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 27, 1998 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 27, 1998, 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 27, 1998
and September 28, 1997
Consolidated Statement of Financial Position at 4
September 27, 1998 and December 31, 1997
Consolidated Statement of Cash Flows for the Nine 5
Months Ended September 27, 1998 and September 28, 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of 9
Operations, Cash Flow and Financial Condition
PART II. OTHER INFORMATION
___________________________
Item 6. Exhibits and Reports on Form 8-K 13
Index to Exhibits 15
<PAGE>
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF EARNINGS
FOR THE THIRD QUARTER AND NINE MONTHS
ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997
_______________________________________________
Unaudited
_________
Third Quarter Nine Months
Millions, except per share amounts 1998 1997 1998 1997
__________________________________ ______ ______ ______ ______
Net sales $1,525 $1,366 $4,660 $4,066
Cost of goods sold 1,218 1,057 3,644 3,147
Special charges 49 - 92 -
______ ______ ______ ______
Gross profit 258 309 924 919
Selling & administrative expenses 191 181 592 545
Research & engineering expenses 61 64 193 189
Net expense (income) from joint
ventures and alliances 8 (3) 18 (12)
Interest expense 17 5 52 17
Other income, net (1) (7) ( 8) (19)
Restructuring and other non-recurring
charges 125 - 125 -
______ ______ ______ ______
Earnings (loss) before income taxes (143) 69 (48) 199
Provision (benefit) for income taxes ( 35) 15 ( 7) 51
Minority interest 2 - 9 -
_______ ______ ________ _______
Net earnings (loss) $ (110) $ 54 $ (50) $ 148
_______ ______ ________ _______
_______ ______ ________ _______
Basic earnings (loss) per share $ (2.86) $ 1.41 $ (1.30) $ 3.87
Diluted earnings (loss) per share (2.86) 1.38 (1.30) 3.82
Cash dividends declared per share .275 .275 .825 .80
<PAGE>
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
____________________________________________
Unaudited
_________
Millions, except per share amounts 9/27/98 12/31/97
__________________________________ _______ ________
Assets
Current assets:
Cash and cash equivalents $ 63 $ 49
Receivables 930 771
Inventories 781 677
Other current assets 193 213
______ ______
1,967 1,710
Investments and other assets 288 346
Property, plant and equipment less accumulated
depreciation of $1,414 & $1,434 1,641 1,532
Goodwill, net of amortization of $14 and $5 384 12
Other intangibles, deferred taxes and deferred
charges 248 165
______ ______
Total assets $4,528 $3,765
______ ______
______ ______
Liabilities and shareholders' investment
Current liabilities:
Loans payable $ 39 $ 90
Current maturities of long-term debt 37 42
Accounts payable 408 386
Other current liabilities 698 537
______ ______
1,182 1,055
______ ______
Long-term debt 1,202 522
______ ______
Other liabilities 787 713
______ ______
Minority interest 59 53
______ ______
Shareholders' investment:
Common stock, $2.50 par value, 48.0 and 48.1
shares issued 120 120
Additional contributed capital 1,117 1,119
Retained earnings 628 713
Common stock in treasury, at cost, 6.1 & 6.0 shares (237) (245)
Common stock held in trust for employee benefit
plans, 3.6 and 3.7 shares (175) (175)
Unearned compensation (ESOP) ( 38) (42)
Cumulative translation adjustments (117) (68)
______ _______
1,298 1,422
______ ______
Total liabilities & shareholders' investment $4,528 $3,765
______ ______
______ ______
<PAGE>
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
____________________________________
Unaudited
_________
Nine Months Ended
Millions 9/27/98 9/28/97
________ _______ _______
Cash flows from operating activities:
Net earnings (loss) $ (50) $ 148
______ _____
Adjustments to reconcile net earnings (loss)
to net cash from operating activities:
Depreciation and amortization 148 118
Restructuring & other non-recurring actions 121 ( 15)
Accounts receivable (118) (174)
Inventories ( 79) ( 63)
Accounts payable and accrued expenses 155 62
Income taxes payable ( 55) 11
Equity in (earnings) losses of joint
ventures and alliances 24 -
Other 18 ( 5)
_____ ______
Total adjustments 214 (66)
_____ _____
Net cash provided by operating activities 164 82
_____ _____
Cash flows from investing activities:
Property, plant and equipment:
Additions (199) (298)
Disposals 3 14
Investments in joint ventures & alliances ( 21) ( 10)
Acquisition and disposition of businesses (467) 67
Other 2 ( 1)
______ ______
Net cash used in investing activities (682) (228)
______ ______
Net cash flows used for operating and
