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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995
CUMMINS ENGINE COMPANY, INC.
Incorporated in the State of Indiana I.R.S. Employer Identification
No. 35-0257090
500 Jackson Street, Box 3005, Columbus, Indiana 47202-3005
(Principal Executive Office)
Telephone Number: (812) 377-5000
Securities registered pursuant to Section 12(b) of the Act: Common
Stock, $2.50 par value, which is registered on the New York Stock
Exchange and on the Pacific Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act: None.
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 preceding 12 months (or for such
shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90
days. Yes [x] No [ ]
Indicate by check mark if disclosures of delinquent filers pursuant to
Item 405 of Regulation S-K are not contained herein and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates
was approximately $1.7 billion at January 28, 1996.
As of January 28, 1996, there were outstanding 40.2 million shares of
the only class of common stock.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement filed with the
Securities and Exchange Commission pursuant to Regulation 14A are
incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENTS
_________________
Part Item Description Page
____ ____ _________________________________________________ ____
I 1 Business 3
2 Properties 14
3 Legal Proceedings 15
4 Submission of Matters to Vote of Security Holders 16
II 5 Market for the Registrant's Common Equity and
Related Stockholder Matters 16
6 Selected Financial Data 18
7 Management's Discussion & Analysis of Results
of Operations and Financial Condition 19
8 Financial Statements & Supplemental Data 24
9 Disagreements on Accounting & Financial
Disclosure 24
III 10 Directors & Executive Officers of the Registrant 24
11 Executive Compensation 25
12 Security Ownership of Certain Beneficial Owners
and Management 26
13 Certain Relationships & Related Transactions 26
IV 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 26
Index to Financial Statements 27
Signatures 46
Exhibit Index 49
PART I
______
ITEM 1. BUSINESS
_______ ________
OVERVIEW
________
Cummins Engine Company, Inc. ("Cummins" or "the Company") is a leading
worldwide designer and manufacturer of diesel engines, ranging from 76
to 6,000 horsepower. The Company also produces natural gas engines
and engine components and subsystems. Cummins provides power for a
wide variety of equipment in its key markets: heavy-duty truck,
midrange truck, power generation, bus and light commercial vehicles,
industrial products and marine.
Cummins sells its products to original equipment manufacturers
("OEMs"), distributors and other customers worldwide and conducts
manufacturing, sales, distribution and service activities in most
areas of the world. Sales of products to major international firms
outside North America are transacted by exports directly from the
United States and shipments from foreign facilities (operated through
subsidiaries, affiliates, joint ventures or licensees) which
manufacture and/or assemble Cummins' products.
In 1995, approximately 58 percent of net sales were made in the United
States. Major international markets include Europe (15 percent of net
sales); Asia, the Far East and Australia (14 percent of net sales);
Canada (7 percent of net sales); and Mexico and South America (4
percent of net sales).
BUSINESS MARKETS
________________
Heavy-duty Truck
________________
The Company has a complete line of 8-, 10-, 11- and 14-litre diesel
engines that range from 260 to 525 horsepower serving the heavy-duty
truck market. Cummins' heavy-duty diesel engines are offered as
standard or optional power by most major heavy-duty truck
manufacturers in North America. The seven largest US heavy-duty truck
OEMs produced approximately 97 percent of the heavy-duty trucks sold
in North America in 1995. The Company's largest customer for heavy-
duty truck engines in 1995 was Navistar International Corporation,
which represented approximately 7 percent of the Company's net sales.
In 1995, the Company accounted for 58 percent of Navistar's heavy-duty
engine purchases.
In 1995, factory retail sales of North American heavy-duty trucks grew
by 10 percent from the previous year's level. Factory retail sales
were 227,000 units in 1995, compared to 207,000 in 1994 and 174,000 in
1993. The Company's share of the North American heavy-duty truck
engine market exceeded 35 percent in 1995 based on data published by
the American Automotive Manufacturers Association. The Company's
share of the North American heavy-duty truck engine market was 34
percent in 1994 and 35 percent in 1993.
Based on data published by the Society of Motor Manufacturers and
Traders, the Company's share of engines for trucks sold in the United
Kingdom was 15 percent in 1995.
Based on data published by the National Association of Truck and Bus
Manufacturers, Cummins remained the leader of the heavy-duty truck
market in Mexico, despite the virtual halt in truck production in that
country.
In the fourth quarter of 1995, the Company introduced new versions of
its M11 and N14 engines, both of which have advanced electronic
controls and information technology. In 1995, the Company also began
to ship alternate fueled engines (the L10 natural gas engine) for
urban special-purpose truck markets and regional haul operations.
In the heavy-duty truck market, the Company competes with independent
engine manufacturers as well as truck producers who manufacture diesel
engines for their own products. Certain of these integrated
manufacturers also are customers of the Company. In North America,
the Company's primary competitors in the heavy-duty truck engine
market are Caterpillar, Inc., Detroit Diesel Corporation and Mack
Trucks, Inc. The Company's principal competitors in international
markets vary from country to country, with local manufacturers
generally predominant in each geographic market. Other diesel engine
manufacturers in international markets include Mercedes Benz, AB
Volvo, Renault Vehicles Industriels, Iveco Diesel Engines, Hino
Motors, Ltd., Mitsubishi Heavy Industries, Ltd., Isuzu Motors, Ltd.,
DAF Trucks N.V., Scania A.B., Nissan Diesel and Perkins Engines.
Midrange Truck
______________
The Company has a line of diesel engines ranging from 160 to 300
horsepower serving midrange and intercity delivery truck customers
worldwide. In 1996, the Company will begin introducing its next
generation of midrange diesel engines, with higher horsepower and
electronic controls.
The Company entered the North American midrange diesel engine truck
market in 1990. Based upon data published by R. L. Polk, the
Company's share of the market for diesel-powered medium-duty trucks in
1995 was 35 percent, compared to 34 percent in 1994 and 31 percent in
1993. A major factor contributing to the Company's market share has
been sales to Ford Motor Company. In 1993, Ford completed its
introduction of Cummins' B and C Series engines as exclusive diesel
power in its medium-duty truck line. Ford was the Company's largest
customer for midrange engines for this market in 1995, representing
approximately 4 percent of the Company's net sales.
The Company sells its B and C Series engines and engine components
outside North America to midrange truck markets in Asia, Europe and
South America. Cummins and Tata Engineering and Locomotive Company
("TELCO"), India's largest truck manufacturer, formed a joint venture
in 1993 to manufacture B Series engines in India for TELCO vehicles.
In the midrange truck market, the Company competes with independent
engine manufacturers as well as truck producers who manufacture diesel
engines for their own products. Certain of these integrated
manufacturers also are customers of the Company. Primary engine
competitors in the midrange truck market in North America are Navistar
International Corporation and Caterpillar, Inc. The Company's
principal competitors in international markets vary from country to
country, with local manufacturers generally predominant in each
geographic market. Other diesel engine manufacturers in international
markets include Mercedes Benz, AB Volvo, Renault Vehicles Industriels,
Iveco Diesel Engines, Hino Motors Ltd., Mitsubishi Heavy Industries,
Ltd., Isuzu Motors, Ltd., DAF Group N.V., Scania A.B., Perkins Engines
Ltd., Nissan Diesel and MWM Brazil.
Power Generation
________________
In 1995, power generation sales represented 21 percent of the
Company's net sales. Products include the complete line of Cummins'
engines, Onan's gasoline engines, generator sets and switches and
Newage alternators. These products serve the stationary power and
mobile markets. In 1994, the Company acquired Power Group
International ("PGI"), a developer and manufacturer of a broad range
of power generation equipment sold under the trade names of Petbow,
Auto Diesel and Agreba.
In stationary power, electrical power generation products and services
are provided to major markets worldwide, with a product line ranging
from 5 to 1,500 kilowatts. The Company's joint venture with Wartsila
Diesel of Finland will extend Cummins' generator set range to 4,000
kilowatts. Providing power generation products for the utility
industry has become an increasingly important market, with utilities
turning to generator sets to manage peak and seasonal demands in lieu
of making capital investments in additional capacity. Onan also
provides load management systems for utility interruptible and peak-
shaving applications. In the mobile business, Onan produces mobile
generator sets, gasoline engines and power electronics for a wide
variety of applications. Onan is a leading supplier of power
generation sets for the recreational vehicle market in the United
States.
In Power Generation, Cummins competes on a global scale with a variety
of engine manufacturers and generator set assemblers. Caterpillar,
Inc., Detroit Diesel Corporation, Perkins Engines and AB Volvo are the
major engine manufacturers with a presence in the high-speed segment
of the market. Onan competes with Caterpillar, F G Wilson and Kohler,
among others, in the generator set business. Newage competes globally
with Leroy Somer, Marathon and Meccalte, among others. In recent
years, Emerson Electric, which already owned Leroy Somer, has become a
major player with its acquisition of F G Wilson and Caterpillar's
subsequent investment in F G Wilson.
Bus and Light Commercial Vehicles
_________________________________
For this market, Cummins has both diesel and natural gas engines for
pickup trucks, school buses, transit buses, delivery trucks and
recreational vehicles.
In North America, Chrysler, which offers the Cummins B Series engines
in its Dodge Ram pickup truck, was the Company's largest customer for
midrange engines in this market, representing approximately 7 percent
of the Company's net sales in 1995.
The Company's C Series and M11 diesel engines and L10 natural gas
engine are available for the US transit bus market. The demand for
alternate fueled products continues to grow. In 1994, Cummins
introduced its B Series natural gas engine for school buses in the
United States and, in 1995, introduced the C Series natural gas
engine.
In these markets, the Company competes with both independent
manufacturers of diesel engines and with vehicle producers who
manufacture diesel engines for their own products. Primary
competitors who manufacture diesel engines for the bus and light
commercial truck markets are Detroit Diesel Corporation, General
Motors Corporation, Navistar International Corporation, Perkins
Engines Ltd., MAN, AB Volvo, Mercedes Benz, Scania A.B. and MWM
Brazil.
Industrial Products
___________________
Cummins' engines power more than 3,000 models of equipment for the
construction, logging, mining, agricultural, petroleum, rail and
government markets throughout the world. Worldwide sales of Cummins
products to this market in 1995 exceeded 67,000 engines, an increase
of approximately 16 percent, compared to 1994. The Company introduced
in 1993 its B Series engine rated at 200 horsepower that met the 1996
California off-highway emissions standards. The Company now has a
complete line of diesel engines certified to meet these stringent
standards.
In construction markets, the Company's relationship with Komatsu
continued to expand. Cummins and Komatsu formed joint ventures in
1993 to produce Cummins B Series engines in Japan and Komatsu's 30-
litre engine in the United States. Production at both joint venture
sites has begun on schedule. Coupled with Cummins' relationship with
Komatsu Dresser in North America, this alliance provides a strong base
in the Company's construction markets.
The Company introduced in late 1995 its new high-horsepower products
(the QSK19) using the CELECT high-pressure injection fuel system.
Cummins' relationship with Wartsila has extended the Company's product
line from 2,000 horsepower to 6,000 horsepower, which will provide new
opportunities in mining and rail markets.
Marine
______
Marine product applications span 76 to 6,000 horsepower for
recreational, commercial and military markets. Cummins engines
already comply with anticipated regulations through the year 2000.
Fleetguard and Holset
_____________________
Sales of filter and turbocharger products represented 11 percent of
the Company's net sales in 1995.
Fleetguard is a leading manufacturer of products for the North
American heavy-duty filter industry. Its products also are produced
and sold in international markets, including Europe, Mexico, India,
Australia, China, South Africa and the Far East.
Holset's products also are sold worldwide. In 1994, Holset introduced
a variable geometry turbocharger design for truck powertrains. In
1994, Holset and TELCO entered into a joint venture to produce
turbochargers in India. In 1995, Holset entered into a joint venture
to produce and market turbochargers in China and an alliance with
Mitsubishi Heavy Industries of Japan, covering cross-sourcing
turbochargers, joint materials sourcing and collaborative
international marketing.
