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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, 1997
CUMMINS ENGINE COMPANY, INC.
Commission File Number 1-4949
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 $2.2 billion at January 30, 1998.
As of January 30, 1998, there were outstanding 42.1 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 11
3 Legal Proceedings 11
4 Submission of Matters to Vote of Security Holders 11
II 5 Market for the Registrant's Common Equity and
Related Stockholder Matters 11
6 Selected Financial Data 12
7 Management's Discussion & Analysis of Results
of Operations and Financial Condition 13
8 Financial Statements & Supplemental Data 17
9 Disagreements on Accounting & Financial
Disclosure 17
III 10 Directors & Executive Officers of the Registrant 18
11 Executive Compensation 19
12 Security Ownership of Certain Beneficial Owners
and Management 19
13 Certain Relationships & Related Transactions 19
IV 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 19
Index to Financial Statements 20
Signatures 35
Exhibit Index 37
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 and the largest producer of
diesel engines over 200 horsepower. The Company also produces
natural gas engines and engine components and subsystems. Cummins
provides power and components for a wide variety of equipment in
its key markets: automotive, power generation, industrial and
filtration.
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 1997, approximately 56 percent of net sales were in the United
States. Major international markets include Asia and Australia
(16 percent of net sales); Europe and the CIS (14 percent of net
sales); Mexico and Latin America (6 percent of net sales) and
Canada (6 percent of net sales).
BUSINESS MARKETS
________________
Automotive
__________
Heavy-duty Truck
________________
Cummins has a complete line of 8-, 10-, 11- and 14-liter diesel
engines that range from 260 to 525 horsepower serving the heavy-
duty truck market. The Company's 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 97 percent of the heavy-duty trucks sold
in the United States and Canada in 1997. The Company's largest
customer for heavy-duty truck engines in 1997 was Navistar
International Corporation, which represented 5 percent of the
Company's net sales.
In 1997, factory retail sales of North American heavy-duty trucks
were 14 percent higher than the previous year's level. Factory
retail sales were 201,000 units in 1997, compared to 176,000 units
in 1996 and 227,000 units in 1995. The Company's share of the
North American heavy-duty truck engine market was 32 percent in
1997 based on data published by the American Automotive
Manufacturers Association. The Company's share of the North
American heavy-duty truck engine market was 35 percent in 1996 and
1995.
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 12 percent in 1997 and 11 percent in 1996.
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, where the economy continued the recovery
which began in 1996.
In 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
natural gas engines for urban special-purpose truck markets and
regional haul operations. In 1998, the Company will begin
production of a 600 horsepower engine with the first electronic
dual cam in automotive history.
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.
Medium-duty Truck
_________________
The Company has a line of diesel engines ranging from 130 to 300
horsepower serving medium-duty and intercity delivery truck customers
worldwide. The Company has begun introducing its next generation of
midrange diesel engines, electronic four-valve-head versions which
bring Interact technology to medium-duty trucks.
The Company entered the North American medium-duty 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 1997 was 25
percent, compared to 31 percent in 1996 and 35 percent in 1995. Ford
Motor Company was the Company's largest customer for this market in
1997, representing 4 percent of the Company's net sales.
The Company sells its B and C Series engines and engine components
outside North America to medium-duty truck markets in Asia, Europe,
South America and India. In 1996, operations in China at Dong Feng
were expanded from a license for B Series engines to include a joint
venture for production of C Series engines.
In the medium-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. Primary engine
competitors in the medium-duty 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.
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 8 percent of the
Company's net sales in 1997. The Company's new 5.9 liter engine will
be introduced first into the recreational vehicle market and, by early
1998, into the Dodge Ram pickup truck. This engine will increase
horsepower from 215 to 235 in the manual transmission option.
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 1995, Cummins
introduced its C Series natural gas engine for school buses in the
United States.
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 vehicle 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.
