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 28, 1997 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 28, 1997, the number of shares outstanding of the
registrant's only class of common stock was 41.9 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 28, 1997
and September 29, 1996
Consolidated Statement of Financial Position at 4
September 28, 1997 and December 31, 1996
Consolidated Statement of Cash Flows for the Nine 5
Months Ended September 28, 1997 and September 29, 1996
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of 7
Operations, Cash Flow and Financial Condition
PART II. OTHER INFORMATION
___________________________
Item 6. Exhibits and Reports on Form 8-K 11
Index to Exhibits 12
<PAGE>
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF EARNINGS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 28, 1997 AND SEPTEMBER 29, 1996
___________________________________________
Unaudited
_________
Third Quarter Nine Months
Millions, Except per Share Amounts 1997 1996 1997 1996
__________________________________ ______ ______ ______ ______
Net sales $1,366 $1,264 $4,066 $3,896
Cost of goods sold 1,057 994 3,147 3,010
______ ______ ______ ______
Gross profit 309 270 919 886
Selling & administrative expenses 181 177 545 537
Research & engineering expenses 64 60 189 188
Net (income) expense from joint
ventures and alliances (3) 1 (12) 6
Interest expense 5 5 17 13
Other income, net (7) (4) (19) (22)
______ ______ ______ ______
Earnings before income taxes 69 31 199 164
Provision for income taxes 15 5 51 45
______ ______ _______ _______
Net earnings $ 54 $ 26 $ 148 $ 119
______ ______ _______ _______
______ ______ _______ _______
Earnings per share $ 1.40 $ .67 $ 3.85 $ 2.99
Cash dividends declared per share .275 .25 .80 .75
<PAGE>
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
____________________________________________
Unaudited
_________
Millions, Except per Share Amounts 9/28/97 12/31/96
__________________________________ _______ ________
Assets
Current assets:
Cash and cash equivalents $ 61 $ 108
Receivables 814 669
Inventories 634 587
Other current assets 200 189
______ ______
1,709 1,553
Investments and other assets 336 326
Property, plant and equipment less accumulated
depreciation of $1,388 & $1,375 1,424 1,286
Intangibles, deferred taxes and deferred charges 210 204
______ ______
Total assets $3,679 $3,369
______ ______
______ ______
Liabilities and shareholders' investment
Current liabilities:
Loans payable $ 34 $ 93
Current maturities of long-term debt 45 39
Accounts payable 402 380
Other current liabilities 560 509
______ ______
1,041 1,021
______ ______
Long-term debt 538 283
______ ______
Other liabilities 758 753
______ ______
Shareholders' investment:
Common stock, $2.50 par value, 47.8 and 43.9
shares issued 119 110
Additional contributed capital 1,099 929
Retained earnings 649 535
Common stock in treasury,at cost,5.9 & 4.5 shares (236) (169)
Common stock held in trust for employee benefit
plans, 3.7 shares (177) -
Unearned compensation (ESOP) ( 42) (46)
Cumulative translation adjustments ( 70) (47)
______ _______
1,342 1,312
______ ______
Total liabilities & shareholders' investment $3,679 $3,369
______ ______
______ ______
<PAGE>
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
____________________________________
Unaudited
_________
Nine Months Ended
Millions 9/28/97 9/29/96
________ _______ _______
Cash flows from operating activities:
Net earnings $ 148 $ 119
_____ _____
Adjustments to reconcile net earnings to
net cash from operating activities:
Depreciation and amortization 118 111
Restructuring actions ( 15) ( 36)
Accounts receivable (174) (125)
Inventories ( 63) (106)
Accounts payable and accrued expenses 62 77
Income taxes payable 11 11
Other ( 5) ( 5)
______ ______
Total adjustments ( 66) (73)
_____ _____
Net cash provided by operating activities 82 46
_____ _____
Cash flows from investing activities:
Property, plant and equipment:
Additions (298) (151)
Disposals 14 30
Investments in joint ventures & alliances (10) 32
Disposition of business activities 79 13
Other (13) 8
______ ______
Net cash used in investing activities (228) ( 68)
______ ______
Net cash flows used for operating and
investing activities (146) ( 22)
______ ______
Cash flows from financing activities:
Proceeds from borrowings 281 160
Payments on borrowings ( 17) ( 14)
Net payments under credit agreements ( 57) ( 41)
Repurchase of common stock ( 66) ( 34)
Dividend payments ( 34) ( 30)
Other ( 7) ( 1)
______ ______
Net cash provided from financing activities 100 40
______ _____
Effect of exchange rate changes on cash ( 1) 1
______ _____
Net change in cash and cash equivalents (47) 19
Cash & cash equivalents at beginning of year 108 60
_____ _____
Cash & cash equivalents at the end of quarter $ 61 $ 79
_____ _____
_____ _____
<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 28, 1997 and September 29, 1996 have
been prepared in accordance with the accounting policies described in the
Company's Annual Report to Shareholders and Form 10-K. Management
believes the statements include all adjustments of a normal recurring
nature necessary to present fairly the results of operations for the
interim periods. Inventory values at interim reporting dates are based
upon estimates of the annual adjustments for taking physical inventory and
for the change in cost of LIFO inventories.
