future litigation and
governmental proceedingsproceedings; and continued availability of financing,
financial instruments and financial resources in the amounts, at the
times and on the terms required to support Cummins' future business.
These are representative of the Future Factors that could affect the
outcome of the forward-looking statements. In addition, such
statements could be affected by general industry and market conditions
and growth rates, general domestic and international economic
conditions, including interest rate and currency exchange rate
fluctuations, and other Future Factors.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
_______ __________________________________________
See Index to Financial Statements on page 28.20.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
_______ ____________________________________________________
None.
PART III
________
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
________ __________________________________________________
The information appearing under the caption "Election of Directors" of
the Company's definitive Proxy Statement for the Annual Meeting of the
Shareholders to be held on April 1, 19977, 1998 ("the Proxy Statement") is
incorporated by reference in partial answer to this item. Except as
otherwise specifically incorporated by reference, the Proxy Statement
is not to be deemed filed as part of this report.
The executive officers of the Company at December 31, 19961997 are set
forth below. The Chairman of the Board and President are elected
annually by the Board of Directors at the Board's first meeting
following the Annual Meeting of the Shareholders. Other officers are
appointed by the Chairman and ratified by the Board of Directors and
hold office for such period as the Board of Directors or Chairman of
the Board may prescribe.
Present Position and Business Experience
Name Age During Last 5 Years
_______________ ___ __________________________________________________
Mark E. Chesnut 49_________________________________________________
Jean S. Blackwell 43 Vice President - Corporate Responsibility & Public
Affairs (1995Human Resources (1997 to
present), Vice President - Quality
& Organizational Effectiveness (1992 to 1995)General Counsel (1997)
C. Roberto Cordaro 4647 Executive Vice President, Group President -
Automotive (1996 to present), Group Vice
President - Marketing (1990 to 1996)
John K. Edwards 5253 Executive Vice President, Group President - Power
Generation and International (1996 to present),
Vice President - International (1989 to 1996)
Mark R. Gerstle 4142 Vice President - Cummins Business Services and
Secretary (1998 to present), Vice President -
Law and Corporate Affairs and Secretary (1997 to
1998), Vice President - General Counsel and
Secretary (1995 to present)1997), Assistant General
Counsel (1991 to 1995)
James A. Henderson 6263 Chairman and Chief Executive Officer (1995 to
present), President & Chief Executive Officer
(1994 to 1995), President and Chief Operating
Officer (1977-1994)
M. David Jones 4950 Vice President - Filtration Group and President,
Fleetguard, Inc. (1996 to present), Vice
President - Aftermarket Group (1989 to 1996)
F. Joseph Loughrey 4748 Executive Vice President, Group President -
Industrial and Chief Technical Officer (1996 to
present), Group Vice President - Worldwide
Operations & Technology (1995 to 1996), Group
Vice President - Worldwide Operations (1990 to
1995)
John McLachlan 64Rick J. Mills 50 Vice President - Corporate Controller (1991(1996
to presentpresent), Vice President Pacific Rim and
Latin America - Fleetguard, Inc. (1993 to 1996),
President - Atlas, Inc. (1990-1993)
Kiran M. Patel 4849 Vice President and Chief Financial Officer
(1996 to present), President - Fleetguard, Inc.
(1993 to 1996), President - CUMBRASIL
(1990 to 1993)
Brenda S. Pitts 46 Vice President - Human Resources (1991 to present)
Theodore M. Solso 4950 President and Chief Operating Officer (1995 to
present), Executive Vice President and Chief
Operating Officer (1994 to 1995), Executive Vice
President - Operations (1992 to 1994)
ITEM 11. EXECUTIVE COMPENSATION
________ ______________________
The information appearing under the following captions in the
Company's Proxy Statement is hereby incorporated by reference: "The
Board of Directors and Its Committees", "Executive Compensation --
Compensation Tables and Other Information", "Executive Compensation --
Change of Control Arrangements" and "Executive Compensation --
Compensation Committee Interlocks and Insider Participation".
The Company has adopted various benefit and compensation plans
covering officers and other key employees under which certain benefits
become payable upon a change of control of the Company. Cummins also
has adopted an employee retention program covering approximately 600
employees of the Company and its subsidiaries, which provides for the
payment of severance benefits in the event of termination of
employment following a change of control of Cummins. The Company and
its subsidiaries also have severance programs for other exempt
employees of the Company whose employment is terminated following a
change of control of the Company. Certain of the pension plans
covering employees of the Company provide, upon a change of control of
Cummins, that excess plan assets become dedicated solely to fund
benefits for plan participants.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
________ ______________________________________________________________
A discussion of the security ownership of certain beneficial owners
and management appearing under the captions "Principal Security
Ownership", "Election of Directors" and "Executive Compensation --
Security Ownership of Management" in the Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
________ ______________________________________________
The information appearing under the captions "The Board of Directors
and Its Committees", "Executive Compensation - Compensation Committee
Interlocks and Insider Participation" and "Other Transactions and
Agreements with Directors, Officers and Certain Shareholders" in the
Proxy Statement is incorporated herein by reference.
PART IV
_______
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
________ _______________________________________________________________
Documents filed as a part of this report:
1. See Index to Financial Statements on page 2820 for a list of
the financial statements filed as a part of this report.
2. See Exhibit Index on page 5437 for a list of the exhibits filed
or incorporated herein as a part of this report.
No reports on Form 8-K were filed during the fourth quarter of 1996.1997.
INDEX TO FINANCIAL STATEMENTS
_____________________________
Page
____
Management's Responsibility for Financial Statements 2921
Report of the Independent Public Accountants 3021
Consolidated Statement of Earnings 3122
Consolidated Statement of Financial Position 3223
Consolidated Statement of Cash Flows 3424
Consolidated Statement of Shareholders' Investment 3625
Notes to Consolidated Financial Statements 3826
Quarterly Financial Data 5034
MANAGEMENT'S
RESPONSIBILITY FOR FINANCIAL STATEMENTS
___________________________________________________________________________________________
Management is responsible for the preparation of the Company's
consolidated financial statements and all related information
appearing in this Form 10-K. The statements and notes have been
prepared in conformity with generally accepted accounting principles
and include some amounts which are estimates based upon currently
available information and management's judgment of current conditions
and circumstances. The Company engaged Arthur Andersen LLP,
independent public accountants, to examine the consolidated financial
statements. Their report appears on the followingthis page.
To provide reasonable assurance that assets are safeguarded against
loss from unauthorized use or disposition and that accounting records
are reliable for preparing financial statements, management maintains
a system of accounting and controls, including an internal audit
program. The system of accounting and controls is improved and
modified in response to changes in business conditions and operations
and recommendations made by the independent public accountants and the
internal auditors.
The Board of Directors has an Audit Committee whose members are not
employees of the Company. The committee met four times in 1996meets periodically with
management, internal auditors and representatives of the Company's
independent public accountants to review the Company's program of
internal controls, audit plans and results, and the recommendations of
the internal and external auditors and management's responses to those
recommendations.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
________________________________________
To the Shareholders and Board of Directors of Cummins Engine Company,
Inc.:
We have audited the accompanying consolidated statement of financial
position of Cummins Engine Company, Inc., (an Indiana corporation) and
subsidiaries as of December 31, 19961997 and 1995,1996, and the related
consolidated statements of earnings, cash flows and shareholders'
investment for each of the three years in the period ended December
31, 1996.1997. These financial statements are the responsibility 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 with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Cummins
Engine Company, Inc., and subsidiaries as of December 31, 19961997 and
1995,1996, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996,1997, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois,
January 27, 1997.26, 1998.