Power Generation
________________
In 1997, power generation sales represented 21 percent of the
Company's net sales. Products include Cummins engines, Onan and
Petbow branded generator sets and Newage alternators.
In stationary power, electrical power generation products and services
are provided to major markets worldwide. The Company's joint venture
with Wartsila Diesel of Finland to produce high-horsepower engines has
been expanded to include customer engineering, marketing and service
support worldwide. The CW 200 series engine family was introduced in
1996 with initial deliveries in Europe and Asia. The CW 170 series
engine family will be introduced in 1998. 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 the mobile business, generator sets are produced
for a variety of applications, with Onan a leading supplier of power
generation sets for recreational vehicles in the United States.
Newage is a leading manufacturer of alternators in its product range.
During 1996, plans were initiated to expand manufacturing capacity at
Newage's joint venture in India. Production at a joint venture in
China (WUXI Newage) began in 1997.
In Power Generation, Cummins competes on a global scale with a variety
of engine manufacturers and generator set assemblers. Caterpillar,
Inc. with an investment in FG Wilson and its recent purchase of
Perkins Engines, provides the main competition. Detroit Diesel
Corporation and AB Volvo are other 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.
Industrial
__________
During 1997, the Company's comprehensive product line, currently
ranging from 76 to 2,000 horsepower, continued to make strong
advances. Cummins' engines power more than 3,000 models of equipment
for the construction, logging, mining, agricultural, petroleum, rail,
marine and government markets throughout the world.
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-
liter engine in the United States. Production at both joint venture
sites began on schedule. In 1997, a third joint venture with Komatsu
to design next generation industrial engines was announced. During
1997, Cummins and Case jointly launched a financing program for
manufacturers, dealers, and customers of Cummins powered industrial
equipment. Cummins relationships with Komatsu and Case provide a
strong base in the Company's construction and agriculture markets.
The Company's first high-horsepower QUANTUM engine was introduced in
1995. Additional high-horsepower QUANTUM engines will be introduced
through 1999 increasing the Company's offering and competitiveness in
the mining and related markets.
Marine product applications include recreational and commercial
markets. The Company's joint venture with Wartsila will expand
commercial product offerings to 6,000 horsepower for the marine
market, significantly higher than the 1,800 horsepower currently
available.
Filtration and Other
____________________
Fleetguard, Cummins' filtration subsidiary, is a leading designer and
manufacturer of filtration products for the North American heavy-duty
industry. Its products are also produced and sold in international
markets, including Europe, South America, India, China, Australia, and
the Far East. Fleetguard produces products for the specialty
filtration market with its Kuss subsidiary located in Findley, Ohio.
The Company purchased the stock of Nelson Industries, Inc., in January
1998. Nelson designs and manufactures air filtration products and
exhaust systems in North America and Europe.
The Company owns 14 distributorships, most of them outside of the
United States. Distributors sell loose engines and service parts as
well as perform service and repair activities on Cummins products.
Holset's turbochargers are sold worldwide. In 1994, Holset introduced
a variable geometry turbocharger design for truck powertrains.
Holset's joint venture with TELCO assembled and shipped its first
turbochargers in 1996. A joint venture with Wuxi in China also began
production in 1996. During 1997, the vibration attenuation business
was sold to Simpson Industries. An alliance with Mitsubishi Heavy
Industries of Japan has begun limited production of jointly developed
turbochargers, with full production beginning in 1998.
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,
Indonesia and other countries.
The Company has entered into alliances with business partners in
various areas of the world.
In 1997, the Company acquired an additional 1% of the outstanding
shares of Kirloskar Cummins Limited, becoming the majority owner, and
changed the name to Cummins India Limited. Also, it was announced
that the joint venture with Wartsila will be expanded to include
worldwide marketing and service activities in addition to design,
development and manufacturing. The Company entered this joint venture
in 1995 to manufacture both diesel and natural gas engines above 2,500
horsepower.
