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 29, 1998 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 29, 1998, the number of shares outstanding of the
registrant's only class of common stock was 42.1 million.
TABLE OF CONTENTS
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Page No.
________
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Statement of Earnings for the First 3
Quarter Ended March 29, 1998 and March 30, 1997
Consolidated Statement of Financial Position at 4
March 29, 1998 and December 31, 1997
Consolidated Statement of Cash Flows for the First 5
Quarter Ended March 29, 1998 and March 30, 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of 8
Operations, Cash Flow 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 3/29/98 3/30/97
__________________________________ _______ _______
Net sales $1,500 $1,304
Cost of goods sold 1,160 1,018
Special charge 43 -
______ ______
Gross profit 297 286
Selling & administrative expenses 202 178
Research & engineering expenses 67 61
Net expense (income) from joint ventures
and alliances 4 (7)
Interest expense 17 5
Other income, net (7) (7)
______ ______
Earnings before income taxes 14 56
Provision for income taxes 4 15
Minority interest 3 -
______ ______
Net earnings $ 7 $ 41
______ ______
Basic earnings per share $ .18 $ 1.07
Diluted earnings per share .18 1.06
Cash dividends declared per share .275 .25
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Unaudited
____________________________________________
Millions, except per share amounts 3/29/98 12/31/97
__________________________________ _______ ________
Assets
Current assets:
Cash and cash equivalents $ 48 $ 49
Receivables 926 771
Inventories 781 677
Other current assets 197 213
______ ______
1,952 1,710
Investments and other assets 351 346
Property, plant & equipment less accumulated
depreciation of $1,515 and $1,434 1,635 1,532
Intangibles, deferred taxes & deferred charges 558 177
______ ______
Total assets $4,496 $3,765
______ ______
Liabilities and shareholders' investment
Current liabilities:
Loans payable $ 32 $ 90
Current maturities of long-term debt 37 42
Accounts payable 458 386
Other current liabilities 582 537
______ ______
1,109 1,055
______ ______
Long-term debt 1,181 522
______ ______
Other liabilities 742 713
______ ______
Minority interest 55 53
______ ______
Shareholders' investment:
Common stock, $2.50 par value, 47.9 and 48.1
shares issued 120 120
Additional contributed capital 1,106 1,119
Retained earnings 708 713
Common stock in treasury, at cost, 5.8 & 6.0 shares (226) (245)
Common stock held in trust for employee benefit
plans, 3.6 and 3.7 shares (174) (175)
Unearned compensation (ESOP) ( 38) ( 42)
Cumulative translation adjustments ( 87) ( 68)
______ _______
1,409 1,422
______ ______
Total liabilities & shareholders' investment $4,496 $3,765
______ ______
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
____________________________________
First Quarter Ended
Millions 3/29/98 3/30/97
________ _______ _______
Cash flows from operating activities:
Net earnings $ 7 $ 41
_____ _____
Adjustments to reconcile net earnings
to net cash from operating activities:
Depreciation and amortization 47 39
Restructuring actions ( 6) ( 4)
Accounts receivable (113) ( 71)
Inventories ( 54) ( 31)
Accounts payable and accrued expenses 120 44
Income taxes payable ( 7) 4
Other 27 8
_____ ______
Total adjustments 14 ( 11)
_____ _____
Net cash provided by operating activities 21 30
_____ _____
Cash flows from investing activities:
Property, plant and equipment:
Additions ( 83) (104)
Disposals 2 7
Investments in joint ventures and alliances ( 20) 3
Acquisition of businesses (453) ( 3)
Other - 1
______ ____
Net cash used in investing activities (554) ( 96)
______ _____
Net cash flows used for operating and
investing activities (533) ( 66)
______ _____
Cash flows from financing activities:
Proceeds from borrowings 710 189
Payments on borrowings (103) ( 9)
Net payments under credit agreements ( 62) ( 70)
Repurchase of common stock - ( 58)
Dividend payments ( 12) ( 10)
Other ( 1) ( 2)
______ ______
Net cash provided from financing activities
532 40
_____ ______
Effect of exchange rate changes on cash - ( 1)
_____ ______
Net change in cash and cash equivalents ( 1) ( 27)
Cash & cash equivalents at beginning of the year 49 108
_____ _____
Cash & cash equivalents at the end of the quarter $ 48 $ 81
_____ _____
CUMMINS ENGINE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
______________________________________________
Note 1. Accounting Policies: The Consolidated Financial Statements
for the interim periods ended March 29, 1998 and March 30, 1997 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. Acquisition: In January 1998, Cummins completed the
acquisition of the stock of Nelson Industries, Inc., for $453 million.
