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, 1996
CUMMINS ENGINE COMPANY, INC.
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 billion at January 26, 1997.
As of January 26, 1997, there were outstanding 41.9 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 15
3 Legal Proceedings 16
4 Submission of Matters to Vote of Security Holders 16
II 5 Market for the Registrant's Common Equity and
Related Stockholder Matters 16
6 Selected Financial Data 17
7 Management's Discussion & Analysis of Results
of Operations and Financial Condition 18
8 Financial Statements & Supplemental Data 24
9 Disagreements on Accounting & Financial
Disclosure 25
III 10 Directors & Executive Officers of the Registrant 25
11 Executive Compensation 26
12 Security Ownership of Certain Beneficial Owners
and Management 27
13 Certain Relationships & Related Transactions 27
IV 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 27
Index to Financial Statements 28
Signatures 52
Exhibit Index 54
PART I
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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. The Company also produces alternate fueled
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, approximately 56 percent of net sales were in the United
States. Major international markets include Asia, the Far East and
Australia (17 percent of net sales); Europe (14 percent of net sales);
Canada (6 percent of net sales); and Mexico and South America (5
percent of net sales).
BUSINESS MARKETS
________________
Automotive
__________
Heavy-duty Truck
________________
Cummins has a complete line of 8-, 10-, 11- and 14-litre diesel engines
that range from 260 to 525 horsepower serving the heavy-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-duty truck OEMs produced
approximately 97 percent of the heavy-duty trucks sold in the United
States and Canada in 1996. The Company's largest customer for heavy-
duty truck engines in 1996 was Freightliner Corporation, which
represented approximately 5 percent of the Company's net sales.
In 1996, factory retail sales of North American heavy-duty trucks were
approximately 23 percent lower than the previous year's level.
Factory retail sales were 176,000 units in 1996, compared to 227,000
units in 1995, and 207,000 in 1994. The Company's share of the North
American heavy-duty truck engine market was 35 percent in 1996 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 1995 and 34 percent in 1994.
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 11 percent in 1996 and 15 percent in 1995.
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 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 fueled engines for urban special-purpose truck markets and
regional haul operations.
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.
Midrange Truck
______________
The Company has a line of diesel engines ranging from 130 to 300
horsepower serving midrange and intercity delivery truck customers
worldwide. In 1996, the Company began introducing its next generation
of midrange diesel engines, with higher horsepower and electronic
controls.
The Company entered the North American midrange diesel engine 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
1996 was 31 percent, compared to 35 percent in 1995 and 34 percent in
1994. Ford Motor Company was the Company's largest customer for
midrange engines for this market in 1996, 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 midrange truck markets in Asia, Europe, South
America and India. In 1996, operations in China at Dongfeng were
expanded from a license for B Series engines to include a joint
venture for production of C Series engines.
In the midrange 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 midrange 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 fueled 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. The Company's new 5.9 litre
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, Cummins introduced its B Series alternate
fueled engine for school buses in the United States and, in 1995,
introduced the C Series.
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, power generation sales represented 23 percent of the
Company's net sales. Products include Cummins engines, Onan and
Petbow 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. The QSZ engine family was introduced in 1996
with initial deliveries in Europe and Asia. The QSW engine family
will be introduced in 1997. 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.
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, and a joint venture was announced in
China, with production scheduled to commence 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., Detroit Diesel Corporation, Perkins Engines and AB Volvo are the
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, the Company's comprehensive product line, ranging
from 76 to 6,000 horsepower, made strong advances. Cummins' engines
power more than 3,000 models of equipment for the construction,
logging, mining, agricultural, petroleum, rail 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-
litre engine in the United States. Production at both joint venture
sites began on schedule. Coupled with Cummins' relationship with Case
in North America, these alliances provide a strong base in the
Company's construction markets.
The Company's high-horsepower QUANTUM engine was introduced in 1995
and enhanced in late 1996 with the announcement of two new products
for the mining market.