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF EARNINGS
__________________________________
Millions, Exceptexcept per Share Amountsshare amounts 1997 1996 1995 1994
__________________________________ ______ ______ ______
Net sales $5,625 $5,257 $5,245 $4,737
Cost of goods sold 4,345 4,072 3,974 3,551
______ ______ ______
Gross profit 1,280 1,185 1,271 1,186
Selling & administrative expenses 744 725 692 641
Research & engineering expenses 260 252 263
238
Net(Income) expense (income) offrom joint
ventures and alliances (10) - 2
(4)
Interest expense 26 18 13 17
Other (income) expense, net (26) (24) 6 -
Restructuring charges - - 118 -
_____ _____ _____
Earnings before income taxes 286 214 177 294
Provision (credit) for income taxes 74 54 (47) 41
_____ _____ _____
Net earnings $ 212 $ 160 $ 224
$ 253
_____ _____ _____
EarningsBasic earnings per share $4.01 $5.52 $6.11$5.55 $4.02 $5.53
Diluted earnings per share 5.48 4.01 5.52
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
____________________________________________
Millions, Exceptexcept per Share Amountsshare amounts December 31,
__________________________________ 1997 1996 1995
______ ______
Assets
Current assets:
Cash and cash equivalents $ 49 $ 108
$ 60
Receivables 771 669
597
Inventories 677 587 513
Other current assets 213 189 218
_____ _____
1,710 1,553 1,388
_____ _____
Investments and other assets:
Investments in joint ventures and alliances 204 207 211
Other assets 142 119 115
_____ _____
326346 326
_____ _____
Property, plant and equipment:
Land and buildings 495 460 436
Machinery, equipment and fixtures 2,079 1,931 1,875
Construction in progress 392 270 164
_____ _____
2,966 2,661 2,475
Less accumulated depreciation 1,434 1,375 1,327
_____ _____
1,532 1,286 1,148
_____ _____
Intangibles, deferred taxes & deferred charges 177 204 194
______ ______
Total assets $3,765 $3,369 $3,056
______ ______
Liabilities and shareholders' investment
Current liabilities:
Loans payable $ 9390 $ 6093
Current maturities of long-term debt 42 39 42
Accounts payable 386 380 376
Accrued salaries and wages 87 84 85
Accrued product coverage & marketing expenses 120 126 152
Income taxes payable 18 16 30
Other accrued expenses 312 283 308
_____ _____
1,055 1,021 1,053
_____ _____
Long-term debt 522 283 117
_____ _____
Other liabilities 753 703713 747
_____ _____
Minority interest 53 6
_____ _____
Shareholders' investment:
Common stock, $2.50 par value, 48.1 and 43.9
shares issued 110120 110
Additional contributed capital 1,119 929 926
Retained earnings 713 535 406
Common stock in treasury,at cost,4.5cost,6.0 & 4.5 shares (245) (169)
Common stock held in trust for employee benefit
plans, 3.7 shares (169) (135)(175) -
Unearned compensation ( 46) (51)42) (46)
Cumulative translation adjustments ( 47) (73)68) (47)
_____ ___________
1,422 1,312 1,183
_____ _____
Total liabilities & shareholders' investment $3,765 $3,369 $3,056
______ ______
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
____________________________________
Millions 1997 1996 1995 1994
________ ______ ______ ______
Cash flows from operating activities:
Net earnings $ 212 $ 160 $ 224 $ 253
_____ _____ _____
Adjustments to reconcile net earnings
to net cash from operating activities:
Depreciation and amortization 158 149 143 128
Restructuring actions ( 24) ( 42) 114
-
Accounts receivableReceivables ( 80) ( 56) ( 91)
Inventories ( 37)
Inventories65) ( 62) 3 ( 46)
Accounts payable and accrued expenses ( 18) 28 99 69
Deferred income taxes 22 17 (100)
Other ( 7)
Other5) ( 1) 14 16
____ ____ ____
Total adjustments ( 12) 33 182 123
____ ____ ____
Net cash provided by operating activities200 193 406 376
____ ____ ____
Cash flows from investing activities:
Property, plant and equipment:
Additions (405) (304) (223)
(238)
Disposals 21 26 6 5
Investments in joint ventures and alliances ( 47) ( 5) (147)
Acquisitions and dispositions of business
activities 76 10 ( 9)1)
Other 241 14 ( 9) ( 19)8)
_____ _____ _____
Net cash used in investing activities(354) (259) (373) (261)
_____ _____ _____
Net cash (used in) provided by operating
and investing activities (154) ( 66) 33 115
_____ ____ ____
Cash flows from financing activities:
Proceeds from borrowings 281 200 2 -
Payments on borrowings ( 50) ( 47) ( 37)
( 34)
Net (payments) borrowings under credit
agreements ( 12) 32 19 17
Repurchases of common stock ( 75) ( 34) ( 69)
( 5)
Dividend payments ( 45) ( 40) ( 40)
Other ( 26)
Other3) ( 1) 4
( 2)
_____ _____ _____
Net cash provided from (used for)
financing activities96 110 (121)
( 50)
____ _________ _____
Effect of exchange rate changes on cash ( 1) 4 1
5_____ ____ _____ ____
Net change in cash and cash equivalents ( 59) 48 ( 87) 70
Cash & cash equivalents at beginning of year 108 60 147 77
____ ____ ____
Cash & cash equivalents at end of year $ 49 $108 $ 60 $147
____ ____ ____
Cash payments during the year for:
Interest $ 21 $ 16 $ 13
$ 19
Income taxes 42 40 59 43
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
__________________________________________________
Millions, Exceptexcept per Share Amountsshare amounts 1997 1996 1995 1994
__________________________________ ______ ______ ______
Convertible preference stock, no par value,
1.0 shares authorized:
Beginning balance (.2 shares)Common stock:
Balance at beginning of year $ -110 $ -110 $ 112
Converted109
Issued to common stock or redeemed
(.2 shares)trust for employee benefit plans 9 - -
(112)Other 1 - 1
_____ _____ ______
Ending balance_____
Balance at end of year 120 110 110
_____ _____ _____
Additional contributed capital:
Balance at beginning of year 929 926 927
Issued to trust for employee benefit plans 171 - -
Other 19 3 ( 1)
_____ _____ _____
Balance at end of year 1,119 929 926
_____ _____ _____
Retained earnings:
Balance at beginning of year 535 406 232
Net earnings 212 160 224
Cash dividends ( 45) (40) ( 40)
Additional minimum liability for pensions 12 9 ( 10)
Other ( 1) - -
_____ _____ _____
Balance at end of year 713 535 406
_____ _____ _____
Common stock in treasury:
Balance at beginning of year (169) (135) ( 72)
Repurchased ( 76) (34) ( 69)
Issued - - 6
______ ______ ______
Balance at end of year (245) (169) (135)
______ ______ ______
Common stock held in trust for employee
benefit plans:
Issued (180) - -
Shares allocated to benefit plans 5 - -
______ _____ _____
Balance at end of year (175) - -
Unearned compensation:
Balance at beginning of year ( 46) (51) ( 55)
Shares allocated to participants 4 5 4
______ ______ ______
Balance at end of year ( 42) (46) ( 51)
______ ______ ______
Cumulative translation adjustments:
Balance at beginning of year ( 47) (73) (69)
Adjustments ( 21) 26 ( 4)
______ ______ ______
Balance at end of year ( 68) (47) (73)
_____ _____ _____
Shareholders' investment $1,422 $1,312 $1,183
______ ______ ______
Shares of stock
Common stock, $2.50 par value, 150.0 shares
authorized:
Beginning balance (43.9,authorized
Balance at beginning of year 43.9 43.9 43.8
& 40.6 shares) 110 109 101
Conversion of preference stock & debt
(2.9 shares)Shares issued 4.2 - -
7
Other (.1 and .3 shares) - 1 1
_____ _____ _____
Ending balance (43.9, 43.9 & 43.8 shares) 110 110 109
_____ _____ _____
Additional contributed capital:
Beginning balance 926 927 823
Conversion of preference stock and debt - - 104
Other 3 (1) -
_____ ______ _____
Ending balance 929 926 927
_____ _____ _____
Retained earnings:
Beginning balance 406 232 4