Nelson, a filtration and exhaust systems manufacturer, was consolidated
from the date of its acquisition. The purchase price in excess of net
assets will be amortized over 40 years. In the first quarter of 1998,
no valuation adjustments were made to Nelson's assets and liabilities.
Note 3. Special Charge: In the first quarter of 1998, the Company
recorded a one-time charge for product coverage expense primarily
attributable to the recent experience of higher-than-anticipated costs
to repair certain automotive engines manufactured in previous years.
The Company believes it is necessary to make a one-time charge of $43
million pre-tax to accrue for such product coverage costs expected to
be incurred in the future on these engines currently in the field.
Note 4. 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 5. Long-term Debt: In January 1998, the Company's revolving
credit agreement was amended, forming two $500 million agreements
maturing in 1999 and 2003. In February 1998, the Company issued $765
million face amount of notes and debentures. Net proceeds were used to
finance the acquisition of Nelson and pay down other indebtedness
outstanding at December 31, 1997. The $500 million revolving credit
agreement maturing in 1999 was terminated in March 1998, with the
financing need being replaced by the debt issue.
Note 6. Earnings per Share: Basic earnings per share of common stock
are computed by dividing net earnings by the weighted-average number of
common shares outstanding during the period. Diluted earnings per
share are computed by dividing net earnings by the weighted-average
number of shares, assuming the exercise of stock options. Shares of
stock held by the employee benefits trust are not included in
outstanding shares for EPS until distributed from the trust.
Weighted Per-
Net Average Share
Millions, except per share amounts Earnings Shares Amount
__________________________________ ________ ________ ______
1998
____
Basic $ 7 38.5 $ .18
Options - .4
___ ____
Diluted $ 7 38.9 $ .18
1997
____
Basic $41 38.2 $1.07
Options - .3
___ ____
Diluted $41 38.5 $1.06
Note 7. Comprehensive Income: Effective January 1, 1998, Cummins
adopted SFAS No. 130, a new accounting rule on reporting comprehensive
income. The new rule requires reporting of comprehensive income, which
includes net income and all other nonowner changes in equity during a
period.
First Quarter Ended
Millions March 29, 1998 March 30, 1997
________ ______________ ______________
Net income $ 7 $ 41
Minimum liability for pensions - -
Translation loss (19) (20)
_____ _____
Comprehensive income $(12) $ 21
_____ ____
Note 8. Contingency: The Environmental Protection Agency, the U. S.
Department of Justice and the California Air Resources Board
(collectively the government agencies) have raised concerns with diesel
engine manufacturers, including Cummins, about the level of Nitrogen
Oxide (NOx) emissions from diesel engines under certain driving
conditions. The government agencies also have raised concerns about
the strategies that diesel manufacturers have employed to maximize fuel
economy and lessen other pollutants, while also meeting Clean Air Act
standards for NOx emissions. The government agencies have indicated
that they may conclude that diesel manufacturers have been in violation
of the Clean Air Act and have, therefore, issued conditional
certificates of conformity on the 1998 heavy-duty, on highway diesel
engine models. Cummins believes that it is in full compliance with all
laws and regulations regarding emissions. The government agencies have
not made any final determinations or allegations. The industry and
Cummins are engaged in confidential discussions regarding these
emissions, the technical challenges confronted if new emissions
standards are imposed, the commercial impact of the government's policy
and legal positions and related issues. Both the industry and the
government agencies are taking these concerns and discussions very
seriously and are working diligently toward an amicable resolution. It
is premature to predict the outcome of the discussions or whether the
outcome will have a material effect on Cummins.
CUMMINS ENGINE COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS,
CASH FLOW AND FINANCIAL CONDITION
_____________________________________________________________
Overview
________
Earnings before interest and taxes in the first quarter of 1998 were
$74 million, excluding the effect of a one-time pre-tax charge of $43
million for product coverage costs related to previously produced
engines. This was 21 percent higher than the first quarter of 1997 on
a 15-percent increase in sales. However, after the higher interest
expense for the acquisition of Nelson, income taxes and minority
interest, the Company's net earnings before the one-time charge were
$37 million or 96 cents per share. Including the charge, net earnings
were $7 million or 18 cents per share. Net earnings in the first
quarter of 1997 were $41 million or $1.06 per share.
