UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 CUMMINS ENGINE COMPANY, INC. ____________________________ For the Quarter Ended March 30, 1997 Commission File Number 1-4949 ______________ ______ Indiana 35-0257090 _______ __________ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 500 Jackson Street, Box 3005 ____________________________ Columbus, Indiana 47202-3005 _________________ __________ (Address of Principal Executive Offices) (Zip Code) 812-377-5000 ____________ (Registrant's Telephone Number) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months and (2) has been subject to such filing requirements for the past 90 days: Yes [x] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of March 30, 1997, the number of shares outstanding of the registrant's only class of common stock was 42.0 million.
TABLE OF CONTENTS _________________ Page No. ________ PART I. FINANCIAL INFORMATION ______________________________ Item 1. Financial Statements Consolidated Statement of Earnings for the First 3 Quarter Ended March 30, 1997 and March 31, 1996 Consolidated Statement of Financial Position at 4 March 30, 1997 and December 31, 1996 Consolidated Statement of Cash Flows for the First 5 Quarter Ended March 30, 1997 and March 31, 1996 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of 7 Operations, Cash Flows and Financial Condition PART II. OTHER INFORMATION ___________________________ Item 4. Submission of Matters to a Vote of Security Holders 11 Item 6. Exhibits and Reports on Form 8-K 12 Index to Exhibits 13
CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF EARNINGS Unaudited __________________________________ First Quarter Ended Millions, Except per Share Amounts 3/30/97 3/31/96 __________________________________ _______ _______ Net sales $1,304 $1,316 Cost of goods sold 1,018 1,000 ______ ______ Gross profit 286 316 Selling & administrative expenses 178 180 Research & engineering expenses 61 62 Net (income) expense from joint ventures and alliances (7) 2 Interest expense 5 4 Other income, net (7) (3) ______ ______ Earnings before income taxes 56 71 Provision for income taxes 15 22 ______ ______ Net earnings $ 41 $ 49 ______ ______ Earnings per share $ 1.06 $ 1.21 Cash dividends declared per share .25 .25
CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF FINANCIAL POSITION Unaudited ____________________________________________ Millions, Except per Share Amounts 3/30/97 12/31/96 __________________________________ _______ ________ Assets Current assets: Cash and cash equivalents $ 81 $ 108 Receivables 730 669 Inventories 615 587 Other current assets 196 189 ______ ______ 1,622 1,553 Investments and other assets 302 326 Property, plant & equipment less accumulated depreciation of $1,375 1,337 1,286 Intangibles, deferred taxes & deferred charges 205 204 ______ ______ Total assets $3,466 $3,369 ______ ______ Liabilities and shareholders' investment Current liabilities: Loans payable $ 23 $ 93 Current maturities of long-term debt 39 39 Accounts payable 378 380 Other current liabilities 543 509 ______ ______ 983 1,021 ______ ______ Long-term debt 459 283 ______ ______ Other liabilities 753 753 ______ ______ Shareholders' investment: Common stock, $2.50 par value, 47.8 and 43.9 shares issued 119 110 Additional contributed capital 1,103 929 Retained earnings 565 535 Common stock in treasury, at cost, 5.8 & 4.5 shares (227) (169) Common stock held in trust for employee benefit plans (181) - Unearned compensation (ESOP) ( 42) ( 46) Cumulative translation adjustments ( 66) ( 47) ______ _______ 1,271 1,312 ______ ______ Total liabilities & shareholders' investment $3,466 $3,369 ______ ______
CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Unaudited ____________________________________ First Quarter Ended Millions 3/30/97 3/31/96 ________ _______ _______ Cash flows from operating activities: Net earnings $ 41 $ 49 _____ _____ Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 39 38 Restructuring actions ( 4) (18) Accounts receivable ( 71) (13) Inventories ( 31) (35) Accounts payable and accrued expenses 44 ( 3) Income taxes payable 4 13 Other 8 ( 6) ______ ______ Total adjustments ( 11) (24) _____ _____ Net cash provided by operating activities 30 25 _____ _____ Cash flows from investing activities: Property, plant and equipment: Additions (104) (36) Disposals 7 2 Investments in joint ventures and alliances 3 26 Other ( 2) 20 ______ ____ Net cash (used in) provided from investing activities ( 96) 12 ______ _____ Net cash (used for) provided from operating and investing activities ( 66) 37 ______ _____ Cash flows from financing activities: Proceeds from borrowings 189 109 Payments on borrowings ( 9) ( 7) Net borrowings under credit agreements ( 70) (30) Repurchases of common stock ( 58) ( 4) Payments of dividends ( 10) (10) Other ( 2) ( 1) ______ ______ Net cash provided from financing activities 40 57 ______ ______ Effect of exchange rate changes on cash ( 1) ( 1) ______ ______ Net change in cash and cash equivalents ( 27) 93 Cash & cash equivalents at beginning of the year 108 60 _____ _____ Cash & cash equivalents at the end of the quarter $ 81 $ 153 _____ _____