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 manufacturer
of products for the North American heavy-duty filter industry. Its
products also are produced and sold in international markets,
including Europe, Mexico, India, Australia and the Far East. A new
distribution center in South Africa opened in 1996. A manufacturing
facility also was opened in Shanghai as part of a joint venture with
Shenlong Auto Accessories Corporation of China, a majority-owned
subsidiary of Dongfeng Motor Corporation.
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. An alliance with Mitsubishi
Heavy Industries of Japan will begin production of its jointly
developed turbochargers in 1997.
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 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, the Company has entered into alliances with business
partners in various areas of the world. A joint venture was formed in
1996 with the Fiat Group companies -- Iveco (trucks and buses) and New
Holland (agricultural equipment) -- to design and manufacture the next
generation of 4-, 5- and 6-litre engines based on Cummins' 4- and 6-
litre B Series engines. In 1996, operations at Dongfeng Motor
Corporation were expanded to form a joint venture for production of C
Series engines 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
Company also entered into a joint venture with Wartsila Diesel
International of Finland to manufacture both diesel and natural gas
engines above 2,500 horsepower. Several of the Company's subsidiaries
have ventures throughout the world.
Because of the Company's increasingly global business, 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 $235 million in 1996, $230 million in 1995
and $200 million in 1994.
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
experienced modest seasonal declines in production, which have had an
effect on the demand for Cummins' products during that quarter of each
year.
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 6,500 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, the
aggregate cost would have been approximately $240 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, Cummins employed 23,500 persons worldwide,
approximately 8,800 of whom are represented by various unions. The
Company has labor agreements covering employees in North America,
South America and the United Kingdom. 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. 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 1996 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.
Emissions Averaging, Banking and Trading regulations were promulgated
by the EPA in July 1990. By selling 1994, 1995 and 1996 model year
engines with emissions levels below applicable standards, Cummins
generated oxides of nitrogen and particulate matter credits. Those
credits expire on December 31, 1997 if not used before this date.
While a portion of the Company's 1997 products will use some of these
credits as part of an effort to achieve cost-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 next major change in emissions requirements for heavy-duty on-
highway diesel engines occurs in 1998, when the oxides of nitrogen
standard is 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, three such audit
tests were performed on Cummins engines; all were 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.
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 if the Company had to pay
penalties, these penalties would have no material financial effect on
the Company.
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, 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. 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 and second phases (those with ratings
between 100 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
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.
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 of 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 16
million square feet, including approximately 7 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
______ _______ __________________
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, the approximate number of holders of record of
the Company's common stock was 4,800.
The Board of Directors in 1994 authorized repurchase by the Company of
up to 2.5 million shares of its common stock. In 1996, the Company
completed this program with the repurchase of .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
repurchased 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. All of the acquired shares are held as
common stock in treasury.
In January 1997, the Company announced that it will issue 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, the
Company has a Shareholders' Rights Plan.
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, Except
per Share Amounts 1996 1995 1994 1993 1992
_____________________ ______ ______ ______ ______ ______
Net sales $5,257 $5,245 $4,737 $4,248 $3,749
Net earnings (loss) 160 224 253 177 (190)
Earnings (loss) per share:
Primary 4.01 5.52 6.11 4.79 (6.01)
Fully diluted 4.01 5.52 6.11 4.63 (6.01)
Cash dividends per share 1.00 1.00 .625 .20 .10
Total assets 3,369 3,056 2,706 2,390 2,230
Long-term debt 283 117 155 190 412
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
________
In 1996, the Company had record sales of $5.3 billion, $12 million
higher than 1995 and 11 percent higher 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. The Company shipped 332,300 engines in
1996, compared to 338,900 in 1995 and 304,300 in 1994 as follows:
Engine Shipments 1996 1995 1994
________________ _______ _______ _______
Midrange engines 237,400 222,100 195,600
Heavy-duty engines 85,000 107,300 99,900
High-horsepower engines 9,900 9,500 8,800
_______ _______ _______
Total engine shipments 332,300 338,900 304,300
_______ _______ _______
Net earnings were $160 million, or $4.01 per share, in 1996. Net
earnings were $224 million, or $5.52 per share, in 1995 and $253
million, or $6.11 per share, in 1994.