Results of Operations
_____________________
Net Sales
_________
Revenues from sales of engines were 55 percent of the Company's net sales
in the first quarter of 1998, with engine revenues 12 percent higher than
first-quarter 1997 and unit shipments 9 percent higher. This positive
variance reflected a mix shift from midrange to heavy-duty engines
in the first quarter of 1998:
First Quarter
Unit Shipments 1998 1997
________________ ______ ______
Midrange Engines 65,000 63,100
Heavy-duty Engines 26,900 20,800
High-horsepower Engines 2,200 2,300
______ ______
94,100 86,200
______ ______
Revenues from non-engine products, which were 45 percent of net sales
in the first quarter of 1998, were 18 percent higher than the first
quarter of 1997. The major changes within non-engine revenues were in
filtration, with the sales of Nelson included from the date of
acquisition by Cummins, and PowerCare (which includes sales of new
parts and remanufactured parts and engines).
The Company's sales for each of its key markets during the comparative
first quarters were:
First Quarter
$ Millions 1998 1997
__________ ______ ______
Automotive $ 684 $ 598
Power Generation 291 275
Industrial 269 257
Filtration and Other 256 174
______ ______
$1,500 $1,304
______ ______
Sales of $684 million in the first quarter of 1998 for automotive
markets were 14 percent higher than the first quarter of 1997. Heavy-
duty truck engine revenues were 39 percent higher than the first
quarter of 1997 on a 40-percent increase in units. The higher level of
sales was due to both the strong market and the Company's higher market
share in North America, as well as continued strong demand in Mexico
and the recovery in European automotive markets.
Revenues from the sales of engines for medium-duty trucks in the first
quarter of 1998 were 18 percent lower than the prior year's quarter on
an 18-percent decrease in units. In North America, the Company was
affected by a shutdown at Ford to relocate production. The effect of
this shutdown was partially offset by higher demand in international
markets, for which unit shipments were 28 percent higher than the year
ago level.
Engine revenues of the bus and light commercial vehicle market were 10
percent higher than the first quarter of 1997 on a 6-percent increase
in unit shipments, with the difference due primarily to pricing on new
engine models. In January, Cummins jointly announced with Chrysler a
new, fully electronic engine -- the ISB -- for the Dodge Ram pickup.
In the first quarter, Cummins shipped 22,200 engines to Chrysler, 8
percent higher than the first-quarter 1997 level, all while ramping up
production for the new engine.
In the first quarter of 1998, the Company's power generation markets
benefited from the consolidation of Cummins India Limited. Without
this, power generation revenues would have been down 3 percent compared
to first quarter 1997. Sales of the Company's generator sets continued
to reflect growth in North America, Latin America and Europe, which
offset declines in demand for generator sets in Southeast Asia, China
and Korea. However, engine sales to generator set assemblers were down
39 percent due to lower demand in Southeast Asia, China, Korea and
markets served from the Company's operations in the United Kingdom.
Sales of all other power generation products were at higher levels than
in the first quarter of 1997.
Sales to industrial markets were 5 percent higher than the first
quarter of 1997, primarily due to strong demand in North American and
European construction markets. Agricultural markets in North America
and Latin America also remained strong.
Filtration and other sales were $82 million higher than the first
quarter of 1997. In January, the Company completed the acquisition of
Nelson whose sales were $76 million in the first quarter.
In total, international markets represented 47 percent of the Company's
revenues in the first quarter of 1998. The Company continued to
benefit from recovery in European automotive markets and increased
industrial business in the first quarter, with Europe and the CIS
representing 13 percent of sales. Business in Mexico, Brazil and Latin
America also continued to be strong. Asian and Australian markets, in
total, represented 13 percent of the Company's sales in the first
quarter. In Australia, sales are primarily for automotive, power
generation and mining markets. In Indonesia, Malaysia, Thailand and
Korea, the Company's business is primarily power generation, industrial
and parts. Business fell in this area in the first quarter, with
revenues almost 60 percent lower than the first quarter of 1997. The
economy in India and portions of China also has slowed.