Net earnings for the.1
____ ____ ____
Balance at end of year 160 224 253
Cash dividends declared ( 40) (40) ( 26)
Additional minimum liability for pensions 9 (10) 1
_____ _____ _____
Ending balance 535 406 232
_____ _____ _____48.1 43.9 43.9
____ ____ ____
Common stock in treasury:
Beginning balance (3.7,treasury
Balance at beginning of year 4.5 3.7 2.2
& 2.1 shares) (135) (72) ( 67)
StockShares repurchased (.8,1.5 .8 1.6
and .1 shares) ( 34) (69) ( 5)
StockShares issued (.1 shares) - 6 - ______ ______ ______
Ending balance (4.5,(.1)
____ ____ _____
Balance at end of year 6.0 4.5 3.7
& 2.2 shares) (169) (135) ( 72)
______ ______ ______
Unearned compensation:
Beginning balance ( 51) (55) ( 59)
Shares allocated to participants 5 4 4
______ ______ ______
Ending balance ( 46) (51) ( 55)
______ ______ ______
Cumulative translation adjustments:
Beginning balance ( 73) (69) (93)
Adjustments 26 ( 4) 24
______ ______ ______
Ending balance ( 47) (73) (69)
_____ _____ _____
Shareholders' investment $1,312 $1,183 $1,072
______ ______ __________ ____ ____
Common stock held in trust for employee
benefit plans 3.7 - -
____ ____ ____
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Unless Otherwise Stated)
________________________________________________________________________________________
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation: The consolidated financial statements
include the accounts of Cummins Engine Company, Inc., and its majority-
ownedall significant majority-owned subsidiaries. Affiliated
companies in which Cummins does not have a controlling interest, or
for which control is expected to be temporary, are accounted for using
the equity method. TheUse of estimates and assumptions as determined by
management is required in the preparation of consolidated financial
statements and notes have been prepared in conformity with generally accepted accounting
principlesprinciples. Actual results could differ from these estimates and
include some amounts
which are estimates based upon currently available information and
management's judgment of current conditions and circumstances.assumptions.
Revenue Recognition: The Company recognizes revenues on the sale of
its products, net of estimated costs of returns, allowances and sales
incentives, when the products are shipped to customers. Product Coverage Programs:The Company
generally sells its products on open account under credit terms
customary to the region of distribution. The Company performs ongoing
credit evaluations of its customers and generally does not require
collateral to secure its customers' receivables.
Foreign Currency: Assets and liabilities of foreign entities, where
the local currency is the functional currency, have been translated at
year-end exchange rates, and income and expenses have been translated
to US dollars at average-period rates. Adjustments resulting from
translation have been recorded in shareholders' investment and are
included in net earnings only upon sale or liquidation of the
underlying foreign investment.
For foreign entities where the US dollar is the functional currency,
including those operating in highly inflationary economies, inventory,
property, plant and equipment balances and related income statement
accounts have been translated using historical exchange rates. The
resulting gains and losses have been credited or charged to net
earnings.
Other Costs: Estimated costs of commitments for product coverage
programs are charged to earnings at the time the Company sells its
products.
Foreign Currency: The Company uses the local currency as the
functional currency for its manufacturing operations outside the
United States, except those in Brazil and Mexico for which it uses the
US dollar. At operations which use the local currency as the
functional currency, results are translated into US dollars using
average exchange rates for the year, while assets and liabilities are
translated into US dollars using year-end exchange rates. The
resulting translation adjustments are recorded as a separate component
of shareholders' investment; gains and losses from foreign currency
transactions are included in net earnings. At the Company's
operations in Brazil and Mexico, cash and certain other monetary
assets and liabilities (such as receivables and payables) and revenues
and expenses are translated into US dollars using current exchange
rates. Inventories and nonmonetary assets, such as fixed assets, are
translated into US dollars using historical exchange rates. The
resulting translation adjustments and gains and losses from foreign
currency transactions are reflected in net earnings.
Research & Development: Expenditures for researchdevelopment expenditures, net of contract reimbursements,
are expensed when incurred and development of
new products, as well as engineering expenditures during early
productionwere $250 million in 1997, $235 million
in 1996 and ongoing efforts to improve existing products,$230 million in 1995.
Maintenance and repair costs are charged to earnings as incurred,incurred.
Inventories: Inventories are generally stated at cost or net
of contract reimbursements.
Research and development costs approximated $235 in 1996, $230 in 1995
and $200 in 1994.
Cash Equivalents: Cash equivalents are investments that are readily
convertible to known amounts of cash and have original maturities of
three months or less.
Inventories: The Company accounts for approximately 25realizable value. Approximately 20 percent of itsdomestic inventories
(primarily heavy-duty and high-horsepower engines and engine parts)
are valued using the last-in, first-out (LIFO) cost method.
These
LIFO inventories include substantially all of the Company's US heavy-
duty and high-horsepower engine and engine parts inventories. All
other inventories are valuedInventories at the lower of first-in, first-out
(FIFO) cost or net realizable value. December 31 Inventorieswere as follows:
$ Millions 1997 1996
1995
_____________________ ____ ____
Finished products $351 $334
$283
Work-in-process &and raw materials 388 319 292
____ ____
Inventories at FIFO cost 739 653 575
Excess of FIFO over LIFO (62) (66) (62)
____ ____
Inventories$677 $587 $513
____ ____
Property, Plant and Equipment: The Company depreciates substantially
all engine production equipment using aA modified units-of-production method,
which is based upon units produced subject to a minimum level.
Depreciation oflevel, is used
to depreciate substantially all engine production equipment. The
straight-line depreciation method is used for all other equipment is computed using the straight-
line method for financial reporting purposes.equipment.
The estimated servicedepreciable lives to compute depreciation range from 20 to 40 years for
buildings and 3 to 20 years for machinery, equipment and fixtures.
Where
appropriate, the Company uses accelerated depreciation methods for tax
purposes. MaintenanceSoftware: Costs of internally-developed software are expensed as
incurred. External software costs (excluding research, reengineering
and repair coststraining) are charged to earnings as
incurred.capitalized and amortized over 5 years. Capitalized
software, net of amortization, was $32 million at December 31, 1997
and $19 million at December 31, 1996.
Earnings Per Share: PrimaryEffective January 1, 1997, Cummins adopted SFAS
No. 128, a new accounting rule on calculating earnings per share.