RESULTS OF OPERATIONS
_____________________
The percentage relationship between net sales and other elements of
the Company's Consolidated Statement of Earnings for each of 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
_______________
The Company's sales for each of its key markets during the last three years
were:
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
Power generation 1,213 23 1,092 21 980 21
Industrial 863 16 776 15 686 14
Filtration and other 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.
Sales of engines 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 international
markets were 7 percent higher than in 1995 and 16 percent higher than
1994, primarily in Brazil and Mexico.
In the bus and light commercial vehicles market, sales were 13 percent
higher than 1995 and 28 percent higher than 1994. The increase in
1996 was due to record demand for the Company's midrange engines in
the Dodge Ram pickup truck, which was 13 percent above 1995.
Power Generation
________________
Sales of power generation represented 23 percent of the Company's net
sales in 1996. Record sales of $1.2 billion in 1996 were $121 million
higher, a 11-percent increase compared to 1995, and $233 million, or
23 percent higher, than 1994. The increase in sales in 1996 was due
to a 20-percent increase in international markets, reflecting strong
demand in China, India and Southeast 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 for the Company's engines in marine
applications worldwide in 1996, almost 30 percent above 1995 and 55
percent higher than 1994.
Filtration and Other
____________________
Sales 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.
Gross Profit
____________
The Company's gross profit percentage was 22.5 percent of net sales in
1996, compared to 24.2 percent in 1995 and 25.0 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, 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", 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 2.7 percent of net sales in
1996, compared to 2.4 percent of net sales in 1995 and 2.3 percent of
net sales in 1994.
Operating Expenses
__________________
Selling and administrative expenses were $725 million (13.8 percent of
net sales) in 1996, compared to $692 million (13.2 percent of net
sales) in 1995 and $641 million (13.5 percent 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 wages as a result of headcount reductions.
Research and engineering expenses of $252 million in 1996 were 4.8
percent of net sales, compared 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
________________________
Interest expense of $18 million was $5 million higher than 1995 due to
the higher level of borrowings. In 1996, other income of $24 million
was due to interest income and gains on the disposal of certain
operations and businesses associated with the restructuring actions.
Restructuring Charges
_____________________
As disclosed in Note 2 to the Consolidated Financial Statements,
results of operations in 1995 included restructuring charges of $118
million ($77 million after taxes) for costs to consolidate operations
and reduce the worldwide work force. Approximately 2,300 employees
have separated from the Company as a result of the actions.
Provision for Income Taxes
__________________________
The Company's income tax provision in 1996 was $54 million, an
effective tax rate of 25 percent, reflecting tax breaks on export
sales and $6 million for reinstatement of the research tax credit in
the second half of 1996. Tax provisions of 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. 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 Flows were:
$ Millions 1996 1995 1994
__________ ____ ____ ____
Net cash provided by operating activities $193 $406 $376
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 110 (121) ( 50)
Effect of exchange rate changes on cash 4 1 5
____ ____ ____
Net change in cash & cash equivalents $ 48 $(87) $ 70
____ ____ ____
During 1996, net cash used in operating and investing activities was
$66 million. The lower level of net cash provided by operating
activities was due to net cash requirements for the restructuring
activities, including increased inventories at certain locations, and
an increase in accounts receivable. In the second quarter of 1996, an
agreement for the sale of up 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 to $223 million in 1995 and $238 million in 1994. The
increased level of expenditures in 1996 was related to continued
investments for new products. The Company expects a significant
increase in these expenditures in 1997, some of which may be funded
externally.
Investments in joint ventures and alliances of $5 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 in certain of its
joint ventures during 1997.
Net cash provided from financing activities was $110 million in 1996.
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 its shelf registration statement.
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 Company repurchased
1.3 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. In January 1997, the Company also
announced that it will issue 3.75 million shares of its common stock
to an employee benefits trust.
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 proceedings 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.