investing activities (518) (146)
______ ______
Cash flows from financing activities:
Proceeds from borrowings 711 281
Payments on borrowings ( 83) ( 17)
Net payments under credit agreements ( 55) ( 57)
Repurchase of common stock ( 11) ( 66)
Dividend payments ( 35) ( 34)
Other 6 ( 7)
_____ ______
Net cash provided from financing activities 533 100
_____ _____
Effect of exchange rate changes on cash ( 1) ( 1)
______ ______
Net change in cash and cash equivalents 14 (47)
Cash & cash equivalents at the beginning of year 49 108
_____ _____
Cash & cash equivalents at the end of quarter $ 63 $ 61
_____ _____
_____ _____
<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 27, 1998 and September 28, 1997 have
been prepared in accordance with the accounting policies described in the
Company's Annual Report to Shareholders and Form 10-K. Management
believes the statements include all adjustments of a normal recurring
nature necessary to present fairly the results of operations for the
interim periods. Inventory values at interim reporting dates are based
upon estimates of the annual adjustments for taking physical inventory and
for the change in cost of LIFO inventories.
Note 2. Acquisition: In January 1998, Cummins completed the
acquisition of the stock of Nelson Industries, Inc., for $453 million.
Nelson, a filtration and exhaust systems manufacturer, was consolidated
from the date of its acquisition. On a proforma basis, if the Company
had acquired Nelson on January 1, 1997, consolidated net sales for 1997
would have been $5.9 billion and consolidated net earnings would not
have been materially different. Under APB Opinion No. 16, Nelson's net
assets were recorded at fair value at the date of acquisition. The
purchase price in excess of net assets will be amortized over 40 years.
Note 3. Special Charges: In the third quarter of 1998, the Company
recorded a special charge of $35 million related to a revised estimate
of product coverage cost liability primarily for extended warranty
programs. The third quarter special charge also includes $14 million
for inventory write-downs associated with the Company's restructuring
and exit activities. This write-down relates to amounts of inventory
rendered excess or unusable due to the closing or consolidation of
facilities. The Company has committed to these facility closures and
consolidations as part of a plan to reduce costs and improve operating
performance.
In the first quarter of 1998, the Company recorded a special charge for
product coverage expense primarily attributable to the recent
experience of higher-than-anticipated base warranty costs to repair
certain automotive engines manufactured in previous years. The Company
believed it was necessary to make a special charge of $43 million pre-
tax to accrue for such product coverage costs expected to be incurred
in the future on these engines currently in the field.
Note 4. Restructuring and Other Non-Recurring Charges: In the third
quarter of 1998, the Company recorded charges of $125 million,
comprised of $100 million for costs to reduce the worldwide workforce
by approximately 1,100 people, as well as costs associated with
streamlining certain majority-owned and international joint venture
operations and $25 million for a civil penalty to be paid by the
Company as a result of an agreement reached with the U.S. Environmental
Protection Agency (EPA) regarding diesel engine emissions. The major
components of these charges are as follows:
$ Millions
__________
Restructuring of majority-owned operations:
Workforce reductions $ 38
Asset impairment loss 22
Facility consolidations and other 17
____
77
____
Restructuring of joint venture operations:
Workforce reductions 11
Tax asset impairment loss 7
Other 5
____
23
____
EPA penalty 25
____
Total $125
____
____
The restructuring program was undertaken as part of a plan to reduce
costs and improve operating performance. Estimated costs for workforce
reductions were based on amounts pursuant to benefit programs and
contractual provisions or statutory requirements at the affected
operations. The workforce reductions at joint venture operations
include costs of employee severance and related benefits for
approximately 1,200 people. The asset impairment loss, calculated
according to the provisions of SFAS 121, is for equipment to be
disposed of upon the closure or consolidation of facilities or the
outsource of production. As disclosed in Note 3, $14 million of
inventory write-downs associated with exit activities are included in
the special charges component of cost of goods sold.