BUSINESS OPERATIONS
___________________
International
_____________
The Company has manufacturing facilities worldwide, including major
operations in Europe, India, Mexico and Brazil. Cummins has entered
into license agreements that provide for the manufacture and sale of
the Company's products in Turkey, China, Pakistan, South Korea and
other countries.
In addition, the Company has entered into alliances with business
partners in various areas of the world. Cummins and Scania of Sweden
have a joint venture to develop a fuel system for heavy-duty diesel
engines. Cummins has a joint venture with TELCO of India to
manufacture the Cummins B Series engines in India for TELCO trucks.
Cummins and Komatsu Ltd. of Japan have formed joint ventures to
manufacture the B Series engines in Japan and high-horsepower Komatsu-
designed engines in the United States. In 1995, the Company formed a
joint venture with China National Heavy Duty Truck Corporation,
previously a Cummins' licensee, to manufacture a broad line of diesel
engines in China. In 1995, the Company also entered into a joint
venture with Wartsila Diesel International of Finland to manufacture
both diesel and natural gas engines above 2,500 horsepower. Several
of the Company's subsidiaries have similar ventures throughout the
world.
Because of the Company's increasingly global business, its operations
are subject to risks, such as currency controls and fluctuations,
import restrictions and changes in national governments and policies.
Generally, Cummins expects to benefit from the North American Free
Trade Agreement and the General Agreement on Tariffs and Trade.
However, economic conditions in Mexico and the devaluation of the
Mexican peso have adversely affected the Company's operations in
Mexico and are expected to continue to do so in 1996.
Research and Development
________________________
Cummins conducts an extensive research and engineering program to
achieve product improvements, innovations and cost reductions for its
customers, as well as to satisfy legislated emissions requirements.
The Company is in the midst of a program to refurbish and extend its
engine range. The Company also offers a natural gas-powered engine
product line for certain of its markets. As disclosed in Note 1 to
the Consolidated Financial Statements, research and development
expenditures approximated $230 million in 1995, $200 million in 1994
and $160 million in 1993.
Sales and Distribution
______________________
While the Company has supply agreements with some customers, including
Ford, Chrysler and Komatsu Dresser, for Cummins engines in both on-
and off-highway markets, most of the Company's business is done on
open purchase orders. These purchase orders usually may be canceled
on reasonable notice without cancellation charges. Therefore, while
incoming orders generally are indicative of anticipated future demand,
the actual demand for the Company's products may change at any time.
While the Company typically does not measure backlog, customers
provide information about future demand, which is used by the Company
for production planning. Lead times for the Company's engines are
dependent upon the customer, market and application.
Historically, during the third quarter of the year, the Company has
experienced modest seasonal declines in production, which have had an
effect on the demand for Cummins' products during that quarter of each
year.
The Company's products compete on a number of factors, including
performance, price, delivery, quality and customer support. Cummins
believes that its continued focus on cost, quality and delivery, its
extensive technical investment, its full product line and customer-led
support programs are key elements of its competitive position.
Cummins warrants its engines, subject to proper use and maintenance,
against defects in factory workmanship or materials for either a
specified time period or mileage or hours of use. Warranty periods
vary by engine family and market segment.
There are approximately 6,700 locations in North America, primarily
owned and operated by OEMs or their dealers, at which Cummins-trained
service personnel and parts are available to maintain and repair
Cummins engines. The Company's parts distribution centers are located
strategically throughout the world.
Cummins also sells engines, parts and related products through
distributorships worldwide. The Company believes its distribution
system is an important part of its marketing strategy and competitive
position. Most of its North American distributors are independently
owned and operated. The Company has agreements with each of these
distributors, which typically are for a term of three years, subject
to certain termination provisions. Upon termination or expiration of
the agreement, the Company is obligated to purchase various assets of
the distributorship. The purchase obligation of the Company relates
primarily to inventory of the Company's products, which can be resold
by the Company over a reasonable period of time. In the event the
Company had been required to fulfill its obligations to purchase
assets from all distributors simultaneously at December 31, 1995, the
aggregate cost would have been approximately $200 million. Management
believes it is unlikely that a significant number of distributors
would terminate their agreements at the same time, requiring the
Company to fulfill its purchase obligation.
Supply
______
The Company machines many of the components used in its engines,
including blocks, heads, rods, turbochargers, crankshafts and fuel
systems. Cummins has adequate sources of supply of raw materials and
components required for its operations. The Company has arrangements
with certain suppliers who are the sole sources for specific products.
While the Company believes it has adequate assurances of continued
supply, the inability of a supplier to deliver could have an adverse
effect on production at certain of the Company's manufacturing
locations.
Employment
__________
At December 31, 1995, Cummins employed 24,300 persons worldwide,
approximately 10,100 of whom are represented by various unions. The
Company has labor agreements covering employees in North America,
South America and the United Kingdom. In 1995, members of the Diesel
Workers Union and the Office Committee Union at the Company's midrange
engine plant in Southern Indiana ratified 5-year agreements. In
December 1995, members of the Office Committee Union ratified an early
agreement which extends until 1999 for offices and plants in Southern
Indiana and the Company's Technical Center. In 1993, members of the
Diesel Workers Union reached an agreement that will extend until the
year 2004. In 1995, members of the United Auto Workers at the
Company's crankshaft plant in Fostoria, Ohio, reached an agreement
which will extend for five years.
The Company has no major contracts expiring during the next 18 months.
ENVIRONMENTAL COMPLIANCE
________________________
Product Environmental Compliance
________________________________
Cummins engines are subject to extensive statutory and regulatory
requirements that directly or indirectly impose standards with respect
to emissions and noise. Cummins' products comply with emissions
standards that the US Environmental Protection Agency ("EPA") and
California Air Resources Board ("CARB") have established for heavy-
duty on-highway diesel engines produced through 1996. Cummins'
ability to comply with these and future emissions standards is an
essential element in maintaining its leadership position in the North
American heavy-duty truck and other automotive markets, as well as in
supplying other markets. The Company will make significant capital
and research expenditures to comply with these standards. Failure to
comply could result in adverse effects on future financial results.
Cummins has successfully completed the certification of its 1996 on-
highway products, which include both midrange and heavy-duty engines.
All of these products underwent extensive laboratory and field testing
prior to their release.
Emissions Averaging, Banking and Trading regulations were promulgated
by the EPA in July 1990. By selling 1991, 1992 and 1993 model year
engines with emissions levels below applicable standards and by
introducing several of the Company's 1994 configurations early,
Cummins generated substantial oxides of nitrogen and particulate
matter credits. These credits expire on December 31, 1996 if not used
before this date. While a portion of the Company's 1996 products will
use some of these credits as part of an effort to achieve cost-
effective compliance, the Company does not believe that the cost of
compliance without relying on these credits would be material. The
Company closely manages credit generation and use and believes that
engines currently using credits will be brought into compliance during
the course of normal engineering improvements or will be replaced by
engines meeting future emissions standards without any material
financial effect.
The next major change in emissions requirements for heavy-duty on-
highway diesel engines occurs in 1998, when the oxides of nitrogen
standard is lowered from 5.0 to 4.0 g/bhp-hr. 1998 is also the
effective date for the Clean Fuel Fleet Vehicle program. Beginning
January 1, 1998, fifty percent of new vehicles purchased by certain
centrally fueled fleets in 22 ozone non-attainment areas in the United
States must be powered by engines which meet a combined oxides of
nitrogen plus non-methane hydrocarbon standard of 3.8 g/bhp-hr.
Design and development activity aimed at meeting these standards are
well underway.
Contained in the environmental regulations are several means for the
EPA to ensure and verify compliance with emissions standards. Two of
the principal means are tests of new engines as they come off the
assembly line, referred to as selective enforcement audits ("SEA"),
and tests of field engines, commonly called in-use compliance tests.
The SEA provisions have been used by the EPA to verify the compliance
of heavy-duty engines for several years. In 1995, two such audit
tests were performed on Cummins engines, both of which were passed.
The failure of an SEA could result in cessation of production of the
noncompliant engines and the recall of engines produced prior to the
audit. In the product development process, Cummins anticipates SEA
requirements when it sets emissions design targets.
No Cummins engines were chosen for in-use compliance testing in 1995.
It is anticipated that the EPA will increase the in-use test rate in
future years, raising the probability that one or more of the
Company's engines will be selected. As with SEA testing, if an in-use
test is failed, an engine recall may be necessary.
In 1990, CARB redefined their medium-duty vehicle class in a way that
affects the Company's products used in certain California vehicles
from 8,500 to 14,000 pounds gross vehicle weight. CARB promulgated
new standards for this category which began phasing-in during 1995. A
new configuration of Cummins B Series engine has been developed and
certified to meet the requirements for this regulatory category.
In 1988, CARB promulgated a rule that necessitates the reporting of
failures of emissions-related components when the failure rate reaches
a specified level (25 component failures or one percent of build,
whichever is greater). At somewhat higher failure rates (50
components or four percent of build), a recall may be required. The
Company continues to monitor such failures. In 1995, there were no
emissions-related failures which reached a level that required a
report.
In January 1992, CARB promulgated a regulation for engines rated at or
above 175 horsepower used in mobile off-highway applications. In mid-
1994, the EPA also promulgated regulations for this category. The EPA
regulation covers engines rated at or above 50 horsepower. In all
other material respects these two regulations are the same. The
effective dates are staged according to rated horsepower and began
phasing in on January 1, 1996. Cummins has successfully completed
certification of the majority of its mobile off-highway products which
are included in the first phase (those with ratings between 175 to 750
horsepower). The remainder will be certified in the first half of
1996. All of these products have undergone, or will undergo,
extensive laboratory and field tests prior to their release.
Emissions standards in international markets, including Europe and
Japan, are becoming more stringent. Given the Company's experience in
meeting US emissions standards, it believes that it is well positioned
to take advantage of opportunities in these markets as the need for
emissions-control capability grows.
There are several federal and state regulations which encourage and,
in some cases, mandate the use of alternate fueled heavy-duty engines.
The Company currently offers natural gas fueled versions of its L10
and B5.9 engines and has several development programs underway to
expand its alternate fueled product offering.
Vehicles and certain industrial equipment in which diesel engines are
installed must meet federal noise standards. The Company believes
that applications in which its engines are now installed meet those
noise standards and that future installations also will be in
compliance.
Other Environmental Statutes and Regulations
____________________________________________
Cummins believes it is in compliance in all material respects with
laws and regulations applicable to the plants and operations of the
Company and its subsidiaries. During the past five years,
expenditures for environmental control activities and environmental
remediation projects at the Company's operating facilities in the
United States have not been a major portion of annual capital outlays
and are not expected to be material in 1996.
Pursuant to notices received from federal and state agencies and/or
defendant parties in site environmental contribution actions, the
Company and its subsidiaries have been identified as potentially
responsible parties ("PRPs") under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, or
similar state laws, at a number of waste disposal sites. Under such
laws, PRPs typically are jointly and severally liable for any
investigation and remediation costs incurred with respect to the
sites. Therefore, the Company's ultimate responsibility for such
costs could be a percentage greater than the percentage of waste
actually contributed to the site by the Company.