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, 1997 ("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, 1996 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 Vice President - Corporate Responsibility & Public
Affairs (1995 to present), Vice President - Quality
& Organizational Effectiveness (1992 to 1995)
C. Roberto Cordaro 46 Executive Vice President, Group President -
Automotive (1996 to present), Group Vice
President - Marketing (1990 to 1996)
John K. Edwards 52 Executive Vice President, Group President - Power
Generation and International (1996 to present),
Vice President - International (1989 to 1996)
Mark R. Gerstle 41 Vice President - General Counsel and Secretary
(1995 to present), Assistant General Counsel
(1991 to 1995)
James A. Henderson 62 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 49 Vice President - Filtration Group and President,
Fleetguard, Inc. (1996 to present), Vice
President - Aftermarket Group (1989 to 1996)
F. Joseph Loughrey 47 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 64 Vice President - Corporate Controller (1991
to present
Kiran M. Patel 48 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 49 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 28 for a list of
the financial statements filed as a part of this report.
2. See Exhibit Index on page 54 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.
INDEX TO FINANCIAL STATEMENTS
_____________________________
Page
____
Management's Responsibility for Financial Statements 29
Report of the Independent Public Accountants 30
Consolidated Statement of Earnings 31
Consolidated Statement of Financial Position 32
Consolidated Statement of Cash Flows 34
Consolidated Statement of Shareholders' Investment 36
Notes to Consolidated Financial Statements 38
Quarterly Financial Data 50
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 following 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 1996 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, 1996 and 1995, 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. 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, 1996 and
1995, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois,
January 27, 1997.
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF EARNINGS
__________________________________
Millions, Except per Share Amounts 1996 1995 1994
__________________________________ ______ ______ ______
Net sales $5,257 $5,245 $4,737
Cost of goods sold 4,072 3,974 3,551
______ ______ ______
Gross profit 1,185 1,271 1,186
Selling & administrative expenses 725 692 641
Research & engineering expenses 252 263 238
Net expense (income) of joint
ventures and alliances - 2 (4)
Interest expense 18 13 17
Other (income) expense, net (24) 6 -
Restructuring charges - 118 -
_____ _____ _____
Earnings before income taxes 214 177 294
Provision (credit) for income taxes 54 (47) 41
_____ _____ _____
Net earnings $ 160 $ 224 $ 253
_____ _____ _____
Earnings per share $4.01 $5.52 $6.11
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
____________________________________________
Millions, Except per Share Amounts December 31,
__________________________________ 1996 1995
______ ______
Assets
Current assets:
Cash and cash equivalents $ 108 $ 60
Receivables 669 597
Inventories 587 513
Other current assets 189 218
_____ _____
1,553 1,388
_____ _____
Investments and other assets:
Investments in joint ventures and alliances 207 211
Other assets 119 115
_____ _____
326 326
_____ _____
Property, plant and equipment:
Land and buildings 460 436
Machinery, equipment and fixtures 1,931 1,875
Construction in progress 270 164
_____ _____
2,661 2,475
Less accumulated depreciation 1,375 1,327
_____ _____
1,286 1,148
_____ _____
Intangibles, deferred taxes & deferred charges 204 194
______ ______
Total assets $3,369 $3,056
______ ______
Liabilities and shareholders' investment
Current liabilities:
Loans payable $ 93 $ 60
Current maturities of long-term debt 39 42
Accounts payable 380 376
Accrued salaries and wages 84 85
Accrued product coverage & marketing expenses 126 152
Income taxes payable 16 30
Other accrued expenses 283 308
_____ _____
1,021 1,053
_____ _____
Long-term debt 283 117
_____ _____
Other liabilities 753 703
_____ _____
Shareholders' investment:
Common stock, $2.50 par value, 43.9 shares issued 110 110
Additional contributed capital 929 926
Retained earnings 535 406
Common stock in treasury,at cost,4.5 & 3.7 shares (169) (135)
Unearned compensation ( 46) (51)