CUMMINS ENGINE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited ______________________________________________ Note 1. Accounting Policies: The Consolidated Financial Statements for the interim periods ended March 30, 1997 and March 31, 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. 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. On April 1, 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 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 38.4 million in the first quarter of 1997 and 40.3 million in the first quarter of 1996. The Financial Accountings Standard Board recently 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.
CUMMINS ENGINE COMPANY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, CASH FLOWS AND FINANCIAL CONDITION _____________________________________________________________ OVERVIEW ________ Sales of $1.3 billion in the first quarter of 1997 were 1 percent lower, or nearly level, with the first quarter of 1996. However, the Company experienced a shift in sales mix from automotive to power generation and industrial markets. Automotive sales were down $86 million, primarily as a result of lower demand in North American heavy- and medium-duty truck markets. This decline in revenues was nearly offset by increased sales in other markets, with sales of power generation $23 million higher than the first quarter of 1996 and industrial sales $55 million higher than the year-ago period. The Company shipped 86,200 engines in the first quarter of 1997, compared to 89,200 in the first quarter of 1996: First Quarter Engine Shipments 1997 1996 ________________ ______ ______ Midrange 63,100 62,600 Heavy-duty 20,800 24,600 High-horsepower 2,300 2,000 ______ ______ Total 86,200 89,200 ______ ______ Net earnings in the first quarter of 1997 were $41 million ($1.06 per share), compared to $49 million ($1.21 per share) in the first quarter 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: First Quarter Percent of Net Sales 1997 1996 ____________________ _____ _____ Net sales 100.0 100.0 Cost of goods sold 78.1 76.0 _____ _____ Gross profit 21.9 24.0 Selling and administrative expenses 13.7 13.7 Research and engineering expenses 4.7 4.7 Net (income) expense from joint ventures & alliances (.6) .1 Interest expense .4 .3 Other income, net (.6) (.2) _____ _____ Earnings before income taxes 4.3 5.4 Provision for income taxes 1.2 1.7 _____ _____ Net earnings 3.1 3.7 _____ _____ Sales by Market _______________ Sales for each of the Company's markets for the comparative reporting periods were: First Quarter 1997 First Quarter 1996 Dollars in Millions Dollars Percent Dollars Percent ___________________ _______ _______ _______ _______ Automotive: Heavy-duty truck 295 23 364 28 Midrange truck 132 10 161 12 Bus and light commercial vehicles 171 13 159 12 Power generation 275 21 252 19 Industrial 257 20 202 15 Filtration and other 174 13 178 14 _____ ___ _____ ___ Net sales 1,304 100 1,316 100 _____ ___ _____ ___ Automotive __________ Sales of $295 million to the heavy-duty truck market were $69 million (almost 20 percent) lower than a year ago. Performance in this market is dominated by the North American market. Compared to the first quarter of 1996, North American shipments were 27 percent lower, due to the lower market size. There are, however, signs that the North American heavy-duty truck market has strengthened. First-quarter 1997 engine shipments to this market were 13 percent higher than in the fourth quarter of 1996. In international markets, engine shipments in the first quarter of 1997 were 26 percent higher than the first quarter of 1996, primarily due to strong demand in Mexico. Compared to the first quarter of 1996, engine shipments for midrange trucks were 22 percent lower, primarily due to decreased demand in North