In addition to the civil penalty, the agreement with the EPA provides a
schedule for diesel engines to meet certain emission standards and
requires manufacturers to continue to invest in environmental projects
to further reduce oxides of nitrogen (NOx) emissions.
Note 5. 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 6. Long-term Debt: In January 1998, the Company's revolving
credit agreement was amended, forming two $500 million agreements
maturing in 1999 and 2003. In February 1998, the Company issued $765
million face amount of notes and debentures. Net proceeds were used to
finance the acquisition of Nelson and pay down other indebtedness
outstanding at December 31, 1997. The $500 million revolving credit
agreement maturing in 1999 was terminated in March 1998, with the
financing need being replaced by the debt issue.
Note 7. Earnings per Share: Basic earnings per share of common stock
are computed by dividing net earnings by the weighted-average number of
common shares outstanding during the period. Diluted earnings per
share are computed by dividing net earnings by the weighted-average
number of shares, assuming the exercise of stock options when the
effect of their exercise is dilutive. Shares of stock held by the
employee benefits trust are not included in outstanding shares for EPS
until distributed from the trust.
Third Quarter Nine Months
_____________________________ ___________________________
Net Weighted Per Net Weighted Per
Millions, except Earnings/ Average Share Earnings/ Average Share
per share amounts (Loss) Shares Amount (Loss) Shares Amount
_________________ ________ _______ ______ ________ _______ ______
1998
____
Basic $(110) 38.5 $(2.86) $(50) 38.5 $(1.30)
Options - - - -
_____ ____ _____ ____
Diluted $(110) 38.5 $(2.86) $(50) 38.5 $(1.30)
1997
____
Basic $ 54 38.3 $ 1.41 $148 38.3 $3.87
Options - .7 - .4
____ ____ ____ ____
Diluted $ 54 39.0 $ 1.38 $148 38.7 $3.82
Note 8. Comprehensive Income: Effective January 1, 1998, Cummins
adopted SFAS No. 130, a new accounting rule which requires companies to
report comprehensive income. Comprehensive income includes net income
and all other nonowner changes in equity during a period.
Third Quarter Ended Nine Months Ended
Millions 9/27/98 9/28/97 9/27/98 9/28/97
________ _______ _______ _______ _______
Net income (loss) $(110) $ 54 $( 50) $148
Foreign currency translation
adjustment 3 (14) ( 49) (23)
Unrealized gain (loss) on securities - - ( 1) -
_____ ____ _____ ____
Comprehensive income (loss) $(107) $ 40 $(100) $125
_____ ____ _____ ____
_____ ____ _____ ____
<PAGE>
CUMMINS ENGINE COMPANY, INC.
____________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS,
CASH FLOW AND FINANCIAL CONDITION
_____________________________________________________________
Overview
________
Net sales in the third quarter of 1998 of $1.53 billion were 12 percent
higher than in the third quarter of 1997, with net sales for the first
nine months of 1998 reflecting a 15-percent increase over the year-ago
period.
As disclosed in Notes 3 and 4 to the Consolidated Financial Statements,
the Company recorded charges in the third quarter of 1998 totaling $174
million, comprised of $35 million related to a revised estimate of
product coverage cost liability for extended warranty programs, $114
million of costs associated with the Company's plan to restructure,
consolidate and exit certain business activities and $25 million for a
civil penalty resulting from an agreement reached with the U.S.
Environmental Protection Agency (EPA) regarding diesel engine
emissions. Excluding these charges, earnings before interest and taxes
in the third quarter of 1998 were $48 million compared to $74 million
in the third quarter of 1997. Including the charges, the Company's net
loss was $110 million or $(2.86) per share for the third quarter of
1998 and a net loss of $50 million or $(1.30) per share for the year-to-
date period. Net earnings in the third quarter of 1997 were $54
million or $1.38 per share and $148 million or $3.82 per share for the
first nine months of 1997.
Results of Operations
_____________________
Net Sales:
__________
Revenues from sales of engines were 54 percent of the Company's net
sales in the third quarter of 1998, with engine revenues 7 percent
higher than third-quarter 1997 and unit shipments 9 percent higher.
