UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
CUMMINS ENGINE COMPANY, INC.
____________________________
For the Quarter Ended March 30, 1997 Commission File Number 1-4949
______________ ______
Indiana 35-0257090
_______ __________
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
500 Jackson Street, Box 3005
____________________________
Columbus, Indiana 47202-3005
_________________ __________
(Address of Principal Executive Offices) (Zip Code)
812-377-5000
____________
(Registrant's Telephone Number)
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 proceeding 12 months and (2) has been
subject to such filing requirements for the past 90 days:
Yes [x]
No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date:
As of March 30, 1997, the number of shares outstanding of the
registrant's only class of common stock was 42.0 million.
TABLE OF CONTENTS
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Page No.
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Statement of Earnings for the First 3
Quarter Ended March 30, 1997 and March 31, 1996
Consolidated Statement of Financial Position at 4
March 30, 1997 and December 31, 1996
Consolidated Statement of Cash Flows for the First 5
Quarter Ended March 30, 1997 and March 31, 1996
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of 7
Operations, Cash Flows and Financial Condition
PART II. OTHER INFORMATION
___________________________
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 12
Index to Exhibits 13
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF EARNINGS
Unaudited
__________________________________
First Quarter Ended
Millions, Except per Share Amounts 3/30/97 3/31/96
__________________________________ _______ _______
Net sales $1,304 $1,316
Cost of goods sold 1,018 1,000
______ ______
Gross profit 286 316
Selling & administrative expenses 178 180
Research & engineering expenses 61 62
Net (income) expense from joint ventures and
alliances (7) 2
Interest expense 5 4
Other income, net (7) (3)
______ ______
Earnings before income taxes 56 71
Provision for income taxes 15 22
______ ______
Net earnings $ 41 $ 49
______ ______
Earnings per share $ 1.06 $ 1.21
Cash dividends declared per share .25 .25
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Unaudited
____________________________________________
Millions, Except per Share Amounts 3/30/97 12/31/96
__________________________________ _______ ________
Assets
Current assets:
Cash and cash equivalents $ 81 $ 108
Receivables 730 669
Inventories 615 587
Other current assets 196 189
______ ______
1,622 1,553
Investments and other assets 302 326
Property, plant & equipment less accumulated
depreciation of $1,375 1,337 1,286
Intangibles, deferred taxes & deferred charges 205 204
______ ______
Total assets $3,466 $3,369
______ ______
Liabilities and shareholders' investment
Current liabilities:
Loans payable $ 23 $ 93
Current maturities of long-term debt 39 39
Accounts payable 378 380
Other current liabilities 543 509
______ ______
983 1,021
______ ______
Long-term debt 459 283
______ ______
Other liabilities 753 753
______ ______
Shareholders' investment:
Common stock, $2.50 par value, 47.8 and 43.9
shares issued 119 110
Additional contributed capital 1,103 929
Retained earnings 565 535
Common stock in treasury, at cost, 5.8 & 4.5 shares (227) (169)
Common stock held in trust for employee benefit plans (181) -
Unearned compensation (ESOP) ( 42) ( 46)
Cumulative translation adjustments ( 66) ( 47)
______ _______
1,271 1,312
______ ______
Total liabilities & shareholders' investment $3,466 $3,369
______ ______
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
____________________________________
First Quarter Ended
Millions 3/30/97 3/31/96
________ _______ _______
Cash flows from operating activities:
Net earnings $ 41 $ 49
_____ _____
Adjustments to reconcile net earnings
to net cash from operating activities:
Depreciation and amortization 39 38
Restructuring actions ( 4) (18)
Accounts receivable ( 71) (13)
Inventories ( 31) (35)
Accounts payable and accrued expenses 44 ( 3)
Income taxes payable 4 13
Other 8 ( 6)
______ ______
Total adjustments ( 11) (24)
_____ _____
Net cash provided by operating activities 30 25
_____ _____
Cash flows from investing activities:
Property, plant and equipment:
Additions (104) (36)
Disposals 7 2
Investments in joint ventures and alliances 3 26
Other ( 2) 20
______ ____
Net cash (used in) provided from investing
activities ( 96) 12
______ _____
Net cash (used for) provided from operating
and investing activities ( 66) 37
______ _____
Cash flows from financing activities:
Proceeds from borrowings 189 109
Payments on borrowings ( 9) ( 7)
Net borrowings under credit agreements ( 70) (30)
Repurchases of common stock ( 58) ( 4)
Payments of dividends ( 10) (10)
Other ( 2) ( 1)
______ ______
Net cash provided from financing activities
40 57
______ ______
Effect of exchange rate changes on cash ( 1) ( 1)
______ ______
Net change in cash and cash equivalents ( 27) 93
Cash & cash equivalents at beginning of the year 108 60
_____ _____
Cash & cash equivalents at the end of the quarter $ 81 $ 153
_____ _____
CUMMINS ENGINE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
______________________________________________
Note 1. Accounting Policies: The Consolidated Financial Statements
for the interim periods ended March 30, 1997 and March 31, 1996 have
been prepared in accordance with the accounting policies described in
the Company's Annual Report to Shareholders and Form 10-K. Management
believes the statements include all adjustments of a normal recurring
nature necessary to present fairly the results of operations for the
interim periods. Inventory values at interim reporting dates are based
upon estimates of the annual adjustments for taking physical inventory
and for the change in cost of LIFO inventories.
