UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
CUMMINS ENGINE COMPANY, INC.
____________________________
For the Quarter Ended September 29, 1996 Commission File Number 1-4949
__________________ ______
Indiana 35-0257090
_______ __________
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
500 Jackson Street, Box 3005,
____________________________
Columbus, Indiana 47202-3005
_________________ __________
(Address of Principal Executive Offices) (Zip Code)
812-377-5000
____________
(Registrant's Telephone Number)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the proceeding 12 months and (2) has been
subject to such filing requirements for the past 90 days:
Yes [x]
No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date:
As of September 29, 1996, the number of shares outstanding of the
registrant's only class of common stock was 39.5 million.
<PAGE>
TABLE OF CONTENTS
_________________
Page No.
________
PART I. FINANCIAL INFORMATION
______________________________
Item 1. Financial Statements
Consolidated Statement of Earnings for the Third 3
Quarter and Nine Months Ended September 29, 1996 and
October 1, 1995
Consolidated Statement of Financial Position at 4
September 29, 1996 and December 31, 1995
Consolidated Statement of Cash Flows for the Nine 5
Months Ended September 29, 1996 and October 1, 1995
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of 7
Operations and Financial Condition
PART II. OTHER INFORMATION
___________________________
Item 1. Legal Proceedings 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 12
Index to Exhibits 12
<PAGE>
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF EARNINGS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 29, 1996 AND OCTOBER 1, 1995
___________________________________________
Unaudited
_________
Third Quarter Nine Months
Millions, Except per Share Amounts 1996 1995 1996 1995
__________________________________ ______ ______ ______ ______
Net sales $1,264 $1,219 $3,896 $3,914
Cost of goods sold 994 942 3,010 2,954
______ ______ ______ ______
Gross profit 270 277 886 960
Selling & administrative expenses 177 154 537 518
Research & engineering expenses 60 61 188 194
Net expense of joint ventures and
alliances 1 2 6 -
Interest expense 5 3 13 10
Other (income) expense, net (4) - (22) 4
Restructuring charge - 2 - 2
______ ______ ______ ______
Earnings before income taxes 31 55 164 232
Provision for income taxes 5 9 45 50
______ ______ _______ _______
Net earnings $ 26 $ 46 $ 119 $ 182
______ ______ _______ _______
______ ______ _______ _______
Earnings per share $ .67 $ 1.14 $ 2.99 $ 4.47
Cash dividends declared per share .25 .25 .75 .75
<PAGE>
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
____________________________________________
Unaudited
_________
Millions, Except per Share Amounts 9/29/96 12/31/95
__________________________________ _______ ________
Assets
Current assets:
Cash and cash equivalents $ 79 $ 60
Receivables 728 597
Inventories 621 513
Other current assets 220 218
______ ______
1,648 1,388
Investments and other assets 286 326
Property, plant and equipment less accumulated
depreciation of $1,352 & $1,327 1,163 1,148
Intangibles, deferred taxes and deferred charges 204 194
______ ______
Total assets $3,301 $3,056
______ ______
______ ______
Liabilities and shareholders' investment
Current liabilities:
Loans payable $ 19 $ 60
Current maturities of long-term debt 50 42
Accounts payable 390 376
Other current liabilities 585 575
______ ______
1,044 1,053
______ ______
Long-term debt 259 117
______ ______
Other liabilities 747 703
______ ______
Shareholders' investment:
Common stock, $2.50 par value, 44.0 and 43.9
shares issued 110 110
Additional contributed capital 929 926
Retained earnings 495 406
Common stock in treasury,at cost,4.5 & 3.7 shares (169) (135)
Unearned compensation ( 46) (51)
Cumulative translation adjustments ( 68) (73)
______ ______
1,251 1,183
______ ______
Total liabilities & shareholders' investment $3,301 $3,056
______ ______
______ ______
<PAGE>
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
___________________________________
Unaudited
_________
Nine Months Ended
Millions 9/29/96 10/1/95
________ _______ _______
Cash flows from operating activities:
Net earnings $ 119 $ 182
_____ _____
Adjustments to reconcile net earnings to