Under the new rule, basic earnings per share are computed by subtracting preference stock dividend requirements fromdividing
net earnings
and dividing that amount by the weighted-average number of common
shares outstanding during each year. Fullyfor
the period; diluted earnings per share are computed by dividing net
earnings by the weighted-average number of shares, outstanding, assuming the
exercise of stock optionsoptions. Shares of stock held by the employee
benefits trust are not included in outstanding shares for EPS until
distributed from the trust. Prior years have been restated to reflect
this new rule.
Weighted
Millions, except Net Average
per share amounts Earnings Shares Per share
_________________ ________ ________ _________
1997
____
Basic $212 38.2 $5.55
Options - .5 _____
____ ____
Diluted $212 38.7 $5.48
____ ____ _____
1996
____
Basic $160 39.8 $4.02
Options - .1 _____
____ ____
Diluted $160 39.9 $4.01
____ ____ _____
1995
____
Basic $224 40.6 $5.53
Options - .1 _____
____ ____
Diluted $224 40.7 $5.52
____ ____ _____
NOTE 2. SUBSEQUENT EVENT: In January 1998, Cummins completed the
acquisition of the stock of Nelson Industries, Inc., for $450 million.
Nelson, a filtration and exhaust systems manufacturer, will be
consolidated from the conversiondate of debt and preference stock to common stock.its acquisition. The purchase price in
excess of net assets will be amortized over 40 years.
NOTE 2.3. RESTRUCTURING CHARGES: Results of operations in 1995
included restructuring charges of $118 million ($77 million after
taxes) for costs to reduce the worldwide work force through a series
of actions, including voluntary and involuntary separations,
retirements and plant consolidations. Facility consolidations
included closing or restructuring selected operations in Europe,
Brazil and North America. The componentsIn 1997, restructuring actions included the
sale of the restructuring charges were:
Work forceCompany's vibration attenuation business, continued
workforce reductions ............$ 82
Asset write downs................. 32
Other 4
___
Total $118
____
Estimated costs for work force reductions were based on amounts
pursuant to benefit programs and contractual provisions or statutory
requirements at the affected operations. Approximately $53culmination of certain plant closings.
The earnings statement effect of this activity was not material. A
total of approximately $83 million has been charged to the liabilities
as of December 31, 1996.
NOTE 3. OPERATING LEASES: Certain of the Company's manufacturing
plants, warehouses and offices are leased facilities. The Company also
leases manufacturing and office equipment. Most of these leases require
fixed rental payments, expire over the next ten years and can be renewed
or replaced with similar leases. Rental expense under these leases
approximated $55 in each of the last three years. Future minimum
payments for leases with original terms of more than one year are $32 in
1997, $28 in 1998, $22 in 1999, $18 in 2000, $15 in 2001 and $59
thereafter.1997.
NOTE 4. INVESTMENTS IN JOINT VENTURES AND ALLIANCES: Investments in
joint ventures and alliances at December 31 were as follows:
$ Millions 1997 1996
1995__________ ____ ____
Cummins Wartsila $ 5988 $ 3159
Consolidated Diesel 32 38 96
Kirloskar Cummins - 36 27
Chongqing Cummins 16 1516
Tata Cummins 1316 13
Behr America, Inc. 14 12
12
Cummins Komatsu 9 3
Other 24 1438 33
____ ____
Carrying value$204 $207 $211
____ ____
Summary financial information for these 50-percent or less ownedIn the fourth quarter of 1997, the Company increased its ownership
interest in Kirloskar Cummins to 51 percent and began consolidating
the subsidiary, which was renamed Cummins India Limited.
Net sales of the joint ventures and alliances:
Earnings Dataalliances were $1.3 billion in
1997 and 1996 1995 1994
_____________ ______ ______ ______
Net sales $1,328 $1,091 $ 914
Earnings 2 6 15
Cummins' share - (2) 4and $1.1 billion in 1995. Summary balance sheet
information for the joint ventures and alliances was as follows:
December 31,
Balance Sheet Data$ Millions 1997 1996
1995
____________________________ ____ ____
Current assets $447 $458 $330
Noncurrent assets 533 478 340
Current liabilities (258) (305) (231)
Noncurrent liabilities (305) (248) ( 63)
____ ____
Net assets $417 $383 $376
____ ____
Cummins' share $204 $207 $211
____ ____
In connection with various joint venture agreements, the CompanyCummins is
required to purchase engine products from the joint ventures in amounts to
provide for the recovery of specified costs of the joint venture.ventures. Under
the agreement with Consolidated Diesel, CumminsCummins' purchases approximated $540 in 1996
and 1995, with future minimum purchases of $6were $538
million in 1997 and 1998, $9 in
1999, $10 in 2000 and 2001 and $85 thereafter. The Company's carrying
value of Consolidated Diesel at December 31, 1995 included temporary
financing of $50 that was repaid to Cummins$540 million in 1996.
NOTE 5. LONG-TERM DEBT: Long-term debt at December 31 Long-term Debtwas:
$ Millions 1997 1996
1995
________________________ ____ ____
Commercial paper $242 $ 90
6.75% notes, due 2027 120 -
8.2% notes, due 2003 $108 $ -
Commercial paper 90 -
10.35%-10.65% medium-term notes, through 1998 35 7396 108
Guaranteed notes of ESOP Trust, due 1998 65 67
6810.35%-10.65% medium-term notes, through 1998 14 35
Other 27 22 18
____ ____
Total indebtedness564 322
159
Less currentCurrent maturities 39 42(42) (39)
____ ____
Long-term debt $522 $283 $117
____ ____
Aggregate maturitiesMaturities of long-term debt for the five years subsequent to December
31, 19961997 are $39, $101, $19, $18$42 million, $25 million, $21 million, $21 million and
$20.$24 million. At both December 31, 19961997 and 1995,1996, the weighted-average
interest raterates on loans payable and current maturities of long-term
debt wasapproximated 7 percent.
In 1997, the Company issued $120 million of 6.75 percent debentures
that mature in 2027. Holders have a 1-time option in 2007 to redeem
the debentures and 8 percent,
respectively.Cummins has a recall right after ten years. The
Company filed a Shelf Registration Statement with the Securities and
Exchange Commission in 1997 in the amount of $1 billion to issue from
time to time debt securities, preferred stock, preference stock,
common stock or warrants at prices and on terms to be determined at
the time of sale. In the first quarter of 1998, the Company issued
$765 million face amount of notes and debentures under this
registration statement to finance the acquisition of Nelson and pay
down other indebtedness outstanding at December 31, 1997. In 1996, a
subsidiary of the Company issued 8.2 percent notes whichthat resulted in
net proceeds of $100.
The Company maintains a revolving credit agreement, under which$100 million.
At December 31, 1997, there were no outstanding borrowings at December 31, 1996 or 1995.under the
Company's $400 million revolving credit agreement. In 1996,January 1998,
the agreement was amended increasingforming two $500 million agreements maturing
in 1999 and 2003. These agreements support the available amount from $300
to $400 and extending the term to 2001. The revolving credit
agreement supportedCompany's commercial
paper borrowings at December 31, 1996.borrowings. The commercial paper initially was issued in 1996
as replacement financing for an arrangement whereby the Company sold
up to $110 million in receivables without recourse. The agreement for
the sale of receivables expired in the second quarter of 1996 and was
not renewed by the Company. The Company also maintainshas other domestic and
international credit lines with approximately $90$250 million available
at December 31, 1996.1997.
The Company has guaranteed the outstanding borrowings of its ESOP Trust.