Note 2. Income Taxes: Income tax expense is reported during the
interim reporting periods on the basis of the estimated annual
effective tax rate for the taxable jurisdictions in which the Company
operates.
Note 3. Long-term Debt: In February 1997, the Company issued $120
million of 6.75 percent debentures that mature in 2027. Net proceeds
were used principally to repay commercial paper indebtedness incurred
to repurchase shares of common stock. Holders of the debentures have a
1-time option in 2007 to redeem the debentures. The Company also has a
recall right after ten years.
Note 4. Common Stock: In January 1997, the Company issued 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 are not 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 repurchased 1.3 million shares of its common
stock from Ford Motor Company in January 1997 and was authorized by the
Board of Directors to repurchase an additional 1.7 million shares from
time-to-time in the open market.
On April 1, 1997, the Company announced an increase in its quarterly
common stock dividend from 25 cents per share to 27.5 cents, effective
with the dividend payment in June 1997.
Note 5. Earnings Per Share: Earnings per share are computed by
dividing net earnings by the weighted-average number of common shares
outstanding during the period. The weighted-average number of shares,
which excludes shares of stock held by the employee benefits trust
until distributed and allocated to a benefit plan, was 38.4 million in
the first quarter of 1997 and 40.3 million in the first quarter of
1996. The Financial Accountings Standard Board recently released a new
accounting rule on the calculation of earnings per share that is
effective at year-end 1997. This rule, which does not permit early
adoption, is not expected to have a material effect on the Company's
reported earnings per share.
CUMMINS ENGINE COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS,
CASH FLOWS AND FINANCIAL CONDITION
_____________________________________________________________
OVERVIEW
________
Sales of $1.3 billion in the first quarter of 1997 were 1 percent
lower, or nearly level, with the first quarter of 1996. However, the
Company experienced a shift in sales mix from automotive to power
generation and industrial markets. Automotive sales were down $86
million, primarily as a result of lower demand in North American heavy-
and medium-duty truck markets. This decline in revenues was nearly
offset by increased sales in other markets, with sales of power
generation $23 million higher than the first quarter of 1996 and
industrial sales $55 million higher than the year-ago period.
The Company shipped 86,200 engines in the first quarter of 1997,
compared to 89,200 in the first quarter of 1996:
First Quarter
Engine Shipments 1997 1996
________________ ______ ______
Midrange 63,100 62,600
Heavy-duty 20,800 24,600
High-horsepower 2,300 2,000
______ ______
Total 86,200 89,200
______ ______
Net earnings in the first quarter of 1997 were $41 million ($1.06 per
share), compared to $49 million ($1.21 per share) in the first quarter
1996.
RESULTS OF OPERATIONS
_____________________
The percentage relationships between net sales and other elements of
the Company's Consolidated Statement of Earnings for the comparative
reporting periods were:
First Quarter
Percent of Net Sales 1997 1996
____________________ _____ _____
Net sales 100.0 100.0
Cost of goods sold 78.1 76.0
_____ _____
Gross profit 21.9 24.0
Selling and administrative expenses 13.7 13.7
Research and engineering expenses 4.7 4.7
Net (income) expense from joint ventures & alliances (.6) .1
Interest expense .4 .3
Other income, net (.6) (.2)
_____ _____
Earnings before income taxes 4.3 5.4
Provision for income taxes 1.2 1.7
_____ _____
Net earnings 3.1 3.7
_____ _____
Sales by Market
_______________
Sales for each of the Company's markets for the comparative reporting
periods were:
First Quarter 1997 First Quarter 1996
Dollars in Millions Dollars Percent Dollars Percent
___________________ _______ _______ _______ _______
Automotive:
Heavy-duty truck 295 23 364 28
Midrange truck 132 10 161 12
Bus and light commercial vehicles 171 13 159 12
Power generation 275 21 252 19
Industrial 257 20 202 15
Filtration and other 174 13 178 14
_____ ___ _____ ___
Net sales 1,304 100 1,316 100
_____ ___ _____ ___
Automotive
__________
Sales of $295 million to the heavy-duty truck market were $69 million
(almost 20 percent) lower than a year ago. Performance in this market
is dominated by the North American market. Compared to the first
quarter of 1996, North American shipments were 27 percent lower, due to
the lower market size. There are, however, signs that the North
American heavy-duty truck market has strengthened. First-quarter 1997
engine shipments to this market were 13 percent higher than in the
fourth quarter of 1996. In international markets, engine shipments in
the first quarter of 1997 were 26 percent higher than the first quarter
of 1996, primarily due to strong demand in Mexico.