net cash from operating activities:
Depreciation and amortization 111 106
Restructuring actions ( 36) 2
Accounts receivable (125) ( 74)
Inventories (106) ( 49)
Accounts payable and accrued expenses 77 27
Income taxes payable 11 2
Other ( 5) 10
______ _____
Total adjustments ( 73) 24
_____ _____
Net cash provided by operating activities 46 206
_____ _____
Cash flows from investing activities:
Property, plant and equipment:
Additions (151) (130)
Disposals 30 3
Joint venture investments 32 ( 85)
Disposition of business activities 13 -
Other 8 ( 1)
______ ______
Net cash used in investing activities ( 68) (213)
______ ______
Net cash flows used for operating and
investing activities ( 22) ( 7)
______ ______
Cash flows from financing activities:
Proceeds from borrowings 160 -
Payments on borrowings ( 14) ( 8)
Net borrowings under credit agreements ( 41) 42
Dividend payments ( 30) ( 30)
Repurchases of common stock ( 34) ( 69)
Other ( 1) 1
______ ______
Net cash provided from (used for)
financing activities 40 ( 64)
_____ ______
Effect of exchange rate changes on cash 1 1
_____ ______
Net change in cash and cash equivalents 19 ( 70)
Cash & cash equivalents at beginning of year 60 147
_____ _____
Cash & cash equivalents at the end of quarter $ 79 $ 77
_____ _____
_____ _____
<PAGE>
CUMMINS ENGINE COMPANY, INC.
____________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________________________________
Unaudited
_________
Note 1. Accounting Policies: The Consolidated Financial Statements for
the interim periods ended September 29, 1996 and October 1, 1995 have been
prepared in accordance with the accounting policies described in the
Company's Annual Report to Shareholders and Form 10-K. Management
believes the statements include all adjustments of a normal recurring
nature necessary to present fairly the results of operations for the
interim periods. Inventory values at interim reporting dates are based
upon estimates of the annual adjustments for taking physical inventory and
for the change in cost of LIFO inventories.
Note 2. Income Taxes: Income tax expense is reported during the
interim reporting periods on the basis of the estimated annual effective
tax rate for the taxable jurisdictions in which the Company operates.
In the first nine months of 1995, the Company recognized approximately $31
million related to a reduction in its valuation allowance for tax benefit
carryforwards.
Note 3. Long-term Debt: The Company maintains a revolving credit
agreement, under which there were no outstanding borrowings at
September 29, 1996. In the second quarter of 1996, the agreement was
amended, increasing the available amount to $400 million and extending
the term to 2001. The revolving credit agreement supported commercial
paper borrowings of $50 million at September 29, 1996. The commercial
paper borrowings were issued as replacement financing for an
arrangement whereby the Company sold up to $110 million receivables
without recourse. The agreement for the sale of receivables expired in
the second quarter and was not renewed by the Company. In the first
quarter of 1996, a subsidiary of the Company issued 8.2 percent notes,
which resulted in net proceeds of $100 million.
Note 4. Stock Repurchase Program: In October 1994, the Board of
Directors authorized repurchase by the Company of up to 2,500,000
shares of its common stock. During the first nine months of 1996, the
Company completed this program with the repurchase of 821,500 shares on
the open market at an aggregate purchase price of $34 million, or
average price of $41.35 per share. The Company repurchased 1,575,400
shares at an aggregate purchase price of $69 million, or average price
of $43.57 per share, in 1995 and 103,100 shares at an aggregate
purchase price of $5 million, or average price of $42.47 per share, in
1994.
Note 5. Earnings per Share: Earnings per share of common stock are
computed by dividing net earnings by the weighted-average number of common
shares outstanding during the period. The weighted-average number of
shares, which includes the exercise of certain stock options granted to
employees, was 39.6 million in the third quarter of 1996 and 40.0 million
in the first nine months of 1996. The weighted-average number of shares
was 40.4 million in the third quarter of 1995 and 40.8 million in the
first nine months of 1995.