The sites at which the Company or its subsidiaries are currently
named as a PRP are the following: Old City Landfill, Columbus,
Indiana; Purity Oil Site, Fresno, California; Oak Grove Sanitary
Landfill, Anoka County, Minnesota; Waste Disposal Engineering
Landfill, Andover, Minnesota; White House Waste Oil Pits,
Jacksonville, Florida; Seaboard Chemical, Jamestown, North Carolina;
Double Eagle Refinery, Oklahoma City, Oklahoma; Wastex Research, East
St. Louis, Illinois; North Hollywood Dump, Memphis, Tennessee;
Commercial Oil, Oregon, Ohio; Berliner & Ferro, Swartz Creek,
Michigan; Schnitzer Iron & Metal, St. Paul, Minnesota; Combustion
Inc., Dedham Springs, Louisiana; Four County Landfill, Culver,
Indiana; Schumann Site, South Bend, Indiana; Great Lakes Asphalt,
Zionsville, Indiana; Third Site, Zionsville, Indiana; Auto-Ion,
Kalamazoo, Michigan; PCB Treatment Inc., Kansas City, Kansas; ENRX,
Buffalo, New York; Dubose, Contonement, Florida; Uniontown Landfill,
Uniontown, Indiana; Sand Springs, Oklahoma; United Steel Drum, East
St. Louis, Illinois; and Wayne Reclamation & Recycling, Ft. Wayne,
Indiana. The Company presently is contesting its status as a PRP at
several of these sites. At some of these sites, the Company will be
released from liability at the site as a de minimis PRP for a nominal
amount.
While the Company is unable at this time to determine the aggregate
cost of remediation at these sites, it has attempted to analyze its
proportionate and actual liability by analyzing the amounts of waste
contributed to the sites by the Company, the estimated costs for total
remediation at the sites, the number of identities of other PRPs and
the level of insurance coverage. The results of that analysis are
described below.
The Company and its subsidiaries have entered into administrative
agreements at certain of these sites to perform remedial actions. At
the Old City Landfill, the Company and two other PRPs have entered
into a Consent Order with the Indiana Department of Environmental
Management to implement the Record of Decision issued by EPA in 1992.
The cost to implement the Consent Order is estimated to be
approximately $300,000, of which the Company will pay 50 percent.
At the Purity Oil Site, a subsidiary of the Company has been
identified as a PRP and is one of several PRPs who have been issued an
order by EPA to undertake remedial action at the site. The Company's
subsidiary has contributed $282,000 toward the first phase of the
remedial action at the site. While the subsidiary's liability for
future expenditures has not been determined, the Company estimates
that its percentage contribution of hazardous waste to the site was
less than one percent. Because all records relating to the site are
unavailable, the PRPs at this site have implemented an Alternative
Dispute Resolution procedure involving a neutral third party who will
recommend an allocation scheme for the PRPs. While waste-in
quantities will be important to this determination, ultimate
resolution of the allocation may vary from the waste-in amount. The
Company believes it has adequate reserves to cover its share of future
expenses at the site.
Onan Corporation, a subsidiary of the Company, has entered into an
administrative agreement to participate in remediation of the Waste
Disposal Engineering Landfill. The cost of remediation at this site
is estimated to range from $10 million to $15 million, of which Onan
expects to contribute approximately $600,000, which has been reserved
fully. Construction of the major remedies at the site have been
completed, leaving only treatment and periodic sampling to be
accomplished. Onan also has entered into an administrative agreement
for the Oak Grove Landfill. The estimated cost to remediate this site
is approximately $6 million. Onan has contributed $127,000 to cover
its share of the costs of remediation. Construction is complete at
this site, and only treatment and periodic sampling remain. Onan has
filed litigation against its insurer at Oak Grove and Waste Disposal
in order to enforce its contract of insurance for both the remedial
costs and all related defense costs at those sites. This litigation
is in its early stages. In addition, the Steering Committees for both
sites have submitted each site for reimbursement under the Minnesota
Landfill Cleanup Program, a legislative initiative that would
reimburse parties for remediating hazardous waste landfills. Both
sites have been qualified initially for the program by the Minnesota
Pollution Control Agency. In the fourth quarter of 1995, Onan
received reimbursement for approximately 15 percent of its
contributions to the Waste Disposal site and expects to receive
additional reimbursements for both sites in the first half of 1996.
With respect to other sites at which the Company or its subsidiaries
have been named as PRPs, the Company cannot accurately estimate the
future remediation costs. At several sites, the remedial action to be
implemented has not been determined for the site. In other cases, the
Company or its subsidiary has only recently been named as a PRP and is
collecting information on the site. Finally, in some cases, the
Company believes it has no liability at the site and is actively
contesting designation as a PRP.
Based upon the Company's prior experiences at similar sites, however,
the aggregate future cost to all PRPs to remediate these sites is not
likely to be significant. In each of these cases, the Company
believes that it has good defenses at several of the sites, that its
percentage contribution at other sites is likely to be de minimis or
that other PRPs will bear most of the future remediation costs.
However, the environmental laws impose joint and several liability
and, consequently, the Company's ultimate responsibility may be based
on many factors outside the Company's control and could be material in
the event that the Company becomes obligated to pay a significant
portion of these expenses. Based upon information presently
available, the Company believes that such an outcome is unlikely and
that its actual and proportionate costs of participating in the
remediation of these sites will not be material.
ITEM 2. PROPERTIES
_______ __________
Cummins' worldwide manufacturing facilities occupy approximately 15
million square feet, including approximately 5 million square feet
outside the United States. Principal manufacturing facilities in the
United States include the Company's plants in Southern Indiana;
Jamestown, New York; Lake Mills, Iowa; Cookeville, Tennessee; and
Fridley, Minnesota, as well as an engine plant in Rocky Mount, North
Carolina, which is operated in partnership with Case Corporation.
Countries of manufacture outside of the United States include England,
Scotland, Brazil, Mexico, France, Spain, Australia and Germany. In
addition, engines and engine components are manufactured by joint
ventures or independent licensees at plants in France, China, India,
Japan, Pakistan, South Korea and Turkey.
Cummins believes that all of its plants have been maintained
adequately, are in good operating condition and are suitable for its
current needs through productive utilization of the facilities.
ITEM 3. LEGAL PROCEEDINGS
_______ _________________
The information appearing in Note 16 to the Consolidated Financial
Statements is incorporated herein by reference.
On April 5, 1990, Raphael Warkel and Alan J. Stransky filed a
complaint in the US District Court for the Southern District of
Indiana against the Company, all of its then current directors and one
past director. The complaint purported to be brought as a class
action on behalf of persons who purchased the Company's common stock
between May 1, 1989 and September 21, 1989. The complaint alleged
that the Company and the other defendants violated Section 10(b) and
Section 20 of the Securities Exchange Act of 1934 by failing to
disclose material financial information concerning the Company in an
effort to "artificially inflate" the market price of the Company's
common stock. The complaint sought compensatory damages of
unspecified amount, costs and attorneys' fees. All defendants
answered denying the substantive allegations of the complaint. The
plaintiffs moved for class certification, which motion was opposed by
the defendants. On November 30, 1992, the court granted defendants'
motion for judgment on the pleadings and dismissed the complaint. The
court held that the complaint failed to state a claim for relief under
the federal securities laws. The court gave the plaintiffs 30 days to
file an amended complaint. On December 29, 1992, plaintiffs filed an
amended complaint against the same defendants. The amended complaint,
which alleges the Company and other defendants violated Section 10(b)
and Section 20 of the Securities Exchange Act by failing to disclose
material financial information concerning the Company in an effort to
"artificially inflate" the market price of the Company's common stock,
is also brought as a class action and seeks compensatory damages of
unspecified amount, costs and attorneys' fees. On March 3, 1993,
defendants moved to dismiss the amended complaint. On September 13,
1993, the court dismissed the claims of plaintiff Stransky with
prejudice. The court also dismissed the claims of plaintiff Warkel
except for a claim based on an allegedly false and misleading press
release issued by the Company in July 1989. Plaintiff Stransky
appealed the dismissal of his claim to the US Court of Appeals for the
Seventh Circuit. On April 7, 1995, the US Court of Appeals for the
Seventh Circuit affirmed in part, reversed in part and remanded in
part the decision of the US District Court for the Southern District
of Indiana to dismiss all the claims of plaintiff Stransky with
prejudice. On July 18, 1995, the US District Court for the Southern
District of Indiana granted plaintiffs' motion to certify Warkel, et
al., v. Cummins Engine Company, Inc., et al., as a class action on
behalf of persons who purchased the Company's common stock between May
1, 1989 and October 11, 1989. On November 29, 1995, plaintiffs filed
a motion for leave to amend their amended complaint to include a claim
under Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 enacted thereunder that certain statements made in a press
release issued by the Company in April 1989 were false and were known
by Cummins to be false at the time they were made. The motion to
amend has been fully briefed but not yet decided. On February 15,
1996, defendants (including the Company and the other past and current
director defendants) and the plaintiffs reached an agreement in
principle to settle the class action suit. The details of the
settlement remain to be negotiated, and any final agreement must be
approved by the District Court. Defendants continue to believe that
plaintiffs' claims under Section 10(b) and Section 20 of the
Securities Exchange Act of 1934 are entirely meritless. However, in
the interests of avoiding the significant burdens and costs, both
financial and non-financial, involved in defending the case through a
trial (scheduled for September 1996), and any appeals, the defendants
have agreed in principle to settle the case for $5.5 million.
Defendants believe that the cost of defending this litigation through
trial and appeals would approach or exceed $2.5 million. Defendants
will pay the entirety of the settlement amount upon approval by the
District Court of the settlement. Pursuant to the provisions of its
by-laws and of Indiana law, the Company is obligated to indemnify the
defendants for the cost of any settlement, and the Company will do so.
The Company will seek reimbursement of approximately $3 million from
the director defendants' indemnity insurer, an amount which represents
the portion of the settlement amount that exceeds the deductible
provided for in the policy, taking into account the amount that
defendants will have expended in defense of the action. The insurer
has indicated that it will deny a portion of this insurance claim when
it is made. The Company believes the insurer's position is meritless.
The Company continues to engage in discussions with the insurer with
the intention of obtaining full reimbursement but ultimately may have
to pursue litigation against the insurer to enforce the terms of the
insurance policy in accordance with the Company's understanding of
those terms. While the Company believes that its position is correct,
there can be no assurance that the Company will achieve full
reimbursement either through negotiations with the insurer or through
litigation.
The material in Item 1 "Other Environmental Statutes and Regulations"
is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
_______ _________________________________________________
None.
PART II
_______
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
_______ _____________________________________________________
The Company's common stock is listed on the New York Stock Exchange
and the Pacific Stock Exchange under the symbol "CUM". The following
table sets forth, for the calendar quarters shown, the range of high
and low composite prices of the common stock and the cash dividends
declared on the common stock.
High Low Dividends Declared
________ _______ __________________
1995
____
First quarter $46 7/8 $41 1/2 $.25
Second quarter 48 5/8 42 1/4 .25
Third quarter 47 1/4 36 5/8 .25
Fourth quarter 39 3/4 34 .25
1994
____
First quarter $57 5/8 $44 1/2 $.125
Second quarter 53 1/8 40 1/8 .125
Third quarter 45 7/8 35 7/8 .125
Fourth quarter 46 1/4 38 5/8 .25
At December 31, 1995, the approximate number of holders of record of
the Company's common stock was 5,000.
The Board of Directors in the fourth quarter of 1994 authorized
repurchase by the Company of up to 2.5 million shares of its common
stock. During 1995, the Company repurchased on the open market 1.6
million shares at an aggregate price of $69 million, or average price
of $43.57 per share. In 1994, the Company repurchased on the open
market .1 million shares of common stock at an aggregate purchase
price of $5 million, or average price of $42.47 per share. All of the
acquired shares are held as common stock in treasury.
In the fourth quarter of 1994, the Board of Directors increased the
Company's quarterly common stock dividend from 12.5 cents per share to
25 cents per share. The declaration and payment of future dividends
by the Board of Directors of the Company will be dependent upon the
Company's earnings and financial condition, economic and market
conditions and other factors deemed relevant by the Board of
Directors.
Certain of the Company's loan indentures and agreements contain
provisions which permit the holders to require the Company to
repurchase the obligations upon a change of control of the Company, as
defined in the applicable debt instruments.
