1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended DECEMBER 31, 1996 OR
-----------------
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
-------- ---------
Commission File No. 1-12394
DETROIT DIESEL CORPORATION
-------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 38-2772023
- --------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
13400 OUTER DRIVE WEST, DETROIT, MICHIGAN 48239-4001
- --------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
313-592-5000
-------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
- ---------------------------- -----------------------------------------
Title of each class Name of each exchange on which registered
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 disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is 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. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 1, 1997 was approximately $148 million.
The number of shares of Common Stock outstanding as of March 1, 1997 was
24,698,816 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in Detroit Diesel Corporation's Proxy Statement in
connection with the Annual Meeting of Stockholders to be held on April 29,
1997, which will be filed with the Securities and Exchange Commission pursuant
to Regulation 14A, not later than 120 days after the end of the fiscal year, is
incorporated by reference into Part III (Items 10, 11, 12 and 13) of this Form
10-K.
THIS DOCUMENT CONTAINS 80 PAGES. THE EXHIBIT INDEX BEGINS ON PAGE 58.
1
2
PART I
ITEM 1. BUSINESS.
GENERAL
Detroit Diesel Corporation (the "Company" or "Detroit Diesel") designs,
manufactures, markets, services and provides aftermarket and remanufactured
products for a full range of high performance diesel and alternative fuel
engines from ten to 10,000 horsepower and offers financing through Detroit
Diesel Capital Corporation. Detroit Diesel serves the on-highway truck, coach
and bus, automotive, construction, mining and industrial, power generation,
marine and military markets through a worldwide network of more than 2,500
authorized distributors and dealers. Additionally, the Company sells its
engines directly to original equipment manufacturers ("OEMs") as well as to
governmental entities. A portion of the Company's products are exported in
equipment sold by its OEM customers to end-users. In 1996, approximately 66% of
the Company's net revenues were derived from sales made directly to U.S.-based
customers, with the balance sold to international accounts. A portion of U.S.
sales were exported as part of equipment built by U.S. customers.
Detroit Diesel's world headquarters is located in Detroit, Michigan. The
Company operates diesel engine manufacturing plants in Redford, Michigan and
in Cento, Italy, as well as an engine assembly facility in Emporia, Kansas.
Additionally, the Company operates a worldwide Parts Distribution Center in
Canton, Ohio, complemented by service parts warehouses located in the
Netherlands and in Singapore.
The Company was incorporated in the State of Delaware on November 23,
1987.
PRODUCTS
The following table shows the number of heavy-duty four-cycle and
two-cycle engines, light-duty engines, and other engines sold by the
Company during the periods indicated:
YEARS ENDED DECEMBER 31,
(UNITS) 1996 1995 1994
-------- -------- --------
Heavy-Duty - Four-cycle 54,514 66,201 58,049
Heavy-Duty - Two-cycle 13,282 14,184 15,904
Light-Duty 64,476 63,566 -
Other 24,438 22,757 18,156
-------- -------- --------
Total 156,710 166,708 92,109
======== ======== ========
The Company offers three four-cycle engine product series: the Series 60
engine, the Series 50 engine and the Series 55 engine. The Series 60 engine is
a six-cylinder engine offering 285 to 500 horsepower, the Series 50 engine is a
four-cylinder version of the Series 60 engine offering 218
2
3
to 325 horsepower, and the Series 55 engine is a six-cylinder engine offering
330 to 400 horsepower. The Series 60 engine is the Company's highest volume
heavy-duty engine product, accounting for approximately 38%, 40%, and 45% of
the Company's net revenues in 1996, 1995 and 1994, respectively. The Series 60
engine is sold primarily in the on-highway truck market; however, the Company
sells this product in other market applications as well. The Series 50 engine
is sold primarily in the on-highway truck and coach and bus markets, but has
expanded into other markets as the Company targets applications that have
horsepower requirements below the Series 60 range. The Series 55 heavy-duty
truck engine was introduced in late 1995 under a joint development agreement
with Mercedes-Benz ("Mercedes") and is being sold only to Freightliner
Corporation, an affiliate of Daimler-Benz AG, for an introductory period. The
Series 60, Series 50 and Series 55 engines feature integral electronic controls
consisting of an electronic control module and electronic unit injectors known
as Detroit Diesel Electronic Controls ("DDEC").
The Company currently sells four two-cycle engine product series: the
Series 53 engine (79 to 400 horsepower), the Series 71 engine (114 to 1,800
horsepower), the Series 92 engine (253 to 1,450 horsepower) and the Series 149
engine (640 to 2,935 horsepower). DDEC is available with the Series 71, Series
92, and Series 149 engines. The Company's two-cycle engines are sold primarily
to end-users who require engines that are able to start and accelerate to full
speed quickly, respond quickly to load shifts, and have lower exhaust
temperatures.
VM Motori S.p.A. ("VM"), located in Cento, Italy, is a wholly owned
subsidiary of Detroit Diesel and is a major independent supplier of diesel
engines to the international automotive industry. Its principal product for
this sector is a high-performance 2.5 liter, 4-cylinder, turbocharged diesel
engine which is currently being used in passenger cars, four-wheel drive and
multi-purpose vehicles.
The Company markets a medium-duty diesel engine, built in the United
States by Navistar International Transportation Corp., to the United States and
Canada. The Company also has agreements with AB Volvo Penta and its North
American subsidiary to distribute certain Volvo Penta marine diesel products in
the NAFTA area. During 1996, the Company and Perkins Engines Limited of
Peterborough, England ("Perkins") jointly elected to discontinue their engine
and parts distribution agreement.
The Company has entered into agreements with Mercedes with respect to the
development, manufacture, assembly and marketing of certain diesel engines and
diesel engine components. Under this joint development agreement, the Series
55 engine was introduced in late 1995.
The Company and MTU Motoren- und Turbinen-Union Friedrichshafen GmbH
("MTU") have entered into collaborative agreements for the joint development,
production and distribution of two new families of four-cycle heavy-duty diesel
engines for off-highway markets. These engines are scheduled for introduction
during 1997 and will be known as the Series 2000 and the Series 4000 diesel
engines. In addition, MTU has appointed the Company its exclusive master
distributor for MTU products in the U.S. and a portion of Canada. The Company
and MTU have a license agreement to develop, produce and distribute specific
variations of the MTU MT880 Series of heavy-duty diesel engines for combat
vehicles and military applications manufactured in the U.S.
3
4
The Company sells to licensees completely knocked-down and semi
knocked-down unassembled engine kits for sale within selected markets.
In addition to its diesel-fueled engines, the Company currently offers
certain of its four-cycle and two-cycle engine products fueled by methanol,
ethanol or natural gas.
The Company also sells new components and parts and remanufactured
components, parts and engines. Remanufactured components, parts and engines
are sold under the Company's reliabilt(R) tradename by the Company's
remanufacturing subsidiary and by selected distributors.
MARKETS AND CUSTOMERS
Detroit Diesel serves the on-highway truck, coach and bus, automotive,
construction and industrial, power generation, marine and military markets.
Following is a brief description of these markets.
ON-HIGHWAY TRUCK. The largest market for the Company's engines continues
to be the on-highway heavy-duty truck market. This market is served primarily
by the Company's four-cycle products. The Series 60 engine is the Company's
highest volume engine for this use, accounting for approximately 96% of the
Company's on-highway truck unit sales in 1996. The Company's engines are
available through all major North American heavy-duty truck manufacturers. The
Company's largest OEM customers for on-highway heavy-duty truck engines in 1996
were Freightliner Corporation, PACCAR Inc., Navistar International
Transportation Corp. and Volvo GM Heavy Truck Corporation, which represented
approximately 33% of the Company's 1996 consolidated net revenues. Sales to
Freightliner Corporation represented approximately one-half of this total. The
loss of any of these customers could have an adverse effect on the Company's
business.
CONSTRUCTION AND INDUSTRIAL. The construction and industrial market
consists of a variety of applications, including construction, forestry,
mining, earth moving, material handling, stationary mechanical power and
petroleum. The Company's two-cycle engines account for the majority of the
Company's sales in this market. Additionally, the Company's Series 60 and
Series 50 engines are gaining market acceptance. The Company's products are
available from a variety of North American and European industrial equipment
manufacturers.
AUTOMOTIVE. The automotive market is currently served by VM. VM sells to
OEMs state-of-the-art turbo diesel engines which are used in passenger cars,
mini-vans and sport utility vehicles sold for the European automotive market.
The Company's largest customer in this market is Chrysler Corporation.
COACH AND BUS. The coach and bus market consists of inter-city bus,
transit bus and medium-duty bus sectors. Detroit Diesel serves this market
with its four-cycle products and remanufactured two-cycle products. The
Company's products are available as standard or optional power by every major
North American heavy-duty coach and bus manufacturer.
4
5
MARINE. The marine market includes engines for both commercial and
pleasure crafts. The Company serves this market with its two-cycle products
and Volvo Penta and MTU engines under its distribution agreements with these
companies. The marine products serve a broad base of boat builders worldwide.
Marine engines are typically sold by the Company to distributors for resale to
boat OEMs.
POWER GENERATION. The power generation market requires engines for
electric power generation applications. These are packaged into generator
sets, which include an electric generator together with the generator drive
engine. The Company's two-cycle products account for the majority of its
generator drive engine sales. The Company has entered into an agreement with
Kohler Company ("Kohler"), its largest customer for generator set engines,
pursuant to which the Company has agreed to supply virtually all of Kohler's
engine requirements for industrial generator sets of 200kW and above. These
products are marketed by Kohler under the Spectrum and Kohler tradenames.
MILITARY. The military market includes both combat and tactical vehicles
plus a variety of diesel-powered specialized equipment. All applications use
commercial Detroit Diesel engines customized for the defense market
requirements. The Company's two-cycle engines are this market's dominant
products with the U.S. Army as the principal end user. A significant portion
of the engines in this market are exported. In addition, Detroit Diesel has
been licensed by MTU to manufacture the MT880 engine for U.S., U.S.-funded and
certain foreign combat vehicle applications.
SALES AND DISTRIBUTION
Sales of the Company's products are made through a direct sales force and
a worldwide network of independently-owned and company-owned distributors who
sell engines, components and parts and provide service support to local OEMs,
dealers and end-users. Currently there are 29 distributors in North America
operating a total of 170 authorized facilities and 76 distributors outside of
North America operating 139 authorized facilities. The network of authorized
service dealers, which is generally administered by these distributors,
consists of over 2,580 dealers worldwide, of which approximately 2,260 are in
North America. The Company has a controlling interest in three distributors
worldwide and investments in five other distributors, including three in North
America and two overseas.
In support of its distribution system, the Company maintains a worldwide
Parts Distribution Center in Canton, Ohio and overseas regional warehouses in
the Netherlands and in Singapore. In addition, the Company's sales and service
activities are supported by four remanufacturing centers in the United States
which provide remanufactured engines, components and parts. The Company also
operates regional sales offices strategically located to support customers in
all market segments.
Because orders for two-cycle products are ordinarily filled within two to
ten weeks, the Company's customers normally place orders on that basis.
However, certain orders such as military contracts or bus orders may be placed
up to 12 months in advance of required delivery. On-highway truck OEM
customers normally place firm orders for Series 60 engines only one month in
advance of their next month's production run. However, the Company typically
5
6
negotiates annual volume targets with each OEM, and certain programs are used
to provide incentives for the OEMs to purchase their targeted annual volume.
Therefore, while firm orders are only received monthly, there are reasonably
anticipated annual requirements that allow for production planning.
For the reasons stated above, the Company's backlog of firm orders
typically averages two to three months' production but the Company normally is
aware of reasonably anticipated future orders well in advance of the placement
of a firm order. At December 31, 1996 and 1995, the Company's backlog of firm
orders was approximately $217 million and $239 million, respectively.
The Company's business is moderately seasonal, as its major OEM customers
historically have two-to four-week summer shutdowns of operations during the
third quarter. The Company typically shuts down its own operations for one
week each July. Consequently, the Company's third quarter results should
reflect the effects of these shutdowns.
INTERNATIONAL
A significant portion of the Company's products are sold in overseas
markets, either directly as loose engines or indirectly in vehicles and
equipment made by North American OEMs. Sales of VM's products are concentrated
outside of North America. The Company has established foreign sales
subsidiaries in Europe, Asia and Latin America which also function in a service
and product support capacity. Parts warehousing operations are strategically
located in the Netherlands and in Singapore, and work in conjunction with the
Company's Parts Distribution Center located in Canton, Ohio to maintain a high
level of parts availability to overseas customers. The Company has also
entered into technical assistance and license agreements in strategic worldwide
locations for the assembly and sale of products and components to meet the
needs of local markets. The Company also operates a manufacturing facility
located in Cento, Italy.
With the increase in global business activity, the Company is subject to
risks of conducting business abroad, including currency exchange rate
fluctuations, limits on repatriation of funds, compliance with foreign laws and
other economic and political uncertainties that may threaten the Company's
operations or assets located in foreign countries. Changes in foreign currency
exchange rates, particularly the Italian Lira, are generally reported as a
component of stockholders' equity. Changes in the value of the Italian Lira
will impact the Company's translation adjustments in the future.
Summary information by geographic area is set forth in "Segments of
Business" in Note 9 of the Notes to the Consolidated Financial Statements.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are intended to facilitate
its ability to respond to market needs and the technological demands of the
market. Total research and development expenditures were $105.2 million, $94.8
million and $64.4 million for 1996, 1995 and
6
7
1994, respectively. In addition, the Company conducts research and development
funded by various government agency-sponsored projects.
SUPPLIERS
The Company believes it has adequate sources for the supply of raw
materials and components for its manufacturing needs. The Company's suppliers
are located primarily in North America and Western Europe. The Company has
initiated a policy of strengthening its supplier relationships by concentrating
its purchases for particular parts over a limited number of suppliers. The
Company believes that this policy contributes to quality control and cost
control and increases the suppliers' commitment to the Company. Moreover, the
Company relies upon, and expects to continue to rely upon, single source
suppliers for critical components: electronic unit injectors from Diesel
Technology Company, an affiliated company; camshafts and cylinder liners from
Dana Corporation; piston castings from General Motors Corporation, Powertrain
Division; crankshafts from Gerlach Werke; valves from Eaton Corporation; and
electronic control modules from Motorola, Inc. Additionally, with the
introduction of new products during 1997, the Company expects the use of
European suppliers to increase. The loss of any of these suppliers could have
an adverse effect on the Company's business.
COMPETITION
The heavy-duty diesel engine business is highly competitive. The Company
competes based on price, quality, durability, fuel economy, emissions
compliance, reliability and availability of replacement parts and service, as
well as overall customer service. The distributor network plays a key
competitive role in providing parts and service to end-users. The Company
competes with independent diesel engine manufacturers as well as OEMs that
manufacture engines for their own products. Certain of these OEMs are also
customers of the Company. The Company's principal competitors in international
markets vary from country to country, with local manufacturers generally
predominating each particular market. In North America, the Company's
principal competitors in each of its markets are Caterpillar Inc. and Cummins
Engine Company, Inc. In its international markets, the Company also competes
with several other manufacturers in Europe and Japan. The Company's principal
competitors are larger than the Company and have substantial resources. There
can be no assurance that competitors will not be able to take actions,
including developing new technology or products, or offering prolonged reduced
pricing, which could adversely affect the Company.