In 1996, a joint venture was formed with two of the Fiat Group
companies - Iveco (trucks and buses) and New Holland (agricultural
equipment) - to design and manufacture the next generation of 4-,5-,
and 6-liter engines based on Cummins 4- and 6-liter B series engines.
Operations on Dong Feng in China were expanded to form a joint venture
for production of a C series engine in addition to the license for B
Series engines.
In 1995, the Company formed a joint venture with China National Heavy
Duty Truck Corporation in Chongqing, previously a Cummins' licensee,
to manufacture a broad line of diesel engines in China.
Cummins and Scania of Sweden have a joint venture to develop a fuel
system for heavy-duty diesel engines. Cummins also has a joint
venture with TELCO to manufacture the Cummins B Series engines in
India for TELCO trucks. Cummins and Komatsu have formed joint
ventures to manufacture the B Series engines in Japan and high-
horsepower Komatsu designed engines in the United States. In 1997, a
third joint venture to design next generation industrial engines was
announced.
Several of the Company's subsidiaries have operations throughout the
world.
Because of the Company's global business activities, its operations
are subject to risks, such as currency controls and fluctuations,
import restrictions and changes in national governments and policies.
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. Cummins has introduced a variety of concepts in the
diesel industry that combine electronic controls, computing capability
and information technology. The Company also offers alternate fueled
engines for certain of its markets. As disclosed in Note 1 to the
Consolidated Financial Statements, research and development
expenditures approximated $250 million in 1997, $235 million in 1996,
and $230 million in 1995.
Sales and Distribution
______________________
While the Company has supply agreements with some customers 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.
While individual product lines may experience modest seasonal declines
in production, there is no material effect on the demand for Cummins'
products on a quarterly basis.
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,
extensive technical investment, 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 7,800 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, 1997, the
aggregate cost would have been approximately $255 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, 1997, Cummins employed 26,300 persons worldwide,
approximately 10,200 of whom are represented by various unions. The
Company has labor agreements covering employees in North America,
South America, the United Kingdom, and India. 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 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 extends 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 extends
for five years.
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 and gas engines and off-highway engines
produced through 1998. Cummins' ability to comply with these and
future emissions standards is an essential element in maintaining its
leadership position in the North American regulated 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 1998 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.
The Environmental Protection Agency, the U. S. Department of Justice
and the California Air Resources Board (collectively, the "government
agencies") have raised concerns with diesel engine manufacturers,
including Cummins, about the level of Nitrogen Oxide (NOx) emissions
from diesel engines under certain driving conditions. The government
agencies also have raised concerns about the strategies that diesel
manufacturers have employed to maximize fuel economy, while also
meeting Clean Air Act standards for NOx emissions. The government
agencies have indicated that they may conclude that diesel
manufacturers have been in violation of the Clean Air Act and have,
therefore, issued conditional certificates of conformity on the 1998
heavy-duty, on-highway diesel engine models. Cummins believes that it
is in full compliance with all laws and regulations regarding
emissions. The government agencies have not made any final
determinations or allegations. The industry and Cummins are engaged
in confidential discussions regarding these emissions, the technical
challenges confronted if new emissions standards are imposed, the
commercial impact of the government's policy and legal positions and
related issues. Both the industry and the government agencies are
taking these concerns and discussions very seriously and are working
diligently toward an amicable resolution. It is premature to predict
the outcome of the discussions or whether the outcome will have a
material effect on Cummins.
Emissions Averaging, Banking and Trading regulations were promulgated
by the EPA in July 1990. By selling 1995, 1996 and 1997 model year
engines with emissions levels below applicable standards, Cummins
generated oxides of nitrogen and particulate matter credits. Those
credits generated in 1995 expire on December 31, 1998 if not used
before this date. While a portion of the Company's 1998 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.