This variance continues to reflect a mix shift from heavy-duty to
midrange engines begun in the second quarter of 1998:
Third Quarter Nine Months
Unit Shipments 1998 1997 1998 1997
______________ ______ ______ _______ _______
Midrange Engines 71,300 64,800 213,600 190,700
Heavy-duty Engines 25,500 23,400 79,800 67,200
High-horsepower Engines 2,400 2,600 7,300 7,500
______ ______ _______ _______
99,200 90,800 300,700 265,400
______ ______ _______ _______
______ ______ _______ _______
Revenues from non-engine products, which were 46 percent of net sales
in the third quarter of 1998, were 18 percent higher than the third
quarter of 1997. The major changes within non-engine revenues were in
filtration, with the sales of Nelson included from the date of
acquisition by Cummins, and PowerCare (which includes sales of new
parts and remanufactured parts and engines).
The Company's sales for each of its key markets during the comparative
reporting periods were:
Third Quarter Nine Months
$ Millions 1998 1997 1998 1997
__________ ______ ______ ______ ______
Automotive $ 733 $ 646 $2,172 $1,870
Power Generation 296 289 900 866
Industrial 245 245 808 765
Filtration and Other 251 186 780 565
______ ______ ______ ______
$1,525 $1,366 $4,660 $4,066
______ ______ ______ ______
______ ______ ______ ______
Sales of $733 million in the third quarter of 1998 for automotive
markets were 13 percent higher than the third quarter of 1997. Heavy-
duty truck engine revenues were 16 percent higher than the third
quarter of 1997 on an 18-percent increase in units. In the first nine
months of 1998, heavy-duty truck engine revenues increased 27 percent
over the year-ago level on a 28-percent increase in units. The higher
level of sales was due to both the strong market and the Company's
higher market share in North America, as well as continued strong
demand in Mexico. In the third quarter of 1998, the Company shipped
approximately 300 units of the new electronic Signature 600 engine,
designed to capture a larger share of the heavy-duty truck market.
Revenues from the sales of engines for medium-duty trucks in the third
quarter of 1998 were 20 percent lower than the prior year's quarter on
a 22-percent decrease in units. Compared to the first nine months of
1997, medium-duty truck engine sales were 15 percent lower in 1998 on a
17-percent decrease in units. In North America, the reduction includes
a significant decrease with Ford when comparing to their record build
in the third quarter of 1997, prior to their relocation of production.
Unit shipments to international markets were down 5 percent from the
year-ago level, where the Company began to experience a reduction in
orders from both Mexico and Brazil toward the end of the third quarter.
Engine revenues of the bus and light commercial vehicle market were 49
percent higher than the third quarter of 1997 and 34 percent higher
than the first nine months of 1997. In January, Cummins jointly
announced with Chrysler a new, fully electronic engine -- the ISB --
for the Dodge Ram pickup. In the third quarter, Cummins shipped 24,800
engines to Chrysler, 8,200 units higher than the year-ago level, due to
the success of the Company's new turbo diesel engine for the Dodge Ram.
Sales to the bus and recreational vehicle markets also were strong with
unit shipments 26 percent higher in the third quarter of 1998 than the
comparable period in 1997.
In the third quarter of 1998, the Company's power generation markets
benefited from the consolidation of Cummins India Limited. Without
this, power generation revenues would have been down 2 percent compared
to third quarter 1997 and 4 percent less than the first nine months of
1997. Sales of the Company's generator sets continued to reflect
growth in North America, which offset declines in demand for generator
sets in Asia. Engine sales to generator set assemblers and sales of
alternators were down 15 percent in the third quarter due primarily to
lower demand in Asia. Genset sales for the RV market, however, were 17
percent higher than in the third quarter of 1997.
Sales of engines to industrial markets were 5 percent lower than the
third quarter of 1997, on a 6-percent increase in unit shipments. The
variance between revenues and units resulted from a shift in mix from
heavy-duty and high-horsepower to midrange engines. The increased
level of shipments was due to continued strong construction volumes in
North America and Europe, partially offset by a decline in global
agricultural markets.
Filtration and other sales were $251 million in the third quarter of
1998, an increase of 35 percent over the year-ago quarter, with Nelson,
acquired in January, contributing sales of $75 million.