PATENTS AND TRADEMARKS
The Company maintains and has pending various U.S. and foreign patents and
patent licenses relating to its business, which it believes are appropriate to
protect the Company's interest in existing products, new inventions and product
developments. VM also maintains various U.S. and foreign patents relating to
its business. The Company does not believe any single patent is material to
its business nor would the expiration or invalidity of any patent have a
material adverse effect on its business or its ability to compete. The Company
is currently involved in a patent infringement lawsuit with one of its
competitors. Refer to Item 3 for a discussion involving this matter.
7
8
The Company owns and maintains U.S. trademarks registrations in all of its
principal trademarks, including Detroit Diesel(R), the spinning arrows design,
reliabilt(R) and Series 60(R). Registrations for its principal trademarks are
also maintained in other countries where a significant volume of its products
are sold and such registration is considered appropriate to protect the
Company's proprietary rights. All authorized distributors and remanufacturing
centers are licensed to use these trademarks in the conduct of their
businesses.
EMPLOYEES
At December 31, 1996, the Company (including its distributor and
remanufacturing subsidiaries) employed approximately 6,200 persons worldwide.
Approximately 1,959 of the Company's employees are represented by the
International Union, United Automobile, Aerospace and Agricultural Implement
Workers of America, Local 163 ("UAW").
ENVIRONMENTAL MATTERS
Product Compliance. The Company's engines are subject to extensive
regulatory requirements. Specific emissions standards for diesel engines are
imposed by the U.S. Environmental Protection Agency ("EPA") and by other
regulatory agencies, such as the California Air Resources Board ("CARB"). The
Company believes that its diesel engine products comply with all applicable
emissions requirements currently in effect. The Company's ability to comply
with emissions requirements which may be imposed in the future is an important
element in maintaining and improving the Company's position in the diesel
engine marketplace. Substantial capital and operating expenses are included in
the Company's capital expenditure budgets to comply with these emissions
requirements and, if the Company is not able to maintain its compliance record,
such non-compliance may have a substantial adverse impact on the Company's
future financial results.
The 1990 Clean Air Act amendments established the U.S. regulatory
framework, including emissions standards for diesel engines. The act provides
the regulatory authority for the EPA to set emissions standards for all mobile
and stationary sources. For mobile on-highway diesel engines, the act included
nitrogen oxide (NOx) emissions standards through 2003, particulate standards
for urban bus engines, and left it to the EPA to establish the stringency of
the other pollutants. The next change from the current 5.0 grams per brake
horsepower-hour (g/bhp-hr) NOx standard is a reduction to 4.0 g/bhp-hr in 1998
for both truck and urban bus engines. Additionally the urban bus particulate
standard, was reduced to 0.05 g/bhp-hr in 1996 from the 0.07 g/hp-hr standard
applicable in 1995. At the present time the other regulated pollutants,
hydrocarbons (HC) and carbon monoxide (CO), are easily achieved by the
company's engines.
In 1995, the Company participated with other heavy-duty engine
manufacturers and negotiated with EPA and CARB a long term NOx reduction
strategy for heavy-duty on-highway engines. This historical long term agreement
known as the Statement of Principle (SOP) provides significant long term
environmental benefits as well as providing the Company a long term vision of
emissions reduction objectives. The SOP sets an emissions goal of 2.5 g/bhp-hr
nitrogen oxide + nonmethane hydrocarbon (NOx + NMHC) for 2004 for on-highway
trucks and buses. The SOP preserves the current CO and PM standards, the
current test cycle and provides
8
9
the Company more flexibility through improvements in the averaging, banking and
trading program. During 1996 EPA issued regulations proposing regulatory
language implementing the terms agreed to in the SOP and the Company
participated in the development of those regulations which are anticipated to
become final in 1997.
Moreover, although regulatory standards have traditionally been imposed
only in connection with on-highway (i.e., truck and bus) applications, the EPA,
in accordance with the 1990 Clean Air Act amendments, has regulations in place
for engines of 50 horsepower ("hp") and higher used in non-road equipment and
vehicles in applications for mining, agricultural, industrial, construction and
other such uses. Standards began in 1996 for engines from 175 hp to 750 hp,
with engines of lower horsepower levels having to meet standards in 1997 and
1998, and non-road engines over 750 hp having to meet standards in 2001. These
regulations complement California's regulations which also went into effect in
1996 for 175 hp to 750 hp engines, and go into effect in 2000 for engines over
750 horsepower. Since the Clean Air Act amendments preempted California from
regulating engines under 175 hp, these engines will fall under EPA regulations.
The Company has emission certified a line of engine families which comply
with non-road standards. The Series 60, Series 50, Series 92 and Series 53
engines have been developed at various ratings to meet the EPA and CARB 1996
non-road emissions standards. In 1997 the Company will add VM Motori
industrial engines to the line of certified non-road engines.
In 1996, the Company signed a second SOP providing the foundation for a
long term NOx reduction strategy for engines used in non-road equipment
applications. The Company believes taking a cooperative approach with the
Government to achieve the nation's air quality goals is more cost-effective and
leads to regulations than the traditional rule-making approach used in the
past. The non-road SOP provides the Company with regulatory requirements
through the year 2008 and provides the long term focus needed to develop the
required technology and make the best use of available resources. The
regulations implementing the non-road SOP will be developed during 1997 and
finalized in 1998 with the first set of standards starting to phase in in 1999.
The Company believes it is well-positioned to comply with the emissions
standards included in the non-road SOP because of the ongoing development of
technology for the Company's on-highway product lines.
In 1994, the EPA proposed emissions standards and regulatory requirements
for marine engines, including both propulsion and auxiliary engines. The
regulations were expected to be phased in beginning in 1998, but it now appears
they will not be finalized. The EPA is reevaluating the strategy it wants to
use for controlling emissions from marine vessels. The non-road SOP includes
engines less than 37 kW used on marine vessels. The Company is involved in
discussions with EPA and other industry representatives over emissions
requirements for engines 37 kW or greater used on marine vessels. The Company
anticipates EPA will determine a strategy for regulating the remainder of the
marine engines during 1997. The EPA has finalized or is contemplating
emissions standards for all markets served by the Company's products. The
Company believes it is well-positioned to comply with the new and proposed
standards because the technology developed for the on-highway engines can be
applied to applications in these other markets.
9
10
The Company's on-highway products comply with EPA emissions standards and
those products marketed in California comply with CARB emissions standards for
on-highway diesel engines. In 1997, the EPA requires that on-highway,
heavy-duty diesel engines meet the same emissions standards which were
applicable to the 1996 model year (5.0 g/bhp-hr NOx and 0.10 g/hp-hr
particulate). Urban bus engines must comply with a 0.05 g/bhp-hr particulate
standard. In California the standards are the same as those adopted by the
EPA, except that California has a 4.0 g/bhp-hr urban bus NOx standard which
went into effect in 1996. The Company offers a full line of diesel engines
complying with the on-highway emissions standards. The Series 60, Series 55,
Series 50 and VM 638 engines have been developed and certified (VM 638 is
anticipated to be certified in April 1997) at various ratings to meet the 1997
on-highway standards. In addition, the Series 50 natural gas engine is
certified to both the Federal and California urban bus standards. The Company
also certified for 1997 a new natural gas engine line with both EPA and CARB.
The new engine is the Series 30G which is the product of a joint development
program with Navistar and is targeted at the small urban bus and truck market.
In addition, the company sells engines made by Navistar, MTU and Volvo
Penta into the various market segments. In the market segments requiring
emission certified products, they as manufacturers, are responsible for
certifying their product. It is the Company's responsibility to apply the
products to the correct market.
The Company has participated in the EPA's averaging, banking and trading
program since the program's inception in 1990. Engine manufacturers are
allowed to "bank" emissions credits based on the amount by which a "Family
Emissions Limit" set for their products is below the applicable emissions
standards. The Family Emissions Limit then becomes the new emissions standard
for that engine family. Since these credits are generated by engines which
were below the standards in effect at that time, they provide an environmental
benefit. Banked credits can be used for up to three years on other engine
families to allow them to comply with current or future emissions standards The
Company has generated and banked emissions credits under the program from 1990
through 1993 which it may use to meet future emissions requirements.
From 1990 through 1993, the Company set Family Emissions Limits for
several of its on-highway engine families, including both the Series 50 and
Series 60 engine families, generating credits by producing engines with
emissions below the required standards. Since 1991 the resulting credits have
been used on Series 92 on-highway products, and the Company used these credits
so that the Series 92 engine could be sold through 1996. Beginning in 1997 the
Company will no longer offer the Series 92 engine to the on-highway market.
The applications served by the Series 92 engine are now being filled with the
Company's other product lines, in particular the Series 50 and Series 55
engines. Going into 1997, all the Company's products will comply with the
emissions standards without the use of banked credits. The Company continues
to look at compliance strategies to allow credits to be banked for future use.
In addition to new engine certification, the EPA has three principal means
by which to verify compliance with its emissions standards: voluntary audit
testing by the manufacturer, selective enforcement audits ("SEA") (which
involves testing engines off the assembly line) and in-use compliance testing.
To date, the EPA has relied on SEAs for heavy-duty truck
10
11
compliance, although the EPA has the authority to conduct in-use compliance
testing. If an engine fails either test, the EPA has the authority to void the
engine family certificate and require recertification, as well as the recall of
affected engines. One SEA was performed at Detroit Diesel in each of 1993,
1994 and 1996 calendar years and the Company's engines passed each of those
audits. In 1995, the EPA conducted an SEA on one rating of the Series 60
engine family. This engine configuration failed the audit when the engines
failed to meet the 1995 particulate standard. The Company had just implemented
a fuel system calibration change on the engine and when it was subsequently
tested by the EPA, the engine family passed the audit. In exchange for not
recalling the small number of engines with the original calibration, the EPA
offered and the Company accepted an alternative which will require the Company
to participate in a joint program with the EPA to evaluate the emissions
characteristics of in-use engines. This program is being run in 1996 and 1997.
The EPA also has an emissions defect reporting program and may require a
recall if defects are found in emissions-related components on 25 or more
engines. CARB regulations require the Company to report failures of
emissions-related components through the monitoring of warranty claims. When
the failure rate reaches a specified level (the greater of 25 component
failures or one percent of engines built), reports are required to be filed
with CARB, and a recall may be required if the failure rate reaches a higher
level (the greater of 50 component failures or two percent of engines built).
Reports have been submitted to California, but no recalls have been conducted
as a result of these reports.
The EPA has regulated emissions from on-highway methanol-fueled engines
since 1986 and issued final regulations for natural gas engines in 1994. The
natural gas regulations are effective with the 1997 model year with
manufacturers having the option to certify voluntarily in 1995 and 1996. The
Company believes it is well-positioned in the alternative fuel marketplace with
its Series 50 natural gas engine and the Series 30G natural gas engine, with
both engines certified to EPA and CARB standards for 1997. The Company also
certified an ethanol fueled, non-road Series 92 engine family with California
which will be available for sale in 1997.
Emissions standards for heavy-duty engines are prevalent around the world.
European EURO II emissions standards for on-highway applications are currently
in effect in Europe. Emissions standards also are being developed in Europe
for non-road engines. These standards are expected to be similar to the EPA's
non-road engine regulations and are targeted to be effective beginning in 1998.
The Company has certified its Series 50 and Series 60 engine families to the
current EURO II on-highway emissions standards. This provides the Company a
line of advanced diesel engines for the European market.
In 1995, the Company acquired VM which provided the Company immediate
presence in the European automobile and industrial diesel engine market. VM
Motori designs and manufactures diesel engines for a variety of automotive and
industrial applications in the 25 HP to 200 HP power range. For the automotive
market, its principal product is a light-duty 2.5 liter, 4 cylinder,
turbocharged diesel engine used in passenger cars, four-wheel-drive and
multi-purpose vehicles. The engine has been certified to meet European
Directive 94/12/EC which went into effect in October 1995 and is applicable to
passenger cars in the European Union. The Company will also be certifying VM's
industrial engines to the EPA and CARB non-road
11
12
emission standards in 1997 and will certify to the European non-road emissions
standards when they are finalized.
In North America, Mexico has adopted and Canada is expected to adopt U.S.
emission standards. Many diesel engine and vehicle manufacturers, including
the Company, voluntarily signed a memorandum of understanding with the Canadian
government, pursuant to which these manufacturers agreed to sell only U.S.
certified engines in Canada beginning in 1995.
The Company has submitted and had approved by EPA and CARB two
applications for certification for rebuild kits for prior model years,
in-service Detroit Diesel urban bus engines. This was in response to another
of the 1990 Clean Air Act amendments requiring regulations to reduce
particulate emissions from urban bus engines at time of overhaul. The
Company's kits were certified by EPA in October 1995 and June 1996. The kits
will allow operators of urban buses to comply with EPA's rebuild requirements.
The kits will allow the rebuilt engines to emit up to fifty percent less
particulate emissions than prior to rebuild.
In addition to emissions standards, the EPA regulates vehicle
manufacturers to noise standards. The Company has worked with truck OEMs to
assure vehicles with the Company's engines comply with the noise requirements.
FACILITY COMPLIANCE. The Company believes that the facilities operated by
it and its subsidiaries are in material compliance with applicable
environmental statutes and regulations. Factory operations include machining,
plating, painting, assembly and testing of diesel engines. An environmental
engineering staff under the direction of the Company's manufacturing operations
group monitors air, water and solid waste discharge which result from those
activities. Prior to Detroit Diesel's commencement of operations in January
1988, certain areas of the Company's manufacturing facilities were identified
as requiring remediation to comply with applicable environmental laws.
Remediation activities have been completed with respect to certain matters and
are ongoing for others.
The distributor facilities owned or leased by the Company's subsidiaries
and other distributors are engaged in the ordinary course of business in
activities which involve steam and chemical cleaning of engines and component
parts and the use and handling of petroleum products for the fueling and
lubrication of vehicles, vessels and equipment with diesel engines.
Remanufacturing facilities are engaged in similar activities as well as
assembling and testing new and remanufactured engines.
VM operates a manufacturing facility in Cento, Italy. The Company
believes that the facility operated by VM is in compliance with Italian
environmental laws and regulations.
Facilities purchased or leased by the Company are typically subject to an
environmental audit before commencing operations. Several of such facilities
are or have been subject to remedial activities. Amounts expended in such
remediation activities have been within anticipated budgets or covered under
indemnity agreements from prior owner/operators and none have individually or
in the aggregate been considered significant or material to the Company.
12
13
A subsidiary of the Company engaged in remanufacturing activities in Salt
Lake City, Utah, was identified as a potentially responsible party ("PRP")
pursuant to the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, or similar state laws, with respect to the Petrochem
Recycling Corp./Ekotek, Inc. site in Salt Lake City. Under such laws, a PRP
can be jointly and severally liable for any investigation and remediation costs
incurred with respect to such sites and thus may be faced with a liability that
is greater than the proportion of waste it contributed to the site. The
contribution of waste to the site was relatively small and in 1996, the
subsidiary participated in a de minimis settlement agreement and is not
expected to have any future liability. In conjunction with a sale of an
adjacent property that subsidiary recently reported to the State of Utah
underground contamination which might exceed local and federal standards
and voluntarily submitted a remedial plan under state law. The cost of
such a remedial plan is not expected to be material to the Company.