America. Midrange truck engines for international markets were 12 percent higher than the first quarter of 1996. This increase was primarily in Brazil. In the bus and light commercial vehicles market, sales of $171 million were 8 percent higher than the first quarter of 1996. First-quarter 1997 engine shipments to Chrysler were another record. In addition, demand for bus markets in the first quarter of 1997 was stronger, 5 percent higher than the first quarter of 1996. Power Generation ________________ Sales of $275 million to power generation markets represented 21 percent of the Company's net sales in the first quarter of 1997. This was $23 million higher than the first quarter of 1996. Strong genset sales in Asia and Mexico accounted for this 9-percent increase. Industrial __________ Record quarterly sales of $257 million to industrial markets were 27 percent higher than first-quarter 1996, reflecting strong sales for construction equipment in North America and international agricultural markets. Engine shipments for marine markets also were 12 percent higher than the prior year. Filtration and Other ____________________ Sales of $174 million for filtration and other products were 2 percent lower than the first quarter of 1996, due primarily to the lower level of demand in North American heavy-duty and midrange truck markets. Gross Profit ____________ Compared to the first quarter of 1996, the Company's gross margin of 21.9 percent of net sales was affected by several factors, the most significant of which was the lower level of heavy-duty truck engine production that resulted in lower fixed cost absorption. Gross profit also was affected by the softer market for midrange truck engines, higher sales of lower margin power generation products and product coverage expense, which at 2.7 percent of net sales was $2 million higher than the first quarter of 1996. Operating Expenses __________________ Selling and administrative expenses in the first quarter of 1997 were $178 million. This was $2 million lower than the first quarter of 1996 due to the effect of lower restructuring expense and benefits from completed restructuring actions. Research and engineering expenses of $61 million in the first quarter were $1 million lower than the prior year. The first-quarter reduction in costs was due primarily to lower costs for new products that are nearing production. Net income from joint ventures and alliances was $9 million higher than the first quarter of 1996 due to higher earnings from Kirloskar Cummins and the Company's joint venture with Komatsu and annual royalties and fees from the new joint venture with Dongfeng. Interest and Other Income and Expense _____________________________________ Interest expense of $5 million in the first quarter of 1997 was $1 million higher than a year ago due to the higher level of long-term debt. Other income and expense includes a variety of items, such as foreign currency translation gains and losses, royalty and technical fees of licensees, interest income, and gains or losses associated with fixed asset dispositions. In the first quarter of 1997, other income was $7 million, which was $4 million higher than the first quarter of 1996 due to no longer having the fees associated with selling receivables, a net translation gain of $1 million (compared to a loss in the first quarter of 1996) and higher royalties from licensees. Provision For Income Taxes __________________________ The estimated effective tax rate (ETR) is 28 percent for 1997. The ETR is lower than the US statutory rate of 35 percent because of lower taxes on US export income and the incremental research tax credit that expires May 31, 1997. CASH FLOW AND FINANCIAL CONDITION _________________________________ Key elements of the Consolidated Statement of Cash Flows were: First Quarter Dollars in Millions 1997 1996 ___________________ ____ ____ Net cash provided by operating activities $ 30 $ 25 Net cash (used in) provided from investing activities (96) 12 _____ ____ Net cash (used for) provided from operating and investing activities (66) 37 Net cash provided from financing activities 40 57 Effect of exchange rate changes on cash ( 1) ( 1) _____ ____ Net change in cash and cash equivalents $(27) $ 93 _____ _____ Net cash used for operating and investing activities was $66 million in the first quarter of 1997. In the second quarter of 1996, the Company elected not to renew an agreement for the sale of up to $110 million in accounts receivable, which