Note 2. Income Taxes: Income tax expense is reported during the
interim reporting periods on the basis of the estimated annual effective
tax rate for the taxable jurisdictions in which the Company operates.
Note 3. Long-term Debt: In February 1997, the Company issued $120
million of 6.75 percent debentures that mature in 2027. Net proceeds
were used principally to repay commercial paper indebtedness incurred
to repurchase shares of common stock. Holders of the debentures have a
1-time option in 2007 to redeem the debentures. The Company also has a
recall right after ten years.
In July 1997, the Company filed a Shelf Registration Statement with the
Securities and Exchange Commission in the amount of $250 million to
issue from time to time debt securities, preferred stock, preference
stock, common stock or warrants at prices and on terms to be determined
at the time of sale.
Note 4. Common Stock: In January 1997, the Company issued 3.75
million shares of its common stock to an employee benefits trust to
fund obligations of employee benefit and compensation plans,
principally retirement savings plans. Shares of the common stock held
by this trust are not used in the calculation of the Company's earnings
per share until distributed from the trust and allocated to a benefit
plan. The Company also repurchased 1.3 million shares of its common
stock from Ford Motor Company in January 1997 and was authorized by the
Board of Directors to repurchase an additional 1.7 million shares from
time to time in the open market. In the third quarter of 1997, the
Company repurchased 110,000 shares of common stock for $9 million, or
$78.71 average price per share.
In April 1997, the Company announced an increase in its quarterly
common stock dividend from 25 cents per share to 27.5 cents, effective
with the dividend payment in June 1997.
Note 5. Earnings per Share: Earnings per share 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 excludes shares of stock held by the employee
benefits trust until distributed and allocated to a benefit plan, was
38.5 million in the third quarter of 1997 and 38.4 million for the nine-
month period of 1997. The weighted-average number of shares was 39.6
million in the third quarter of 1996 and 40.0 million shares in the
first nine months of 1996. The Financial Accounting Standards Board
has released a new accounting rule on the calculation of earnings per
share that is effective at year-end 1997. This rule, which does not
permit early adoption, is not expected to have a material effect on the
Company's reported earnings per share.
<PAGE>
CUMMINS ENGINE COMPANY, INC.
____________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS,
CASH FLOW AND FINANCIAL CONDITION
______________________________________________________________
OVERVIEW
________
The Company's revenues of $1.37 billion were a third-quarter record, 8
percent higher than the year-ago quarter and only 2 percent lower than
Cummins' quarterly record in the second quarter of 1997. The increase
was primarily due to strong sales to industrial markets and
improvements in North American truck markets. For the first nine
months, the Company's sales were $4.1 billion, 4 percent higher than
the first nine months of 1996.
Net earnings were $54 million, or $1.40 per share, in the third quarter
of 1997, more than double the third quarter of 1996. This was the
third consecutive quarter of higher earnings and the second consecutive
quarter in which the Company's net earnings have exceeded the year-ago
quarter. For the first nine months of 1997, net earnings were $148
million, or $3.85 per share, compared to $119 million, or $2.99 per
share, in the first nine months of 1996.
RESULTS OF OPERATIONS
_____________________
The percentage relationships between net sales and other elements of
the Company's Consolidated Statement of Earnings for the comparative
reporting periods were:
Third Quarter Nine Months
Percent of Net Sales 1997 1996 1997 1996
____________________ _____ _____ _____ _____
Net sales 100.0 100.0 100.0 100.0
Cost of goods sold 77.4 78.6 77.4 77.3
_____ _____ _____ _____
Gross profit 22.6 21.4 22.6 22.7
Selling and administrative expenses 13.2 14.0 13.4 13.8
Research and engineering expenses 4.7 4.7 4.6 4.8
Net (income) expense from joint
ventures and alliances (.2) .1 (.3) .2
Interest expense .3 .4 .4 .3
Other income, net (.5) (.3) (.4) (.6)
______ ______ ______ ______
Earnings before income taxes 5.1 2.5 4.9 4.2
Provision for income taxes 1.1 .4 1.3 1.1
_____ _____ _____ _____
Net earnings 4.0 2.1 3.6 3.1
_____ _____ _____ _____
_____ _____ _____ _____
Net Sales
_________
The Company's sales are diversified across geographic regions and with a
broad set of markets. Sales for each of the Company's markets for the
comparative reporting periods were:
Third Quarter Nine Months
Dollars in Millions 1997 1996 1997 1996
___________________ ______ ______ ______ ______
Automotive $ 646 $ 569 $1,870 $1,868
Power generation 289 314 866 874
Industrial 245 203 765 614
Filtration, turbochargers and
company-owned distributors 186 178 565 540
______ ______ ______ ______
Net sales $1,366 $1,264 $4,066 $3,896
______ ______ ______ ______
______ ______ ______ ______
Revenues from sales of engines, which generally represent 55 to 60
percent of the Company's net sales, were approximately 16 percent
higher than in the third quarter of 1996. Sales of other products,
which make up the remainder of Cummins' revenues, were essentially
level with the third quarter of 1996.