The Company's remanufacturing subsidiary in Cambridge, Ohio has been named in
a third party claim in a lawsuit with respect to the Fultz Landfill site in
Byesville, Ohio. The Company did not contribute waste to this site and expects
to be dismissed from the lawsuit.
ITEM 2. PROPERTIES.
The Company's world headquarters is located in Detroit, Michigan and its
primary manufacturing facility is on adjoining premises located in the township
of Redford, Michigan. The 129-acre site includes almost three million square
feet of manufacturing and storage buildings, engineering laboratory, and
administrative offices. The Company leases this facility on a long-term basis
with a right of first refusal and purchase option. The Company also operates a
575,000 square foot Parts Distribution Center in Canton, Ohio under a lease
which expires in 2005. In 1996, the Company and its remanufacturing subsidiary
participated in the acquisition and lease of a 300,000 square foot
manufacturing facility in Tooele, Utah. Its regional sales offices in North
America and Europe are operated from leased facilities. VM's operations are
located in Cento, Italy, near Bologna. The 19-acre site contains approximately
500,000 square feet of developed space for manufacturing, engineering and
administrative offices. The Company believes its facilities are suitable for
its current needs.
The Company-owned distributors either own or lease their facilities. The
Company also subleases similar facilities in various locations to several
independently-owned distributors. The Company's remanufacturing business is
conducted from four facilities located on leased premises in Kansas, Ohio,
Texas and Utah. The Company relocated existing Salt Lake City operations to
Tooele and plans to relocate the existing Texas operations to Tooele during
1997. Lease terms generally range from 5 to 15 years with renewal options.
ITEM 3. LEGAL PROCEEDINGS.
The Company is presently involved in certain claims and litigation arising
in the ordinary course of its business, including claims relating to the use of
and performance of the Company's products. The Company does not believe that
the resolution of any of these matters will have a material adverse effect on
the Company's results of operations or financial position.
James M. Wright, et al, filed a class action lawsuit against the Company
and General Motors Corporation in the Superior Court of New Jersey, Camden
County Law Division, on February 15, 1993, seeking actual and punitive
damages based on breach of warranty, fraud, negligent misrepresentation and
violation of the Magnuson-Moss Warranty Act and the New Jersey Consumer Fraud
Act. Plaintiffs initially sought to represent a class consisting of marine
pleasurecraft owners whose vessels were equipped with Series 92 and 71
industrial engines that were marinized by third parties after their initial
manufacture. The court denied plaintiffs' request to certify such a class in
October 1993, but allowed plaintiffs to refile their request after conducting
discovery. After over two years of discovery, plaintiffs filed another
request to certify
13
14
an expanded class that included factory-built marine engines. On November 12,
1996, the court again denied plaintiffs' request for class certification.
Plaintiffs have appealed the decision to deny class certification. The
Company believes that it has meritorious defenses to the claims and that the
proceedings will not have a material adverse impact on the financial position
or results of operations of the Company.
Caterpillar Inc., a competitor of the Company, filed a lawsuit on June 12,
1995 in the U.S. District Court, Northern District of Indiana (South Bend
Division) claiming that the cruise power feature used on certain of the
Company's on-highway engines infringes on a Caterpillar patent. Caterpillar
seeks an injunction and monetary damages for lost profits or, alternatively, a
reasonable royalty. The Company has responded to the complaint denying
infringement and has filed several motions for summary judgment of non-
infringement and patent invalidity which are pending with the court.
The Company believes that it has meritorious defenses to the claims and that
the proceedings will not have a material adverse impact on the financial
position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets out the names and ages of the executive officers
of the Company, their present positions and their business experience during
the past five years.
Name Age Positions with Company
- ---- --- ----------------------
Roger S. Penske 60 Chairman and Director
Timothy D. Leuliette 47 Vice Chairman and Director
Ludvik F. Koci 60 President and Director
Robert R. Allran 54 Senior Vice President-Operations
A. Gordon Clark 75 Senior Vice President-Sales
J. Randall Lawrence 47 Senior Vice President-Finance
David F. Merrion 60 Senior Vice President-Engineering
Robert A. Sisk 42 Senior Vice President - Strategic Planning
and Business Development
Paul F. Walters 53 Senior Vice President-Administration
Walter F. Ware 54 Senior Vice President
John F. Farmer 43 Vice President and General Counsel
Roger S. Penske has been Chairman and a director of the Company since its
organization in 1987. Mr. Penske is also Chairman of the Board and Chief
Executive Officer of Penske Corporation. Penske Corporation is a
privately-owned diversified transportation services company
14
15
which (among other things) holds, through its subsidiaries, interests in a
number of businesses, including Penske Truck Leasing Co., L.P., Penske
Motorsports, Inc., and Diesel Technology Company. Mr. Penske is also a member
of the Boards of Directors of Philip Morris Companies Inc., General Electric
Company and Penske Motorsports, Inc.
Tim Leuliette has been a director and Vice Chairman of the Company since
1996. Before that, Mr. Leuliette had been President and Chief Executive
Officer of ITT Automotive, Inc., and Senior Vice President of ITT Industries,
Inc., since 1991, and was President and Chief Executive Officer of Siemens
Automotive, L.P. from 1988 to 1991. Mr. Leuliette is also a director and the
President and Chief Operating Officer of Penske Corporation. Mr. Leuliette is
a director of Libby-Ownes-Ford and the Detroit Branch of The Federal Reserve
Bank of Chicago. His other affiliations have been with the Leukemia Society of
America, Children's Center, Vision 2000, Arthritis Foundation and Junior
Achievement.
Ludvik F. Koci has been a Director of the Company since its organization
in 1987 and President and Chief Operating Officer since December 1989. Before
that, Mr. Koci had been Executive Vice President of the Company since the
Company's organization in 1987. Mr. Koci is also a director of Wabash National
Corporation.
Robert R. Allran has been Senior Vice President-Operations since the
Company's organization in 1987.
A. Gordon Clark has been Senior Vice President-Sales since October 1993.
Before that, Mr. Clark had been active in the Company's business in his
capacity as Executive Vice President-Sales of Penske Transportation, Inc. since
1989. Mr. Clark has an employment agreement with the Company that provides an
annual salary of $350,000 through January 31, 1998 when the agreement
terminates.
J. Randall Lawrence was appointed Senior Vice President-Finance in January
1995. Prior to this appointment, Mr. Lawrence was Chief Financial Officer of
Penske Automotive Group, Inc. since 1986.
David F. Merrion has been Senior Vice President-Engineering since the
Company's organization in 1987.
Robert A. Sisk has been Senior Vice President - Strategic Planning and
Business Development since January 1997. Before that, he was Vice President,
Business Development from 1992 to 1997, and Vice President, Power Systems from
1989 to 1992.
Paul F. Walters has been Senior Vice President-Administration since the
Company's organization in 1987.
Walter F. Ware was appointed Senior Vice President of the Company in
November 1995. Prior to his appointment, Mr. Ware was actively involved in
seeking entrepreneurial opportunities in the automotive sector from August 1994
to November 1995. Before that, Mr. Ware had been Vice-President-Group
Executive of IDEX Corporation since 1993, where he was responsible for
15
16
three wholly-owned subsidiaries involved in the industrial machinery business,
and Group Vice-President of the Industrial Products Group of Goulds Pumps Inc.
from 1989 to 1993.
John F. Farmer has been General Counsel of the Company since 1988 and a Vice
President of the Company since April 1993. From 1988 to January 1994, Mr.
Farmer was also Secretary of the Company.
PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
On March 1, 1997, the Company had 24,698,816 shares of its common stock
$.01 par value outstanding, which were owned by 2,763 stockholders of record.
The Company did not pay any dividends in 1996, 1995 or 1994 and does not
anticipate payment of cash dividends on its Common Stock in the foreseeable
future. The Company's current policy is to retain all future earnings for use
in the operation and expansion of its business. Furthermore, the Company's
credit agreement and lease of its primary production facility and
administrative offices contain certain restrictions on the payment of dividends
or other distributions.
The common stock has been traded on the New York Stock Exchange under the
symbol "DDC", since October 8, 1993. From that date to December 31, 1996, the
Common Stock has had a low market price of $17 per share and a high market
price of $36 per share.
COMMON STOCK QUARTERLY MARKET PRICE INFORMATION
- -----------------------------------------------------------------
1996 1995
FISCAL QUARTER HIGH LOW HIGH LOW
- -----------------------------------------------------------------
First 20 3/4 18 1/8 24 3/4 21 1/8
Second 20 5/8 18 5/8 24 7/8 19 7/8
Third 20 1/8 18 1/8 23 1/2 17 7/8
Fourth 23 18 1/2 21 17
- -----------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected Statement of Income and Balance
Sheet Data for the periods indicated. This table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and the Company's Consolidated Financial Statements and related
notes included in Item 8.
16
17
(In millions, except per share and unit amounts) YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME DATA
Net revenues $1,962.9 $2,087.1 $1,662.5 $1,560.1 $1,369.1
Gross profit 449.1 486.3 388.8 348.7 289.5
Selling and administrative expenses 292.1 311.0 259.9 245.0 212.0
Research and development expenses 105.2 94.8 64.4 58.3 53.2
Interest expense 12.1 9.7 4.9 13.1 13.3
Special charge 38.3 - - - -
Restructuring charge - 10.0 - - -
Gain on sale of subsidiary - - - - 6.8
Income before income taxes and
minority interests 1.4 60.8 59.6 32.3 17.8
Net income 3.8(1) 40.1(2) 36.1 20.7 10.5
Primary net income per share $ .16(1) $ 1.62(2) $ 1.52 - -
Pro forma net income per share - - - $ 1.17 $ .61
BALANCE SHEET DATA
Total assets $1,112.6 $1,045.1 $ 711.2 $ 652.7 $593.7
Long-term debt 92.6 58.5 - 44.7 127.4
Total debt 119.0 90.1 - 62.3 183.2
Total liabilities 791.4 734.7 433.5 446.1 519.7
Total stockholders' equity 321.2 310.4 277.7 206.6 74.0
Working capital 178.3 140.7 174.1 147.3 126.4
OPERATING DATA
Number of manufactured engines sold 132,272 143,951 73,953 66,909 59,089
Income before interest, taxes and
minority interests $ 13.5 $ 70.5 $ 64.5 $ 45.4 $ 31.1
Capital expenditures 57.8 76.5 37.9 34.6 37.3
(1) Includes a $24.9 million, net of tax, special charge for product
coverage and to reduce the value of an investment in Mexico. Excluding
this charge net income would have been $28.7 million, or $1.17 per share.
(2) Includes a $6.7 million, net of tax, restructuring charge to cover costs
of a reduction in salaried personnel. Excluding this charge, net income
would have been $46.8 million, or $1.90 per share.
17
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of Detroit Diesel Corporation's (Detroit Diesel or the
Company) historical results of operations and of its liquidity and capital
resources should be read in conjunction with the Consolidated Financial
Statements and related notes thereto.
OVERVIEW
Net revenues for 1996 were $1.96 billion, a decrease of 6% from 1995 record
revenues of $2.1 billion. During 1996, the Company sold approximately 132,000
manufactured units versus a Company record of approximately 144,000 units
during 1995. Total heavy-duty engine shipments during 1996 were nearly 67,800
units versus 80,400 units for 1995, a decrease of 16%. The change in unit
volume for 1996 is attributed to a nearly 23% decline in the North American
on-highway heavy-duty truck market and the resulting reduction in sales of the
Company's Series 60 engines to this market.
Lower revenues and a second quarter special charge of $38.3 million contributed
to reduced income before income taxes and net income for Detroit Diesel in
1996. Income before income taxes, after the special charge for product support
and for the write-down of an investment in Mexico, was $1.4 million, compared
to the $60.8 million record achieved in 1995. Net income was $3.8 million, or
$.16 per share, versus net income of $40.1 million, or $1.62 per share, for
1995. Excluding the special charge, 1996 net income would have been $28.7
million or $1.17 per share.
While the special charge adversely affected earnings during 1996, the Company
improved its market share in the on-highway heavy-duty truck market to 26.3%
for the full year and achieved 29.4% during the fourth quarter. The Company
also maintained its strength in most of its other markets.
Total assets increased to $1.1 billion at the end of 1996, up 6% over 1995
levels. The Company's debt to total capitalization ratio at the end of 1996
was 27% versus 22.5% at the end of 1995.
RESULTS OF OPERATIONS
For the periods indicated, the following table sets forth the percentage of net
revenues represented by certain items included in the Company's Consolidated
Statements of Income.
18
19
YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1996 1995 1994
------ ------ ------
Net revenues 100.0% 100.0% 100.0%
Cost of sales 77.1 76.7 76.6
- ------------------------------------------------------ ----- ----- -----
Gross profit 22.9 23.3 23.4
Expenses:
Selling and administrative 14.9 14.9 15.6
Research and development 5.4 4.5 3.9
Interest .6 .5 .3
Special charge 1.9 - -
Restructuring charge - .5 -
- ------------------------------------------------------ ----- ----- -----
Total 22.8 20.4 19.8
Income before income taxes and minority interests .1 2.9 3.6
Provision for income taxes (.1) .9 1.3
Minority interests - .1 .1
- ------------------------------------------------------ ----- ----- -----
Net income .2% 1.9% 2.2%
- ------------------------------------------------------ ===== ===== =====
The Company's net revenues for each of its market segments during the last
three years were:
(In millions)
YEARS ENDED DECEMBER 31,
- --------------------------------------------------
1996 1995 1994
------ ------ -------
On-Highway Truck $ 755 $ 929 $ 851
Construction & Industrial 364 351 250
Automotive 222 213 -
Coach & Bus 220 188 185
Marine 156 149 139
Power Generation 133 143 133
Military 113 114 105
- ------------------------- ------ ------ -------
Net revenues $1,963 $2,087 $1,663
- ------------------------- ====== ====== =======
As shown by the above chart, Detroit Diesel's revenue base continued to
diversify during 1996. Approximately one-third of the Company's revenues are
generated from sales made to customers located outside of the United States
compared to approximately 26% in 1994. The geographic diversity is mainly
attributable to the acquisition of VM Motori S.p.A. ("VM") in 1995 and the
related growth in VM's business.
The on-highway heavy-duty truck market is Detroit Diesel's largest market;
however, net revenues from this market represented approximately 38% of total
consolidated revenues in 1996 versus approximately 45% in 1995 and 52% in 1994.
Detroit Diesel expects to further diversify its revenue base during 1997 by
expanding business overseas for its automotive products and the launch of the
Series 2000 and Series 4000 engines in off-road markets.
19
20
1996 COMPARED TO 1995
NET REVENUES. Net revenues for 1996 were $1,962.9 million, a decrease of
$124.2 million, or 6.0%, from $2,087.1 million for 1995. The decrease in net
revenues during 1996 reflects lower demand in the North American Class 8
heavy-duty truck market, which achieved record unit volume during 1995, and the
sale of certain company-owned distributors during 1995. These decreases were
somewhat offset by an increase in parts sales plus higher revenues from
remanufactured products and from automotive products.