Gross Margin:
_____________
The Company's gross margin percentage before the special charge for
product coverage costs was 22.7 percent in the first quarter of 1998,
compared to 21.9 percent in the prior year's quarter. The Company's
gross margin percentage benefited from volume in the first quarter of
1998 ($25 million dollars, or 30-percent leverage). In addition, the
acquisition of Nelson and consolidation of Cummins India Limited added
$35 million. Gross margin percentage after the special charge was 19.8
percent in the first quarter of 1998.
Operating Expenses:
___________________
Selling and administrative expenses were 13.4 percent of sales in the
first quarter of 1998, compared to 13.7 percent in the first quarter of
1997. Excluding Nelson and Cummins India Limited, selling and
administrative expenses were $11 million higher than the first quarter
of 1997, due equally to costs of new products, information systems and
Year 2000 projects. Research and engineering expenses were 4.5 percent
of sales in the first quarter of 1998, compared to 4.7 percent in the
prior year's quarter.
The Company's losses from joint ventures and alliances were $4 million
in the first quarter of 1998, compared to income of $7 million in the
first quarter of 1997. The $11 million difference was primarily caused
by the consolidation of Cummins India Limited and higher start-up costs
at the Company's joint venture with Wartsila.
Other:
______
Interest expense was $17 million in the first quarter of 1998. The
increase over the prior year's quarter was due to the increased level
of borrowings to support working capital on the higher sales level and
to complete the acquisition of Nelson. Other income of $7 million was
equal to the first quarter of 1997.
Provision for Income Taxes:
___________________________
The Company's income tax provision in the first quarter of 1998 was $4
million, reflecting an effective tax rate of 29 percent for the year.
Cash Flow and Financial Condition
_________________________________
Key elements of cash flows were:
First Quarter
$ Millions 1998 1997
__________ ______ ______
Net cash used for operating and investing activities $(533) $ (66)
Net cash from financing activities 532 40
Effect of exchange rate changes on cash - ( 1)
______ ______
Net change in cash and cash equivalents $ ( 1) $ (27)
______ ______
In the first quarter of 1998, net cash used for operating and investing
activities was $533 million. This high level of net cash requirements
was due primarily to the acquisition of Nelson and planned capital
expenditures of $83 million. In the first quarter of 1998, the Company
issued $765 million face amount of notes and debentures to support
working capital and to complete the acquisition of Nelson.
As disclosed in Note 8, diesel engine manufacturers, including Cummins,
are involved in discussions with the Environmental Protection Agency,
the US Department of Justice and the California Air Resources Board
regarding diesel engine emissions.
FORWARD-LOOKING STATEMENTS
__________________________
The Company has included certain forward-looking statements in this
Management's Discussion and Analysis of Results of Operations, Cash
Flow 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 7,
1998 at which security holders elected 13 directors of the Company for
the ensuing year and ratified the appointment of Arthur Andersen LLP as
auditors for the year 1998.
Results of the voting in connection with each of the items were as
follows:
Voting on Directors:
____________________
For Withheld
__________ ________
H. Brown 32,040,765 826,548
R. Darnall 32,410,308 457,005
J. M. Deutch 32,403,211 464,102
W. Y. Elisha 32,406,962 460,351
H. H. Gray 32,396,085 471,228
J. A. Henderson 32,389,013 478,300
W. I. Miller 32,407,082 460,231
D. S. Perkins 32,394,111 473,202
W. D. Ruckelshaus 32,409,063 458,250
H. B. Schacht 32,401,593 465,720
T. M. Solso 32,356,038 511,275
F. A. Thomas 32,409,662 457,651
J. L. Wilson 32,411,817 455,496
Ratify Appointment of Auditors:
_______________________________
For Against Abstain
__________ _______ _______
35,794,688 302,328 59,879
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 who 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 19, 1998, the Company filed a Form 8-K Other Event to
report the merger of Safari Inc., a wholly owned subsidiary of the
Company, with and into Nelson Industries, Inc. pursuant to an
Agreement and Plan of Merger dated as of December 3, 1997 among
the Company, Safari Inc. and Nelson Industries, Inc.
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 May 1, 1998
________________
Rick J. Mills
Vice President - Corporate Controller
(Chief Accounting Officer)
CUMMINS ENGINE COMPANY, INC.
____________________________
INDEX TO EXHIBITS
_________________
4(a) Amended and Restated Credit Agreement (filed herewith)
4(b) Credit Agreement (filed herewith)
27 Financial Data Schedule (filed herewith)