Engine shipments were 21 percent higher than the third quarter of 1996,
reflecting a shift from heavy-duty to midrange engines for industrial
markets. Year-to-date, the Company has shipped over 265,000 engines, with
almost 30 percent of these outside the United States.
Third Quarter Nine Months
Engine Shipments 1997 1996 1997 1996
________________ ______ ______ _______ _______
Midrange 64,800 52,500 190,600 176,100
Heavy-duty 23,400 19,700 67,100 66,200
High-horsepower 2,600 2,700 7,500 7,100
______ ______ _______ _______
Total 90,800 74,900 265,200 249,400
______ ______ _______ _______
______ ______ _______ _______
Engine revenues and unit shipments for the heavy-duty truck market were
approximately 25 percent higher than the third quarter of 1996 due to
the improvement in the North American market and to stronger demand in
Mexico in 1997. For the medium-duty truck market, engine revenues and
shipments were approximately 35 percent higher than the third quarter
of 1996 due to a higher level of shipments to Ford. In the bus and
light commercial vehicle market, engine revenues and shipments were
approximately 15 percent higher than the same period of 1996. In the
third quarter of 1997, the Company shipped 16,600 engines to Chrysler,
a 14-percent increase over the third quarter of 1996. Demand in North
American bus markets also remained strong in the third quarter of 1997,
16 percent higher than the third quarter of 1996.
Engine shipments for industrial markets in the third quarter of 1997
were 22 percent higher, continuing to reflect strong demand for
construction equipment in North America and for international
agricultural markets. However, engine revenues for industrial markets
were only 14 percent higher due to the shift from heavy-duty to
midrange engines for these markets.
A decline in sales of gensets and an 18-percent decrease in power gen
sales for recreational vehicles in North America were offset by
increased sales of engine kits, filtration and other products. Sales
of both alternators and service parts were essentially level with the
third quarter of 1996.
Gross Profit
____________
In the third quarter and first nine months of 1997, the Company's gross
profit percentage was 22.6 percent of net sales compared to 21.4
percent in the third quarter of 1996 and 22.7 percent in the first nine
months of 1996. In the third quarter of 1997, the Company benefited
from higher volume absorption and lower costs, including a reduction in
product coverage, which was 2.4 percent of net sales, compared to 2.9
percent in the third quarter of 1996. In the first nine months of
1997, product coverage expense was 2.6 percent of net sales, compared
to 2.8 percent in the first nine months of 1996.
Operating Expenses
__________________
Selling and administrative expenses of $181 million in the third
quarter of 1997 and $545 million in the first nine months were 13.2
percent and 13.4 percent of net sales, respectively, compared to 14.0
percent and 13.8 percent of net sales in the same periods of 1996. The
increase in absolute dollars in 1997 was primarily due to expenditures
for new product launches, software and systems development, and volume-
related marketing programs.
Net income from joint ventures and alliances was $3 million in the
third quarter and $12 million in the first nine months of 1997. The
increase in income over 1996 was due to the net effect of higher
earnings and royalties from Kirloskar Cummins (KCL) and the joint
ventures with Komatsu and lower start-up losses at the Company's joint
venture with Wartsila. In the fourth quarter of 1997, the Company will
consolidate the results of KCL, which has been renamed Cummins India
Limited as a result of Cummins' increase in ownership to 51 percent.
Interest and Other Income and Expense
_____________________________________
Interest expense of $17 million in the first nine months of 1997 was
higher than 1996 due to a higher level of debt in 1997. In the third
quarter of 1997, the increase in other income of $3 million over third-
quarter 1996 was due primarily to foreign currency translation. In the
third quarter of 1997, the Company had a net gain of $2 million compared
to a net loss of $1 million in the third quarter of 1996.
Provision For Income Taxes
__________________________
In the third quarter, the estimated effective tax rate (ETR) for 1997
was reduced to 26 percent for the year as a result of the recent tax
legislation, which reinstated the research tax credit that had expired
May 31. For the quarter, the Company's tax rate was 22 percent to
reflect the year-to-date adjustment to the lower ETR. In the third
quarter of 1996, the Company had a similar full-year adjustment that
resulted in an ETR of 15 percent in that quarter.