During 1996, sales of the Company's Series 60 engine were approximately 49,700
units, a decrease of 12,200 units, or 20%, from 1995 levels. Two-cycle unit
sales declined 6% as sales transitioned to the Company's Series 50 engine,
which increased 6% to nearly 4,600 units. Sales of Volvo Penta, MTU and Series
30/40 engine products distributed by the Company rose 25%.
During 1996, Detroit Diesel and Perkins Group Limited (of Peterborough,
England) elected not to renew their engine supply and distribution agreement.
The loss of revenues and the related earnings associated with this activity
will not be significant.
GROSS PROFIT. Gross profit for 1996 was $449.1 million, or 22.9% of net
revenues, compared to $486.3 million, or 23.3% of net revenues, for 1995, a
decrease of $37.2 million. The decrease in gross profit reflects the Company's
lower revenues in 1996 combined with a change in sales mix and higher price
incentives in most markets, particularly the on-highway heavy-duty truck
market.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
were $292.1 million, or 14.9% of net revenues, for 1996, compared to $311
million, or 14.9% of net revenues, for 1995, a decrease of $18.9 million.
Selling and administrative expense includes warranty, service parts
warehousing, direct selling, sales promotion, advertising and general expenses.
The $18.9 million decrease from 1995 reflects lower bonus and profit sharing
obligations and lower expenses due to the sale of certain company-owned
distributors during 1995.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$105.2 million, or 5.4% of net revenues for 1996, compared to $94.8 million,
or 4.5% of net revenues for 1995, an increase of $10.4 million. The increase
is attributable to continued development of Series 2000 and Series 4000
engines, off-highway emissions efforts and automotive engine development.
INTEREST EXPENSE. Interest expense was $12.1 million for 1996, compared
to $9.7 million for 1995, an increase of $2.4 million. The increase in
interest expense is attributed to higher debt levels in 1996 associated with
capital spending and an increase in working capital requirements.
SPECIAL CHARGE. In the second quarter of 1996, the Company recorded a
special charge of $38.3 million, or $24.9 million net of taxes, for product
support and to reduce the value of an investment in Mexico. The charge was used
to cover costs associated with variability in component machining that could
cause engine failures on four-cycle on-highway products under specific
application conditions. The charge reflected the estimated amount of expected
costs for repair or replacement of the affected products. In response to this
situation, management adopted
20
21
a specific action plan to provide customers with appropriate product support to
correct the problem and made changes in the manufacturing and design process to
remedy the situation. Management believes that its proactive approach in
handling this situation has produced favorable results with distributors and
customers. As part of the special charge, the Company also reduced the value
of an investment in Mexico by $2 million.
INCOME TAX EXPENSE. Income taxes for 1996 reflect a credit of $3 million.
This compares to income tax expense of $19.8 million during 1995. The
decrease in tax expense is attributable to the Company's lower level of
earnings during 1996, the benefit from the formation of a foreign sales
corporation and the utilization of foreign tax credits.
NET INCOME. Net income for 1996 was $3.8 million, compared to $40.1
million for 1995. Net income for 1996 reflects a $38.3 million, $24.9 million
net of tax, special charge related to product coverage and to reduce the value
of an investment in Mexico. Excluding the special charge, net income was $28.7
million, or $1.17 per share.
1995 COMPARED TO 1994
NET REVENUES. Net revenues for 1995 were $2,087.1 million, an increase of
$424.6 million, or 26%, over $1,662.5 million for 1994. Excluding VM, the
Company's increase in net revenues was 10% over 1994 levels. The increase in
net revenues during 1995 reflects higher demand in the North American Class 8
heavy-duty truck market, which achieved record unit volume during 1995, along
with the Company's increase in its share of this market.
During 1995, unit sales of the Company's Series 60 engine increased 13% to over
61,900 units. Sales of the Company's Series 50 engine increased 25% to nearly
4,300 units while sales of Perkins, Volvo Penta and MTU engine products
distributed by the Company rose 25%. These increases were offset by the
continuing decline in two-cycle unit sales of 11% as the Company's four-cycle
products gain popularity. The increase also reflects an 11% growth in service
parts sales over 1994 levels.
GROSS PROFIT. Gross profit for 1995 was $486.3 million, or 23.3% of net
revenues, compared to $388.8 million, or 23.4% of net revenues, for 1994, an
increase of $97.5 million. The decrease in gross profit as a percent of net
revenues reflects the inclusion of VM in consolidated results, which has a
lower gross profit percent on its products as compared to the Company's
traditional business, partially offset by cost improvements and production
efficiencies achieved by the Company associated with increased production
volumes. Excluding VM, gross profit as a percent of net revenues was 23.8%, an
increase of .4 points over 1994.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
were $311 million, or 14.9% of net revenues, for 1995, compared to $259.9
million, or 15.6% of net revenues, for 1994, an increase of $51.1 million.
Selling and administrative expense includes warranty, service parts
warehousing, direct selling, sales promotion, advertising and general expenses.
The $51.1 million increase over 1994 reflects higher warranty accruals related
to increased engine volume and the addition of VM. Selling and administrative
expenses as a percent of sales were reduced, however, reflecting the Company's
higher net revenues without
21
22
incurring proportionately higher expenses and the acquisition of VM, which has
a lower ratio of selling and administrative expenses to sales.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$94.8 million, or 4.5% of net revenues for 1995, compared to $64.4 million, or
3.9% of net revenues for 1994, an increase of $30.4 million. The increase is
attributable to continued development of alternative fuel engines, Series 2000
and Series 4000 engine development, introduction of the Series 55 engine and
engine development at VM. Excluding VM, the increase in research and
development expenses was $17.1 million.
INTEREST EXPENSE. Interest expense was $9.7 million for 1995 compared to
$4.9 million for 1994, an increase of $4.8 million. The increase in interest
expense is attributed to higher debt levels in 1995, associated with the
acquisition of VM in January 1995, as the Company borrowed approximately $125
million to finance the acquisition. (See "Liquidity and Capital Resources.")
INCOME TAX EXPENSE. Income tax expense for 1995 was $19.8 million
compared to $22.3 million for 1994, a decrease of $2.5 million. The decrease
in income tax expense reflects the decrease in the Company's effective tax rate
for 1995 to 32.5% from 37.4% due to tax credits related to capital expenditures
at VM.
NET INCOME. Net income for 1995 was $40.1 million, an increase of $4
million, or 11%, from $36.1 million for 1994. Net income for 1995 reflects a
$6.7 million, net of tax, restructuring charge to cover costs associated with a
reduction in salaried personnel. Excluding the restructuring charge, net
income was $46.8 million, or $1.90 per share.
LIQUIDITY AND CAPITAL RESOURCES
During the three years ended December 31, 1996, Detroit Diesel funded its
working capital, investments and capital expenditure requirements using cash
flow from operations and bank borrowings under various revolving lines of
credit and bank notes.
The Company has a $300 million, unsecured revolving credit agreement with a
bank group, including The Chase Manhattan Bank (Chase), as participant and
agent for the other participating banks, which expires in the year 2000.
Borrowings under this agreement bear interest at LIBOR-based rates, prime-based
rates and rates determined by competitive bidding among the participating
banks. The Company had available credit under this agreement totaling
approximately $211 million at December 31, 1996.
The Company has interest rate swap agreements, which extend through June 2000
and may be extended through June 2001, that effectively convert $50 million of
its variable rate debt to fixed rates ranging from 5.4% to 6.24%.
VM has approximately $60 million in unsecured, short-term lines of credit with
several banks. At December 31, 1996, VM had available credit of approximately
$59 million under these lines of credit.
22
23
The Company generated cash flows from operations of $22.9 million, $97.4
million and $71.8 million for 1996, 1995 and 1994, respectively, which reflects
the Company's net income, adjusted for non-cash items and changes in working
capital. The Company funded the acquisition of VM using its revolving credit
agreement to borrow approximately $125 million. During 1994, the Company
realized cash proceeds of $38.3 million from the exercise by Diesel Project
Development, Inc. of its option to purchase 2.4 million newly issued shares of
the Company's common stock.
Capital expenditures were $57.8 million in 1996 compared to $76.5 million in
1995 and $37.9 million in 1994. Capital expenditures for 1996 include capital
spending for VM of approximately $9.4 million. Capital expenditures in 1996
were used to expand and enhance engine production capabilities, to upgrade
engineering facilities and equipment, and to make improvements to the Company's
distributor and remanufacturing facilities. The Company's present capital
expenditure program includes spending approximately $50 million during 1997 on
new and existing products and to upgrade facilities.
At December 31, 1996, the Company was contingently liable for letters of credit
of approximately $43.6 million and guarantees to banks of approximately $29.2
million. The Company had commitments of approximately $11 million to complete
various capital projects.
The Company is subject to risk of changes in foreign currency exchange rates
due to operations located outside the United States. Changes in foreign
currency exchange rates are generally reported as a component of stockholders'
equity. Changes in the value of the Italian Lira will impact the Company's
translation adjustments in the future.
The Company believes that it will be able to satisfy on-going cash requirements
(including capital expenditures for environmental compliance and other
projects) for the next twelve months and thereafter, with cash flow from
operations, supplemented, as necessary, by borrowings under its revolving
credit agreement.
SEASONALITY
The Company's business is moderately seasonal, as its major OEM customers
historically have two- to four-week summer shutdowns of operations during the
third quarter. The Company typically shuts down its own operation for one week
each July. Additionally, VM typically shuts down its operations during the
month of August. Consequently, the Company's third quarter results reflect the
effects of these shutdowns.
EFFECTS OF INFLATION
The Company believes that the relatively moderate inflation rate over the last
few years has not had a significant impact on the Company's revenues or
profitability. The Company does not expect inflation to have any near-term
material effect on the sales of its products, although there can be no
assurance that such an effect will not occur in the future.
23
24
FOREIGN OPERATIONS
Approximately 34% of the Company's 1996 net revenues were derived from sales
made to purchasers in foreign countries. Included is the Company's subsidiary,
VM, which operates a manufacturing facility located in Cento, Italy. Because
of these foreign factors, the Company's business is subject to the risks of
conducting business abroad, including currency exchange rate fluctuations,
limits on repatriation of funds, compliance with foreign laws and other
economic and political uncertainties. (See Note 9 of Notes to Consolidated
Financial Statements.)
PROSPECTIVE INFORMATION
The Company expects the North American heavy-duty truck market to remain a
significant part of its business. The overall strength of this market and the
requirements necessary to compete in this market will impact the Company's
performance during 1997. Management anticipates that industry demand in North
America will remain near 1996 levels. Management believes that all of its
markets will experience continued price competition, particularly the North
American heavy-duty truck market.
Detroit Diesel plans to mitigate its dependence on the North American
heavy-duty truck market with the introduction of its Series 2000 and Series
4000 engines, with increased sales of its four-cycle products to other markets
and through expansion of the automotive market. Additionally, with the
introduction of Detroit Diesel 2000, a focused management plan emphasizing
individual product lines, Detroit Diesel expects to enhance its financial
performance.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" UNDER THE PRIVATE SECURITIES
REFORM ACT OF 1995
The Company may, from time to time, make forward-looking statements, including
statements projecting, forecasting or estimating company performance and
industry trends. The achievement of the projections, forecasts or estimates
contained in these statements is subject to certain risks and uncertainties,
and actual results and events may differ materially from those projected,
forecasted or estimated.
The applicable risks and uncertainties include general economic and industry
conditions that affect all international businesses, as well as matters that
are specific to the Company and the markets it serves. For example, the
achievement of projections, forecasts or estimates contained in the Company's
forward-looking statements may be impacted by national and international
economic conditions; compliance with U.S. and foreign treaties, laws and
regulations; and the general risks associated with doing business abroad, such
as currency exchange rate fluctuations, limits on repatriation of funds and
political uncertainties.
Risks that are specific to the Company and its markets include compliance with
increasingly stringent emissions controls standards applicable to diesel
engines; the cyclical demand for engines, particularly in the on-highway
heavy-duty truck market; competition in pricing and new product development
from larger companies with substantial resources; the concentration of a
substantial percentage of the Company's sales with a few major OEM customers,
the loss of, or change in demand from, any of which could have a material
impact on the Company; increasing
24
25
diversification in overseas markets and operations; labor relations at the
Company and its customers and suppliers; and the Company's single-source supply
and just-in-time inventory strategies, which could adversely affect production
if a single-source supplier is unable for any reason to meet the Company's
requirements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Refer to "Index to Financial Statements and Schedule" on page 31.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The information contained in the Company's Current Report on Form 8-K,
relating to VM, dated March 26, 1997 is incorporated herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
As to directors, the information under the caption "Proposals-Election of
Directors" and "Board of Directors-Directors Continuing in Office" in the Proxy
Statement furnished in connection with the solicitation by the Board of
Directors of the Company of proxies for the 1997 Annual Meeting of Stockholders
to be held April 29, 1997 (the "Proxy Statement") is incorporated herein by
reference. As to executive officers, information is contained under the
caption "Executive Officers of the Registrant" hereof. Information contained
under the caption "Board of Directors-Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information under the captions "Board of Directors-Director
Compensation" and "Executive Compensation", and Appendix A - Performance Graph
and Appendix C-Executive Compensation, of the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the caption "Appendix B - Stockholdings" of the
Proxy Statement is incorporated herein by reference, and the information
regarding beneficial owners of more than 5% of the shares of the Company's
common stock of the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the caption "Certain Stockholders" of the Proxy
Statement is incorporated herein by reference.
25
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following documents are filed as part of this report:
(a) Financial Statements and Schedule
Refer to the "Index to Financial Statements and Schedule" on page 31
for a list of financial statements and schedule filed as a part of this
report.
(b) Reports on Form 8-K
The Company filed no current reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended December 31, 1996.
(c) Exhibits:
Exhibit
Number Description of Exhibit
- ------- ----------------------
[S] [C]
3.1 Certificate of Incorporation, as amended, which is incorporated by
reference from Exhibit 3.1 of the Company's Registration Statement on
Form S-1, File No. 33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.
3.2 Amended and Restated Bylaws of Detroit Diesel Corporation, which is
incorporated by reference from Exhibit 3.2 of the Company's
Registration Statement on Form S-1, File No. 33-66760, filed with the
Securities and Exchange Commission on July 30, 1993, as amended.
4.1 Termination, Replacement and Restatement Agreement dated as of June 7,
1995 among Detroit Diesel Corporation, the Lenders listed on Exhibit A
and Chemical Bank, as agent for the lenders, which is incorporated by
reference from Exhibit 10.1 of the Company Form 10-Q, File No.
1-12394, filed with the Securities and Exchange Commission on August
10, 1995.
4.1.1 First Amendment to the Termination, Replacement and Restatement
Agreement, dated November 22, 1996, among Detroit Diesel Corporation,
the several banks and other financial institutions and Chemical Bank,
as agent for the Lenders and the predecessor in interest of The Chase
Manhattan Bank, now acting as agent for the Lenders
4.2 Specimen Form of Certificate for Common Stock, which is incorporated
by reference from Exhibit 4.4 of the Company's Registration Statement
on Form S-1, File No. 33-66760, filed with the Securities and Exchange
26
27
Exhibit
Number Description of Exhibit
- ------ ----------------------
Commission on July 30, 1993, as amended.