<PAGE>
CUMMINS ENGINE COMPANY, INC.
____________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
________________________________________________
OVERVIEW
________
The Company's net sales of $1.3 billion in the third quarter of 1996
were $45 million, or 4 percent, higher than the third quarter of 1995.
The Company traditionally experiences a seasonal decline in its
automotive markets in the third quarter. In addition, in the third
quarter of 1996, Cummins experienced the decline in the North American
heavy-duty truck market that was anticipated for the second half of
1996. Sales to power generation and certain industrial markets were
strong, however, offsetting the decline in sales to automotive markets.
The Company shipped 249,400 engines in the first nine months of 1996 as
indicated in the following table:
Third Quarter Nine Months
Engine Shipments 1996 1995 1996 1995
________________ ______ ______ _______ _______
Midrange engines 52,500 49,000 176,100 167,500
Heavy-duty engines 19,700 25,000 66,200 82,400
High-horsepower engines 2,700 2,300 7,100 7,000
______ ______ _______ _______
Total 74,900 76,300 249,400 256,900
______ ______ _______ _______
______ ______ _______ _______
The Company's net earnings were $26 million, or 67 cents per share, in
the third quarter of 1996 compared to $46 million, or $1.14 per share, in
the third quarter of 1995. For the first nine months of 1996, net
earnings were $119 million, or $2.99 per share, compared to $182 million,
or $4.47 per share, in the first nine months of 1995. Although sales
exceeded the 1995 level, the Company's results were affected by several
factors, including the decline in heavy-duty production that resulted in
lower fixed cost absorption, a shift in sales to lower margin power
generation products and higher than anticipated costs to implement the
restructuring actions.
RESULTS OF OPERATIONS
_____________________
The percentage relationships between net sales and other elements of
the Company's Consolidated Statement of Earnings for the comparative
reporting periods were:
Third Quarter Nine Months
Percent of Net Sales 1996 1995 1996 1995
____________________ _____ _____ _____ _____
Net sales 100.0 100.0 100.0 100.0
Cost of goods sold 78.6 77.3 77.3 75.5
_____ _____ _____ _____
Gross profit 21.4 22.7 22.7 24.5
Selling and administrative expenses 14.0 12.6 13.8 13.2
Research and engineering expenses 4.7 5.0 4.8 5.0
Net expense of joint ventures & alliances .1 .2 .2 -
Interest expense .4 .2 .3 .3
Other (income) expense, net (.3) - (.6) .1
Restructuring charge - .2 - -
______ _____ ______ _____
Earnings before income taxes 2.5 4.5 4.2 5.9
Provision for income taxes .4 .7 1.1 1.3
_____ _____ _____ _____
Net earnings 2.1 3.8 3.1 4.6
_____ _____ _____ _____
_____ _____ _____ _____
Net Sales
_________
Sales for each of the Company's markets for the comparative reporting
periods were:
Third Quarter Nine Months
Dollars in Millions 1996 1995 1996 1995
___________________ ______ ______ ______ ______
Heavy-duty truck $ 274 $ 361 $ 929 $1,155
Midrange truck 131 143 445 446
Bus and light commercial vehicles 166 139 562 502
Power generation 348 269 918 824
Industrial products 183 149 540 499
Marine 29 23 91 69
Fleetguard and Holset 133 135 411 419
______ ______ ______ ______
Net sales $1,264 $1,219 $3,896 $3,914
______ ______ ______ ______
______ ______ ______ ______
Sales of $274 million to the heavy-duty truck market were 24 percent
lower than the third quarter of 1995. The North American heavy-duty
truck market is experiencing the decline anticipated for the second half
of 1996. The latest estimates for 1996 project a market size
approximately 25 percent below 1995. This lower market size has been
the cause for the Company's drop in engine shipments in 1996.
International engine shipments were 4 percent lower compared to the
third quarter of 1995, due primarily to lower demand from European
markets.