Cumulative translation adjustments ( 47) (73)
_____ _____
1,312 1,183
_____ _____
Total liabilities & shareholders' investment $3,369 $3,056
______ ______
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
____________________________________
Millions 1996 1995 1994
________ ______ ______ ______
Cash flows from operating activities:
Net earnings $ 160 $ 224 $ 253
_____ _____ _____
Adjustments to reconcile net earnings
to net cash from operating activities:
Depreciation and amortization 149 143 128
Restructuring actions ( 42) 114 -
Accounts receivable ( 56) ( 91) ( 37)
Inventories ( 62) 3 ( 46)
Accounts payable and accrued expenses 28 99 69
Deferred income taxes 17 (100) ( 7)
Other ( 1) 14 16
____ ____ ____
Total adjustments 33 182 123
____ ____ ____
Net cash provided by operating activities 193 406 376
____ ____ ____
Cash flows from investing activities:
Property, plant and equipment:
Additions (304) (223) (238)
Disposals 26 6 5
Investments in joint ventures and alliances ( 5) (147) ( 9)
Other 24 ( 9) ( 19)
_____ _____ _____
Net cash used in investing activities (259) (373) (261)
_____ _____ _____
Net cash (used in) provided by operating
and investing activities ( 66) 33 115
_____ ____ ____
Cash flows from financing activities:
Proceeds from borrowings 200 2 -
Payments on borrowings ( 47) ( 37) ( 34)
Net borrowings under credit agreements 32 19 17
Repurchases of common stock ( 34) ( 69) ( 5)
Dividend payments ( 40) ( 40) ( 26)
Other ( 1) 4 ( 2)
_____ _____ _____
Net cash provided from (used for)
financing activities 110 (121) ( 50)
____ _____ _____
Effect of exchange rate changes on cash 4 1 5
____ _____ ____
Net change in cash and cash equivalents 48 ( 87) 70
Cash & cash equivalents at beginning of year 60 147 77
____ ____ ____
Cash & cash equivalents at end of year $108 $ 60 $147
____ ____ ____
Cash payments during the year for:
Interest $ 16 $ 13 $ 19
Income taxes 40 59 43
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
__________________________________________________
Millions, Except per Share Amounts 1996 1995 1994
__________________________________ ______ ______ ______
Convertible preference stock, no par value,
1.0 shares authorized:
Beginning balance (.2 shares) $ - $ - $ 112
Converted to common stock or redeemed
(.2 shares) - - (112)
_____ _____ ______
Ending balance - - -
_____ _____ _____
Common stock, $2.50 par value, 150.0 shares
authorized:
Beginning balance (43.9, 43.8 & 40.6 shares) 110 109 101
Conversion of preference stock & debt
(2.9 shares) - - 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 year 160 224 253
Cash dividends declared ( 40) (40) ( 26)
Additional minimum liability for pensions 9 (10) 1
_____ _____ _____
Ending balance 535 406 232
_____ _____ _____
Common stock in treasury:
Beginning balance (3.7, 2.2 & 2.1 shares) (135) (72) ( 67)
Stock repurchased (.8, 1.6 and .1 shares) ( 34) (69) ( 5)
Stock issued (.1 shares) - 6 -
______ ______ ______
Ending balance (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
______ ______ ______
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-
owned subsidiaries. Affiliated companies in which Cummins does not
have a controlling interest are accounted for using the equity method.
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.
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: 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 research and development of
new products, as well as engineering expenditures during early
production and ongoing efforts to improve existing products, are
charged to earnings as incurred, 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 25 percent of its
inventories 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 valued at the lower of first-in, first-out
(FIFO) cost or net realizable value.
December 31,
Inventories 1996 1995
___________ ____ ____
Finished products $334 $283
Work-in-process & raw materials 319 292
____ ____
Inventories at FIFO cost 653 575
Excess of FIFO over LIFO (66) (62)
____ ____
Inventories $587 $513
____ ____
Property, Plant and Equipment: The Company depreciates substantially
all engine production equipment using a modified units-of-production
method, which is based upon units produced subject to a minimum level.
Depreciation of all other equipment is computed using the straight-
line method for financial reporting purposes. The estimated service
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. Maintenance and repair costs are charged to earnings as
incurred.
