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. 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 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 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 ______ ______ ______ ______ 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 _____ _____ _____ _____ 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. 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 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)