Midrange truck engine sales of $131 million in the third quarter of 1996
were 8 percent lower than the third quarter of 1995. In North America,
engine shipments were 14 percent lower than the third quarter of 1995,
due to an overall decrease in demand for medium-duty trucks. Shipments
for international markets have been higher in 1996 due to demand in
Mexico.
Sales for the bus and light commercial vehicles market were 19 percent
higher than the third quarter of 1995 and 12 percent higher than the
first nine months of 1995 due to the high level of sales of midrange
engines to Chrysler.
Sales of $348 million to the power generation market were $79 million
higher, a 29-percent increase compared to the third quarter of 1995.
The increase was all in international markets, due primarily to strong
demand in China, India and Southeast Asia. Power generation, however,
continues to be affected by price competition in international markets
and a shift in sales to lower margin products. For the first nine
months of 1996, sales were 11 percent higher than the same period of
1995.
Sales to industrial markets, which traditionally are affected by a
seasonal decline in the third quarter, were 23 percent higher, compared
to the third quarter of 1995. The increase was due to strong sales of
engines for construction equipment in international markets. Sales in
the first nine months of 1996 were $540 million, 8 percent higher than
the first nine months of 1995.
In the third quarter and first nine months of 1996, sales of filtration
products and turbochargers were slightly lower than the prior year's
respective periods.
Gross Profit
____________
In the third quarter of 1996, the Company's gross profit percentage was
21.4 percent of net sales, compared to 22.7 percent in the third
quarter of 1995. In the first nine months of 1996, the Company's gross
profit percentage was 22.7 percent of net sales, compared to 24.5
percent in the first nine months of 1995.
The reduction in gross profit in 1996 was due to several factors, the
most significant of which was the decline in heavy-duty production that
resulted in lower fixed cost absorption. Gross profit in 1996 also was
affected by lower demand for midrange engines for medium-duty trucks,
price competition and higher sales of lower margin power generation
products and expenses associated with restructuring actions. While the
restructuring actions are proceeding, expenses associated with
implementation of certain of these actions have been higher than
anticipated. In the third quarter and first nine months of 1996,
product coverage expense was 2.9 percent and 2.8 percent of net sales,
respectively, compared to 2.6 percent and 2.5 percent of net sales in
the comparative periods of 1995.
Operating Expenses
__________________
Selling and administrative expenses of $177 million, 14.0 percent of
net sales, in the third quarter and $537 million, 13.8 percent of net
sales, in the first nine months of 1996 reflected expenditures
associated with the restructuring actions and marketing programs that
offset a decrease in administrative expenses.
In the third quarter and first nine months of 1996, research and
engineering expenses of $60 million and $188 million, respectively,
were slightly lower than the prior year's levels.
Net expense of joint ventures and alliances was associated with product
development and start-up costs of the joint venture with Wartsila.
Interest and Other Income and Expense
_____________________________________
Interest expense in the third quarter and first nine months of 1996 was
slightly higher than the comparable periods of 1995 due to the increase
in long-term debt.
Other income and expense includes a variety of items, such as foreign
currency gains and losses, royalties, interest income, and gains and
losses associated with fixed asset dispositions. In the first nine
months of 1996 other income of $22 million was generated primarily from
capital gains associated with various asset disposals.
Provision For Income Taxes
__________________________
The estimated effective tax rate for 1996 is 26 percent. This is lower
than the US federal statutory rate of 35 percent, primarily because of
export sales, lower state taxes and the effect of reinstatement of the
research credit. Tax provisions in the Small Business Job Protection Act
that was signed into law in August 1996 included reinstatement of the
research credit for an 11-month period, beginning July 1, 1996. In the
first nine months of 1995, the Company recognized approximately $31
million related to a reduction in its valuation allowance for tax
benefit carryforwards.