Earnings Per Share: Primary earnings per share are computed by
subtracting preference stock dividend requirements from net earnings
and dividing that amount by the weighted-average number of common
shares outstanding during each year. Fully diluted earnings per share
are computed by dividing net earnings by the weighted-average number
of shares outstanding, assuming the exercise of stock options and the
conversion of debt and preference stock to common stock.
NOTE 2. RESTRUCTURING CHARGES: Results of operations in 1995
included restructuring charges of $118 ($77 after taxes) for costs to
reduce the worldwide work force through a series of actions, including
voluntary and involuntary separations, retirements and plant
consolidations. Facility consolidations included closing or
restructuring selected operations in Europe, Brazil and North America.
The components of the restructuring charges were:
Work force reductions ............$ 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 $53 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.
NOTE 4. INVESTMENTS IN JOINT VENTURES AND ALLIANCES:
December 31,
1996 1995
____ ____
Cummins Wartsila $ 59 $ 31
Consolidated Diesel 38 96
Kirloskar Cummins 36 27
Chongqing Cummins 16 15
Tata Cummins 13 13
Behr America 12 12
Cummins Komatsu 9 3
Other 24 14
____ ____
Carrying value $207 $211
____ ____
Summary financial information for these 50-percent or less owned joint
ventures and alliances:
Earnings Data 1996 1995 1994
_____________ ______ ______ ______
Net sales $1,328 $1,091 $ 914
Earnings 2 6 15
Cummins' share - (2) 4
December 31,
Balance Sheet Data 1996 1995
__________________ ____ ____
Current assets $458 $330
Noncurrent assets 478 340
Current liabilities (305) (231)
Noncurrent liabilities (248) ( 63)
____ ____
Net assets $383 $376
____ ____
Cummins' share $207 $211
____ ____
In connection with various joint venture agreements, the Company is
required to purchase engine products in amounts to provide for the
recovery of specified costs of the joint venture. Under the agreement
with Consolidated Diesel, Cummins purchases approximated $540 in 1996
and 1995, with future minimum purchases of $6 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 in 1996.
NOTE 5. LONG-TERM DEBT:
December 31,
Long-term Debt 1996 1995
______________ ____ ____
8.2% notes, due 2003 $108 $ -
Commercial paper 90 -
10.35%-10.65% medium-term notes, through 1998 35 73
Guaranteed notes of ESOP Trust, due 1998 67 68
Other 22 18
____ ____
Total indebtedness 322 159
Less current maturities 39 42
____ ____
Long-term debt $283 $117
____ ____
Aggregate maturities of long-term debt for the five years subsequent
to December 31, 1996 are $39, $101, $19, $18 and $20. At December 31,
1996 and 1995, the weighted-average interest rate on loans payable and
current maturities of long-term debt was 7 percent and 8 percent,
respectively.
In 1996, a subsidiary of the Company issued 8.2 percent notes, which
resulted in net proceeds of $100.
The Company maintains a revolving credit agreement, under which there
were no outstanding borrowings at December 31, 1996 or 1995. In 1996,
the agreement was amended, increasing the available amount from $300
to $400 and extending the term to 2001. The revolving credit
agreement supported commercial paper borrowings at December 31, 1996.
The commercial paper initially was issued as replacement financing for
an arrangement whereby the Company sold up to $110 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 maintains other domestic and international credit lines
with approximately $90 available at December 31, 1996.