Compared to the first quarter of 1996, engine shipments for midrange
trucks were 22 percent lower, primarily due to decreased demand in
North America. Midrange truck engines for international markets were
12 percent higher than the first quarter of 1996. This increase was
primarily in Brazil.
In the bus and light commercial vehicles market, sales of $171 million
were 8 percent higher than the first quarter of 1996. First-quarter
1997 engine shipments to Chrysler were another record. In addition,
demand for bus markets in the first quarter of 1997 was stronger, 5
percent higher than the first quarter of 1996.
Power Generation
________________
Sales of $275 million to power generation markets represented 21
percent of the Company's net sales in the first quarter of 1997. This
was $23 million higher than the first quarter of 1996. Strong genset
sales in Asia and Mexico accounted for this 9-percent increase.
Industrial
__________
Record quarterly sales of $257 million to industrial markets were 27
percent higher than first-quarter 1996, reflecting strong sales for
construction equipment in North America and international agricultural
markets. Engine shipments for marine markets also were 12 percent
higher than the prior year.
Filtration and Other
____________________
Sales of $174 million for filtration and other products were 2 percent
lower than the first quarter of 1996, due primarily to the lower level
of demand in North American heavy-duty and midrange truck markets.
Gross Profit
____________
Compared to the first quarter of 1996, the Company's gross margin of
21.9 percent of net sales was affected by several factors, the most
significant of which was the lower level of heavy-duty truck 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 product
coverage expense, which at 2.7 percent of net sales was $2 million
higher than the first quarter of 1996.
Operating Expenses
__________________
Selling and administrative expenses in the first quarter of 1997 were
$178 million. This was $2 million lower than the first quarter of 1996
due to the effect of lower restructuring expense and benefits from
completed restructuring actions.
Research and engineering expenses of $61 million in the first quarter
were $1 million lower than the prior year. The first-quarter reduction
in costs was due primarily to lower costs for new products that are
nearing production.
Net income from joint ventures and alliances was $9 million higher than
the first quarter of 1996 due to higher earnings from Kirloskar Cummins
and the Company's joint venture with Komatsu and annual royalties and
fees from the new joint venture with Dongfeng.
Interest and Other Income and Expense
_____________________________________
Interest expense of $5 million in the first quarter of 1997 was $1
million higher than a year ago due to the higher level of long-term
debt. Other income and expense includes a variety of items, such as
foreign currency translation gains and losses, royalty and technical
fees of licensees, interest income, and gains or losses associated with
fixed asset dispositions. In the first quarter of 1997, other income
was $7 million, which was $4 million higher than the first quarter of
1996 due to no longer having the fees associated with selling
receivables, a net translation gain of $1 million (compared to a loss
in the first quarter of 1996) and higher royalties from licensees.
Provision For Income Taxes
__________________________
The estimated effective tax rate (ETR) is 28 percent for 1997. The ETR is
lower than the US statutory rate of 35 percent because of lower taxes on
US export income and the incremental research tax credit that expires May
31, 1997.
CASH FLOW AND FINANCIAL CONDITION
_________________________________
Key elements of the Consolidated Statement of Cash Flows were:
First Quarter
Dollars in Millions 1997 1996
___________________ ____ ____
Net cash provided by operating activities $ 30 $ 25
Net cash (used in) provided from investing activities (96) 12
_____ ____
Net cash (used for) provided from operating and
investing activities (66) 37
Net cash provided from financing activities 40 57
Effect of exchange rate changes on cash ( 1) ( 1)
_____ ____
Net change in cash and cash equivalents $(27) $ 93
_____ _____
Net cash used for operating and investing activities was $66 million in
the first quarter of 1997. In the second quarter of 1996, the Company
elected not to renew an agreement for the sale of up to $110 million in
accounts receivable, which resulted in an increase in receivables.