Model year 1998 marked the latest major change in emissions
requirements for heavy-duty on-highway diesel engines when the oxides
of nitrogen standard was lowered from 5.0 to 4.0 g/bhp-hr.
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 1997, one such audit test
was performed on Cummins engines; it was 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 1997.
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 1996, EPA raised an issue with the Company relating to the
definition of rated speed, a parameter in engine emissions
certification testing. For years, the Company has been operating under
a long-standing interpretation of this area of the regulations. EPA
questioned the Company's interpretation and requested further
information. If the EPA maintains, and ultimately prevails in, its
more stringent position, a small number of the Company's 1996 and
earlier model year on-highway engines would be affected. The Company
believes it has a strong legal basis for its regulatory interpretation;
nevertheless, no 1998 model year engines have been released using the
questioned interpretation.
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 1997, 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 although
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 its mobile off-highway products which are included in
the first, second, and third phases (those with ratings between 50 to
750 horsepower). All of these products have undergone 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,
C8.3 and B5.9 engines, ranging from 150 to 300 horsepower.
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 1998.
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; 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;
Uniontown Landfill, Uniontown, Indiana; Sand Springs, Oklahoma; United
Steel Drum, East St. Louis, Illinois; Putnam County Landfill,
Cookeville, Tennessee; Enterprise Oil, Detroit, Michigan; 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 and identities of other PRPs and
the level of insurance coverage. 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 upon 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 6 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,
Brazil, Mexico, France and Australia. In addition, engines and engine
components are manufactured by joint ventures or independent licensees
at plants in England, France, China, India, Japan, Pakistan, South
Korea, Turkey and Indonesia.
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 13 to the Consolidated Financial
Statements is incorporated herein by reference. The material in Item
1 "Other Environmental Statutes and Regulations" also 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
______ _______ __________________
1997
____
First quarter $55 5/8 $44 1/4 $.25
Second quarter 72 3/4 47 3/4 .275
Third quarter 83 67 7/8 .275
Fourth quarter 82 1/2 55 5/16 .275
1996
____
First quarter $42 7/8 $34 1/2 $.25
Second quarter 47 3/4 40 1/4 .25
Third quarter 41 7/8 36 7/8 .25
Fourth quarter 47 3/4 39 .25
At December 31, 1997, the approximate number of holders of record of
the Company's common stock was 4,700.
The Company has repurchased 3.9 million shares of its common stock
since 1994. In 1997, the Company repurchased 1.3 million shares from
Ford Motor Company and another .3 million shares on the open market at
an aggregate purchase price of $75 million. The Company repurchased
.8 million shares of stock in the open market at an aggregate purchase
price of $34 million in 1996 and 1.6 million shares at an aggregate
purchase price of $69 million in 1995. All of the acquired shares are
held as common stock in treasury.
In 1997, the Company issued 3.75 million shares of its common stock to
an employee benefits trust to fund obligations of employee benefit and
compensation plans, principally retirement savings plans. Shares of
the common stock held by this trust will not be used in the
calculation of the Company's earnings per share until distributed from
the trust and allocated to a benefit plan.
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.
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.
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
_______ _______________________
$ Millions, except
per share amounts 1997 1996 1995 1994 1993
_____________________ ______ ______ ______ ______ ______
Net sales $5,625 $5,257 $5,245 $4,737 $4,248
Net earnings 212 160 224 253 177
Earnings per share:
Basic 5.55 4.02 5.53 6.14 4.85
Diluted 5.48 4.01 5.52 6.11 4.63
Cash dividends per share 1.075 1.00 1.00 .625 .20
Total assets 3,765 3,369 3,056 2,706 2,391
Long-term debt 522 283 117 155 190
Earnings per share for 1993-1996 have been restated to reflect the
adoption of SFAS No. 128 as disclosed in Note 1 to the Consolidated
Financial Statements.