The Company has guaranteed the outstanding borrowings of its ESOP
Trust. 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. Cash contributions and
dividends to the ESOP Trust and the Company's compensation expense
approximated $10 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 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:
December 31,
Other Liabilities 1996 1995
_________________ ____ ____
Accrued retirement & post-employment benefits $530 $533
Accrued product coverage & marketing expenses 112 86
Deferred taxes 28 21
Accrued compensation 28 21
Other 55 42
____ ____
Other liabilities $753 $703
____ ____
NOTE 7. INCOME TAXES:
Tax Provision 1996 1995 1994
_____________ ____ ____ ____
Current:
US Federal and state $22 $ 30 $29
Foreign 15 23 19
__ ___ __
37 53 48
__ ___ __
Deferred:
US Federal and state - ( 93) (9)
Foreign 17 ( 7) 2
__ _____ ____
17 (100) (7)
___ _____ ___
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
in 1995 and $32 in 1994. Tax benefits of $35 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 relate
to the following tax effects of differences between financial and tax
reporting:
December 31,
Net Deferred Tax Assets 1996 1995
_______________________ ____ ____
US accrued employee benefits $247 $236
US accrued product coverage & marketing expenses 72 73
Restructuring charges 10 25
US plant & equipment (125) (124)
Other net US differences 21 7
Net foreign taxable differences, primarily plant
and equipment ( 23) ( 7)
US Federal carryforward benefits:
General business tax credits, expiring 2000 to 2010 45 58
Minimum tax credits, no expiration 9 11
____ ____
Net deferred tax assets $256 $279
____ ____
Balance Sheet Classification
____________________________
Current assets $131 $164
Noncurrent assets 153 136
Noncurrent liabilities (28) (21)
___ ____
Net deferred tax assets $256 $279
____ ____
Earnings before income taxes and differences between the effective tax
rate and US Federal income tax rates were:
1996 1995 1994
____ ____ ____
Earnings before income taxes:
US $134 $135 $181
International 80 42 113
____ ____ ____
$214 $177 $294
____ ____ ____
Tax at 35 percent US statutory rate $ 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 ( 6) ( 6) ( 9)
Current-year foreign sales corporation benefits (11) ( 5) -
Differences in rates and taxability of foreign
subsidiaries - - (18)
All other, net ( 4) 5 ( 3)
____ _____ ____
Tax provision (credit) $ 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 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-
income Government obligations. Cummins common stock represented 6
percent of plan assets at December 31, 1996.
While the Company provides certain health care and life insurance
benefits to eligible retirees and their dependents, it reserves the
right to change benefits covered under these plans. The plans are
contributory, with retirees' contributions adjusted annually, and
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 Cost 1996 1995 1994
________________ ____ ____ ____
Service cost $ 9 $ 8 $ 10
Interest cost 36 38 33
Other 10 7 10
____ ____ ____
Total $ 55 $ 53 $ 53
____ ____ ____
December 31,
Accrued Liability 1996 1995
_________________ ____ ____
Obligation for:
Retirees $273 $238
Eligible to retire 145 125
Others 127 163
Unrecognized:
Prior service cost 4 (10)
Experience loss (38) (40)
____ ____
Accrued liability $511 $476
____ ____
The weighted-average discount rate used to determine the accumulated
benefit obligation was 7.75 percent in 1996 and 7 percent in 1995.
The weighted-average trend rate for medical benefits was 8.9 percent,
grading down to an ultimate rate of 5.5 percent by 2006. 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
and net cost by $3.
NOTE 9. COMMON STOCK REPURCHASES: In 1994, the Board of Directors
authorized repurchase by the Company of up to 2.5 million shares of
its common stock. During 1996, the Company completed this program
with the repurchase of .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 repurchased 1.6 million shares at an aggregate
purchase price of $69, or average price of $43.57 per share, in 1995
and .1 million shares at an aggregate purchase price of $5, or average
price of $42.47 per share, in 1994. All of the acquired shares are
held as common stock in treasury.
In January 1997, the Company announced that it will issue 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.
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, there were 174,741 shares of common stock available
for grant and 792,075 options exercisable under the plans.
Number of Weighted-average
Options Shares Exercise 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
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
Options outstanding at December 31, 1996 have exercise prices between
$15.94 and $53.25 and a weighted-average remaining life of 5 years. The
weighted-average fair value of options granted was $11.36 per share in 1996
and $10.41 per share in 1995. The fair value of each option was estimated
on the date of grant using a risk-free interest rate of 6.7 percent in 1996
and 5.7 percent in 1995, current annual dividends, expected lives of 10
years and expected volatility of 27 percent. If the Company had used a
fair-value method of accounting for awards subsequent to January 1, 1995,
net earnings would have been reduced less than $2 in 1996.