Days sales outstanding were 50 at the end of the first quarter of 1997,
compared to 49 in the first quarter of 1996, adjusted for discontinuing
the receivables sale program. Investing activities required net cash
resources of $96 million in the first quarter of 1996. Capital
expenditures were $104 million, compared to $36 million in the first
quarter of 1996. The increased level of expenditures in 1997 was
related to continued investments for new products.
Net cash provided from financing activities was $40 million in the
first quarter of 1997. As disclosed in Note 3 to the Consolidated
Financial Statements, the Company issued $120 million in debentures
under its shelf registration statement in February 1997.
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 issued 3.75 million shares
of its common stock to an employee benefits trust.
On April 1, 1997, the Company announced a 10-percent increase in its
quarterly common stock dividend from 25 cents per share to 27.5 cents,
effective with the dividend payment in June 1997.
Forward-looking Statements
__________________________
The Company has included certain forward-looking statements in this
Management's Discussion and Analysis of Results of Operations, Cash
Flows and Financial Condition. These statements are based on current
expectations, estimates and projections about the industries in which
the Company operates, management's beliefs and various assumptions made
by management which are difficult to predict. Among the factors that
could affect the outcome of the statements are general industry and
market conditions and growth rates. Therefore, actual outcomes and
their impact on the Company may differ materially from what is
expressed or forecasted. The Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of
new information, future events or otherwise.
PART II. OTHER INFORMATION
___________________________
Item 4. Submission of Matters to a Vote of Security Holders
____________________________________________________________
The Company held its annual meeting of security holders on April 1,
1997 at which security holders elected 12 directors of the Company for
the ensuing year and ratified the appointment of Arthur Andersen LLP as
auditors for the year 1997.
Results of the voting in connection with each of the items were as
follows:
Voting on Directors:
____________________
For Withheld
__________ ________
H. Brown 34,563,096 528,586
R. Darnall 34,569,086 522,596
W. Y. Elisha 34,569,374 522,308
H. H. Gray 34,514,238 577,444
J. A. Henderson 34,562,667 529,015
W. I. Miller 34,578,197 513,485
D. S. Perkins 34,567,033 524,649
W. D. Ruckelshaus 34,568,116 523,566
H. B. Schacht 34,562,402 529,280
T. M. Solso 34,539,676 552,006
F. A. Thomas 34,572,809 518,873
J. L. Wilson 34,573,758 517,924
Ratify Appointment of Auditors:
_______________________________
For Against Abstain
__________ _______ _______
34,710,312 251,389 129,981
With regard to the election of directors, votes were cast in favor of
or withheld from each nominee; votes that were withheld were excluded
entirely from the vote and had no effect. Abstentions on the
ratification of the appointment of Arthur Andersen LLP were counted as
present for purposes of determining the existence of a quorum. Under
the rules of the New York Stock Exchange, brokers who held shares in
street names had the authority to vote on certain items when they did
not receive instructions from beneficial owners. Brokers that did not
receive instructions were entitled to vote on the election of
directors. Under applicable Indiana law, a broker non-vote had no
effect on the outcome of the election of directors.
Item 6. Exhibits and Reports on Form 8-K:
__________________________________________
(a) See the Index to Exhibits on Page 13 for a list of exhibits filed
herewith.
(b) On February 14, 1997, the Company filed a Form 8-K Other Event to
define the calculation of the ratio of earnings to fixed charges
disclosed in the Company's Prospectus Supplement dated February
14, 1997 to the Prospectus dated November 17, 1993 relating to
issuance of 6.75 percent debentures, due February 15, 2027.
Signatures
__________
Pursuant to the requirements 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/Rick J. Mills April 21, 1997
________________
Rick J. Mills
Vice President - Corporate Controller
(Chief Accounting Officer)
CUMMINS ENGINE COMPANY, INC.
____________________________
INDEX TO EXHIBITS
_________________
10(k) Retirement Plan for Non-employee Directors of Cummins Engine
Company, Inc., as amended February 1997 (filed herewith)
10(m) Three Year Performance Plan, as amended February 1997
(filed herewith)
10(p) Restricted Stock Plan for Non-employee Directors, as amended
February 11, 1997 (filed herewith)
10(t) Senior Executive Three Year Performance Plan, as amended
February 11, 1997 (filed herewith)
11 Schedule of Computation of Per Share Earnings for the First
Quarter Ended March 30, 1997 and March 31, 1996
(filed herewith)
27 Financial Data Schedule (filed herewith)