As more fully described in Note 14 to the Consolidated Financial
Statements, which information is incorporated herein by reference, the
Company has a Shareholders' Rights Plan.
The Company's bylaws provide that Cummins is not subject to the
provisions of the Indiana Control Share Act. However, Cummins is
governed by certain other laws of the State of Indiana applicable to
transactions involving a potential change of control of the Company.
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in Millions, Except Per Share Amounts)
_______ _______________________________________________
1995 1994 1993 1992 1991
______ ______ ______ ______ ______
Net sales $5,245 $4,737 $4,248 $3,749 $3,406
Net earnings (loss) 224 253 177 (190) (14)
Net earnings (loss)
per share:
Primary 5.52 6.11 4.79 (6.01) (.75)
Fully diluted 5.52 6.11 4.63 (6.01) (.75)
Cash dividends per
share 1.00 .625 .20 .10 .35
Total assets 3,056 2,706 2,390 2,230 2,041
Long-term debt 117 155 190 412 443
In 1995, the Company's results included restructuring charges of $118
million ($77 million after taxes) to reduce the worldwide work force
and to close or restructure selected operations in Europe, Brazil and
North America. Net earnings in 1995 also included release of the tax
valuation allowance of $68 million.
In December 1993, the Company sold 2.6 million shares of its common
stock in a public offering and used a portion of the proceeds to
redeem $77 million in principal amount of the Company's outstanding 9-
3/4 percent sinking fund debentures. This early extinguishment of
debt resulted in an extraordinary charge of $6 million.
In 1992, the Company's results included a charge of $251 million for
the cumulative effect of changes in accounting as prescribed by SFAS
Nos. 106, 109 and 112 related to accounting for retirees' health care
and life insurance benefits, income taxes and postemployment benefits.
In 1992, the Company sold 4.6 million shares of its common stock in a
public offering and used a portion of the proceeds to extinguish $71
million of debt of Consolidated Diesel Company, an unconsolidated, 50-
percent owned partnership, $8 million of the Company's 8-7/8 percent
sinking fund debentures and $11 million of a 15-percent note payable
to an insurance company. These early extinguishments of debt resulted
in an extraordinary charge of $6 million.
The Company's results for 1991 included a credit of $52 million for
the cumulative effect of changes in accounting to include in inventory
certain production-related costs previously charged directly to
expense and to adopt a modified units-of-production depreciation
method for substantially all engine production equipment.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
_______ _____________________________________________________________
OVERVIEW
________
Cummins' record net sales of $5.2 billion in 1995 were 11 percent
higher than 1994's record sales and 23 percent higher than 1993 sales.
The Company shipped 338,900 engines in 1995, an 11-percent increase
above 1994 and 29 percent higher than 1993. Shipments by engine
family for the comparative periods were:
Engine Shipments 1995 1994 1993
________________ _______ _______ _______
Midrange engines 222,100 195,600 167,900
Heavy-duty engines 107,300 99,900 86,500
High-horsepower engines 9,500 8,800 8,600
_______ _______ _______
Total engine shipments 338,900 304,300 263,000
_______ _______ _______
Excluding the restructuring charges, earnings before taxes were a
record $295 million in 1995, slightly higher than earnings before
taxes of $294 million in 1994 and $90 million higher than in 1993. In
the fourth quarter of 1995, the Company announced that it was
evaluating the consolidation and disposal of certain assets and
planned to reduce its worldwide work force by approximately 2,000.
Restructuring charges related to these actions were $118 million, or
$77 million after taxes, in 1995. In addition, the Company recorded a
credit of $68 million in 1995 for the release of its tax valuation
allowance.
Net earnings in 1995 were $224 million, or $5.52 per share. Excluding
the effects of the restructuring charges and tax credit, net earnings
would have been $233 million, or $5.73 per share, compared to $253
million, or $6.11 per share, in 1994. Net earnings of $177 million,
or $4.79 per share, in 1993 included a charge of $6 million for early
extinguishment of debt.
RESULTS OF OPERATIONS
_____________________
The percentage relationship between net sales and other elements of
the Company's Consolidated Statement of Earnings for each of the last
three years was:
Percent of Net Sales 1995 1994 1993
____________________ _____ _____ _____
Net sales 100.0 100.0 100.0
Cost of goods sold 75.8 75.0 75.6
_____ _____ _____
Gross profit 24.2 25.0 24.4
Selling & administrative expenses 13.2 13.5 13.6
Research & engineering expenses 5.0 5.0 4.9
Interest expense .2 .4 .9
Other, net .2 (.1) .2
Restructuring charges 2.2 - -
____ ____ ____
Earnings before income taxes 3.4 6.2 4.8
Provision (credit) for income taxes (.9) .9 .5
____ ____ ____
Earnings before extraordinary item 4.3 5.3 4.3
Early extinguishment of debt - - (.1)
____ ____ ____
Net earnings 4.3 5.3 4.2
____ ____ ____
Sales by Market
_______________
The Company's sales for each of its key markets during the last three years
were:
1995 1994 1993
________________ ________________ ________________
$ Millions Dollars Percent Dollars Percent Dollars Percent
__________ _______ _______ _______ _______ _______ _______
Heavy-duty truck 1,506 29 1,410 30 1,230 29
Midrange truck 581 11 513 11 482 11
Power generation 1,130 21 1,039 22 963 23
Bus & light commercial
vehicles 687 13 592 12 498 12
Industrial products 680 13 593 12 547 13
Marine 93 2 78 2 68 1
Fleetguard and Holset 568 11 512 11 460 11
_____ ___ _____ ___ _____ ___
Net sales 5,245 100 4,737 100 4,248 100
_____ ___ _____ ___ _____ ___
Sales to the heavy-duty truck market in 1995 were 7 percent higher
than in 1994 and 22 percent higher than the 1993 level. The increase
in sales during the last three years has been due to a high level of
demand for engines for the North American heavy-duty truck market. In
1995, the Company's engine shipments for this market were 15 percent
higher than in 1994 and 31 percent higher than in 1993. In 1995,
factory retail sales of heavy-duty trucks in North America were 10
percent higher than the previous year's level. However, with the high
level of cancellation rates in the second half of 1995 and lower truck
production levels at OEMs, this market is expected to decline in 1996.
Cummins continued to lead this market and its share exceeded 35
percent in 1995. The Company's market share was 34 percent in 1994
and 35 percent in 1993.
International engine shipments for heavy-duty trucks were 41 percent
lower than in 1994 and 25 percent below 1993. The decline in engine
shipments in 1995 was primarily in Mexico where heavy-duty engine
shipments have been at very low levels due to economic conditions in
that country. The Company's operations in Mexico were near break-even
in 1995, with the outlook uncertain for 1996. Engine shipments in
Mexico are not expected to improve in 1996.
Sales of engines for the midrange truck market in 1995 were 13 percent
higher than in 1994 and 21 percent higher than in 1993. Engine
shipments for the North American market were 16 percent higher than
1994 and 18 percent higher than 1993. Midrange truck engines for
international markets were 8 percent higher than in 1994 and 33
percent higher than 1993, primarily in Europe and Brazil. In Mexico,
engine sales for this market were at very low levels in 1995.
Economic conditions in Brazil and Mexico are likely to result in a low
level of demand in those countries in 1996.
Sales of $1.1 billion to the power generation market in 1995 were 9
percent higher than in 1994 and 17 percent higher than 1993. The
increase in 1995 was due to a 14-percent increase in shipments in the
United States. International markets, which were affected in 1995 by
economic conditions in Mexico and China, were 9 percent lower than
1994 and essentially level with 1993.
In the bus and light commercial vehicles market, sales in 1995 were 16
percent higher than 1994 and 38 percent higher than 1993. The
increase in 1995 was due primarily to record demand for the Company's
midrange engines for the Chrysler Dodge Ram pickup truck. Engine
shipments for bus markets were 23 percent higher than 1994, due
primarily to engine demand for school buses in North America.
International engine shipments were 12 percent higher than 1994.
In 1995, sales to industrial markets were 15 percent higher than 1994
and 24 percent higher than 1993. The increase in sales in 1995 was
for construction and agricultural markets in the United States and
construction markets in North Asia and Europe.
Sales of $93 million for marine applications in 1995 were 19 percent
higher than 1994 and 37 percent higher than 1993. The increase in
sales in 1995 was due to higher engine shipments in both North
American and international markets.
Sales of filters and turbochargers continued to represent approximately
11 percent of the Company's net sales in 1995. Sales of these products
in 1995 were 11 percent higher, compared to 1994, and 23 percent higher
than in 1993. The increase in sales in 1995 was due primarily to
international markets.
Gross Profit
____________
The Company's gross profit percentage was 24.2 percent of net sales in
1995, compared to 25.0 percent in 1994 and 24.4 percent in 1993.
The Company's gross profit was affected by several factors in 1995,
including increased product costs and a lower level of parts sales in
North America. The most significant factor affecting product costs
was the slowdown in the North American truck market late in the third
quarter, which resulted in lower overhead absorption in the second
half of 1995. Product costs also were affected by higher technical
spending and material pricing pressures. As disclosed in Note 16 to
the Consolidated Financial Statements, the Company has entered into
commodity swap contracts that have the effect of fixing the cost of
certain material purchases.
The cost of product coverage programs was 2.4 percent of net sales in
1995, compared to 2.3 percent of net sales in 1994 and 2.1 percent in
1993. In 1993, and to a lesser extent in 1994, the cost of product
coverage programs included adjustments to reduce the product coverage
liability for engines previously placed in service.
Operating Expenses
__________________
Selling and administrative expenses were $692 million (13.2 percent of
net sales) in 1995, compared to $641 million (13.5 percent of net
sales) in 1994 and $579 million (13.6 percent of net sales) in 1993.
Research and engineering expenses were $263 million in 1995, compared
to $238 million in 1994 and $210 million in 1993. The 25-percent
increase in research and engineering expenses since 1993 has been
related to expenditures for the development of fuel systems and future
products.
Other Income and Expense
________________________
Interest expense of $13 million was $4 million lower than in 1994 and
$23 million lower than 1993 as a result of the Company's early
retirement of debt obligations during 1993. Other income and expense
includes a variety of items such as foreign exchange gains and losses,
interest income, earnings and losses of unconsolidated companies and
royalty income. The increase in other expense of $12 million in 1995,
compared to 1994, was due to start-up expenses of the Company's joint
ventures.
As disclosed in Note 16 to the Consolidated Financial Statements, the
Company enters into forward exchange contracts that serve to hedge the
effects of fluctuating currency rates on certain assets and liabilities
that are denominated in other than the functional currencies of
international entities.
Restructuring Charges
_____________________
As disclosed more fully in Note 2 to the Consolidated Financial
Statements, results of operations in 1995 included restructuring
charges of $118 million ($77 million after taxes) for costs to
consolidate operations and reduce the worldwide work force. In
addition to the restructuring charges, the Company expects to incur
approximately $25 million in 1996, primarily for continuity payments
and employee and equipment relocations associated with the facility
consolidations and closings.
Provision for Income Taxes
__________________________
As described in Note 9 to the Consolidated Financial Statements, the
Company reduced its valuation allowance for tax benefit carryforwards
$68 million in 1995, $32 million in 1994 and $34 million in 1993. The
tax provision for 1995 also included a credit of $35 million for
additional tax benefits related to the amendment of prior years'
returns.
Early Extinguishment of Debt
____________________________
As disclosed in Note 6 to the Consolidated Financial Statements, the
Company extinguished certain indebtedness in 1993 that resulted in an
extraordinary charge of $6 million.