Long-term debt instruments and credit facility agreements of the
Detroit Diesel Corporation, under each of which the authorized debt is
equal to less than 10% of the total assets of the Detroit Diesel
Corporation and its subsidiaries on a consolidated basis, are not
filed as exhibits to this report. Detroit Diesel Corporation agrees to
furnish to the Commission, upon request, copies of any such unfiled
instruments.
10.1 Form of 1993 Stock Incentive Plan, which is incorporated by reference
from Exhibit 10.1 of the Company's Registration Statement on Form S-1,
File No. 33-66760, filed with the Securities and Exchange Commission
on July 30, 1993, as amended.
10.1.1 Form of 1993 Stock Incentive Plan Restricted Stock Award and Deferred
Stock Award, which is incorporated by reference from Exhibit 10.1.1 of
the Company's Registration Statement on Form S-1, File no. 33-66760,
filed with the Securities and Exchange Commission on July 30, 1993, as
amended.
10.2 Collaboration Agreement, dated as of January 31, 1993, between Detroit
Diesel Corporation and Mercedes-Benz AG, which is incorporated by
reference from Exhibit 10.2 of the Company's Registration Statement on
Form S-1, File No. 33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.
#10.3 Development Agreement, dated as of December 21, 1992, between Detroit
Diesel Corporation and Mercedes-Benz AG, which is incorporated by
reference from Exhibit 10.3 of the Company's Registration Statement on
Form S-1, File No. 33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.
#10.4 License Agreement, dated as of March 27, 1993, between Detroit Diesel
Corporation and Mercedes-Benz AG, which is incorporated by reference
from Exhibit 10.4 of the Company's Registration Statement on Form S-1,
File No. 33-66760, filed with the Securities and Exchange Commission
on July 30, 1993, as amended.
10.5 Financing Agreement between Diesel Project Development, Inc. and
Detroit Diesel Corporation, dated as of April 30, 1993, which is
incorporated by reference from Exhibit 10.5 of the Company's
Registration Statement on Form S-1, File No. 33-66760, filed with the
Securities and Exchange Commission on July 30, 1993, as amended.
27
28
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.6 Amended and Restated Lease Agreement by and between Corporate Property
Associates 8, L.P., and Corporate Property Associates 9, L.P. and
Detroit Diesel Corporation, dated as of May 24, 1994, which is
incorporated by reference from Exhibit 10.6 of Amendment No. 1 to the
Company's Registration Statement on Form S-1, File No. 33-79286, filed
with the Securities and Exchange Commission on June 15, 1994.
10.7 Lease Agreement, dated June 30, 1988, between the Timken Company and
Detroit Diesel Corporation, which is incorporated by reference from
Exhibit 10.7 of the Company's Registration Statement on Form S-1, File
No. 33-66760, filed with the Securities and Exchange Commission on
July 30, 1993, as amended.
10.8 Agreement for Data Processing Services between Electronic Data Systems
Corporation and the Company, dated as of January 1, 1988 (as amended
and effective through December 31, 2003), which is incorporated by
reference from Exhibit 10.9 of the Company's Registration Statement on
Form S-1, File No. 33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.
10.9 Master Lease Agreement between Detroit Diesel Corporation and GECC,
dated as of May 26, 1992, which is incorporated by reference from
Exhibit 10.11 of the Company's Registration Statement on Form S-1,
File No. 33-66760, filed with the Securities and Exchange Commission
on July 30, 1993, as amended.
#10.10 Requirements Agreement between Diesel Technology Company and Detroit
Diesel Corporation, dated February 17, 1992, which is incorporated by
reference from Exhibit 10.15 of the Company's Registration Statement
on Form S-1, File No. 33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.
10.11 Purchase Agreement between Detroit Diesel Corporation and Penske Truck
Leasing Corporation, dated October 7, 1993, related to purchase of
remanufacturing business, which in incorporated by reference from
Exhibit 10.18 of the Company's Registration Statement on Form S-1,
File No. 33-66760, filed with the Securities and Exchange Commission
on July 30, 1993, as amended.
10.12 Employment Agreement, dated February 1, 1989, between Penske
Transportation, Inc. and A. Gordon Clark, as amended, assumed by
Detroit Diesel Corporation, which is incorporated by reference from
Exhibit 10.19 of the Company's Registration Statement on Form S-1,
File No. 33-66760, filed with the Securities and Exchange Commission
on
28
29
Exhibit
Number Description of Exhibit
- ------- ----------------------
July 30, 1993, as amended.
10.12.1 Second Amendment to Employment Agreement dated as of January 31, 1995,
between Detroit Diesel Corporation, as assignee of Penske
Transportation, Inc., and A. Gordon Clark, which is incorporated by
reference from Exhibit 10.12.1 of the Company's Annual Report on Form
10-K, File No. 1-12394, filed with the Securities and Exchange
Commission on March 31, 1995, as amended.
10.13 Restated Share Purchase Agreement by and between Montagu Private
Equity Investments Limited and others, and Detroit Diesel Corporation,
dated January 4, 1995, which is incorporated by reference from Exhibit
10.13 of the Company's Annual Report on Form 10-K, File No. 1-12394,
filed with the Securities and Exchange Commission on March 31, 1995,
as amended.
#10.14 TED Joint Development and License Agreement by and among Detroit
Diesel Corporation and Mercedes-Benz Aktiengesellschaft and MTU
Motoren- und Turbinen-Union Friedrichshafen GmbH, dated September 5,
1994, which is incorporated by reference from Exhibit 10.3 of the
Company's Quarterly Report on Form 10-Q, File No. 1-12394, filed with
the Securities and Exchange Commission on November 11, 1994.
#10.15 FEAT Joint Development and License Agreement by and between MTU
Motoren- und Turbinen-Union Friedrichshafen GmbH and Detroit Diesel
Corporation, dated June 28, 1994, which is incorporated by reference
from Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q, File
No. 1-12394, filed with the Securities and Exchange Commission on
November 11, 1994.
10.15.1 Amendment to FEAT Joint Development and License Agreement by and
between MTU Motoren- und Turbinen-Union Friedrichshafen GmbH and
Detroit Diesel Corporation, dated June 28, 1994, which is incorporated
by reference from Exhibit 10.4.1 of the Company's Quarterly Report on
Form 10-Q, File No. 1-12394, filed with the Securities and Exchange
Commission on November 11, 1994.
10.16 Mutual Distribution Agreement by and between Detroit Diesel
Corporation and MTU Motoren- und Turbinen-Union Friedrichshafen GmbH,
dated June 28, 1994, which is incorporated by reference from Exhibit
10.5 of the Company's Quarterly Report on Form 10-Q, File No. 1-12394,
filed with the Securities and Exchange Commission on November 11,
1994.
29
30
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.17 Joinder Agreement by and between Detroit Diesel Corporation,
Mercedes-Benz AG and Motoren- und Turbinen-Union Friedrichshafen GmbH,
dated July 13, 1994, which is incorporated by reference from Exhibit
10.6 of the Company's Quarterly Report on Form 10-Q, File No. 1-12394,
filed with the Securities and Exchange Commission on November 11,
1994.
11.1 Statement re: Computation of Per Share Earnings
21.1 List of Subsidiaries
23.1 Consent of Deloitte & Touche LLP
25.1 Powers of Attorney of Directors and Officers of the Registrant
27 Financial Data Schedule
- -----------------------
# Does not include certain information as to which the Company has
been granted confidential treatment.
30
31
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
PAGE
----
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994 32
Consolidated Balance Sheets at December 31, 1996 and 1995 33
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994 34
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994 35
Notes to Consolidated Financial Statements 36
Quarterly Financial Data 51
Report of Management 52
Independent Auditors' Report 53
Independent Auditors' Report on Schedule 54
Schedule II - Valuation and Qualifying Accounts 55
31
32
DETROIT DIESEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Net revenues $1,962.9 $2,087.1 $1,662.5
Cost of sales 1,513.8 1,600.8 1,273.7
------------ ------------ ------------
Gross profit 449.1 486.3 388.8
Expenses:
Selling and administrative 292.1 311.0 259.9
Research and development 105.2 94.8 64.4
Interest 12.1 9.7 4.9
Special charge (Note 2) 38.3 - -
Restructuring charge (Note 19) - 10.0 -
------------ ------------ ------------
Total 447.7 425.5 329.2
Income before income taxes and
minority interests 1.4 60.8 59.6
Provision for income taxes (3.0) 19.8 22.3
Minority interests .6 .9 1.2
------------ ------------ ------------
Net income $ 3.8 $ 40.1 $ 36.1
============ ============ ============
Primary net income per share (Note 3) $ .16 $ 1.62 $ 1.52
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
32
33
DETROIT DIESEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
DECEMBER 31,
- ------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 3.0 $ 5.1
Accounts and notes receivable, net 293.1 283.9
Inventories 292.1 282.4
Prepaid expenses, deferred charges and other current assets 19.8 11.4
Deferred tax assets 56.4 56.8
----------- -----------
Total Current Assets 664.4 639.6
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 69.4 63.7
Machinery, equipment and tooling 337.4 292.7
----------- -----------
Total Property, Plant and Equipment 406.8 356.4
Less: accumulated depreciation 125.3 100.0
----------- -----------
Net Property, Plant and Equipment 281.5 256.4
----------- -----------
DEFERRED TAX ASSETS 26.0 15.7
INTANGIBLE ASSETS, NET 103.9 102.4
OTHER ASSETS 36.8 31.0
----------- -----------
TOTAL ASSETS $ 1,112.6 $ 1,045.1
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 16.6 $ 29.2
Accounts payable 279.9 275.0
Accrued expenses 179.8 191.0
Deferred tax liabilities - 1.3
Current portion of long-term debt and capital leases 9.8 2.4
----------- -----------
Total Current Liabilities 486.1 498.9
----------- -----------
LONG-TERM DEBT AND CAPITAL LEASES 92.6 58.5
OTHER LIABILITIES 165.2 138.6
DEFERRED TAX LIABILITIES 35.4 26.8
DEFERRED INCOME 6.5 7.0
MINORITY INTERESTS 5.6 4.9
COMMITMENTS AND CONTINGENCIES (NOTE 13)
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01 per share: authorized
10 million shares; no shares issued - -
Common Stock, par value $.01 per share: authorized
40 million shares; 24.7 million shares issued and .2 .2
outstanding
Additional paid-in capital 217.8 217.4
Retained earnings 108.9 105.1
Additional minimum pension adjustment (2.5) (6.7)
Currency translation adjustment (3.0) (5.0)
Deferred compensation on restricted stock (.2) (.6)
----------- -----------
Total Stockholders' Equity 321.2 310.4
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,112.6 $ 1,045.1
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
33
34
DETROIT DIESEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ---------------------------------------------------------------------------------------------------------------
ADDITIONAL CURRENCY
COMMON ADDITIONAL MINIMUM TRANSLATION
COMMON STOCK PAID-IN RETAINED PENSION ADJUSTMENT
STOCK AMOUNT CAPITAL EARNINGS ADJUSTMENT AND OTHER TOTAL
- ---------------------------------------------------------------------------------------------------------------
Balance at January 1, 1994 22.2 $.2 $179.1 $ 28.9 $(1.6) $206.6
Issuance of common stock 2.4 - 38.3 38.3
Net income 36.1 36.1
Currency translation adjustment (3.8) (3.8)
Deferred compensation on
restricted stock .1 - - .5 .5
- ------------------------------- ------ ------ ----------- -------- ----------- ------------- --------
Balance at December 31, 1994 24.7 .2 217.4 65.0 (4.9) 277.7
Net income 40.1 40.1
Additional minimum pension
adjustment, net of taxes of
$3.3 million $(6.7) (6.7)
Currency translation adjustment (1.1) (1.1)
Deferred compensation on
restricted stock - - .4 .4
- ------------------------------- ------ ------ ----------- -------- ----------- ------------- --------
Balance at December 31, 1995 24.7 .2 217.4 105.1 (6.7) (5.6) 310.4
Issuance of common stock .4 .4
Net income 3.8 3.8
Reduction in minimum pension
adjustment, net of taxes of
$1.9 million 4.2 4.2
Currency translation adjustment 2.0 2.0
Deferred compensation on
restricted stock - - .4 .4
- ------------------------------- ------ ------ ----------- -------- ----------- ------------- --------
Balance at December 31, 1996 24.7 $.2 $217.8 $108.9 $(2.5) $(3.2) $321.2
- ------------------------------- ====== ====== =========== ======== =========== ============= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
34
35
DETROIT DIESEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3.8 $ 40.1 $ 36.1
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 33.8 33.1 23.3
Gain on sale of property, plant and equipment (1.8) - -
Exchange gains (4.0) - -
Changes in assets and liabilities which
provided (used) cash:
Accounts and notes receivable (7.0) (19.4) (12.5)
Inventories (8.2) (42.6) (6.3)
Prepaid expenses, deferred charges and other current assets (8.2) (.6) .3
Deferred taxes (5.8) (6.4) (9.1)
Accounts payable 1.6 57.1 4.4
Accrued expenses and other liabilities 21.0 39.4 50.2
Intangible and other assets (2.3) (3.3) (14.6)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 22.9 97.4 71.8
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (57.8) (76.5) (37.9)
Proceeds from sale of property, plant and equipment 12.9 - -
Investments in and advances to affiliates (5.6) (1.9) (2.2)
Proceeds from sale of investment - 10.0 -
Proceeds from sale of subsidiaries - 27.5 10.5
Acquisition of consolidated subsidiaries - (129.9) (5.1)
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (50.5) (170.8) (34.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) notes payable (13.1) 17.1 (10.8)
Proceeds from revolving lines of credit 135.0 - -
Payments on revolving lines of credit (145.0) - -
Net proceeds from (payments on) other long-term borrowings 48.1 52.3 (51.5)
Net proceeds from issuance of common stock - - 38.3
------- ------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 25.0 69.4 (24.0)
EFFECT OF EXCHANGE RATE CHANGES ON CASH .5 (2.2) (3.8)
------- ------- -------
NET INCREASE (DECREASE) IN CASH (2.1) (6.2) 9.3
CASH AT THE BEGINNING OF THE PERIOD 5.1 11.3 2.0
------- ------- -------
CASH AT THE END OF THE PERIOD $ 3.0 $ 5.1 $ 11.3
- --------------------------------------------------------------------- ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 12.5 $ 9.2 $ 5.1
======= ======= =======
Income taxes $ 8.3 $ 26.7 $ 16.3
- --------------------------------------------------------------------- ======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Capital lease obligations incurred $ 2.3
=======
Gain from dilution of ownership in affiliate $ .9
=======
Conversion of accounts receivable to investment in affiliate $ .6
=======
Contribution of assets to joint venture $ .5
=======
Issuance of deferred stock $ .4
=======
Receivables in connection with sales of subsidiaries $ 2.3 $ .1
======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
35
36
DETROIT DIESEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Detroit Diesel Corporation and subsidiaries (the "Company" or "DDC")
design, manufacture, market, service and provide aftermarket and
remanufactured products for a full range of high performance diesel
and alternative fuel engines from ten to 10,000 horsepower and
offers financing through Detroit Diesel Capital Corporation. The
Company serves the on-highway truck, coach and bus, automotive,
construction, mining and industrial, power generation, marine, and
military markets. The Company has a worldwide distribution and
product support system. Customers, both U.S. and internationally,
include original equipment manufacturers (OEMs), authorized
distributors and governmental entities.