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 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
_______ _____________________________________________________________
OVERVIEW
________
Profit before interest and taxes was a record $312 million in 1997, 34
percent higher than in 1996 on a 7 percent increase in sales. This
was accomplished while the Company was in the midst of start-up
activities of its new products and joint ventures and completing
restructuring actions.
Net earnings were $212 million in 1997, $160 million in 1996 and $224
million in 1995.
RESULTS OF OPERATIONS
_____________________
Net Sales:
__________
In 1997, the Company had revenues of $5.6 billion, the sixth
consecutive year of record sales. Revenues from sales of engines were
56 percent of the Company's net sales in 1997, with engine revenues
and unit shipments 10 percent and 11 percent higher, respectively,
than in 1996. The Company shipped a record 369,800 engines in 1997,
compared to 332,300 in 1996 and 338,900 in 1995 as follows:
Unit shipments 1997 1996 1995
________________ _______ _______ _______
Midrange engines 264,300 237,400 222,100
Heavy-duty engines 94,900 85,000 107,300
High-horsepower engines 10,600 9,900 9,500
_______ _______ _______
369,800 332,300 338,900
_______ _______ _______
Revenues from non-engine products, which were 44 percent of net sales
in 1997, were 3 percent higher than in 1996. The increase in 1997 was
due primarily to filtration products and PowerCare (which includes new
parts and remanufactured engines and parts) in North American and
European markets. Sales of the remaining non-engine products, in the
aggregate, were essentially level with 1996.
The Company's sales for each of its key markets during the last three
years were:
$ Millions 1997 1996 1995
__________ ______ ______ ______
Automotive $2,622 $2,447 $2,689
Power Generation 1,205 1,213 1,092
Industrial 1,044 863 776
Filtration and Other 754 734 688
______ ______ ______
$5,625 $5,257 $5,245
______ ______ ______
Sales of $2.6 billion in 1997 for automotive markets were 7 percent
higher than in 1996 and 2 percent lower than in 1995, when North
American heavy-duty truck production was at record levels. In 1997,
heavy-duty truck engine revenues and unit shipments were both 11
percent higher than in 1996, with unit shipments up 6 percent over
1996 for the North American market, where Cummins continued to be the
market leader with a 32-percent market share. The Company announced
in 1997 a new electronic engine (the Signature 600) for this market,
with initial shipments scheduled in 1998. International unit
shipments for the heavy-duty market in 1997 were 55 percent higher
than in 1996 due to the recovery in European automotive markets and
strong demand in Mexico.
Revenues from the sales of engines for medium-duty trucks in 1997 were
essentially level with the prior year, with sales in international
markets (Brazil, Europe and Mexico) offsetting a lower level of unit
shipments in North America. For the bus and light commercial vehicle
market, engine revenues in 1997 were 15 percent higher than in 1996,
on a 13-percent increase in unit shipments. The increase in 1997 was
due to both record unit shipments to Chrysler for the Dodge Ram
pickup, which were 8 percent higher than in 1996 and 22 percent higher
than in 1995, and strong demand in bus markets. In early 1998, the
Company and Chrysler jointly announced production of a new fully
electronic engine for the new Dodge Ram pickup. In November 1997, the
Company introduced the new ISC engine for the premium end of the
medium-duty truck, bus and recreational vehicle markets.
Revenues of $1.2 billion in 1997 for power generation, while level
with 1996, were 10 percent higher than in 1995. Sales of the
Company's generator sets continued to reflect growth in Latin American
and most Asian markets during 1997. In addition, sales of alternators
were 4 percent higher than the prior year, despite the effects of the
strong UK pound. Demand for small generator sets that provide
electrical power for recreational vehicles also continued to be strong
in North America where the Company enjoys over an 80-percent market
share. However, 1997 sales were lower than in prior years due to the
Company's exiting the gas engine business in 1996.