CASH FLOW AND FINANCIAL CONDITION
_________________________________
Key elements of the Consolidated Statement of Cash Flows were:
$ Millions 1995 1994 1993
__________ ____ ____ ____
Net cash provided by operating activities $406 $376 $286
Net cash used for investing activities (373) (261) (149)
Net cash flows from operating and ____ ____ ____
investing activities 33 115 137
Net cash used for financing activities (121) ( 50) (114)
Effect of exchange rate changes on cash 1 5 -
____ ____ ____
Net change in cash & cash equivalents $(87) $ 70 $ 23
_____ ____ ____
Net cash flows from operating and investing activities totaled $33
million in 1995. Capital expenditures during 1995 were $223 million,
compared to $238 million in 1994 and $174 million in 1993. The
expenditures in 1995 were related to continued investments for new
products and fuel systems. The Company expects a significant increase
in these expenditures in 1996, some of which may be funded externally.
Investments in and advances to unconsolidated companies of $155 million
in 1995 included temporary advances to Consolidated Diesel Company. The
outstanding balance of $50 million at December 31, 1995 will be repaid
in 1996. Investments also included capital contributions of $67 million
for previously announced joint ventures, including the joint ventures
with Wartsila to manufacture diesel and natural gas engines above 2,500
horsepower; in China to manufacture a broad line of diesel engines and
related products; with TELCO to produce midrange engines in India for
TELCO vehicles; and with Komatsu to produce midrange engines in Japan
and high-horsepower engines in the United States. The Company expects
to continue to make investments in certain of these joint ventures
during 1996.
At December 31, 1995, the Company had no borrowings outstanding on its
$300 million revolving credit agreement. The Company's debt-to-
capital ratio was 16 percent at December 31, 1995 and 18 percent at
December 31, 1994. The ratio is expected to be higher in 1996 due to
funding capital expenditures.
As disclosed in Note 11 to the Consolidated Financial Statements, the
Company called for redemption of its preference stock in 1994. In
lieu of accepting the cash redemption price, most holders elected to
convert their shares of preference stock into common stock of the
Company.
As disclosed in Note 12 to the Consolidated Financial Statements, the
Board of Directors in the fourth quarter of 1994 authorized repurchase
by the Company of up to 2.5 million shares of common stock.
Concurrently, the Board of Directors increased the Company's quarterly
common stock dividend from 12.5 cents per share to 25 cents per share.
In 1993, the Board of Directors of the Company increased the quarterly
common stock dividend from 2.5 cents per share to 12.5 cents per
share.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
_______ __________________________________________
See Index to Financial Statements on page 27.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
_______ ____________________________________________________
None.
PART III
________
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
________ __________________________________________________
The information appearing under the caption "Election of Directors" of
the Company's definitive Proxy Statement for the Annual Meeting of the
Shareholders to be held on April 9, 1996 ("the Proxy Statement") is
incorporated by reference in partial answer to this item. Except as
otherwise specifically incorporated by reference, the Proxy Statement
is not to be deemed filed as part of this report.
The executive officers of the Company at December 31, 1995 are set
forth below. The Chairman of the Board and President are elected
annually by the Board of Directors at the Board's first meeting
following the Annual Meeting of the Shareholders. Other officers are
appointed by the Chairman and ratified by the Board of Directors and
hold office for such period as the Board of Directors or Chairman of
the Board may prescribe.
Present Position & Business Experience During
Name Age Last 5 Years
_______________ ___ __________________________________________________
Mark E. Chesnut 48 Vice President - Corporate Responsibility & Public
Affairs (1995 to present), Vice President - Quality
& Organizational Effectiveness (1992 to 1995), Vice
President - Human Resources & Organizational
Effectiveness (1989-1992)
C. Roberto Cordaro 45 Group Vice President - Marketing (1990 to present)
John K. Edwards 51 Vice President - International (1989 to present)
Robert L. Fealy 44 Vice President - Business Strategy and Treasurer
(1996 to present), Vice President - Treasurer
(1988 to 1996)
Mark R. Gerstle 40 Vice President - General Counsel and Secretary
(1995 to present), Assistant General Counsel
(1991 to 1995)
James A. Henderson 61 Chairman and Chief Executive Officer (1995 to
present), President & Chief Executive Officer
(1994 to 1995), President and Chief Operating
Officer (1977-1994)
M. David Jones 48 Vice President - Aftermarket Group
(1989 to present)
F. Joseph Loughrey 46 Group Vice President - Worldwide Operations &
Technology (1995 to present), Group Vice
President - Worldwide Operations (1990 to 1995)
John McLachlan 63 Vice President - Corporate Controller (1991
to present
Theodore M. Solso 48 President and Chief Operating Officer (1995 to
present), Executive Vice President and Chief
Operating Officer (1994 to 1995), Executive Vice
President - Operations (1992 to 1994), Vice
President & General Manager Engine Business
(1988 to 1992)
Richard B. Stoner-Jr. 49 Vice President - Cummins Power Generation Group
and President - Onan Corporation (1993 to
present), Managing Director - Holset (1986-1993)
ITEM 11. EXECUTIVE COMPENSATION
________ ______________________
The information appearing under the following captions in the
Company's Proxy Statement is hereby incorporated by reference: "The
Board of Directors and Its Committees", "Executive Compensation --
Compensation Tables and Other Information", "Executive Compensation --
Change of Control Arrangements" and "Executive Compensation --
Compensation Committee Interlocks and Insider Participation".
The Company has adopted various benefit and compensation plans
covering officers and other key employees under which certain benefits
become payable upon a change of control of the Company. Cummins also
has adopted an employee retention program covering approximately 500
employees of the Company and its subsidiaries, which provides for the
payment of severance benefits in the event of termination of
employment following a change of control of Cummins. The Company and
its subsidiaries also have severance programs for other exempt
employees of the Company whose employment is terminated following a
change of control of the Company. Certain of the pension plans
covering employees of the Company provide, upon a change of control of
Cummins, that excess plan assets become dedicated solely to fund
benefits for plan participants.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
________ ______________________________________________________________
A discussion of the security ownership of certain beneficial owners
and management appearing under the captions "Principal Security
Ownership", "Election of Directors" and "Executive Compensation --
Security Ownership of Management" in the Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
________ ______________________________________________
The information appearing under the captions "The Board of Directors
and Its Committees", "Executive Compensation - Compensation Committee
Interlocks and Insider Participation" and "Other Transactions and
Agreements with Directors, Officers and Certain Shareholders" in the
Proxy Statement is incorporated herein by reference.
PART IV
_______
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
________ _______________________________________________________________
Documents filed as a part of this report:
1. See Index to Financial Statements on page 27 for a list of
the financial statements filed as a part of this report.
2. See Exhibit Index on page 49 for a list of the exhibits filed
or incorporated herein as a part of this report.
No reports on Form 8-K were filed during the fourth quarter of 1995.
INDEX TO FINANCIAL STATEMENTS
_____________________________
Page
____
Management's Responsibility for Financial Statements 28
Report of the Independent Public Accountants 29
Consolidated Statement of Earnings 30
Consolidated Statement of Financial Position 31
Consolidated Statement of Cash Flows 32
Consolidated Statement of Shareholders' Investment 33
Notes to Consolidated Financial Statements 34
Quarterly Financial Data 46
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
____________________________________________________
Management is responsible for the preparation of the Company's
consolidated financial statements and all related information
appearing in this Form 10-K. The statements and notes have been
prepared in conformity with generally accepted accounting principles
and include some amounts which are estimates based upon currently
available information and management's judgment of current conditions
and circumstances. The Company engaged Arthur Andersen LLP,
independent public accountants, to examine the consolidated financial
statements. Their report appears on page 29.
To provide reasonable assurance that assets are safeguarded against
loss from unauthorized use or disposition and that accounting records
are reliable for preparing financial statements, management maintains
a system of accounting and controls, including an internal audit
program. The system of accounting and controls is improved and
modified in response to changes in business conditions and operations
and recommendations made by the independent public accountants and the
internal auditors.
The Board of Directors has an Audit Committee whose members are not
employees of the Company. The committee met four times in 1995 with
management, internal auditors and representatives of the Company's
independent public accountants to review the Company's program of
internal controls, audit plans and results, and the recommendations of
the internal and external auditors and management's responses to those
recommendations.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
________________________________________
To the Shareholders and Board of Directors of Cummins Engine Company,
Inc.:
We have audited the accompanying consolidated statement of financial
position of Cummins Engine Company, Inc., (an Indiana corporation) and
subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of earnings, cash flows and shareholders'
investment for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Cummins
Engine Company, Inc., and subsidiaries as of December 31, 1995 and
1994, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois,
January 22, 1996.
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF EARNINGS
(Millions, Except Per Share Amounts)
____________________________________
1995 1994 1993
______ ______ ______
Net sales $5,245 $4,737 $4,248
Cost of goods sold 3,974 3,551 3,211
______ ______ ______
Gross profit 1,271 1,186 1,037
Selling & administrative expenses 692 641 579
Research & engineering expenses 263 238 210
Interest expense 13 17 36
Other, net 8 (4) 7
Restructuring charges 118 - -
_____ _____ _____
Earnings before income taxes 177 294 205
Provision (credit) for income taxes (47) 41 22
_____ _____ _____
Earnings before extraordinary item 224 253 183
Early extinguishment of debt - - (6)
_____ _____ _____
Net earnings 224 253 177
Preference stock dividends - - 8
______ ______ ______
Earnings available for common shares $ 224 $ 253 $ 169
______ ______ ______
Primary earnings per share:
Before extraordinary item $ 5.52 $ 6.11 $ 4.95
Net 5.52 6.11 4.79
Fully diluted earnings per share:
Before extraordinary item $ 5.52 $ 6.11 $ 4.77
Net 5.52 6.11 4.63
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Millions, Except Per Share Amounts)
____________________________________________
December 31,
1995 1994
______ ______
Assets
Current assets:
Cash and cash equivalents $ 60 $ 147
Receivables 597 504
Inventories 513 514
Other current assets 218 133
_____ ______
1,388 1,298
_____ ______
Investments and other assets:
Investments in and advances to unconsolidated
companies 234 100
Other assets 92 90
_____ _____
326 190
_____ _____
Property, plant and equipment:
Land and buildings 436 386
Machinery, equipment and fixtures 1,875 1,779
Construction in progress 164 204
_____ _____
2,475 2,369
Less accumulated depreciation 1,327 1,279
_____ _____
1,148 1,090
_____ _____
Intangibles, deferred taxes & deferred charges 194 128
______ ______
Total assets $3,056 $2,706
______ ______
Liabilities and shareholders' investment
Current liabilities:
Loans payable $ 60 $ 41
Current maturities of long-term debt 42 37
Accounts payable 376 322
Accrued salaries and wages 85 87
Accrued product coverage & marketing expenses 152 131
Income taxes payable 30 27
Other accrued expenses 308 195
_____ _____
1,053 840
_____ _____
Long-term debt 117 155
_____ ______
Other liabilities 703 639
_____ _____
Shareholders' investment:
Common stock, $2.50 par value, 43.9 and 43.8
shares issued 110 109
Additional contributed capital 926 927
Retained earnings 406 232
Common stock in treasury,at cost,3.7 & 2.2 shares (135) (72)
Unearned compensation ( 51) (55)
Cumulative translation adjustments ( 73) (69)
_____ _____
1,183 1,072
_____ _____
Total liabilities & shareholders' investment $3,056 $2,706
______ ______
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions)