The notes are due in July 1998 and the Trust intends to refinance the
notes with the Company continuing to guarantee the borrowings. Cash
contributions to the Trust, together with the dividends accumulated on
the common stock held by the Trust, are used to pay interest and
principal due on the notes.principal. Cash contributions and dividends to the ESOP Trust and the
Company's compensation expense approximated $10 million in each year.
The unearned compensation, which is reflected as a reduction to
shareholders' investment, represents the historical cost of the ESOP Trust's shares of
common stock that have not yet been allocated by the Trust to
participants.
In February 1997, the Company issued $120 of 6.75 percent debentures
that mature in 2027. Holders have a 1-time option in 2007 to redeem
the debentures. The Company also has a recall right after ten years.
NOTE 6. OTHER LIABILITIES: Other liabilities at December 31 Other Liabilitiesincluded
the following:
$ Millions 1997 1996
1995
___________________________ ____ ____
Accrued retirement & post-employment benefits $487 $530 $533
Accrued product coverage & marketing expenses 111 112 86
Deferred taxes 28 21
Accrued compensation 34 28
21Deferred income taxes 25 28
Other 55 4256 49
____ ____
Other liabilities $753 $703$713 $747
____ ____
NOTE 7. INCOME TAXES: Tax ProvisionThe provision for income taxes was as follows:
$ Millions 1997 1996 1995 1994
_____________ ____ ____ ____
Current:
USU.S. Federal and state $16 $22 $ 30
$29
Foreign 32 15 23
19
__ ___ __ __
48 37 53
48
__ _____ __
Deferred:
USU.S. Federal and state 26 - ( 93)
(9)
Foreign - 17 ( 7)
2__ __ _____
____26 17 (100)
(7)___ ___ _____
$74 $54 $(47)
___ Tax provision (credit) $54 $( 47) $41
___ ______ ________
The Company expects to realize all of its tax assets, including the
use of all carryforwards, before any expiration. A valuation
allowance previously maintained against tax carryforward benefits was
released to earnings as a reduction of income tax expense in the
amount of $68 million in 1995 and $32 in 1994.1995. Tax benefits of $35 million also were
recorded as a reduction to income tax expense in 1995 for changes in
the treatment of foreign tax credits and foreign sales corporation
benefits for prior years.
Significant components of the Company's net deferred tax assets relaterelated to the
following tax effects of differences between financial and tax
reporting:reporting at December 31,
Net Deferred Tax Assets31:
$ Millions 1997 1996
1995
_________________________________ ____ ____
US accrued employee benefitsEmployee Benefit plans $266 $247
$236
US accrued productProduct coverage & marketing expenses 64 72 73
Restructuring charges 9 10 25
US plant & equipment (139) (125) (124)
Other net US differences 21 7
Net foreign taxable differences, primarily plant
and equipment ( 23) ( 7)23)
US Federal carryforward benefits:
General business tax credits, expiring 20002009 to 20102011 31 45 58
Minimum tax credits, no expiration 10 9
11Other net differences 13 21
____ ____
Net deferred tax assets$231 $256 $279
____ ____
Balance Sheet Classification
____________________________
Current assets $129 $131 $164
Noncurrent assets 127 153 136
Noncurrent liabilities (25) (28) (21)
___ ____
Net deferred tax assets$231 $256 $279
____ ____
Earnings before income taxes and differences between the effective tax
rate and US Federal income tax rates were:
$ Millions 1997 1996 1995
1994__________ ____ ____ ____
Earnings before income taxes:
US $205 $134 $135
$181
InternationalForeign 81 80 42 113
____ ____ ____
$286 $214 $177 $294
____ ____ ____
Tax at 35 percent US statutory rate $100 $ 75 $ 62 $103
Adjustment to beginning-of-year
valuation allowance - - (68) (32)
Change in treatment of foreign tax credit
and foreign sales corporation benefits
of prior years - - (35) -
Research tax credits (11) ( 6) ( 6) ( 9)
Current-year foreign sales corporation benefits (11) (11) ( 5) -
Differences in rates and taxability of foreign
subsidiaries ( 3) - - (18)
All other, net ( 1) ( 4) 5
( 3)
____ _____ ____
Tax provision (credit)_____
$ 74 $ 54 $(47)
$ 41
____ _____ _________
NOTE 8. RETIREMENT PLANS: The Company has various contributory and
noncontributory pension plans covering substantially all employees.
Benefits for salaried plans generally are based upon annual
compensation, and benefits under the hourly plans generally are based
upon various monthly amounts for each year of service. The Company
has a non-qualified excess benefit plan that provides certain
employees with defined retirement benefits in excess of qualified plan
limits imposed by US tax law. In addition, the Company has a plan
that provides officers and other key employees with term life
insurance during active employment and supplemental retirement
benefits.
Pension Cost 1996 1995 1994
____________ ____ ____ ____
Service cost $ 45 $ 40 $ 42
Interest cost 104 99 89
Asset return:
Actual (155) (214) (26)
Deferred 39 110) (79)
Transition asset amortization ( 9) ( 9) ( 9)
Other 16 14 12
____ ____ ____
Pension cost $ 40 $ 40 $ 29
____ ____ ____
December 31
Funded Status 1996 1995
_____________ ________ ________
Benefit obligation:
Vested $(1,286) $(1,139)
Accumulated $(1,410) $(1,332)
_______ _______
Projected $(1,491) $(1,467)
Plan assets 1,555 1,367
______ _______
Funded status 64 ( 100)
Unrecognized:
Experience gain ( 114) ( 26)
Prior service cost 70 106
Transition asset ( 21) ( 29)
Additional liability ( 35) ( 63)
_______ _______
Accrued liability $( 36) $( 112)
________ ________
The projected benefit obligation for under-funded plans was $694 at
December 31, 1996 and $688 at December 31, 1995, of which $109 and
$168, respectively, was recorded as a liability. The projected
benefit obligation for the Company's principal plans was determined
using a weighted-average discount rate of 7.75 percent in 1996 and 7
percent in 1995. The long-term rate of return on assets was assumed
to be 9.25 percent in 1996 and 10 percent in 1995. The assumed long-
term rate of compensation increase for salaried plans approximated
expected inflation in both 1996 and 1995.
It is the Company's policy to make contributions to pension plans
sufficient to meet the funding requirements of applicable laws and
regulations, plus such additional amounts as deemed to be appropriate.
Plan assets consisted principally of equity securities and corporate
and fixed-
incomefixed-income Government obligations. Cummins common stock
represented 67 percent of plan assets at December 31, 1997.
The Company's pension expense under these plans was as follows:
$ Millions 1997 1996 1995
____________ ____ ____ ____
Service cost $ 41 $ 45 $ 40
Interest cost 115 104 99
Asset return:
Actual (414) (155) (214)
Deferred 280 39 110
Amortization of transition asset ( 9) ( 9) ( 9)
Other 13 16 14
____ ____ ____
$ 26 $ 40 $ 40
____ ____ ____
The liability for these plans at December 31 was as follows:
$ Millions 1997 1996
__________ ________ ________
Vested $(1,449) $(1,286)
Accumulated $(1,637) $(1,410)
_______ _______
Projected $(1,693) $(1,491)
Plan assets 1,905 1,555
______ ______
Funded status 212 64
Unrecognized:
Experience gain (a) ( 269) ( 114)
Prior service cost (b) 63 70
Transition asset (c) ( 11) ( 21)
Adjustment to recognize minimum
liability (d) - ( 35)
_______ _______
Prepaid pension liability $( 5) $( 36)
_______ _______
(a) The net deferred gain 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.