In 1997, sales for industrial markets were 21 percent higher than in
1996 and 35 percent higher than in 1995, exceeding $1 billion for the
first time. Sales for construction markets in 1997 were 23 percent
higher than in 1996 with increases in North America and new business
in Europe. Sales for agricultural markets were 45 percent higher than
the prior year, with the increase due to strong markets and sales in
Uzbekistan. Sales for the marine market in 1997 were 9 percent higher
than in 1996 and 39 percent higher than in 1995. The Company's sales
to the mining market also were 9 percent higher than the prior year.
Sales of $754 million in 1997 for filtration and other markets were 3
percent higher than in 1996 and 10 percent higher than in 1995.
Fleetguard continued to enjoy a 9 percent sales growth in 1997. In
January 1998, the Company completed the acquisition of Nelson
Industries, Inc., a manufacturer of filtration and exhaust system
products, which will significantly expand the Company's product line.
Net sales by marketing territory for each of the last three years
were:
$ Millions 1997 1996 1995
__________ ______ ______ ______
United States $3,123 $2,925 $3,018
Asia/Australia 898 868 723
Europe/CIS 796 759 783
Mexico/Latin America 364 260 233
Canada 318 313 384
South Africa/Middle East 126 132 104
______ ______ ______
$5,625 $5,257 $5,245
______ ______ ______
Europe and the CIS, which represented 14 percent of the Company's
sales in 1997, were 5 percent higher than in 1996 as a result of
recovery in automotive markets and increased industrial business.
Business in Mexico and Latin America also was strong in 1997, a 40
percent increase over 1996. In Australia, the Company's sales are
primarily for automotive, power generation and mining markets, and, in
1997, were essentially level with 1996. Asian countries, in total,
represented 12 percent of the Company's sales in 1997 and 1996 and 10
percent in 1995. In Indonesia, Malaysia, Thailand and Korea, the
Company's business is primarily power generation, industrial and
parts. Business in this area in the fourth quarter of 1997 was 9
percent below the third quarter, although, for the year, it exceeded
the 1996 level. Despite the slowdown due to economic turmoil in these
countries, the Company has experienced no material changes to date in
other parts of Asia. With the awareness that the Company's business
can change rapidly, it is difficult to forecast the future effect of
this region's uncertainties.
Gross Margin:
_____________
The Company's gross margin percentage was 22.8 percent of sales in
1997, compared to 22.5 percent in 1996 and 24.2 percent in 1995. The
Company's gross margin percentage benefited from volume and mix in
1997 ($116 million, or 32-percent leverage). In addition, net
benefits from the Company's restructuring actions served to mitigate
higher costs associated with new product introductions. Product
coverage costs were 2.6 percent of net sales in 1997, compared to 2.7
percent in 1996 and 2.4 percent in 1995.
Operating Expenses:
___________________
Selling and administrative expenses were 13.2 percent of net sales in
1997, compared to 13.8 percent in 1996 and 13.2 percent in 1995. On
the 7-percent sales increase in 1997, these expenses, which include
volume-variable components, were up less than 3 percent in absolute
dollars. Net benefits of the Company's restructuring actions offset
increases in costs associated with new product launches and
information systems during 1997.
The Company has undertaken a program to prepare its computer systems
and applications for the year 2000. This will be accomplished with
the use of existing information technology resources and external
consulting services. The Company expects to incur expenditures of
approximately $43 million to remedy this problem. In 1997, $3 million
was expensed, and the Company estimates an expense of $18 million in
1998.
Research and engineering expenses were 4.6 percent of net sales in
1997, compared to 4.8 percent in 1996 and 5.0 percent in 1995. This
is a result of certain product developments moving to the production
stage and expense controls.
Income from joint ventures and alliances was $10 million in 1997. The
increase in income over prior years was due to earnings and royalties
from Kirloskar Cummins and the joint ventures with Komatsu. In the
fourth quarter of 1997, the Company began consolidating the results of
Kirloskar Cummins, which was renamed Cummins India Limited, as a
result of increasing Cummins' ownership interest to 51 percent.