The Company is indirectly owned by Penske Corporation (45.6%)
("Penske"), and directly by Diesel Project Development, Inc. (20%)
("DPD") and by public stockholders (34.4%).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. Affiliated companies
in which the Company owns at least 20% of the voting securities are
accounted for using the equity method. All significant intercompany
transactions have been eliminated in consolidation.
FOREIGN CURRENCY
The financial statements of foreign subsidiaries and affiliates are
translated into U.S. dollars using current exchange rates. The
resulting translation adjustments are accumulated as a separate
component of stockholders' equity.
ACCOUNTS AND NOTES RECEIVABLE
The accounts and notes receivable are net of an allowance of $6.1
million and $5.2 million at December 31, 1996 and 1995,
respectively. The carrying value of accounts and notes receivable
approximate fair value.
INVENTORIES
Substantially all inventories are stated at the lower of cost or
market, with cost determined by the first-in, first-out (FIFO)
method.
36
37
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is
computed using the straight-line method. The estimated service
lives range from 5 to 35 years for buildings and improvements and 5
to 28 years for machinery, equipment and tooling, and leasehold
improvements.
INTANGIBLE ASSETS
The Company amortizes the excess of cost over fair value of net
assets acquired (Goodwill) on a straight-line basis over periods
ranging from 5 to 40 years and other intangible assets over periods
ranging from 3 to 30 years. Intangible assets are reported net of
accumulated amortization of $13.9 million and $9.0 million at
December 31, 1996 and 1995, respectively. Approximately 78% and 79%
of the Company's unamortized goodwill and other intangibles at
December 31, 1996 and 1995, respectively, relate to the acquisition
of VM Motori, S.p.A. ("VM") (Note 18). The Company periodically
evaluates the carrying value of its intangible assets for
impairment. This evaluation is based principally on the projected,
undiscounted cash flows generated by the underlying tangible assets.
INCOME TAXES
Deferred tax assets and liabilities reflect the impact of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as
incurred.
PRODUCT COVERAGE PROGRAMS
Estimated costs of product coverage, including warranty, are charged
to operations at the time the Company sells its products. Such
costs were $129.6 million, $88.0 million, and $71.1 million in 1996,
1995 and 1994, respectively. Product coverage costs in 1996 reflect
a special charge of $36.3 million. This charge related to costs
associated with variability in component machining affecting a
limited number of engines used in specific duty cycles. In addition
to amounts included in accrued expenses (Note 7), other liabilities
include $75.6 million and $54.6 million at December 31, 1996 and
1995, respectively, for these programs.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS
The Company records postretirement benefit costs during the period
the employees provide service to the Company. The Company funds its
postretirement benefit obligation as benefits are paid. The Company
amortizes the initial accumulated benefit obligation over a 20 year
period (Note 15).
37
38
The Company provides other postemployment benefits to substantially
all U.S. employees. Postemployment benefits offered include
disability benefits, supplemental unemployment benefits, workers'
compensation benefits, and continuation of health care benefits and
life insurance coverage. The Company records postemployment benefit
costs at the time the employees leave active service. The costs of
providing postemployment benefits are not significant.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company may enter into derivative financial instruments to
manage its exposure to fluctuations in interest and currency
exchange rates. Derivative financial instruments are not used for
speculative or investment purposes. The Company is exposed to
market risks arising from changes in interest and foreign currency
exchange rates. Interest rate swap agreements that effectively
change the interest rate characteristics of existing debt are
accounted for as an adjustment to interest expense.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts of assets and
liabilities reported therein. Actual results reported in future
periods may differ from these estimates.
LONG LIVED ASSETS
The Company evaluates the carrying value of its long lived assets
for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may be impaired. During 1996,
the Company reduced the carrying value of an investment in Mexico by
$2 million, which is included as part of the special charge.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years amounts
to conform with the classifications used in 1996.
3. NET INCOME PER SHARE
Primary net income per share for 1996 was computed by dividing net
income by the weighted average common shares outstanding
(24,697,316) and the weighted average dilutive effect of the
Company's incentive stock options (344) under the treasury stock
method (Note 16).
Primary net income per share for 1995 was computed by dividing net
income by the weighted average common shares outstanding
(24,676,696) and the weighted average dilutive effect of the
Company's incentive stock options (16,722) under the treasury stock
method (Note 16).
Primary net income per share for 1994 was computed by dividing net
income by the weighted average common shares outstanding
(22,967,654) and the weighted average dilutive effect of
38
39
common stock equivalents (786,276) under the treasury stock method. Common stock
equivalents used in calculating per share amounts include the dilutive effect of
the DPD option which was outstanding during the year (689,620) plus the dilutive
effect of the Company's incentive stock options (96,656), (Note 16).
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" which
was effective for the Company beginning January 1, 1996. Statement No. 123
encourages compensation cost to be measured based on the fair value of the
equity instrument awarded. In accordance with this statement the Company has
elected to continue the application of Accounting Principles Board Opinion No.
25 which recognizes compensation cost based on the intrinsic value of the
equity instrument award. Compensation costs determined under the provisions of
Statement No. 123 were not significant for 1996 and 1995.
4. INVENTORIES
At December 31, 1996 and 1995, inventories consist of the following:
(In millions)
- --------------------------------------------------------
1996 1995
- --------------------------------------------------------
Productive $161.1 $163.6
Service parts 89.8 85.7
Remanufacturing parts 34.7 25.6
Non-productive 6.5 7.5
- ------------------------------- ------ ------
Total $292.1 $282.4
- ------------------------------- ====== ======
The components of productive
inventory are:
Raw materials 48% 49%
Work in process 24% 21%
Finished product 28% 30%
5. INTANGIBLE ASSETS
At December 31, 1996 and 1995, intangible assets, net of accumulated
amortization, consist of the following:
(In millions)
- ------------------------------------------------
1996 1995
- ------------------------------------------------
Goodwill $ 80.0 $ 79.5
Pension plan intangible asset 11.6 11.9
Other 12.3 11.0
- ------------------------------- ------ ------
Total $103.9 $102.4
- ------------------------------- ====== ======
39
40
6. NOTES PAYABLE
The Company and its subsidiaries have $16.6 million and $29.2
million in debt under lines of credit and bank loan agreements at
December 31, 1996 and 1995, respectively. The weighted average
interest rate at December 31, 1996 was 7%. The amount available for
borrowing under these lines of credit and bank loan agreements was
approximately $85 million at December 31, 1996. The carrying value
of notes payable approximates fair value.
7. ACCRUED EXPENSES
At December 31, 1996 and 1995, accrued expenses consist of the
following:
(In millions)
- -------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------
Policy and warranty $ 72.3 $ 82.8
Accrued payroll and related taxes 31.8 31.1
Other 75.7 77.1
- -------------------------------------- ------ ------
Total $179.8 $191.0
- -------------------------------------- ====== ======
8. LONG-TERM DEBT AND CAPITAL LEASES
At December 31, 1996 and 1995, long-term debt and capital leases
consist of the following:
(In millions)
- -----------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------
Unsecured, $300 million revolving line of credit bearing
interest at 7.8%, expires in 2000 $80.9 $45.0
Unsecured, $7.4 million revolving lines of credit with a
weighted average interest rate of 4.5%, expires in 1998 7.4 3.5
Bank loans with a weighted average interest rate of 4.0%,
due in varying installments through 2010 4.0 3.6
Bank loans with a weighted average interest rate of 8.75%,
due in 2008 2.0 2.3
Economic Development loan bearing interest at 10% due in 2001 0.8 -
Capital leases with a weighted average interest rate of
9.8%, due in varying installments through 2001 7.3 6.5
- ------------------------------------------------------------- ----- -----
Total long-term debt and capital leases 102.4 60.9
Less current portion 9.8 2.4
- ------------------------------------------------------------- ----- -----
Total $92.6 $58.5
===== =====
Principal repayment requirements on long-term debt and minimum lease on
capitalized leases are as follows:
40
41
(In millions)
- ----------------------------------------------------------------------
CAPITAL
DEBT LEASES TOTAL
- ----------------------------------------------------------------------
1997 $ 7.7 $ 2.7 $ 10.4
1998 82.0 2.7 84.7
1999 .4 2.3 2.7
2000 .4 .8 1.2
2001 .4 - .4
2002 and thereafter 4.2 - 4.2
- ---------------------------------- -------- ----------- -----------
Total payments 95.1 8.5 103.6
Less: Amount representing interest - 1.2 1.2
- ---------------------------------- -------- ----------- -----------
Total long-term debt $ 95.1 $ 7.3 $ 102.4
================================== ======== =========== ===========
The Company has a $300 million, unsecured variable rate credit facility which
expires in the year 2000. This facility has several restrictive covenants which
require the maintenance of a certain level of net worth, restrict the Company's
ability to incur additional debt and require maintenance of minimum interest
coverage and leverage ratios. At December 31, 1996, the Company had
approximately $211 million available under its revolving lines of credit. The
carrying value of long-term debt approximates fair value.
During 1996, the Company refinanced the VM acquisition debt by allocating a
portion of this facility to VM. The Company realized an exchange gain of $3.9
million on this transaction. At December 31, 1996, approximately $85 million of
long-term debt is denominated in Italian Lira.
The Company has interest rate swap agreements which, extend through June 2000
and may be extended through June 2001, that effectively convert $50 million of
its variable rate debt to fixed rates ranging from 5.4% to 6.24%.
The Company is exposed to risk of loss on the interest rate swap agreement in
the event of nonperformance by The Chase Manhattan Bank ("Chase"). Such risk of
loss is limited to amounts accrued by the Company as a receivable from Chase.
The Company believes the risk of nonperformance is remote.
9. SEGMENTS OF BUSINESS
The Company operates in the single industry segment of design, manufacture, sale
and service of heavy-duty diesel and alternative fuel engines, automotive diesel
engines, off-highway diesel engines and engine parts. Manufacturing activities
are carried out in the United States and Europe. Major distribution centers are
located in the United States, Europe and Asia to support sales to all areas of
the world.
Financial information is listed below by geographic area. Transfers to other
geographic areas primarily represent intercompany export sales of U.S. produced
goods and are accounted for by transfer prices based upon business conditions,
distribution costs and other costs incurred in marketing products. Operating
profit is total revenues less operating expenses and excludes interest expense,
income taxes and minority interests. Operating profit for each area may not be
41
42
a meaningful representation of each area's contribution to
consolidated operating results because of the significant sales of
products from the Company's domestic operations to its foreign
operations. Identifiable assets are those assets identified with
the operations in each geographic area.
(In millions) YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------
NET REVENUES
United States:
Domestic customers $1,298.9 $1,402.2 $1,238.1
Export customers 281.5 304.8 289.1
Transfers to other geographic areas 83.8 88.2 85.0
----------- -------- ---------
Total United States 1,664.2 1,795.2 1,612.2
Europe/Middle East/Africa 331.9 311.2 50.2
Other 50.6 68.9 85.1
Eliminations (83.8) (88.2) (85.0)
----------- -------- ---------
Total $1,962.9 $2,087.1 $1,662.5
=========== ======== ==========
OPERATING PROFIT
United States $ (9.8)(1) $ 54.4(2) $ 60.5
Europe/Middle East/Africa 19.7 13.2 1.0
Other 3.6 2.9 3.0
----------- -------- ---------
Total $ 13.5 $ 70.5 $ 64.5
=========== ======== =========
IDENTIFIABLE ASSETS
United States $ 786.8 $ 720.0 $ 651.8
Europe/Middle East/Africa 300.2 301.9 21.4
Other 32.7 31.8 44.3
Eliminations (7.1) (8.6) (6.3)
----------- -------- ---------
Total $1,112.6 $1,045.1 $ 711.2
=========== ======== =========
(1) Includes a $38.3 million pretax special charge (Note 2)
(2) Includes a $10 million pretax restructuring charge (Note 19).
Net revenues by customer location were:
(In millions) YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------
United States $1,298.9 $1,402.2 $1,238.1
Europe/Middle East/Africa 347.9 335.8 77.3
Canada 161.1 202.2 191.9
Mexico 40.6 20.5 46.0
Asia/Pacific 83.9 99.8 84.3
Latin America 30.5 26.6 24.9
-------- -------- --------
Total $1,962.9 $2,087.1 $1,662.5
======== ======== ========
42
43
10. MAJOR CUSTOMERS AND MARKETS
The Company sells its products to the on-highway truck, construction and
industrial (including mining), automotive, coach and bus, marine, power
generation and military markets. The on-highway truck market comprised
approximately 38%, 45% and 52% of the Company's net revenues for 1996, 1995, and
1994, respectively. Within this market, the Company's largest OEM customers are
Freightliner Corporation, Navistar International Transportation Corp., Volvo GM
Heavy Truck Corporation and PACCAR Inc., of which approximately 33%, 40% and 43%
of the Company's net revenues in 1996, 1995 and 1994, respectively, were
derived. The Company also sells automotive products to Chrysler Corporation
which accounted for approximately 7% and 6% of net revenues during 1996 and
1995, respectively. While the Company sells its products directly to OEMs, the
ultimate customers are major fleet carriers and other end users in North America
and throughout the world.
11. RELATED PARTY TRANSACTIONS
The Company's purchases from Diesel Technology Company, an affiliate, were $94
million in 1996, $108 million in 1995, and $104 million in 1994. Accounts
payable to Diesel Technology Company were $16 million at December 31, 1996 and
$12.8 million at December 31, 1995.
The Company's payments to Penske Corporation and its affiliates, other than
Diesel Technology Company, for miscellaneous expenses and other items for the
years ended December 31, 1996, 1995 and 1994 were $7.1 million, $14.2 million,
and $9.6 million, respectively.
During the years ended December 31, 1996, 1995 and 1994, the Company had sales
to affiliates of Daimler-Benz Aktiengesellschaft ("Daimler-Benz"), indirect
parent corporation of DPD, of $395.6 million, $426.4 million and $332.3 million,
respectively, substantially all of which were to one major customer. Purchases
from Daimler-Benz affiliates were $48.0 million during 1996, $33.4 million
during 1995 and $4.0 million during 1994. At December 31, 1996 and 1995, the
Company had accounts receivable of $32.1 million and $30.1 million due from such
affiliates. Accounts payable to Daimler-Benz affiliates were $15.1 million and
$4.6 million at December 31, 1996 and 1995, respectively.
The Company is a lessee under agreements with GE Capital Corporation, a partner
in a Penske Corporation affiliate, for certain manufacturing equipment. Rent
expense was $9.1 million in 1996, 1995 and 1994. Future minimum rental payments
are: $9.1 million each for 1997 and 1998, $3.6 million in 1999 and $1.8 million
in the year 2000.