CASH FLOW AND FINANCIAL CONDITION
_________________________________
Key elements of the Consolidated Statement of Cash Flows were:
First Nine Months
Dollars in Millions 1997 1996
___________________ ______ ______
Net cash provided by operating activities $ 82 $ 46
Net cash used for investing activities (228) ( 68)
______ ______
Net cash flows used for operating and
investing activities (146) (22)
Net cash provided from financing activities 100 40
Effect of exchange rate changes on cash ( 1) 1
______ ____
Net change in cash and cash equivalents $( 47) $ 19
______ ____
______ ____
During the first nine months of 1997, the Company generated cash flows
from operating activities of $82 million, compared to $46 million in
the first nine months of 1996. Investing activities required net cash
resources of $228 million in 1997, due to a higher level of capital
expenditures for previously announced investments for new products. In
the first nine months of 1997, capital expenditures were $298 million
compared to $151 million in the first nine months of 1996. At the end
of the second quarter of 1997, the Company sold its vibration
attenuation business to Simpson Industries for approximately $74
million. The sale of this business was a continuation of the Company's
restructuring program announced previously. The sale and the
associated restructuring actions had no material effect on reported
results.
Net cash provided from financing activities was $100 million in the
first nine months of 1997. As disclosed in Note 3 to the Consolidated
Financial Statements, the Company issued $120 million in debentures
under its shelf registration statement in February 1997.
In January 1997, the Company repurchased 1.3 million shares of its
common stock from Ford Motor Company and was authorized by the Board of
Directors to repurchase an additional 1.7 million shares in the open
market. In the third quarter of 1997, the Company repurchased 110,000
shares of common stock for $9 million. In January 1997, the Company
issued 3.75 million shares of its common stock to an employee benefits
trust. Shares held by this trust are not used in the calculation of
the Company's earnings per share until distributed from the trust.
In April 1997, the Company announced a 10-percent increase in its
quarterly common stock dividend from 25 cents per share to 27.5 cents,
effective with the dividend payment in June 1997.
FORWARD-LOOKING STATEMENTS
__________________________
The Company has included certain forward-looking statements in this
Management's Discussion and Analysis of Results of Operations, Cash Flow
and Financial Condition. These statements are based on current
expectations, estimates and projections about the industries in which the
Company operates, management's beliefs and various assumptions made by
management which are difficult to predict. Among the factors that could
affect the outcome of the statements are general industry and market
conditions and growth rates. Therefore, actual outcomes and their impact
on the Company may differ materially from what is expressed or forecasted.
The Company undertakes no obligation to update publicly any forward-
looking statements, whether as a result of new information, future events
or otherwise.
PART II. OTHER INFORMATION
___________________________
Item 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 1997.
Signatures
__________
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CUMMINS ENGINE COMPANY, INC.
By: /s/Rick J. Mills
________________
Rick J. Mills
Vice President - Corporate Controller
(Chief Accounting Officer) November 7, 1997
<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 28, 1997 and
September 29, 1996 (filed herewith)
27 Financial Data Schedule (filed herewith)
EXHIBIT 11
__________
CUMMINS ENGINE COMPANY, INC.
____________________________
SCHEDULE OF COMPUTATION OF PER SHARE EARNINGS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 28, 1997 AND SEPTEMBER 29, 1996
____________________________________________
Third Quarter Nine Months
_________________ _________________
Weighted Weighted
Average Net Average Net
Millions, Except per Share Amounts Shares Earnings Shares Earnings
__________________________________ ______ ________ ______ ________
1997
____
Shares outstanding & net earnings 38.3 $ 54 38.3 $148
Options .2 - .1 -
____ ___ ____ ____
Used in the determination of
earnings per share 38.5 $ 54 38.4 $148
____ ___ ____ ____
____ ___ ____ ____
Primary and fully diluted
earnings per share $1.40 $3.85
_____ _____
_____ _____
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 $0.67 $2.99
____ _____
____ _____
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-28-1997
<CASH> 61
<SECURITIES> 0
<RECEIVABLES> 814
<ALLOWANCES> 0
<INVENTORY> 634
<CURRENT-ASSETS> 1,709
<PP&E> 2,812
<DEPRECIATION> 1,388
<TOTAL-ASSETS> 3,679
<CURRENT-LIABILITIES> 1,041
<BONDS> 538
0
0
<COMMON> 119
<OTHER-SE> 1,223
<TOTAL-LIABILITY-AND-EQUITY> 3,679
<SALES> 4,066
<TOTAL-REVENUES> 4,066
<CGS> 3,147
<TOTAL-COSTS> 734
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> 199
<INCOME-TAX> 51
<INCOME-CONTINUING> 148
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 148
<EPS-PRIMARY> 3.85
<EPS-DILUTED> 3.85
</TABLE>