(d) An adjustment to reflect the unfunded accumulated benefit
obligation for plans whose benefits exceed the assets.
The projected benefit obligation for under-funded plans was $418
million at December 31, 1997 and $694 million at December 31, 1996, of
which $13 million and $109 million, respectively, was recorded as a
liability. The assumed long-term rate of compensation increase for
salaried plans approximated expected inflation in both 1997 and 1996.
WhileOther significant assumptions for the CompanyCompany's principal plans were:
1997 1996
____ ____
Weighted-average discount rate for
benefit obligations 7.5% 7.75%
Long-term rate of return on plan assets 10.0% 9.25%
Cummins also provides certainvarious health care and life insurance benefits
to eligible retirees and their dependents itbut reserves the right to
change benefits covered under these plans. The plans are contributory
with retirees' contributions adjusted annually, and they contain other
cost-sharing features, such as deductibles, coinsurance and spousal
contributions. The general policy is to fund benefits as claims and
premiums are incurred.
Health Care CostThe Company's expense under these plans was as follows:
$ Millions 1997 1996 1995 1994
________________ ____ ____ ____
Service cost $ 8 $ 9 $ 8
$ 10
Interest cost 41 36 38
33
Other 9 10 7 10
____ ____ ____
Total$ 58 $ 55 $ 53 $ 53
____ ____ ____
The accrued liability for these plans at December 31 Accrued Liabilitywas:
$ Millions 1997 1996 1995
_________________ ____ ____
Obligation for:
Retirees $339 $273 $238
Eligible to retire 133 145
125
Others 124 127 163
Unrecognized:
Prior service cost 12 4 (10)
Experience loss (62) (38) (40)
____ ____
Accrued liability$546 $511 $476
____ ____
The weighted-averageSignificant assumptions:
Weighted-average discount rate used to determine the accumulated
benefit obligation was 7.75 percent in 1996 and 7 percent in 1995.
The weighted-average7.5% 7.75%
Present trend rate for medical benefits was 8.9 percent,
grading down to an ultimate8.0% 8.9%
Ultimate trend rate of 5.5 percent by 2006. Thein ten years 5.25% 5.50%
Increasing the health care cost trend rate assumption could have a significant effect on the
determination of the obligation. For example, increasing the rate by one percent would
increase the accumulated benefit obligation by $31$38 million and net costannual expense by $3.$4
million.
NOTE 9. COMMON STOCK REPURCHASES: In 1994,STOCK: The Company increased its quarterly common
stock dividend from 25 cents per share to 27.5 cents, effective with
the Board of Directors
authorized repurchase by thedividend payment in June 1997.
The Company of up to 2.5has repurchased 3.9 million shares of its common stock. During 1996,stock
since 1994. In 1997, the Company completed this program
withrepurchased 1.3 million shares from
Ford Motor Company and another .2 million shares on the repurchaseopen market at
an aggregate purchase price of $75 million. The Company repurchased
.8 million shares of stock on the open market at an aggregate purchase price of
$34 or average price of $41.35 per
share. The Company repurchasedmillion in 1996 and 1.6 million shares at an aggregate purchase
price of $69 or average price of $43.57 per share,million in 1995
and .1 million shares at an aggregate purchase price of $5, or average
price of $42.47 per share, in 1994.1995. All of the acquired shares are held as
common stock in treasury.
In January 1997, the Company announced that it will issueissued 3.75 million shares of its common stock to
an employee benefits trust to fund obligations of employee benefit and
compensation plans, principally retirement savings plans. Shares of
the common stock held by this trust willare not be used in the calculation of
the Company's earnings per share until distributed from the trust and allocated to a benefit plan. The Company also announced in January 1997 repurchase of 1.3
million shares of its common stock from Ford Motor Company and that
the Board of Directors has authorized the repurchase of an additional
1.7 million shares in the open market.
NOTE 10. SHAREHOLDERS' RIGHTS PLAN: The Company has a Shareholders'
Rights Plan which it first adopted in 1986. The Rights Plan provides
that each share of the Company's common stock has associated with it a
stock purchase right. The Rights Plan becomes operative when a person
or entity acquires 15 percent of the Company's common stock or
commences a tender offer to purchase 20 percent or more of the
Company's common stock without the approval of the Board of Directors.
In the event a person or entity acquires 15 percent of the Company's
common stock, each right, except for the acquiring person's rights,
can be exercised to purchase $400 worth of common stock for $200. In
addition, for a period of 10 days after such acquisition, the Board of
Directors can exchange such right for a new right which permits the
holders to purchase one share of the Company's common stock for $1 per
share. If a person or entity commences a tender offer to purchase 20
percent or more of the Company's common stock, unless the Board of
Directors redeems the rights within 10 days of the event, each right
can be exercised to purchase one share for $200. The plan also allows
holders of the rights to purchase shares of the acquiring person's
stock at a discount if the Company is acquired or 50 percent of the
assets or earnings power of the Company is transferred to an acquiring
person.
NOTE 11. EMPLOYEE STOCK PLANS: Under the Company's stock incentive
and option plans, officers and other eligible employees may be awarded
stock options, stock appreciation rights and restricted stock. Under
the provisions of the stock incentive plan, up to one percent of the
Company's outstanding shares of common stock at the end of the
preceding year is available for issuance under the plan each year. At
December 31, 1996,1997, there were 174,74187,281 shares of common stock available
for grant and 792,075852,700 options exercisable under the plans.
Number of Weighted-average
Options Shares Exercise Priceexercise price
________ _________ ________________
December 31, 1993 525,070 $32.54
Granted 349,927 43.05
Exercised (10,200) 27.44
_________
December 31, 1994 864,797 37.49$37.49
Granted 360,625 39.98
Exercised (22,520) 30.83
Cancelled (19,627) 41.03
_________
December 31, 1995 1,183,275 38.45
Granted 394,150 40.13
Exercised (47,475) 32.43
Cancelled (19,800) 41.00
_________
December 31, 1996 1,510,150 38.88
Granted 766,500 60.61
Exercised (294,025) 35.85
Cancelled ( 61,775) 42.66
_________
December 31, 1997 1,920,850 46.08
Options outstanding at December 31, 19961997 have exercise prices between
$15.94 and $53.25$79.81 and a weighted-average remaining life of 58 years.
The weighted-average fair value of options granted was $14.94 per
share in 1997 and $11.36 per share in 1996
and $10.41 per share in 1995.1996. The fair value of each
option was estimated on the date of grant using a risk-free interest
rate of 6.4 percent in 1997 and 6.7 percent in 1996,
and 5.7 percent in 1995, current annual
dividends, expected lives of 10 years and expected volatility of 2723
percent. If the Company had used aA fair-value method of accounting for awards subsequent to
January 1, 1995, net earnings would have been reduced less than $2 in 1996.had no material effect on results of
operations.
NOTE 12. SEGMENTS OF THE BUSINESS: The Company operates in a single
industry segment -- designing, manufacturing and marketing diesel
engines and related products. The Company's key markets for engines
are automotive (heavy-duty(heavy and medium-duty trucks, midrange trucks, busbuses and light
commercial vehicles), power generation and industrial. Manufacturing,
marketing and technical operations are maintained in major areas of
the world. Summary
financial information is listed below for each geographic area. Earnings for each area may not be a meaningful
representation of each area's contribution to consolidated operating
results because of significant sales of products between and among the
Company's various domestic and international operations.