____________________________________
1995 1994 1993
______ ______ ______
Cash flows from operating activities:
Net earnings $ 224 $ 253 $ 177
_____ _____ _____
Adjustments to reconcile net earnings
to net cash from operating activities:
Restructuring charges 114 - -
Depreciation and amortization 143 128 125
Early extinguishment of debt - - 6
Accounts receivable ( 91) ( 37) ( 59)
Inventories 3 ( 46) 1
Accounts payable and accrued expenses 99 69 8
Deferred income taxes (100) ( 7) ( 2)
Other 14 16 30
____ ____ ____
Total adjustments 182 123 109
____ ____ ____
Net cash provided by operating activities 406 376 286
____ ____ ____
Cash flows from investing activities:
Property, plant and equipment:
Additions (223) (238) (174)
Disposals 6 5 12
Investments in and advances to unconsolidated
companies (155) ( 8) 10
Acquisition of new businesses, net of cash
acquired ( 1) ( 20) 3
_____ _____ _____
Net cash used for investing activities (373) (261) (149)
_____ _____ _____
Net cash flows from operating and investing
activities 33 115 137
____ ____ ____
Cash flows from financing activities:
Proceeds from borrowings 2 - 57
Payments on borrowings ( 37) ( 34) (248)
Net borrowings under credit agreements 19 17 ( 26)
Net proceeds from common stock issuances - - 125
Repurchase of common stock ( 69) ( 5) -
Dividend payments ( 40) ( 26) ( 15)
Other 4 ( 2) ( 7)
_____ _____ _____
Net cash used for financing activities (121) ( 50) (114)
_____ _____ _____
Effect of exchange rate changes on cash 1 5 -
_____ _____ ____
Net change in cash and cash equivalents ( 87) 70 23
Cash & cash equivalents at beginning of year 147 77 54
____ ____ ____
Cash & cash equivalents at end of year $ 60 $147 $ 77
____ ____ ____
Cash payments during the year for:
Interest $ 13 $ 19 $ 40
Income taxes 59 43 18
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
(Millions, Except Per Share Amounts)
__________________________________________________
1995 1994 1993
______ ______ ______
Convertible preference stock, no par value,
1.0 shares authorized:
Beginning balance (.2 shares) $ - $ 112 $ 115
Converted to common stock or redeemed
(.2 shares) - (112) ( 3)
______ _______ _______
Ending balance - - 112
______ ______ ______
Common stock, $2.50 par value, 150.0 shares
authorized:
Beginning balance (43.8, 40.6 & 36.5 shares) 109 101 92
Issued in public offerings (2.6 shares) - - 7
Conversion of preference stock & LYONs
(2.9 & 1.1 shares) - 7 1
Other (.1, .3 and .4 shares) 1 1 1
______ ______ ______
Ending balance (43.9, 43.8 & 40.6 shares) 110 109 101
______ ______ ______
Additional contributed capital:
Beginning balance 927 823 654
Issued in public offerings - - 118
Conversion of preference stock and LYONs - 104 48
Other ( 1) - 3
_______ ______ ______
Ending balance 926 927 823
______ ______ ______
Retained earnings (deficit):
Beginning balance 232 4 (146)
Net earnings for the year 224 253 177
Cash dividends declared:
Convertible preference stock - - ( 8)
Common stock ( 40) (26) ( 7)
Additional minimum liability for pensions ( 10) 1 ( 12)
_______ ______ _______
Ending balance 406 232 4
______ ______ ______
Common stock in treasury:
Beginning balance (2.2, 2.1 & 2.1 shares) ( 72) (67) ( 67)
Stock repurchased (1.6 and .1 shares) ( 69) ( 5) -
Stock issued (.1 shares) 6 - -
_______ _______ _______
Ending balance (3.7, 2.2 & 2.1 shares) (135) (72) ( 67)
_______ _______ _______
Unearned compensation:
Beginning balance ( 55) (59) ( 64)
Shares allocated to participants 4 4 5
_______ _______ _______
Ending balance ( 51) (55) ( 59)
______ _______ _______
Cumulative translation adjustments:
Beginning balance ( 69) (93) (83)
Adjustments ( 4) 24 (10)
_______ _______ _______
Ending balance ( 73) (69) (93)
______ ______ ______
Shareholders' investment $1,183 $1,072 $ 821
______ ______ ______
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Unless Otherwise Stated)
______________________________________________
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation: The consolidated financial statements
include the accounts of Cummins Engine Company, Inc., and its majority-
owned subsidiaries. Affiliated companies in which Cummins does not
have a controlling interest or in which control is expected to be
temporary are accounted for using the equity method.
The statements and notes have been prepared in conformity with
generally accepted accounting principles and include some amounts
which are estimates based upon currently available information and
management's judgment of current conditions and circumstances.
Revenue Recognition: The Company recognizes revenues on the sale of
its products, net of estimated costs of returns, allowances and sales
incentives, when the products are shipped to customers.
Product Coverage Programs: Estimated costs of product coverage
programs are charged to earnings at the time the Company sells its
products.
Foreign Currency: The Company uses the local currency as the
functional currency for its manufacturing operations outside the
United States, except those in Brazil and Mexico for which it uses the
US dollar. At operations which use the local currency as the
functional currency, results are translated into US dollars using
average exchange rates for the year, while assets and liabilities are
translated into US dollars using year-end exchange rates. The
resulting translation adjustments are recorded as a separate component
of shareholders' investment. Gains and losses from foreign currency
transactions are included in net earnings. At the Company's
operations in Brazil and Mexico, cash and certain other monetary
assets and liabilities, such as receivables and payables, and revenues
and expenses are translated into US dollars using current exchange
rates. Inventories and nonmonetary assets, such as fixed assets, are
translated into US dollars using historical exchange rates. The
resulting translation adjustments and gains and losses from foreign
currency transactions are reflected in net earnings.
Technical Investment: Expenditures for research and development of
new products, as well as engineering expenditures during early
production and ongoing efforts to improve existing products, are
charged to earnings as incurred, net of contract reimbursements:
Technical Investment 1995 1994 1993
____________________ ____ ____ ____
Research & engineering $263 $238 $210
Reimbursements 46 31 29
Other 52 43 38
____ ____ ____
Total $361 $312 $277
____ ____ ____
Included above in research and engineering were research and
development costs approximating $230 in 1995, $200 in 1994 and $160 in
1993.
Cash Equivalents: Cash equivalents are investments that are readily
convertible to known amounts of cash and have original maturities of
three months or less.
Inventories: The Company accounts for approximately 30 percent of its
inventories using the last-in, first-out (LIFO) cost method. These
LIFO inventories include substantially all of the Company's US heavy-
duty and high-horsepower engine and engine parts inventories. All
other inventories are valued at the lower of first-in, first-out
(FIFO) cost or net realizable value.
December 31,
Inventories 1995 1994
___________ ____ ____
Finished products $283 $291
Work-in-process & raw materials 292 277
____ ____
Inventories at FIFO cost 575 568
Excess of FIFO over LIFO (62) (54)
____ ____
Inventories $513 $514
____ ____
Property, Plant and Equipment: Property, plant and equipment are
recorded at cost. The Company depreciates substantially all engine
production equipment using a modified units-of-production method,
which is based upon units produced subject to a minimum level.
Depreciation of all other equipment is computed using the straight-
line method for financial reporting purposes. The estimated service
lives to compute depreciation range from 20 to 40 years for buildings
and 3 to 20 years for machinery, equipment and fixtures. Where
appropriate, the Company uses accelerated depreciation methods for tax
purposes. Maintenance and repair costs are charged to earnings as
incurred.
Earnings Per Common Share: Primary earnings per share of common stock
are computed by subtracting preference stock dividend requirements
from net earnings and dividing that amount by the weighted-average
number of common shares outstanding during each year. Fully diluted
earnings per share are computed by dividing net earnings by the
weighted-average number of shares outstanding, assuming the exercise
of stock options and the conversion of debt and preference stock to
common stock.
NOTE 2. RESTRUCTURING CHARGES: Results of operations in 1995
included restructuring charges of $118 ($77 after taxes) for costs to
reduce the worldwide work force by approximately 2,000 people through
a series of actions, including voluntary and involuntary separations,
retirements and plant consolidations. Facility consolidations include
closing or restructuring selected operations in Europe, Brazil and
North America.
The components of the restructuring charges are as follows:
Work force reductions ............$ 82
Asset write downs................. 32
Other 4
___
Total $118
____
Estimated costs for work force reductions were based on amounts
pursuant to benefit programs and contractual provisions or statutory
requirements at the affected operations. At December 31, 1995,
approximately 1,300 employees had separated from the Company as a
result of the restructuring actions. In addition to the restructuring
charges, the Company expects to incur approximately $25 in 1996,
primarily for continuity payments and equipment and employee
relocations associated with the facility consolidations and closings.
NOTE 3. OPERATING LEASES: Certain of the Company's manufacturing
plants, warehouses and offices are leased facilities. The Company also
leases manufacturing and office equipment. Most of these leases require
fixed rental payments, expire over the next ten years and can be renewed
or replaced with similar leases. Rental expense under these leases in
1995, 1994 and 1993 was $54, $52 and $51, respectively. Future minimum
payments for operating leases with original terms of more than one year
are $31 in 1996, $26 in 1997, $20 in 1998, $20 in 1999, $22 in 2000 and
$84 thereafter.
NOTE 4. SALE OF RECEIVABLES: The Company has an agreement to sell,
without recourse, up to $110 of eligible trade receivables. The
amount of receivables outstanding was $110 under this agreement at
both December 31, 1995 and 1994. As collections reduce previously
sold receivables, new receivables customarily are sold up to the $110
level.
NOTE 5. INVESTMENTS IN UNCONSOLIDATED COMPANIES:
December 31,
1995 1994
____ ____
Consolidated Diesel Company $ 96 $ 33
Kirloskar Cummins Limited 27 22
Cummins Wartsila 31 -
Chongqing Cummins 15 -
Tata Cummins Ltd. 13 8
Other 52 37
____ ____
Carrying value $234 $100
____ ____
Included above in the Company's carrying value of Consolidated Diesel
Company is temporary financing of $50 that will be repaid to Cummins
in 1996. Other investments at December 31, 1995 and 1994 included
$23 and $19, respectively, for temporarily owned distributorships.
Cummins' sales to these distributorships approximated $20 in 1995, $40
in 1994 and $50 in 1993.
Summary financial information for 50-percent or less owned companies:
Earnings Data 1995 1994 1993
_____________ ______ ______ ______
Net sales $1,091 $ 914 $ 746
Earnings 6 15 3
Cummins' share 1 6 1
December 31,
Balance Sheet Data 1995 1994
__________________ ____ ____
Current assets $330 $199
Noncurrent assets 340 186
Current liabilities (231) (146)
Noncurrent liabilities ( 63) ( 42)
____ ____
Net assets $376 $197
____ ____
Cummins' share $211 $ 81
____ ____
NOTE 6. EARLY EXTINGUISHMENT OF DEBT:
In December 1993, the Company sold 2.6 million shares of its common
stock in a public offering and used a portion of the proceeds to
redeem $77 in principal amount of outstanding 9-3/4 percent sinking
fund debentures. This early extinguishment of debt resulted in an
extraordinary charge of $6.
NOTE 7. LONG-TERM DEBT:
December 31,
Long-term Debt 1995 1994
______________ ____ ____
9.74%-10.65% medium-term notes, through 1998 $ 73 $102
8.76% guaranteed notes of ESOP Trust, due 1998 68 70
Other 18 20
____ ____
Total indebtedness 159 192
Less current maturities 42 37
____ ____
Long-term debt $117 $155
____ ____
Aggregate maturities of long-term debt for the five years subsequent
to December 31, 1995 are $42, $25, $81, $3 and $1. At December 31,
1995 and 1994, the weighted-average interest rate on loans payable and
current maturities of long-term debt was 8 percent and 7 percent,
respectively.
The Company maintains a $300 revolving credit agreement, under which
there were no outstanding borrowings at December 31, 1995 or 1994.
The Company also maintains other domestic and international credit
lines with approximately $110 available at December 31, 1995.
The Company has guaranteed the outstanding borrowings of its ESOP
Trust. The ESOP was established for certain of the Company's salaried
employees who participate in the qualified benefit savings plans.
Cash contributions to the ESOP Trust, together with the dividends
accumulated on the common stock held by the Trust, are used to pay
interest and principal due on the notes. Cash contributions and
dividends to the ESOP Trust to fund principal and interest payments
approximated $10 in both 1995 and 1994. The Company's compensation
expense was $8 in 1995, $9 in 1994 and $10 in 1993. The unearned
compensation, which is reflected as a reduction to shareholders'
investment, represents the historical cost of the ESOP Trust's shares
of common stock that have not yet been allocated to participants.