CASH FLOW AND FINANCIAL CONDITION
_________________________________
Key elements of the Consolidated Statement of Cash Flows were:
First Nine Months
Dollars in Millions 1996 1995
___________________ ______ ______
Net cash provided by operating activities $ 46 $206
Net cash used in investing activities (68) (213)
______ ______
Net cash flows used for operating and
investing activities (22) ( 7)
Net cash provided from (used for) financing
activities 40 (64)
Effect of exchange rate changes on cash 1 1
______ _____
Net change in cash and cash equivalents $ 19 $(70)
______ ____
______ ____
During the first nine months of 1996, cash flows used for operating
and investing activities were $22 million compared to $7 million in the
first nine months of 1995. In the second quarter of 1996, an agreement for
the sale of up to $110 million of accounts receivable was not renewed by
the Company, which resulted in an increase in receivables and a lower
level of net cash flows provided by operating activities. Investing
activities required $151 million for capital expenditures in the first
nine months of 1996.
Net cash provided from financing activities was $40 million in the
first nine months of 1996. Total indebtedness was $328 million at
September 29, 1996 compared to $219 million at December 31, 1995. As
disclosed more fully in Note 3 to the Consolidated Financial
Statements, the Company amended its revolving credit agreement in the
second quarter of 1996 to increase the available amount to $400 million
and extend the term to 2001. There were no outstanding borrowings
under the agreement at September 29, 1996. Commercial paper borrowings
of $50 million were outstanding at September 29, 1996. In the first
quarter of 1996, a subsidiary of the Company issued 8.2 percent notes,
which resulted in net proceeds of $100 million.
As disclosed in Note 4 to the Consolidated Financial Statements, the
Company repurchased on the open market 821,500 shares of its common
stock at an average price of $41.35 per share in the first nine months
of 1996.
PART II. OTHER INFORMATION
___________________________
Item 1. Legal Proceedings:
___________________________
On July 8, 1996, the United States District Court for the Southern
District of Indiana entered an order approving the settlement of Warkel v.
Cummins Engine Company, et.al.
Item 5. Other Information:
___________________________
Certain information contained in this Form 10-Q is forward-looking and
involves risks and uncertainties, including general economic and
competitive conditions that could significantly affect expected results.
Item 6. Exhibits and Reports on Form 8-K:
__________________________________________
(a) See the Index to Exhibits on Page 12 for a list of exhibits filed
herewith.
(b) The Company was not required to file a Form 8-K during the third
quarter of 1996.
<PAGE>
Signatures
__________
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CUMMINS ENGINE COMPANY, INC.
By: /s/John McLachlan
_________________
John McLachlan
Vice President - Corporate Controller
(Chief Accounting Officer) October 30, 1996
<PAGE>
CUMMINS ENGINE COMPANY, INC.
____________________________
INDEX TO EXHIBITS
_________________
11 Schedule of Computation of Per Share Earnings for the Third
Quarter and Nine Months Ended September 29, 1996 and
October 1, 1995 (filed herewith)
27 Financial Data Schedule (filed herewith)
CUMMINS ENGINE COMPANY, INC.
____________________________
EXHIBIT 11
__________
SCHEDULE OF COMPUTATION OF PER SHARE EARNINGS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 29, 1996 AND OCTOBER 1, 1995
____________________________________________
Third Quarter Nine Months
_________________ _________________
Weighted Weighted
Average Net Average Net
Millions, Except per Share Amounts Shares Earnings Shares Earnings
__________________________________ ______ ________ ______ ________
1996
____
Shares outstanding & net earnings 39.6 $ 26 40.0 $119
Options - - - -
____ ___ ____ ____
Used in the determination of
earnings per share 39.6 $ 26 40.0 $119
____ ___ ____ ____
____ ___ ____ ____
Primary and fully diluted
earnings per share $.67 $2.99
____ _____
____ _____
1995
____
Shares outstanding & net earnings 40.3 $ 46 40.7 $182
Options .1 - .1 -
____ ___ ____ ____
Used in the determination of
earnings per share 40.4 $ 46 40.8 $182
____ ___ ____ ____
____ ___ ____ ____
Primary and fully diluted
earnings per share $1.14 $4.47
_____ _____
_____ _____
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0
0
<COMMON> 110
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