In total, international markets represented 46 percent of the Company's
revenues in the third quarter of 1998. Europe, Africa and the Middle
East, representing 14 percent of sales, continued to show strength with
the exception of agricultural equipment and power generation sales.
Business in the Americas (Canada, Mexico, Brazil and Latin America),
representing 19 percent of sales, also was strong, but began to show
signs of softening toward the latter part of the third quarter. Asian
and Australian markets, in total, represented 13 percent of the
Company's sales in the third quarter. In Australia, sales are
primarily for automotive, power generation and mining markets. In
Asia, sales to China were flat with the third quarter of 1997, while
revenues in Korea decreased 63 percent, India declined 33 percent and
Southeast Asia and Japan were 44 percent below the year-ago quarter.
Gross Margin:
_____________
The Company's gross margin percentage before the special charges was
20.1 percent in the third quarter of 1998, compared to 22.6 percent in
the prior year's quarter. The Company's gross margin percentage
declined due to a temporary increase in product coverage costs from ISB
and ISC engines and higher new product costs attributable to the
production ramp-up of both the ISB and Signature 600 engines. This
decrease was partially offset by the benefit from higher volume and
pricing. In addition, the acquisition of Nelson and consolidation of
Cummins India Limited added $31 million. For the third quarter of
1998, gross margin percentage after the special charges was 16.9
percent. Gross margin percentage after the special charges recorded in
the first and third quarters was 19.8 percent in the first nine months
of 1998 and 22.6 percent in the comparable period in 1997.
Operating Expenses:
___________________
Selling and administrative expenses were 12.5 percent of sales in the
third quarter of 1998 and 12.7 percent in the first nine months of
1998, compared to 13.2 percent in the third quarter and 13.4 percent in
the first nine months of 1997. The $10 million incremental cost in the
third quarter included $12 million in expenses for Nelson and Cummins
India Limited, reduced by the benefits of the Company's cost reduction
efforts despite additional spending for Year 2000 compliance. Research
and engineering expenses were 4.0 percent of sales in the third quarter
of 1998, compared to 4.7 percent in the prior year's quarter as a
result of new engines moving into production.
The Company's losses from joint ventures and alliances were $8 million
in the third quarter of 1998 and $18 million in the first nine months
of 1998, compared to income of $3 million in the third quarter of 1997
and $12 million in the first nine months of 1997. The difference was
primarily caused by the consolidation of Cummins India Limited and
volume shortfalls at the Company's joint venture with Wartsila.
In the third quarter of 1998, the Company recorded charges of $125
million, comprised of $100 million for costs to reduce the worldwide
workforce by approximately 1,100 people, as well as costs associated
with streamlining certain majority-owned and international joint
venture operations and $25 million for a civil penalty to be paid by
the Company as a result of an agreement reached with the U.S.
Environmental Protection Agency regarding diesel engine emissions. The
restructuring program was undertaken as part of a plan to reduce costs
and improve operating performance. In addition to the civil penalty,
the agreement with the EPA provides a schedule for diesel engines to
meet certain emission standards and requires manufacturers to continue
to invest in environmental projects to further reduce oxides of
nitrogen (NOx) emissions. For additional information regarding these
charges, refer to Note 4 of the Consolidated Financial Statements.
Year 2000:
__________
The Company continues to address the impact of the Year 2000 issue on
its businesses worldwide. This issue affects computer systems that
have date-sensitive programs that may not properly recognize the year
2000. Specifically, with respect to the Company, this issue affects
not only the computer system but also machines and equipment used in
production that contain embedded technology.
Following a review and assessment of information systems and technology
used in its internal business operations and its production, the
Company inventoried and identified its systems and products that the
Company believes may be vulnerable to Year 2000 failures and
established a program to address Year 2000 issues. The Company's Year
2000 efforts are being carried out by the Company's Year 2000 Team
under the leadership of the Director of Year 2000 Compliance. A Year
2000 coordinator has been established at each of the Company's
facilities who is responsible for overseeing the implementation of the
Company's Year 2000 program at the site with the assistance of a local
Year 2000 cross-functional team. The Year 2000 Team maintains a
reporting structure to ensure that progress is made on Year 2000
issues.