NOTE 8. OTHER LIABILITIES:
December 31,
Other Liabilities 1995 1994
_________________ ____ ____
Accrued retirement & post-employment benefits $533 $475
Accrued product coverage & marketing expenses 86 91
Deferred taxes 21 21
Accrued compensation 21 12
Other 42 40
____ ____
Other liabilities $703 $639
____ ____
NOTE 9. INCOME TAXES:
Tax Provision 1995 1994 1993
_____________ ____ ____ ____
Current:
US federal and state $ 30 $ 29 $ 5
Foreign 23 19 19
___ ___ ___
53 48 24
___ ___ ___
Deferred:
US federal and state (93) (9) (12)
Foreign ( 7) 2 10
____ ____ ____
(100) (7) ( 2)
____ ____ ____
Tax provision (credit) $(47) $ 41 $ 22
_____ ____ ____
Significant components of the Company's net deferred tax assets relate
to the following tax effects of differences between financial and tax
reporting:
December 31,
Net Deferred Tax Assets 1995 1994
_______________________ ____ ____
US accrued employee benefits $236 $219
US accrued product coverage & marketing expenses 73 66
Restructuring charges 25 -
US plant & equipment (124) (111)
Other net US differences 7 10
UK taxable differences, primarily plant & equipment ( 5) ( 13)
Other net foreign taxable differences ( 2) ( 1)
US federal carryforward benefits:
General business tax credits, expiring 2000 to 2010 58 62
Minimum tax credits, no expiration 11 6
Less valuation allowance - ( 68)
____ ____
Net deferred tax assets $279 $170
____ ____
Balance Sheet Classification
____________________________
Current assets $164 $ 90
Noncurrent assets 136 101
Noncurrent liabilities (21) (21)
___ ____
Net deferred tax assets $279 $170
____ ____
During 1995, the valuation allowance maintained against the tax
carryforward benefits was released to earnings as a reduction of
income tax expense. Assessments of the likelihood of realizing net
deferred tax assets take into consideration historical information,
expected future income and tax planning strategies. Based upon the
most recent assessment, the Company now expects to realize all of its
tax assets, including the use of all carryforwards before any
expiration. The Company previously had released the valuation
allowance to earnings as carryforwards were actually used, leaving
unused carryforward benefits offset by the allowance. The reduction
in income tax expense resulting from reducing the beginning-of-the-
year valuation allowance amounted to $68 in 1995, $32 in 1994 and $34
in 1993.
The Company determined during 1995 that its levels and character of
taxable income were sufficient to allow changes to its tax treatment
of foreign tax credits and foreign sales corporation benefits for
prior years. As a consequence, $35 of foreign taxes paid and
previously used as deductions were used as full credits against US
federal taxes, increasing their value $23. In addition, foreign sales
corporation benefits for prior years were maximized, producing a net
tax benefit of $12. These additional tax benefits of $35 related to
prior years have been recorded as a reduction to 1995 income tax
expense.
Earnings before income taxes and differences between the effective tax
rate and US federal income tax rates were:
1995 1994 1993
____ ____ ____
Earnings before income taxes:
US $135 $181 $111
International 42 113 94
____ ____ ____
$177 $294 $205
____ ____ ____
Tax at 35 percent US statutory rate $ 62 $103 $ 72
Change in US tax rate - - (4)
Adjustment to beginning-of-year
valuation allowance (68) (32) (34)
Modification of foreign tax credit
and foreign sales corporation benefits
of prior years (35) - -
Research tax credits ( 6) ( 9) ( 8)
Current-year foreign sales corporation benefits ( 5) - -
Differences in rates and taxability of foreign
subsidiaries - (18) 1
All other, net 5 ( 3) ( 5)
____ ____ ____
Tax provision (credit) $(47) $ 41 $ 22
____ ____ ____
NOTE 10. RETIREMENT PLANS: The Company has several contributory and
noncontributory pension plans covering substantially all employees.
Benefits for salaried plans generally are based upon compensation
during the three to five years preceding retirement. Under the hourly
plans, benefits generally are based upon various monthly amounts for
each year of service. The Company has a non-qualified excess benefit
plan that provides certain employees with defined retirement benefits
in excess of qualified plan limits imposed by US tax law. In
addition, the Company has a supplementary life insurance plan that
provides officers and other key employees with term life protection
during their active employment and supplemental benefits upon
retirement.
December 31, 1995 December 31, 1994
__________________________ __________________________
Over- Under- Over- Under-
Funded Status funded funded Combined funded funded Combined
_____________ ______ ______ ________ ______ ______ ________
Benefit obligation:
Vested $(600) $(539) $(1,139) $(397) $(544) $( 941)
Accumulated $(674) $(658) $(1,332) $(459) $(642) $(1,101)
Projected $(779) $(688) $(1,467) $(533) $(693) $(1,226)
Plan assets 863 504 1,367 623 562 1,185
_____ ______ ________ _____ ______ ________
Funded status 84 (184) ( 100) 90 (131) ( 41)
Unrecognized:
Experience (gain)
loss ( 30) 4 ( 26) ( 33) ( 35) ( 68)
Prior service cost 21 85 106 12 105 117
Transition asset ( 19) ( 10) ( 29) ( 21) ( 18) ( 39)
Additional liability - ( 63) ( 63) - ( 32) ( 32)
_____ ______ ________ _____ ______ ________
Accrued asset
(liability) $ 56 $(168) $ ( 112) $ 48 $(111) $( 63)
_____ ______ ________ ______ ______ ________
In 1995, the projected benefit obligation was determined using
weighted-average discount rates of 7 percent for the US plans and 8.5
percent for the international plans and, in 1994, rates of 8.25
percent and 8.5 percent, respectively. The assumed long-term rates of
compensation increase for salaried plans approximated expected
inflation. The long-term rates of return on assets were assumed to be
10 percent in 1995 and 8.5 percent in 1994 for US plans and 9.25
percent in 1995 and 8.75 percent in 1994 for the international plans.
It is the Company's policy to make contributions to these plans
sufficient to meet the funding requirements of applicable laws and
regulations, plus such additional amounts as deemed to be appropriate.
Plan assets consist principally of equity securities and corporate and
fixed-income Government obligations.
Pension Cost 1995 1994 1993
____________ ____ ____ ____
Service cost $ 40 $ 42 $ 32
Interest cost 99 89 83
Asset return:
Actual (214) (26) (203)
Deferred 110 (79) 100
Transition asset amortization ( 9) ( 9) ( 9)
Other 14 12 3
____ ____ ____
Pension cost $ 40 $ 29 $ 6
____ _____ ____
While the Company provides certain health care and life insurance
benefits to eligible retirees and their dependents, it reserves the
right to change benefits covered under these plans. The plans are
contributory, with retirees' contributions adjusted annually, and
contain other cost-sharing features, such as deductibles, coinsurance
and spousal contributions. The general policy is to fund these
benefits as claims and premiums are incurred.
Health Care Cost 1995 1994 1993
________________ ____ ____ ____
Service cost $ 8 $ 10 $ 6
Interest cost 38 33 30
Other 7 10 (1)
____ ____ ____
Total $ 53 $ 53 $ 35
____ ____ ____
December 31,
Accrued Liability 1995 1994
_________________ ____ ____
Accumulated benefit obligation for:
Retirees $238 $226
Employees eligible to retire 125 92
Others 163 148
Unrecognized:
Prior service cost (10) (17)
Net experience loss (40) ( 6)
____ ____
Accrued liability $476 $443
____ ____
The weighted-average discount rate used to determine the accumulated
benefit obligation was 7 percent in 1995 and 8.25 percent in 1994.
The trend rate for medical benefits provided prior to Medicare
eligibility is 11 percent, grading down to an ultimate rate of 4.75
percent by 2008. For benefits provided after Medicare eligibility,
the trend rate is 6.25 percent, grading down to an ultimate rate of
4.75 percent by 1999. The health care cost trend rate assumption
could have a significant effect on the determination of the
obligation. For example, increasing the rate by one percent would
increase the accumulated benefit obligation by $31 and net cost by $3.
NOTE 11. PREFERENCE STOCK REDEMPTION: In 1994, the Company called
for redemption, at a price of $51.05 per depositary share, plus
accrued dividends, of all its outstanding Convertible Exchangeable
Preference Stock, which had a face value of $112. Holders of the
stock elected to convert their shares into 2.9 million shares of
common stock.
NOTE 12. COMMON STOCK REPURCHASE PROGRAM: In 1994, the Board of
Directors authorized repurchase by the Company of up to 2.5 million
shares of its common stock. During 1995, the Company repurchased on
the open market 1.6 million shares at an aggregate purchase price of
$69, or average price of $43.57 per share. In 1994, the Company
repurchased on the open market .1 million shares at an aggregate
purchase price of $5, or average price of $42.47 per share. All of
the acquired shares are held as common stock in treasury.
NOTE 13. EMPLOYEE STOCK PLANS: Under the Company's stock incentive
and option plans, officers and other eligible employees may be awarded
stock options, stock appreciation rights and restricted stock. Under
the provisions of the stock incentive plan, up to one percent of the
Company's outstanding shares of common stock at the end of the
preceding year is available for issuance under the plan each year. At
December 31, 1995, there were 408,109 shares of common stock available
for grant and 451,500 options exercisable under the plans.
Number of
Options Shares Option Price per Share
________ _________ ______________________
December 31, 1993 525,070 $15.94 to $52.56
Granted 349,927 $36.81 to $53.25
Exercised ( 10,200) $20.72 to $37.41
_________
December 31, 1994 864,797 $15.94 to $53.25
Granted 360,625 $34.94 to $46.13
Exercised (22,520) $15.94 to $42.06
Cancelled (19,627) $21.94 to $52.56
_________
December 31, 1995 1,183,275 $15.94 to $53.25
_________
In 1995, the Financial Accounting Standards Board issued Statement No. 123,
"Accounting for Stock-based Compensation", which is effective in 1996.
This statement encourages, but does not require, a fair-value based method
of accounting for stock options. The Company does not expect to change its
method of accounting for stock options.
NOTE 14. SHAREHOLDERS' RIGHTS PLAN: The Company has a Shareholders'
Rights Plan which it first adopted in 1986. The Rights Plan provides
that each share of the Company's common stock has associated with it a
stock purchase right. The Rights Plan becomes operative when a person
or entity acquires 15 percent of the Company's common stock or
commences a tender offer to purchase 20 percent or more of the
Company's common stock without the approval of the Board of Directors.
In the event a person or entity acquires 15 percent of the Company's
common stock, each right, except for the acquiring person's rights,
can be exercised to purchase $400 worth of common stock for $200. In
addition, for a period of 10 days after such acquisition, the Board of
Directors can exchange such right for a new right which permits the
holders to purchase one share of the Company's common stock for $1 per
share. If a person or entity commences a tender offer to purchase 20
percent or more of the Company's common stock, unless the Board of
Directors redeems the rights within 10 days of the event, each right
can be exercised to purchase one share for $200. The plan also allows
holders of the rights to purchase shares of the acquiring person's
stock at a discount if the Company is acquired or 50 percent of the
assets or earnings power of the Company is transferred to an acquiring
person.
NOTE 15. SEGMENTS OF THE BUSINESS: The Company operates in a single
industry segment -- designing, manufacturing and marketing diesel engines
and related products. The Company's key markets for diesel engines are
heavy-duty and midrange trucks, power generation, bus and light
commercial vehicles, industrial products and marine. Manufacturing,
marketing and technical operations are maintained in major areas of the
world. Summary financial information is listed below for each geographic
area. Earnings (loss) for each area may not be a meaningful
representation of each area's contribution to consolidated operating
results because of significant sales of products between and among the
Company's various domestic and international operations.