Summary financial information is listed below for each geographic
area:
Europe/ All Corporate
$ Millions US EuropeCIS Other Items Combined
__________ _____ ______ _____ _________ ________
1997
____
Net sales:
To customers in the area $3098 $ 792 $811 $ - $4701
To customers outside the area 552 349 23 - 924
Intergeographic transfers 561 220 140 (921) -
_____ _____ _____ _____ _____
Total $4211 $1361 $974 $(921) $5625
Earnings before income taxes $ 168 $ 60 $ 48 $ 10 $ 286
Identifiable assets $2311 $ 682 $673 $ 99 $3765
1996
____
Net sales:
To customers in the area $2904 $ 770 $619 $ - $4293
To customers outside the area 581 363 20 - 964
Intergeographic transfers 415 180 129 (724) -
_____ _____ ____ ______ _____
Total $3900 $1313 $768 $(724) $5257
Earnings before income taxes $ 111 $ 75 $ 22 $ 6 $ 214
Identifiable assets $2069 $ 624 $517 $ 159 $3369
1995
____
Net sales:
To customers in the area $3010 $ 772 $524 $ - $4306
To customers outside the area 587 342 10 - 939
Intergeographic transfers 367 186 126 (679) -
_____ _____ ____ ______ _____
Total $3964 $1300 $660 $(679) $5245
Earnings (loss) before
income taxes $ 178 $ 113 $ 24 $(138) $ 177
Identifiable assets $1853 $ 598 $483 $ 122 $3056
1994
____
Net sales:
To customers in the area $2708 $ 657 $538 $ - $3903
To customers outside the area 594 234 6 - 834
Intergeographic transfers 410 159 114 (683) -
_____ _____ _____ _____ _____
Total $3712 $1050 $658 $(683) $4737
Earnings (loss) before
income taxes $ 177 $ 87 $ 44 $( 14) $ 294
Identifiable assets $1618 $ 499 $412 $ 177 $2706
Total sales for each geographic area are classified by manufacturing source
and include sales to customers within and outside the area and
intergeographic transfers. Transfer prices for sales between the Company's
various operating units generally are at arm's length, based upon business
conditions, distribution costs and other costs which are expected to be
incurred in producing and marketing products. Corporate items include
interest and other income and expense. Identifiable assets are those
resources associated with the operations in each area. Corporate assets are
principally cash and investments.
The Company generally sells its products on open account under credit
terms customary to the region of distribution. The Company performs
ongoing credit evaluations of its customers and generally does not
require collateral to secure its customers' receivables.
Net sales by marketing territory:
Net Salesterritory were as follows:
$ Millions 1997 1996 1995
1994
___________________ ______ ______ ______
United States $3,123 $2,925 $3,018
$2,712
Asia, Far East & Asia/Australia 898 868 723
626
EuropeEurope/CIS 796 759 783
671Mexico/Latin America 364 260 233
Canada 318 313 384
330
Mexico & South America 260 233 318
Africa & Africa/Middle East 126 132 104 80
______ ______ ______
Net sales$5,625 $5,257 $5,245 $4,737
______ ______ ______
NOTE 13. GUARANTEES, COMMITMENTS AND OTHER CONTINGENCIES: Accounts
receivable that have been sold with recourse amounted to $25 atAt
December 31, 1996.1997, the Company had the following minimum rental
commitments for noncancelable operating leases: $33 million in 1998,
$26 million in 1999, $21 million in 2000, $16 million in 2001, $14
million in 2002 and $47 million thereafter. Rental expense under
these leases approximated $60 million in 1997 and $55 million in 1996
and 1995.
Commitments under outstanding letters of credit, guarantees and
contingencies approximated $185.$120 million. Based on borrowing rates
currently available to the Company for bank loans with similar terms
and average maturities, the fair value of total indebtedness of $322$654
million at December 31, 19961997 was approximately $335.$878 million. The carrying values of
all other receivables and liabilities approximated fair values atvalues.
In December 31, 1996.1997, the Company entered into an agreement to fix the
interest rates on the planned debt issuance in early 1998. The gain
or loss upon settlement will be amortized over the terms of the notes
and debentures.
The Company enters into forward exchange contracts to hedge the
effects of fluctuating currency rates on certain assets and
liabilities, such as accounts receivable and
payable that are denominated in other than the functional currencies
of entities. The contracts typically provide for the exchange of
different currencies at specified future dates and rates. The gain or
loss due to the difference between the forward exchange rates of the
contracts and current rates offsetsoffset in whole or in part the loss or
gain on the assets or liabilities being hedged. The Company had $214$257
million of contracts outstanding at December 31, 1996,1997, which mature in
19971998 and are denominated in a variety of foreign currencies where the
Company does business.
Commodity swap contracts at December 31, 19961997, amounted to $35$41 million
and have the effect of fixing the Company's cost of certain future
material purchases. These contracts mature through 1998.1999. Gains or
losses on the contracts are reflected in earnings concurrently with
the hedged items.
The Environmental Protection Agency, the U. S. Department of Justice
and the California Air Resources Board (collectively, the "government
agencies") have raised concerns with diesel engine manufacturers,
including Cummins, about the level of Nitrogen Oxide (NOx) emissions
from diesel engines under certain driving conditions. The government
agencies also have raised concerns about the strategies that diesel
manufacturers have employed to maximize fuel economy while also
meeting Clean Air Act standards for NOx emissions. The government
agencies have indicated that they may conclude that diesel
manufacturers have been in violation of the Clean Air Act and have,
therefore, issued conditional certificates of conformity on the 1998
heavy-duty, on-highway diesel engine models. Cummins believes that it
is in full compliance with all laws and regulations regarding
emissions. The government agencies have not made any final
determinations or allegations. The industry and Cummins are engaged
in confidential discussions regarding these emissions, the technical
challenges confronted if new emissions standards are imposed, the
commercial impact of the government's policy and legal positions and
related issues. Both the industry and the government agencies are
taking these concerns and discussions very seriously and are working
diligently toward a amicable resolution. It is premature to predict
the outcome of the discussions or whether the outcome will have a
material effect on Cummins.
Cummins and its subsidiaries are defendants in a number of pending
legal actions, including actions relatingrelated to use and performance of the
Company's products. The Company carries product liability insurance
covering significant claims for damages involving personal injury and
property damage. In the event the Company is determined to be liable
for damages in connection with such actions and proceedings, the unreserved
and uninsured portion of such liability is not expected to be
material. The Company also has been identified as a potentially
responsible party at several waste disposal sites under US and related
state environmental statutes and regulations. The Company denies
liability with respect to many of these legal actions and
environmental proceedings and vigorously is defending such actions or
proceedings. The Company has established reserves whichthat it believes
are adequate for its expected future liability in such actions and
proceedings where the nature and extent of such liability can be
estimated reasonably based upon presently available information.