12. INCOME TAXES
For the years ended December 31, 1996, 1995, and 1994, the Company's provision
for income taxes consists of the following:
43
44
(In millions) YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------
Current:
Federal $ (.1) $25.3 $28.6
State & local .9 2.9 1.4
Foreign 1.0 1.4 1.4
---------- --------- ---------
Total current 1.8 29.6 31.4
---------- --------- ---------
Deferred:
Federal (6.7) (6.3) (9.2)
State and local (1.1) (1.6) -
Foreign 3.0 (1.9) .1
---------- --------- ---------
Total deferred (4.8) (9.8) (9.1)
---------- --------- ---------
Total income tax provision $(3.0) $19.8 $22.3
========== ========= =========
Income before income taxes and minority interests consists of the following:
(In millions) YEARS ENDED DECEMBER 31,
- -----------------------------------------------
1996 1995 1994
- -----------------------------------------------
Domestic $(17.8) $50.2 $46.7
Foreign 19.2 10.6 12.9
-------- ------- -------
Total pretax income $ 1.4 $60.8 $59.6
======== ======= =======
Temporary differences which give rise to deferred tax assets and
liabilities at December 31, 1996 and 1995 are as follows:
(In millions)
- -----------------------------------------------------
1996 1995
- -----------------------------------------------------
Deferred tax assets:
Product coverage reserves $ 54.3 $48.7
Sales reserves 5.4 5.8
Payroll and benefits 21.5 20.3
State and local 4.7 3.6
Allowance for doubtful accounts 1.3 1.0
Deferred gain on sale/leaseback 2.3 2.4
Inventory 4.8 4.3
Foreign loss carryforwards 2.7 1.3
Foreign tax credit carryforward - .8
Other 8.1 8.6
------ ------
Subtotal 105.1 96.8
Valuation Allowance (2.7) (1.3)
------ ------
Total deferred tax assets $102.4 $95.5
====== ======
Deferred tax liabilities
Fixed assets $ 40.7 $38.0
Other 14.7 13.1
------ ------
Total deferred tax liabilities $ 55.4 $51.1
====== ======
44
45
The consolidated income tax provision differs from the amount computed on pretax
income using the U.S. statutory income tax rate for the years ended December
31, for the following reasons:
(In millions)
- -------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------
Federal income tax
at statutory rates $ .5 $21.3 $20.9
Increase (decrease) in taxes:
Nondeductible goodwill 1.7 1.1 .2
State, local taxes, net (.2) .8 .9
Foreign investment credits (.8) (2.9) -
FSC Benefit (1.0) - -
US tax effect on foreign earnings (3.6) .6 .3
Fuel tax credits (.5) (.8) (.5)
Other .9 (.3) .5
- -------------------------------------- ------- ------- -------
Provision for income taxes $(3.0) $19.8 $22.3
- -------------------------------------- ======= ======= =======
Effective tax rate - 32.5% 37.4%
- -------------------------------------- ======= ======= =======
The Company has not recorded deferred taxes on the undistributed earnings of
foreign subsidiaries which are deemed to be indefinitely reinvested. Such
undistributed earnings aggregate to approximately $7.8 million, $4.5 million and
$3.4 million at December 31, 1996, 1995 and 1994, respectively.
13. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
Several claims, suits and complaints arising in the ordinary course of business
have been threatened or are pending against the Company. In the opinion of
management, all such matters are adequately covered by insurance or
indemnification or, if not so covered, there are meritorious defenses to
substantially all such claims, or they are of such kind, or involve such
amounts, as would not have a materially adverse effect on the financial position
or results of operations of the Company if disposed of unfavorably.
Facilities purchased or leased since the Company began operations are typically
subject to an environmental audit before commencing operations. Several of such
facilities have been subject to remedial activities due to non-compliance with
applicable regulations. Amounts expended in such remediation activities have
generally been insignificant or have been covered under indemnity agreements
from prior owner/operators and none have individually or in the aggregate been
considered material to the Company's financial position or results of
operations.
At December 31, 1996, the Company is contingently liable for letters of credit
of $43.6 million, bank guarantees of $29.2 million, and has commitments of $11
million to complete various capital projects.
45
46
The Company leases its production facility and administrative offices, certain
distributor and remanufacturing facilities, certain production machinery,
equipment and tooling, its parts distribution center and various transportation
and office equipment. Certain leased properties are subleased to distributors.
The leases have terms of varying lengths and substantially all are accounted for
as operating leases. Certain of the leases contain several restrictive
covenants which require the maintenance of a certain level of net worth,
restrict the Company's ability to incur additional debt and require the
maintenance of minimum interest coverage and leverage ratios. Deferred income
resulting from the sale of the production facility and administrative offices is
being amortized over the lease term. At December 31, 1996 and 1995, deferred
income was $6.5 million and $7.0 million respectively.
Future minimum rental payments under non-cancelable operating leases, including
related party leases, at December 31, 1996 are: $34.1 million in 1997; $32.0
million in 1998; $24.9 million in 1999; $22.9 million in 2000; $21.0 million in
2001 and $101.7 million in the year 2002 and subsequent years.
Rental expense for the years ended December 31, 1996, 1995, and 1994 are as
follows:
(In millions)
- ---------------------------------------------------
1996 1995 1994
- ---------------------------------------------------
Rentals $21.2 $20.7 $19.6
Less: Sublease rentals 2.0 2.2 2.3
------- -------- --------
Net Rentals $19.2 $18.5 $17.3
======= ======== ========
The Company believes it has adequate sources for the supply of raw materials and
components for its manufacturing requirements. The Company's suppliers are
located primarily in North America and Western Europe. The Company has a policy
of strengthening its supplier relationships by concentrating its purchases for
particular parts over a limited number of suppliers in order to maintain quality
and cost control and to increase the suppliers' commitment to the Company. The
Company relies upon, and expects to continue to rely upon, several single source
suppliers for critical components.
14. PENSION AND OTHER EMPLOYEE BENEFITS
The Company has defined benefit pension plans covering the majority of its
employees. Benefits for salaried employees are provided under an account
balance type of defined benefit plan, under which the benefit is determined
primarily on the basis of annual contributions, with a minimum benefit related
to an employee's highest average annual compensation determined over a 60 month
period selected out of the 120-month period immediately prior to retirement.
Benefits for hourly employees are provided primarily on the basis of a monthly
amount for each year of credited service. The type of assets held by the plans
include equity, fixed income and real estate funds. It is the Company's policy
to make contributions to these plans to meet funding levels required by ERISA.
The following tables set forth the plans' funded status, amounts recognized in
the Company's balance sheet, and components of net periodic pension expense:
46
47
(In millions) DECEMBER 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested $185.3 $177.9
Non-vested 65.7 79.6
- ------------------------------------------------------------- ------ -------
Accumulated benefit obligation $251.0 $257.5
- ------------------------------------------------------------- ====== =======
Projected benefit obligation for service rendered to date $270.4 $277.3
Plan assets at fair value 234.7 229.0
- ------------------------------------------------------------- ------ -------
Plan assets less than projected benefit obligation 35.7 48.3
Unrecognized prior service cost (19.6) (21.0)
Unrecognized net loss (1.1) (16.2)
Additional liability 15.5 22.2
- ------------------------------------------------------------- ------ -------
Pension liability included in the consolidated balance sheet $ 30.5 $ 33.3
- ------------------------------------------------------------- ====== =======
Net periodic pension expense included the following components:
(In millions) YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Service cost benefits during the year $ 8.6 $ 6.2 $ 7.5
Interest cost on projected benefit obligation 20.0 18.1 15.5
Actual return on plan assets (32.1) (52.5) 4.7
Net amortization and deferral 12.1 34.0 (22.0)
Effect of plan curtailment - .6 -
- -------------------------------------------------- ----- ------ ------
Net periodic pension expense $ 8.6 $ 6.4 $ 5.7
- -------------------------------------------------- ===== ====== ======
The projected benefit obligation was determined using a discount rate of 7.5%
and 7.25% at December 31, 1996 and 1995, respectively. The annual long-term rate
of return on assets was assumed to be 11% for 1996, and 10.5% for 1995 and 1994.
Compensation increases for applicable employees were estimated using 4.5% for
1996 and thereafter.
The Company also sponsors other defined contribution plans, including deferred
savings plans, covering a majority of its domestic employees. Employee
contributions are based on a percentage of payroll. Certain plans require the
Company to make matching contributions based on a percentage of employee
contributions. They may also provide for the employer to make discretionary or
fixed contributions. Where contributions are made, amounts are based on a
percentage of payroll for eligible employees. Contributions to these plans in
1996, 1995 and 1994 totaled $5.2 million, $4.7 million and $4.6 million,
respectively.
The Company maintains profit-sharing programs covering all of its domestic
employees and a cash bonus plan covering certain senior officers and other
eligible employees. Contributions to
47
48
these programs are based on income before interest and taxes. The cost of these
programs for 1996, 1995, and 1994 was $2.1 million, $11.4 million, and $11.4
million, respectively.
The Company's Italian subsidiary, VM, accrues employee termination indemnities
in accordance with local civil and labor laws based upon each employee's length
of service, employment category and remuneration. There are no vesting period
or funding requirements associated with this liability and benefits are payable
immediately upon separation. The liability is adjusted annually by a
cost-of-living index provided by the Italian government. The costs of providing
these benefits during 1996 and 1995 approximated $2.1 and $1.8 million,
respectively. The termination liability recorded in the balance sheet is the
amount to which the employee would be entitled upon separation from the Company.
15. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain health care benefits for retired employees.
Eligibility is based on years of service and requires employees to remain
employed until retirement age. These benefits are either self-insured or are
provided through health insurance plans.
The employee separation program discussed in Note 19 provides for postretirement
health insurance benefits. The effect of that program on accumulated
postretirement health insurance benefits was accounted for as a curtailment
during 1995.
Net periodic postretirement benefit cost for the years ended December 31, 1996,
1995 and 1994 includes the following components:
(In millions)
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Service cost $ 1.5 $ 1.7 $ 1.9
Interest cost 6.3 5.7 5.4
Amortization of losses .5 .1 .4
Amortization of transition obligation 2.6 2.6 2.6
Effect of plan curtailment - .8 -
- ------------------------------------------------- ------- --------- --------
Net periodic postretirement benefit cost $10.9 $10.9 $10.3
- ------------------------------------------------- ======= ========= ========
The following table sets forth the amount recorded in the consolidated balance
sheet at December 31, 1996 and 1995:
48
49
(In millions)
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 25.2 $ 32.0
Fully eligible active plan participants 27.8 14.7
Other active plan participants 36.1 43.2
- ---------------------------------------------------------- ------ ------
Total 89.1 89.9
Unrecognized transition obligation (41.6) (44.2)
Unrecognized prior service costs (.8) (1.0)
Unrecognized net loss (10.8) (16.7)
- ---------------------------------------------------------- ------ ------
Accrued postretirement benefit liability recognized in the
consolidated balance sheet $ 35.9 $ 28.0
- ---------------------------------------------------------- ====== ======
For measurement purposes, a 6% and 7% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1996 and 1995,
respectively. The rate was assumed to remain at 6% after 1996. The health care
cost trend rate assumption has an effect on the amount reported. Changing the
assumed health care cost trends by one percentage point in each year would
change the accumulated postretirement benefit obligation as of December 31, 1996
and 1995 by approximately $.7 million and $1.3 million, respectively, and net
periodic postretirement benefit cost by $.1 million for both 1996 and 1995. The
estimate incorporates defined dollar limits on Company costs for postretirement
benefits and is supplemented by amounts contributed by the Company and the union
to a fund that can be used to reimburse retirees whose costs exceed the plan
coverage limits.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% in 1996 and 7.25% in 1995.
16. STOCK INCENTIVE PLAN
The Company has a stock incentive plan reserving 975,000 shares of common stock
for issuance pursuant to that plan. Under the plan, the Company can grant
restricted or unrestricted stock, stock appreciation rights (SARs),
non-qualified options and options qualifying as incentive stock options under
the Internal Revenue Code of 1986, as amended. The term of an option cannot
exceed 10 years from the grant date and the option price may not be less than
market value at the date of grant.
As of December 31, 1996, the Company had granted options aggregating 216,000
shares to certain employees at an option price of $20 per share, options
aggregating 109,000 shares at an option price of $23.75 per share and options
aggregating 5,000 shares at an option price of $18 per share. No options were
exercised during 1996, 1995 or 1994. However, 15,000 options have been
forfeited as of December 31, 1996. Additionally, the Company has issued 73,842
shares of restricted stock and granted 123,072 shares of deferred stock to
certain executives of the Company to meet obligations of a previous deferred
compensation plan, designed to retain key members of management at the start of
the Company's operations in 1988, which was terminated in 1993. At December 31,
1996, 55,381 shares of restricted stock had vested and are owned by the
participants with the remaining 18,461 shares due to vest in 1997. Deferred
stock is fully
49
50
vested and will be issued 90 days after termination of employment. During 1996,
20,570 shares of the deferred stock were issued.
At December 31, 1996 and 1995, shares available for granting options were
448,086 and 453,086, respectively.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has the following derivative financial instruments at December 31:
(In millions)
- ---------------------------------------------------------------------------------
NOTIONAL CARRYING FAIR
1996 AMOUNT VALUE VALUE
- ---------------------------------------------------------------------------------
Interest rate swap agreements $50.0 $1.9 $ -
- ---------------------------------------------------------------------------------
1995
- ---------------------------------------------------------------------------------
Interest rate swap agreements $50.0 $2.8 $(1.1)
- ---------------------------------------------------------------------------------
The fair value of the interest rate swap agreements was determined using
prevailing spot rates at December 31, 1996 and 1995, and discounted as
applicable.
18. ACQUISITION OF VM MOTORI S.P.A.
On January 4, 1995, the Company acquired all of the outstanding shares of VM for
198 billion Lira, or approximately $125 million. The acquisition was accounted
for using the purchase method of accounting and, accordingly, the purchase price
was allocated to the assets acquired and liabilities assumed based upon their
fair values at the date of acquisition. The excess purchase price over the fair
value of the net assets acquired, totaling approximately $76 million, was
recorded as goodwill, which is being amortized over 30 years. The fair values
of the assets acquired and the liabilities assumed were as follows: current
assets of $101 million; property, plant and equipment of $69 million; other
assets of $13 million; current liabilities of $89 million; long-term
liabilities of $20 million and deferred tax liabilities of $25 million.
The following pro forma financial information (unaudited) is presented for the
year ended December 31, 1994, as if the purchase of VM had occurred on January
1, 1994.
(In millions, except per share amounts)
- -------------------------------------------------------
1994
- -------------------------------------------------------
Net revenues $1,856.7
Income before taxes and minority interests 61.5
Net income 38.6
Net income per share $ 1.62
50
51
19. RESTRUCTURING CHARGE
In December 1995, the Company established a salaried employee separation
program to reduce its workforce by approximately 5%. In connection with this
program, the Company recorded a pretax charge of $10 million for severance
related costs, including pension and health care benefits. During 1996
substantially all the costs related to the restructuring plan were incurred.
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents the Company's quarterly results:
(In millions, except per share amounts)
- -----------------------------------------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
- -----------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Net revenues $478.8 $530.6 $491.3 $552.5 $487.6 $493.6 $505.2 $510.4
Gross profit 112.2 124.6 112.7 124.9 112.3 116.2 111.9 120.6
Net income 8.3 12.0 (16.2) 12.7 7.1 10.9 4.6 4.5
Net income per share $ .34 $ .49 $ (.66) $ .51 $ .29 $ .44 $ .19 $ .18
Net income for the second quarter of 1996 includes a $24.9 million after tax
special charge. The special charge is associated with product coverage and the
reduction of the value of an investment in Mexico. Excluding the special
charge, net income for the second quarter of 1996 was $8.7 million, or $.35 per
share.
Net income for the fourth quarter of 1995 includes a $6.7 million after tax
restructuring charge to cover costs of a reduction in salaried personnel.