resulted in an increase in receivables. Days sales outstanding were 50 at the end of the first quarter of 1997, compared to 49 in the first quarter of 1996, adjusted for discontinuing the receivables sale program. Investing activities required net cash resources of $96 million in the first quarter of 1996. Capital expenditures were $104 million, compared to $36 million in the first quarter of 1996. The increased level of expenditures in 1997 was related to continued investments for new products. Net cash provided from financing activities was $40 million in the first quarter 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 January 1997, the Company also issued 3.75 million shares of its common stock to an employee benefits trust. On April 1, 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 Flows and Financial Condition. These statements are based on current expectations, estimates and projections about the industries in which the Company operates, management's beliefs and various assumptions made by management which are difficult to predict. Among the factors that could affect the outcome of the statements are general industry and market conditions and growth rates. Therefore, actual outcomes and their impact on the Company may differ materially from what is expressed or forecasted. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
PART II. OTHER INFORMATION ___________________________ Item 4. Submission of Matters to a Vote of Security Holders ____________________________________________________________ The Company held its annual meeting of security holders on April 1, 1997 at which security holders elected 12 directors of the Company for the ensuing year and ratified the appointment of Arthur Andersen LLP as auditors for the year 1997. Results of the voting in connection with each of the items were as follows: Voting on Directors: ____________________ For Withheld __________ ________ H. Brown 34,563,096 528,586 R. Darnall 34,569,086 522,596 W. Y. Elisha 34,569,374 522,308 H. H. Gray 34,514,238 577,444 J. A. Henderson 34,562,667 529,015 W. I. Miller 34,578,197 513,485 D. S. Perkins 34,567,033 524,649 W. D. Ruckelshaus 34,568,116 523,566 H. B. Schacht 34,562,402 529,280 T. M. Solso 34,539,676 552,006 F. A. Thomas 34,572,809 518,873 J. L. Wilson 34,573,758 517,924 Ratify Appointment of Auditors: _______________________________ For Against Abstain __________ _______ _______ 34,710,312 251,389 129,981 With regard to the election of directors, votes were cast in favor of or withheld from each nominee; votes that were withheld were excluded entirely from the vote and had no effect. Abstentions on the ratification of the appointment of Arthur Andersen LLP were counted as present for purposes of determining the existence of a quorum. Under the rules of the New York Stock Exchange, brokers who held shares in street names had the authority to vote on certain items when they did not receive instructions from beneficial owners. Brokers that did not receive instructions were entitled to vote on the election of directors. Under applicable Indiana law, a broker non-vote had no effect on the outcome of the election of directors. Item 6. Exhibits and Reports on Form 8-K: __________________________________________ (a) See the Index to Exhibits on Page 13 for a list of exhibits filed herewith. (b) On February 14, 1997, the Company filed a Form 8-K Other Event to define the calculation of the ratio of earnings to fixed charges disclosed in the Company's Prospectus Supplement dated February 14, 1997 to the Prospectus dated November 17, 1993 relating to issuance of 6.75 percent debentures, due February 15, 2027. 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 April 21, 1997 ________________ Rick J. Mills Vice President - Corporate Controller (Chief Accounting Officer)
CUMMINS ENGINE COMPANY, INC. ____________________________ INDEX TO EXHIBITS _________________ 10(k) Retirement Plan for Non-employee Directors of Cummins Engine Company, Inc., as amended February 1997 (filed herewith) 10(m) Three Year Performance Plan, as amended February 1997 (filed herewith) 10(p) Restricted Stock Plan for Non-employee Directors, as amended February 11, 1997 (filed herewith) 10(t) Senior Executive Three Year Performance Plan, as amended February 11, 1997 (filed herewith) 11 Schedule of Computation of Per Share Earnings for the First Quarter Ended March 30, 1997 and March 31, 1996 (filed herewith) 27 Financial Data Schedule (filed herewith)