The Company's program combines the remediation of existing software
with the replacement of certain systems. The Company expects to retire
and replace non-compliant application systems and to upgrade
application systems to a Year 2000 complaint version to the extent
possible. The Company is in the process of repairing and testing its
information and technology systems, including electronically controlled
manufacturing equipment, engines and generator sets, information
products and product support systems, using Company established testing
protocols. In addition to internal resources, the Company is utilizing
external resources to implement its Year 2000 program. The Company has
contracted with outside consultants to assist it with the remediation
efforts on the Company's mainframe computer system.
As part of its Year 2000 program, the Company has also made efforts to
determine and assess the Year 2000 compliance status of third parties
with which it does business. During the second half of 1997, the
Company contacted all of its key suppliers to obtain information
relating to the status of such suppliers with respect to Year 2000
issues, placing particular emphasis on determining the Year 2000
readiness of its critical suppliers. In addition, to assist the
Company in its efforts to determine the Year 2000 readiness of third
parties, the Company continues its involvement in the Automotive
Industry Action Group.
Due to the uncertainties associated with Year 2000 problems, the
Company is in the process of developing contingency plans in the event
that its business or operations are disrupted January 1, 2000. It has
identified and reserved the availability of a software maintenance and
remediation firm for 1999 and early 2000.
The Company expects to complete substantially all of its remediation
efforts by December 31, 1998, and to complete fully its Year 2000
program by the end of the second quarter of 1999. The Company expects
to incur total expenditures of approximately $45 million in connection
with its Year 2000 program and remediation efforts. To date, the
Company has incurred approximately $18 million in costs relating to its
Year 2000 issues and expects to incur an additional $12 million during
the remainder of 1998.
The estimated percentage of completion by the end of 1998, the date on
which the Company believes it will complete its Year 2000 compliance
efforts, and the expenses related to the Company's Year 2000 compliance
efforts are based upon management's best estimates, which were based on
assumptions of future events, including the availability of certain
resources, third party modification plans and other factors. There can
be no assurances that these results and estimates will be achieved, and
the actual results could materially differ from those anticipated.
Specific factors that might cause such material differences include,
but are not limited to, the availability of personnel trained in this
area and the ability to locate and correct all relevant computer codes.
In addition, there can be no assurances that the systems or products of
third parties on which the Company relies will be timely converted or
that a failure by a third party, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on
the Company.
Other:
______
Interest expense of $17 million in the third quarter of 1998 and $52
million in the first nine months of 1998 was higher than the comparable
periods of 1997 due to the increased level of borrowings to support
working capital on the higher sales level and to complete the acquisition
of Nelson. Other income decreased $6 million in the third quarter and $11
million in the first nine months of 1998 when comparing to the year-ago
periods. Such decrease is due to the Nelson goodwill amortization and
lower royalty income.
Provision for Income Taxes:
___________________________
The Company recorded an income tax benefit in the third quarter of 1998
of $35 million and $7 million in the first nine months of 1998,
reflecting an estimated effective tax rate of 29 percent for the year,
excluding the EPA penalty.
Cash Flow and Financial Condition
_________________________________
Key elements of cash flows were:
Nine Months
$ Millions 1998 1997
__________ ______ ______
Net cash used for operating and
investing activities $(518) $(146)
Net cash from financing activities 533 100
Effect of exchange rate changes on cash ( 1) ( 1)
______ ______
Net change in cash and cash equivalents $ 14 $( 47)
______ ______
______ ______
In the first nine months of 1998, net cash used for operating and
investing activities was $518 million. The higher level of net cash
requirements was due primarily to the acquisition of Nelson and planned
capital expenditures of $199 million. In the first quarter of 1998,
the Company issued $765 million face amount of notes and debentures to
support working capital and to complete the acquisition of Nelson.
FORWARD-LOOKING STATEMENTS
__________________________
When used herein, the terms "expect, plan, anticipate, believe" or
similar expressions, as they relate to the Company or its management,
are intended to identify 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 15 for a list of exhibits filed
herewith.
(b) The Company was not required to file a Form 8-K during the third
quarter of 1998.
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) October 29, 1998
<PAGE>
CUMMINS ENGINE COMPANY, INC.
____________________________
INDEX TO EXHIBITS
_________________
27 Financial Data Schedule (filed herewith)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
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0
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