Excluding the restructuring charge, net income for the fourth quarter of 1995
was $11.2 million, or $.46 per share.
51
52
DETROIT DIESEL CORPORATION
REPORT OF MANAGEMENT
The consolidated financial statements of Detroit Diesel Corporation have been
prepared by management and have been audited by Detroit Diesel Corporation's
independent auditors, Deloitte & Touche LLP. Management is responsible for the
consolidated financial statements, which have been prepared in conformity with
generally accepted accounting principles and include amounts based on
management's judgments.
Management is also responsible for maintaining internal accounting control
systems designed to provide reasonable assurance, at appropriate cost, that
assets are recorded in accordance with established policies and procedures.
Detroit Diesel Corporation's systems are under continuing review and are
supported by, among other things, business conduct and other written
guidelines, an internal audit function and the selection and training of
qualified personnel.
The Board of Directors is responsible for the Company's financial and
accounting policies, practices and reports. Its Audit Committee, comprised of
outside directors, meets regularly with the independent auditors,
representatives of management and the internal auditors to discuss and make
inquiries into their activities. Both the independent auditors and the
internal auditors have free access to the Audit Committee, with and without
management representatives in attendance, to discuss the results of the audit,
the adequacy of internal accounting controls, and the quality of the financial
reporting.
It is management's conclusion that the system of internal accounting controls
at December 31, 1996 provides reasonable assurance that the books and records
reflect the transactions of the Company and that the Company has complied with
its established policies and procedures.
/s/ Roger S. Penske
Chairman
/s/ J. Randall Lawrence
Senior Vice President - Finance
February 3, 1997
52
53
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
Detroit Diesel Corporation
We have audited the accompanying consolidated balance sheets of Detroit Diesel
Corporation and subsidiaries (the Company) as of December 31, 1996 and 1995 and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of VM Motori S.p.A. (a consolidated subsidiary) for the year ended
December 31, 1995, which statements reflect total assets and total revenues
constituting 27% and 12%, respectively, of the related consolidated totals
for that year. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for VM Motori S.p.A. for the year ended December 31, 1995, is based
solely on the report of such other auditors.
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 and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 1996 and 1995 and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Detroit, Michigan
February 3, 1997
53
54
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of directors
Detroit Diesel Corporation
Detroit, Michigan
We have audited the consolidated financial statements of Detroit Diesel
Corporation and subsidiaries (the "Company") as of December 31, 1996 and 1995,
and for each of the three years in the period ended December 31, 1996, and have
issued our report there on dated February 3, 1997; such report is included
elsewhere in this Form 10-K. Our audits also included the financial statement
schedule of Detroit Diesel Corporation and subsidiaries, listed in Item 14.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, based on our audits and the report of the other auditors, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
February 3, 1997
54
55
DETROIT DIESEL CORPORATION
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Additions
-----------------------------
Charged to Charged to Deductions-
Balance costs and other accounts- Write-offs and Balance
January 1 expenses Acquisitions Disposals December 31
--------- ----------- ---------------- --------------- -----------
DOUBTFUL ACCOUNTS RESERVES
For the Year Ended December 31,
1996 $5,210 $1,962 $ - $(1,067) $ 6,105
1995 $3,712 $2,011 $ 819 $(1,332) $ 5,210
1994 $2,067 $2,205 $ - $ (560) $ 3,712
INVENTORY RESERVES
For the Year Ended December 31,
1996 $ 9,677 $3,192 $ - $(1,855) $11,014
1995 $10,119 $1,310 $ 1,626 $(3,378) $ 9,677
1994 $ 9,195 $3,721 $ - $(2,797) $10,119
TAX VALUATION ALLOWANCE
For the Year Ended December 31,
1996 $ 1,322 $1,363 $ - $ - $ 2,685
1995 $ - $ - $ 1,322 $ - $ 1,322
1994 $ - $ - $ - $ - $ -
55
56
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.
DETROIT DIESEL CORPORATION
By: /s/ Roger S. Penske
-------------------
Roger S. Penske
Chairman of the Board and
Chief Executive Officer
March 27, 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
- ----------------------------------------- ------------------------------- --------------
/s/ Roger S. Penske Chairman of the Board, Director March 27, 1997
- ---------------------------------- and Chief Executive Officer
Roger S. Penske
(Principal Executive Officer)
/s/ J. Randall Lawrence Senior Vice President-Finance March 27, 1997
- ---------------------------------- and Chief Financial Officer
J. Randall Lawrence
(Principal Financial and
Accounting Officer)
/s/ Ludvik F. Koci President and Director March 27, 1997
- ----------------------------------
Ludvik F. Koci
/s/ Timothy D. Leuliette Vice Chairman and Director March 27, 1997
- ----------------------------------
Timothy D. Leuliette
56
57
/s/ John E. Doddridge * Director March 27, 1997
- --------------------------------
John E. Doddridge
/s/ William E. Hoglund * Director March 27, 1997
- --------------------------------
William E. Hoglund
/s/ Gary G. Jacobs * Director March 27, 1997
- --------------------------------
Gary G. Jacobs
/s/ Dr. Kurt J. Lauk * Director March 27, 1997
- --------------------------------
Dr. Kurt J. Lauk
/s/ Joseph F. Welch * Director March 27, 1997
- --------------------------------
Joseph F. Welch
/s/ Dr. Eckhard Cordes *
- -------------------------------- Director March 27, 1997
Dr. Eckhard Cordes
/s/ R. Jamison Williams, Jr. * Director March 27, 1997
- --------------------------------
R. Jamison Williams, Jr.
*By: /s/ J. Randall Lawrence
-----------------------
Attorney-in-Fact
57
58
EXHIBIT INDEX
The following constitutes the exhibits to the report on Form 10-K of the
Company for the year ended December 31, 1996:
Exhibit Sequential
Number Description of Exhibit Page Number
- ------- ---------------------- --------------
3.1 Certificate of Incorporation, as amended, which is N/A
incorporated by reference from Exhibit 3.1 of the
Company's Registration Statement on Form S-1, File No.
33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.
3.2 Amended and Restated Bylaws of Detroit Diesel N/A
Corporation, which is incorporated by reference from
Exhibit 3.2 of the Company's Registration Statement on
Form S-1, File No. 33-66760, filed with the Securities
and Exchange Commission on July 30, 1993, as amended.
4.1 Termination, Replacement and Restatement Agreement N/A
dated as of June 7, 1995 among Detroit Diesel
Corporation, the Lenders listed on Exhibit A and
Chemical Bank, as agent for the lenders, which is
incorporated by reference from Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q, File No.
1-12394, filed with the Securities and Exchange
Commission on August 10, 1995.
4.1.1 First Amendment to the Termination, Replacement and 64
Restatement Agreement, dated November 22, 1996, among
Detroit Diesel Corporation, the several banks and
other financial institutions and Chemical Bank, as
agent for the Lenders and the predecessor in interest
of The Chase Manhattan Bank, now acting as agent for
the Lenders.
4.2 Specimen Form of Certificate for Common Stock, which N/A
is incorporated by reference from Exhibit 4.4 of the
Company's Registration Statement on Form S-1, File No.
33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.
58
59
Exhibit Sequential
Number Description of Exhibit Page Number
- -------- ---------------------- -----------
Long-term debt instruments and credit facility N/A
agreements of the Detroit Diesel Corporation, under
each of which the authorized debt is equal to less
than 10% of the total assets of the Detroit Diesel
Corporation and its subsidiaries on a consolidated
basis, are not filed as exhibits to this report.
Detroit Diesel Corporation agrees to furnish to the
Commission, upon request, copies of any such unfiled
instruments.
10.1 Form of 1993 Stock Incentive Plan, which is N/A
incorporated by reference from Exhibit 10.1 of the
Company's Registration Statement on Form S-1, File No.
33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.
10.1.1 Form of 1993 Stock Incentive Plan Restricted Stock N/A
Award and Deferred Stock Award, which is incorporated
by reference from Exhibit 10.1.1 of the Company's
Registration Statement on Form S-1, File no. 33-66760,
filed with the Securities and Exchange Commission on
July 30, 1993, as amended.
10.2 Collaboration Agreement, dated as of January 31, 1993, N/A
between Detroit Diesel Corporation and Mercedes-Benz
AG, which is incorporated by reference from Exhibit
10.2 of the Company's Registration Statement on Form
S-1, File No. 33-66760, filed with the Securities and
Exchange Commission on July 30, 1993, as amended.
#10.3 Development Agreement, dated as of December 21, 1992, N/A
between Detroit Diesel Corporation and Mercedes-Benz
AG, which is incorporated by reference from Exhibit
10.3 of the Company's Registration Statement on Form
S-1, File No. 33-66760, filed with the Securities and
Exchange Commission on July 30, 1993, as amended.
#10.4 License Agreement, dated as of March 27, 1993, between N/A
Detroit Diesel Corporation and Mercedes-Benz AG, which
is incorporated by reference from Exhibit 10.4 of the
Company's
59
60
Exhibit Sequential
Number Description of Exhibit Page Number
- -------- ---------------------- -----------
Registration Statement on Form S-1, File No. 33-66760,
filed with the Securities and Exchange Commission on
July 30, 1993, as amended.
10.5 Financing Agreement between Diesel Project N/A
Development, Inc. and Detroit Diesel Corporation,
dated as of April 30, 1993, which is incorporated by
reference from Exhibit 10.5 of the Company's
Registration Statement on Form S-1, File No. 33-66760,
filed with the Securities and Exchange Commission on
July 30, 1993, as amended.
10.6 Amended and Restated Lease Agreement by and between N/A
Corporate Property Associates 8, L.P., and Corporate
Property Associates 9, L.P. and Detroit Diesel
Corporation, dated as of May 24, 1994, which is
incorporated by reference from Exhibit 10.6 of
Amendment No. 1 to the Company's Registration
Statement on Form S-1, File No. 33-79286, filed with
the Securities and Exchange Commission on June 15,
1994.
10.7 Lease Agreement, dated June 30, 1988, between the N/A
Timken Company and Detroit Diesel Corporation, which
is incorporated by reference from Exhibit 10.7 of the
Company's Registration Statement on Form S-1, File No.
33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.
10.8 Agreement for Data Processing Services between N/A
Electronic Data Systems Corporation and the Company,
dated as of January 1, 1988 (as amended and effective
through December 31, 2003), which is incorporated by
reference from Exhibit 10.9 of the Company's
Registration Statement on Form S-1, File No. 33-66760,
filed with the Securities and Exchange Commission on
July 30, 1993, as amended.
10.9 Master Lease Agreement between Detroit Diesel N/A
Corporation and GECC, dated as of May 26, 1992, which
is incorporated by reference from Exhibit 10.11 of the
Company's Registration
60
61
Exhibit Sequential
Number Description of Exhibit Page Number
- -------- ---------------------- -----------
Statement on Form S-1, File No. 33-66760, filed with
the Securities and Exchange Commission on July 30, 1993,
as amended.
#10.10 Requirements Agreement between Diesel Technology N/A
Company and Detroit Diesel Corporation, dated February
17, 1992, which is incorporated by reference from
Exhibit 10.15 of the Company's Registration Statement
on Form S-1, File No. 33-66760, filed with the
Securities and Exchange Commission on July 30, 1993,
as amended.
10.11 Purchase Agreement between Detroit Diesel Corporation N/A
and Penske Truck Leasing Corporation, dated October 7,
1993, related to purchase of remanufacturing business,
which in incorporated by reference from Exhibit 10.18
of the Company's Registration Statement on Form S-1,
File No. 33-66760, filed with the Securities and
Exchange Commission on July 30, 1993, as amended.
10.12 Employment Agreement, dated February 1, 1989, between N/A
Penske Transportation, Inc. and A. Gordon Clark, as
amended, assumed by Detroit Diesel Corporation, which
is incorporated by reference from Exhibit 10.19 of the
Company's Registration Statement on Form S-1, File No.
33-66760, filed with the Securities and Exchange
Commission on July 30, 1993, as amended.
10.12.1 Second Amendment to Employment Agreement dated as of N/A
January 31, 1995, between Detroit Diesel Corporation,
as assignee of Penske Transportation, Inc., and A.
Gordon Clark, which is incorporated by reference from
Exhibit 10.12.1 of the Company's Annual Report on Form
10-K, File No. 1-12394, filed with the Securities and
Exchange Commission on March 31, 1995, as amended.
10.13 Restated Share Purchase Agreement by and between N/A
Montagu Private Equity Investments Limited and others,
and Detroit Diesel Corporation, dated January 4, 1995,
which is incorporated by reference from Exhibit 10.13
of the Company's
61
62
Exhibit Sequential
Number Description of Exhibit Page Number
- -------- ---------------------- -----------
Annual Report on Form 10-K, File No.
1-12394, filed with the Securities and Exchange
Commission on March 31, 1995, as amended
#10.14 TED Joint Development and License Agreement by and N/A
among Detroit Diesel Corporation and Mercedes-Benz
Aktiengesellschaft and MTU Motoren- und Turbinen-Union
Friedrichshafen GmbH, dated September 5, 1994, which
is incorporated by reference from Exhibit 10.3 of the
Company's Quarterly Report on Form 10-Q, File No.
1-12394, filed with the Securities and Exchange
Commission on November 11, 1994.
#10.15 FEAT Joint Development and License Agreement by and N/A
between MTU Motoren- und Turbinen-Union
Friedrichshafen GmbH and Detroit Diesel Corporation,
dated June 28, 1994, which is incorporated by
reference from Exhibit 10.4 of the Company's Quarterly
Report on Form 10-Q, File No. 1-12394, filed with the
Securities and Exchange Commission on November 11,
1994.
10.15.1 Amendment to FEAT Joint Development and License N/A
Agreement by and between MTU Motoren- und
Turbinen-Union Friedrichshafen GmbH and Detroit Diesel
Corporation, dated June 28, 1994, which is
incorporated by reference from Exhibit 10.4.1 of the
Company's Quarterly Report on Form 10-Q, File No.
1-12394, filed with the Securities and Exchange
Commission on November 11, 1994.
10.16 Mutual Distribution Agreement by and between Detroit N/A
Diesel Corporation and MTU Motoren- und Turbinen-Union
Friedrichshafen GmbH, dated June 28, 1994, which is
incorporated by reference from Exhibit 10.5 of the
Company's Quarterly Report on Form 10-Q, File
No. 1-12394, filed with the Securities and Exchange
Commission on November 11, 1994.
62
63
Exhibit Sequential
Number Description of Exhibit Page Number
- -------- ---------------------- -----------
10.17 Joinder Agreement by and between Detroit Diesel N/A
Corporation, Mercedes-Benz AG and Motoren- und
Turbinen-Union Friedrichshafen GmbH, dated July 13,
1994, which is incorporated by reference from Exhibit
10.6 of the Company's Quarterly Report on Form 10-Q,
File No. 1-12394, filed with the Securities and
Exchange Commission on November 11, 1994.
11.1 Statement re: Computation of Per Share Earnings 70
21.1 List of Subsidiaries 71
23.1 Consent of Deloitte & Touche LLP 72
25.1 Powers of Attorney of Directors and Officers of the 73
Registrant
27 Financial Data Schedule 80
- -----------------
# Does not include certain information as to which the Company has been
granted confidential treatment.
63