NOTE 14. QUARTERLY FINANCIAL DATA (unaudited):
$ Millions, except First Second Third Fourth Full
1996per share amounts Quarter Quarter Quarter Quarter Year
______________________ _______ _______ _______ _______ ______
1997
____
Net sales $1,304 $1,396 $1,366 $1,559 $5,625
Gross profit 286 324 309 361 1,280
Net earnings 41 53 54 64 212
Basic earnings per share $ 1.07 $ 1.40 $ 1.41 $ 1.69 $ 5.55
Diluted earnings per share 1.06 1.38 1.38 1.66 5.48
1996
____
Net sales $1,316 $1,316 $1,264 $1,361 $5,257
Gross profit 316 300 270 299 1,185
Net earnings 49 44 26 41 160
EarningsBasic earnings per share $ 1.21 $ 1.101.11 $ .67 $ 1.03 $ 4.01
1995
____
Net sales $1,334 $1,361 $1,219 $1,331 $5,245
Gross profit 343 340 277 311 1,271
Net4.02
Diluted earnings 67 69 46 42 224per share 1.21 1.10 .67 1.03 4.01
Earnings per share $ 1.63 $ 1.69 $ 1.14 $ 1.05 $ 5.52
Includedfor 1996 and the first three quarters of 1997 have been
restated to reflect the adoption of SFAS No. 128 as disclosed in net earnings in the fourth quarter of 1995 was a
restructuring charge of $116 ($76 after taxes). There also was a tax
credit of $68. Net earnings for 1995 included restructuring charges
of $118 ($77 after taxes.)Note 1.
SIGNATURES
__________
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CUMMINS ENGINE COMPANY, INC.
By /s/K. M. Patel By /s/John McLachlanR. J. Mills
________________________ _________________
K. M. Patel John McLachlanR. J. Mills
Vice President and Chief Vice President -
Financial Officer Corporate Controller
(Principal Financial (Principal Accounting
Officer) Officer)
Date: March 1, 19971998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date
__________ _____ ____
Director & Chairman of the Board 3/1/9798
* of Directors & Chief Executive
_____________________ Officer (Principal Executive Officer)
(James A. Henderson)
* Director and President & Chief 3/1/9798
_____________________ Operating Officer
(Theodore M. Solso)
* 3/1/9798
_____________________ Director
(Harold Brown)
*
_____________________ Director 3/1/9798
(Robert J. Darnall)
*
_____________________ Director 3/1/9798
(John M. Deutch)
*
_____________________ Director 3/1/98
(W. Y. Elisha)
*
_____________________ Director 3/1/9798
(Hanna H. Gray)
*
_____________________ Director 3/1/97
(J. Irwin Miller)
*
_____________________ Director 3/1/9798
(William I. Miller)
*
_____________________ Director 3/1/9798
(Donald S. Perkins)
*
________________________ Director 3/1/9798
(William D. Ruckelshaus)
*
_____________________ Director 3/1/9798
(H. B. Schacht)
*
_____________________ Director 3/1/9798
(F. A. Thomas)
*
_____________________ Director 3/1/9798
(J. Lawrence Wilson)
By /s/Mark R. Gerstle
__________________
Mark R. Gerstle
Attorney-in-fact
CUMMINS ENGINE COMPANY, INC.
EXHIBIT INDEX
____________________________
3(a) Restated Articles of Incorporation of Cummins Engine Company,
Inc., as amended (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended April 3, 1994, by
reference to Quarterly Report on Form 10-Q for the quarter
ended October 1, 1989 and by reference to Form 8-K dated
July 26, 1990).
3(b) By-laws of Cummins Engine Company, Inc., as amended and
restated effective as of August 12, 1994 (incorporated
by reference to Quarterly Report on Form 10-Q for the quarter
ended October 2, 1994).
4(a) Amended and Restated Credit Agreement (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996).
4(b) Rights Agreement, as amended (incorporated by reference to
Annual Report on Form 10-K for the year ended December 31,
1989, by reference to Form 8-K dated July 26, 1990, by
reference to Form 8 dated November 6, 1990, by reference to
Form 8-A/A dated November 1, 1993, and by reference to
Form 8-A/A dated January 12, 1994 and by reference to
Form 8-A/A dated July 15, 1996).
10(a) Target Bonus Plan (filed herewith)(incorporated by reference to Annual Report
on Form 10-K for the year ended December 31, 1996).
10(b) Deferred Compensation Plan (incorporated by reference to
Annual Report on Form 10-K for the year ended December 31,
1994).
10(c) Key Employee Stock Investment Plan, as amended (incorporated
by reference to Quarterly Report on Form 10-Q for the quarter
ended July 3, 1994).
10(d) Supplemental Life Insurance and Deferred Income Plan
(filed
herewith)(incorporated by reference to Annual Report on Form 10-K for
the year ended December 31, 1996).
10(e) Financial Counseling Program, (incorporated by reference to
Quarterly Report on Form 10-Q for the quarter ended
July 3, 1994).
10(f) 1986 Stock Option Plan (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended March 30, 1986)1986,
Exhibit 10(g)).
10(g) Deferred Compensation Plan for Non-Employee Directors, as
amended, effective as of April 15, 1994 (incorporated by
reference to Annual Report on Form 10-K for the year ended
December 31, 1994).
10(h) Key Executive Compensation Protection Plan (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended October 2, 1994).
10(i) Excess Benefit Retirement Plan, (incorporated by reference to
Quarterly Report on Form 10-Q for the quarter ended October 2,
1994).
10(j) Restated Sponsors Agreement between Case Corporation and
Cummins Engine Company, Inc., dated December 7, 1990, together
with the Restated Partnership Agreement between Case Engine
Holding Company, Inc., and Cummins Engine Holding Company,
Inc., dated December 7, 1990 (incorporated by reference to
Annual Report on Form 10-K for the year ended December 31,
1990)1990, Exhibit 10(k)).
10(k) Retirement Plan for Non-Employee Directors of Cummins Engine
Company, Inc., effective September 1989as amended February 1997 (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended April 2, 1995)March 30, 1997).
10(l) Stock Unit Appreciation Plan effective October 1990
(incorporated by reference to Quarterly Report on Form 10-Q
for the quarter ended April 2, 1995)1995, Exhibit 10(m)).
10(m) Three Year Performance Plan effective December 1992as amended February 1997
(incorporated by reference to Quarterly Report on Form 10-Q
for the quarter ended April 2, 1995)March 30, 1997).
10(n) Consulting arrangement with Harold Brown (incorporated by
reference to the description thereof provided in the Company's
definitive Proxy Statement).
10(o) 1992 Stock Incentive Plan (incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1995)1995,
Exhibit 10(s)).
10(p) Restricted Stock Plan for Non-Employee Directors as amended
February 11, 1997 (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended April 3, 1994)March 30, 1997).
10(q) Executive Retention Plan (incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1995)1995,
Exhibit 10(u)).
10(r) Performance Share Plan, as amended January 1989 (incorporated
by reference to Quarterly Report on Form 10-Q for the quarter
ended April 2, 1995)1995, Exhibit 10(j)).
10(s) Senior Executive Bonus Plan (filed herewith)(incorporated by reference to
Annual Report on Form 10-K for the year ended December 31, 1996).
10(t) Senior Executive Three Year Performance Plan as amended
February 11, 1997 (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended April 2, 1995)March 30, 1997).
10(u) Guarantees of Perpetual Loan Facility of Cummins Finance
Limited dated January 31, 1996 with the Toronto Dominion Bank,
The Bank of New York and Societe Generale (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996)1996, Exhibit 10(y)).
11 Schedule of Computation of Per Share Earnings for each of the
Three Years Ended December 31, 19961997 (filed herewith).
21 Subsidiaries of the Registrant (filed herewith).
23 Consent of Arthur Andersen LLP (filed herewith).
24 Powers of Attorney (filed herewith).
27 Financial Data Schedule (filed herewith).