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 trucks, midrange trucks, bus 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.
All Corporate
US Europe Other Items Combined
_____ ______ _____ _________ ________
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 Sales 1996 1995 1994
_________ ______ ______ ______
United States $2,925 $3,018 $2,712
Asia, Far East & Australia 868 723 626
Europe 759 783 671
Canada 313 384 330
Mexico & South America 260 233 318
Africa & Middle East 132 104 80
______ ______ ______
Net sales $5,257 $5,245 $4,737
______ ______ ______
NOTE 13. GUARANTEES, COMMITMENTS AND OTHER CONTINGENCIES: Accounts
receivable that have been sold with recourse amounted to $25 at
December 31, 1996. Commitments under outstanding letters of credit,
guarantees and contingencies approximated $185. 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 at December 31, 1996 was approximately $335. The carrying values
of all other receivables and liabilities approximated fair values at
December 31, 1996.
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 offsets in whole or in part the loss or gain on the
assets or liabilities being hedged. The Company had $214 of contracts
outstanding at December 31, 1996, which mature in 1997 and are
denominated in a variety of foreign currencies where the Company does
business.
Commodity swap contracts at December 31, 1996 amounted to $35 and have
the effect of fixing the Company's cost of certain future material
purchases. These contracts mature through 1998. Gains or losses on
the contracts are reflected in earnings concurrently with the hedged
items.
Cummins and its subsidiaries are defendants in a number of pending legal
actions, including actions relating 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 which 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):
First Second Third Fourth Full
1996 Quarter Quarter Quarter Quarter Year
____ _______ _______ _______ _______ ______
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
Earnings per share $ 1.21 $ 1.10 $ .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
Net earnings 67 69 46 42 224
Earnings per share $ 1.63 $ 1.69 $ 1.14 $ 1.05 $ 5.52
Included 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.)
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 McLachlan
________________________ _________________
K. M. Patel John McLachlan
Vice President and Chief Vice President -
Financial Officer Corporate Controller
(Principal Financial (Principal Accounting
Officer) Officer)
Date: March 1, 1997
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 3/1/97
* of Directors & Chief Executive
_____________________ Officer (Principal Executive Officer)
(James A. Henderson)
* Director and President & Chief 3/1/97
_____________________ Operating Officer
(Theodore M. Solso)
* 3/1/97
_____________________ Director
(Harold Brown)
*
_____________________ Director 3/1/97
(Robert J. Darnall)
*
_____________________ Director 3/1/97
(W. Y. Elisha)
*
_____________________ Director 3/1/97
(Hanna H. Gray)
*
_____________________ Director 3/1/97
(J. Irwin Miller)
*
_____________________ Director 3/1/97
(William I. Miller)
*
_____________________ Director 3/1/97
(Donald S. Perkins)
*
________________________ Director 3/1/97
(William D. Ruckelshaus)
*
_____________________ Director 3/1/97
(H. B. Schacht)
*
_____________________ Director 3/1/97
(F. A. Thomas)
*
_____________________ Director 3/1/97
(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).
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).
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).
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).
10(k) Retirement Plan for Non-Employee Directors of Cummins Engine
Company, Inc., effective September 1989 (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended April 2, 1995).
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).
10(m) Three Year Performance Plan effective December 1992
(incorporated by reference to Quarterly Report on Form 10-Q
for the quarter ended April 2, 1995).
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).
10(p) Restricted Stock Plan for Non-Employee Directors (incorporated
by reference to Quarterly Report on Form 10-Q for the quarter
ended April 3, 1994).
10(q) Executive Retention Plan (incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1995).
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).
10(s) Senior Executive Bonus Plan (filed herewith).
10(t) Senior Executive Three Year Performance Plan (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended April 2, 1995).
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).
11 Schedule of Computation of Per Share Earnings for each of the
Three Years Ended December 31, 1996 (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).