All Corporate
US Europe Other Items Combined
_____ ______ _____ _________ ________
1995
____
Net sales:
To customers in the area $3010 $ 772 $524 $ - $4306
To customers outside the area 587 342 10 - 939
Intergeographic transfers 367 186 126 (679) -
_____ _____ ____ ______ _____
Total $3964 $1300 $660 $(679) $5245
Earnings (loss) before
income taxes $ 178 $ 113 $ 24 $(138) $ 177
Identifiable assets $1853 $ 598 $483 $ 122 $3056
1994
____
Net sales:
To customers in the area $2708 $ 657 $538 $ - $3903
To customers outside the area 594 234 6 - 834
Intergeographic transfers 410 159 114 (683) -
_____ _____ _____ _____ _____
Total $3712 $1050 $658 $(683) $4737
Earnings (loss) before
income taxes $ 177 $ 87 $ 44 $( 14) $ 294
Identifiable assets $1618 $ 499 $412 $ 177 $2706
1993
____
Net sales:
To customers in the area $2374 $ 590 $439 $ - $3403
To customers outside the area 589 251 5 - 845
Intergeographic transfers 317 149 84 (550) -
_____ _____ ____ ______ _____
Total $3280 $ 990 $528 $(550) $4248
Earnings (loss) before
income taxes $ 140 $ 89 $ 19 $( 43) $ 205
Identifiable assets $1487 $ 407 $340 $ 157 $2391
Total sales for each geographic area are classified by manufacturing
source and include sales to customers within and outside the area and
intergeographic transfers. Transfer prices for sales between the
Company's various operating units generally are at arm's length, based
upon business conditions, distribution costs and other costs which are
expected to be incurred in producing and marketing products. Corporate
items include interest and other income and expense. Identifiable
assets are those resources associated with the operations in each area.
Corporate assets are principally cash and investments.
The Company generally sells its products on open account under credit
terms customary to the region of distribution. The Company performs
ongoing credit evaluations of its customers and generally does not
require collateral to secure its customers' receivables.
Net sales by marketing territory:
Net Sales 1995 1994 1993
_________ ______ ______ ______
United States $3,018 $2,712 $2,389
Europe 783 671 600
Asia, Far East & Australia 723 626 559
Canada 384 330 257
Mexico & South America 233 318 330
Africa & Middle East 104 80 113
______ ______ ______
Net sales $5,245 $4,737 $4,248
______ ______ ______
NOTE 16. GUARANTEES, COMMITMENTS AND OTHER CONTINGENCIES: At
December 31, 1995, loans, leases and accounts receivable that have
been sold with recourse amounted to $25. Commitments under
outstanding letters of credit, guarantees and contingencies
approximated $170. Based on borrowing rates currently available to
the Company for bank loans with similar terms and average maturities,
the fair value of total indebtedness of $219 at December 31, 1995
approximated $240. The carrying values of all other receivables and
liabilities approximated fair values at December 31, 1995.
The Company enters into forward exchange contracts to hedge the
effects of fluctuating currency rates on certain assets and
liabilities, such as accounts receivable and payable, that are
denominated in other than the functional currencies of entities. The
contracts typically provide for the exchange of different currencies
at specified future dates and rates. The gain or loss due to the
difference between the forward exchange rates of the contracts and
current rates offsets in whole or in part the loss or gain on the
assets or liabilities being hedged. The Company had $84 of contracts
outstanding at December 31, 1995, which mature in 1996 and are
denominated in a variety of foreign currencies where the Company does
business.
Commodity swap contracts at December 31, 1995 amounted to $39 and have
the effect of fixing the Company's cost of certain future material
purchases. These contracts mature through 1998. Gains or losses on
the contracts are reflected in earnings concurrently with the hedged
items. No significant concentration of credit or market risk exists
for the Company.
Cummins and its subsidiaries are defendants in a number of pending legal
actions, including actions relating to use and performance of the
Company's products. The Company carries product liability insurance
covering significant claims for damages involving personal injury and
property damage. In the event the Company is determined to be liable
for damages in connection with such actions and proceedings, the
unreserved and uninsured portion of such liability is not expected to be
material. The Company also has been identified as a potentially
responsible party at several waste disposal sites under US and related
state environmental statutes and regulations. The Company denies
liability with respect to many of these legal actions and environmental
proceedings and vigorously is defending such actions or proceedings.
The Company has established reserves which it believes are adequate for
its expected future liability in such actions and proceedings where the
nature and extent of such liability can be estimated reasonably based
upon presently available information.
NOTE 17. QUARTERLY FINANCIAL DATA (unaudited):
First Second Third Fourth Full
1995 Quarter Quarter Quarter Quarter Year
____ _______ _______ _______ _______ ______
Net sales $1,334 $1,361 $1,219 $1,331 $5,245
Gross profit 343 340 277 311 1,271
Net earnings 67 69 46 42 224
Primary and fully
diluted earnings
per share $ 1.63 $ 1.69 $ 1.14 $ 1.05 $ 5.52
1994
____
Net sales $1,099 $1,205 $1,156 $1,277 $4,737
Gross profit 271 297 295 323 1,186
Net earnings 55 66 62 70 253
Primary and fully
diluted earnings
per share $ 1.35 $ 1.58 $ 1.48 $ 1.68 $ 6.11
Included in net earnings in the fourth quarter of 1995 was a
restructuring charge of $116 ($76 after taxes). There also was a tax
credit of $68. Net earnings for 1995 included restructuring charges
of $118 ($77 after taxes.)
SIGNATURES
__________
Pursuant to the requirements of Section 13 or 15(d) 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/Kiran M. Patel By /s/John McLachlan
__________________ _________________
Kiran M. Patel John McLachlan
Vice President and Chief Vice President -
Financial Officer Corporate Controller
(Principal Financial (Principal Accounting
Officer) Officer)
Date: March 4, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date
__________ _____ ____
Director & Chairman of the Board 3/2/96
* of Directors & Chief Executive
_____________________ Officer (Principal Executive Officer)
(James A. Henderson)
* Director and President & Chief 3/2/96
_____________________ Operating Officer
(Theodore M. Solso)
* 3/2/96
_____________________ Director
(Harold Brown)
*
_____________________ Director 3/2/96
(K. R. Dabrowski)
*
_____________________ Director 3/2/96
(Robert J. Darnall)
*
_____________________ Director 3/2/96
(W. Y. Elisha)
*
_____________________ Director 3/2/96
(Hanna H. Gray)
*
_____________________ Director 3/2/96
(D. G. Mead)
*
_____________________ Director 3/2/96
(J. Irwin Miller)
*
_____________________ Director 3/2/96
(William I. Miller)
*
_____________________ Director 3/2/96
(Donald S. Perkins)
*
________________________ Director 3/2/96
(William D. Ruckelshaus)
*
_____________________ Director 3/2/96
(H. B. Schacht)
*
_____________________ Director 3/2/96
(F. A. Thomas)
*
_____________________ Director 3/2/96
(J. Lawrence Wilson)
By /s/Mark R. Gerstle
__________________
Mark R. Gerstle
Attorney-in-fact
CUMMINS ENGINE COMPANY, INC.
EXHIBIT INDEX
____________________________
3(a) Restated Articles of Incorporation of Cummins Engine Company,
Inc., as amended (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended April 3, 1994, by
reference to Quarterly Report on Form 10-Q for the quarter
ended October 1, 1989 and by reference to Form 8-K, dated
July 26, 1990).
3(b) By-laws of Cummins Engine Company, Inc., as amended and
restated effective as of August 12, 1994 (incorporated
by reference to Quarterly Report on Form 10-Q for the quarter
ended October 2, 1994).
4(a) Amended and Restated Credit Agreement (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended October 2, 1994).
4(b) Rights Agreement, as amended (incorporated by reference to
Annual Report on Form 10-K for the year ended December 31,
1989, by reference to Form 8-K, dated July 26, 1990, by
reference to Form 8, dated November 6, 1990, by reference to
Form 8-A12B/A, dated November 1, 1993, and by reference to
Form 8-A12B/A, dated January 12, 1994).
10(a) Target Bonus Plan (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended July 3, 1994).
10(b) Deferred Compensation Plan (incorporated by reference to
Annual Report on Form 10-K for the year ended December 31,
1994).
10(c) Key Employee Stock Investment Plan, as amended (incorporated
by reference to Quarterly Report on Form 10-Q for the quarter
ended July 3, 1994).
10(d) Supplemental Life Insurance and Deferred Income Plan
(incorporated by reference to Quarterly Report on Form 10-Q
for the quarter ended October 2, 1994).
10(e) Financial Counseling Program, (incorporated by reference to
Quarterly Report on Form 10-Q for the quarter ended
July 3, 1994).
10(f) 1986 Stock Option Plan (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended March 30, 1986).
10(g) Deferred Compensation Plan for Non-Employee Directors, as
amended, effective as of April 15, 1994 (incorporated by
reference to Annual Report on Form 10-K for the year ended
December 31, 1994).
10(h) Key Executive Compensation Protection Plan (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended October 2, 1994).
10(i) Excess Benefit Retirement Plan, (incorporated by reference to
Quarterly Report on Form 10-Q for the quarter ended October 2,
1994).
10(j) Restated Sponsors Agreement between Case Corporation and
Cummins Engine Company, Inc., dated December 7, 1990, together
with the Restated Partnership Agreement between Case Engine
Holding Company, Inc., and Cummins Engine Holding Company,
Inc., dated December 7, 1990 (incorporated by reference to
Annual Report on Form 10-K for the year ended December 31,
1990).
10(k) Retirement Plan for Non-Employee Directors of Cummins Engine
Company, Inc., effective September 1989 (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended April 2, 1995).
10(l) Stock Unit Appreciation Plan effective October 1990
(incorporated by reference to Quarterly Report on Form 10-Q
for the quarter ended April 2, 1995).
10(m) Investment Agreement between Ford Motor Company and Cummins
Engine Company, Inc., dated July 16, 1990 (incorporated by
reference to Form 8-K, dated July 26, 1990).
10(n) Investment Agreement between Tenneco Inc., and Cummins Engine
Company, Inc., dated July 16, 1990 (incorporated by reference
to Form 8-K, dated July 26, 1990).
10(o) Investment Agreement between Kubota Corporation and Cummins
Engine Company, Inc., dated July 16, 1990 (incorporated by
reference to Form 8-K, dated July 26, 1990).
10(p) Three Year Performance Plan effective December 1992
(incorporated by reference to Quarterly Report on Form 10-Q
for the quarter ended April 2, 1995).
10(q) Consulting arrangement with Harold Brown (incorporated by
reference to the description thereof provided in the Company's
definitive Proxy Statement).
10(r) Consulting arrangement with Henry B. Schacht (incorporated by
reference to the description thereof provided in the Company's
definitive Proxy Statement).
10(s) 1992 Stock Incentive Plan (filed herewith).
10(t) Restricted Stock Plan for Non-Employee Directors (incorporated
by reference to Quarterly Report on Form 10-Q for the quarter
ended April 3, 1994).
10(u) Executive Retention Plan (filed herewith).
10(v) Performance Share Plan, as amended January 1989 (incorporated
by reference to Quarterly Report on Form 10-Q for the quarter
ended April 2, 1995).
10(w) Senior Executive Bonus Plan (incorporated by reference to
Quarterly Report on Form 10-Q for the quarter ended April 2,
1995).
10(x) Senior Executive Three Year Performance Plan (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended April 2, 1995).
11 Schedule of Computation of Per Share Earnings for each of the
Three Years Ended December 31, 1995 (filed herewith).
21 Subsidiaries of the Registrant (filed herewith).
23 Consent of Arthur Andersen LLP (filed herewith).
24 Powers of Attorney (filed herewith).
27 Financial Data Schedule (filed herewith).