Other:
______
Interest expense of $26 million was $8 million higher than in 1996 and
$13 million higher than in 1995 due to the increased level of
borrowings in 1997 to support higher capital expenditures, working
capital and share repurchases.
In 1995, the Company's results included restructuring charges of $118
million for costs to consolidate operations and reduce its worldwide
work force. During 1997, restructuring actions included the sale of
the Company's vibration attenuation business, continued workforce
reductions and the culmination of certain plant closings. The
earnings statement effect of this activity was not material. To date,
approximately 3,300 employees have separated from the Company as a
result of these restructuring actions.
Provision for Income Taxes:
___________________________
The Company's income tax provision in 1997 was $74 million, an
effective tax rate of 26 percent, reflecting tax breaks on export
sales and benefits from the research tax credit. In 1996, the
Company's effective tax rate was 25 percent. In 1995, the Company
reduced its valuation allowance for tax benefit carryforwards $68
million. The tax provision for 1995 also included a credit of $35
million for additional tax benefits related to the amendment of prior
years' returns.
CASH FLOW AND FINANCIAL CONDITION
_________________________________
Key elements of cash flows were:
$ Millions 1997 1996 1995
__________ ____ ____ ____
Net cash from operating & investing activities $(154) $(66) $ 33
Net cash from financing activities 96 110 (121)
Effect of exchange rate changes on cash ( 1) 4 1
_____ ___ _____
Net change in cash $( 59) $ 48 $( 87)
______ ____ ______
During 1997, net cash used for operating and investing activities was
$154 million. The higher level of net cash requirements in 1997 was
due primarily to planned capital expenditures ($405 million in 1997,
compared to $304 million in 1996 and $223 million in 1995) for
investments in new products and for working capital. The Company
expects a decrease in capital expenditures during 1998 as new engines
move into production. Net working capital, excluding the
consolidation of Cummins India Limited's working capital of $46
million, was 10.8 percent of sales, compared to 10.1 percent in 1996.
Investments in joint ventures and alliances of $47 million reflected
the net effect of capital contributions, primarily to the joint
venture with Wartsila, and cash generated by certain joint ventures.
Net cash provided from financing activities was $96 million in 1997.
As disclosed in Note 5, the Company issued $120 million in debentures
under a shelf registration statement in 1997 and filed a registration
statement with the Securities and Exchange Commission in December 1997
for $1 billion. Notes and debentures to be issued initially under
this registration statement will be used to repay interim financing
obtained in early 1998 for the acquisition of Nelson Industries, Inc.,
and to pay down other indebtedness outstanding at December 31, 1997.
As disclosed in Note 9, the Company has repurchased 3.9 million shares
of its common stock since 1994. In 1997, the Company also issued 3.75
million shares of its common stock to an employee benefit trust.
Shares held by this trust are not used in the calculation of earnings
per share until distributed from the trust and allocated to a benefit
plan.
In April 1997, the Company announced a 10 percent increase in its
quarterly stock dividend from 25 cents per share to 27.5 cents. The
increase was effective with the dividend payment in June 1997.
As more fully disclosed in Note 13, diesel engine manufacturers,
including Cummins, are involved in discussions with the Environmental
Protection Agency, the U. S. Department of Justice and the California
Air Resources Board regarding diesel engine emissions.
Forward-looking Statements
__________________________
This Management's Discussion and Analysis of Results of Operations and
Financial Condition and other sections of this Form 10-K contain
forward-looking statements that are based on current expectations,
estimates and projections about the industries in which Cummins
operates, management's beliefs and assumptions made by management.
Words, such as "expects", "anticipates", "intends", "plans",
"believes", "seeks", "estimates", variations of such words and similar
expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions ("Future Factors") which
are difficult to predict. Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in such forward-
looking statements. Cummins undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
Future Factors include increasing price and product competition by
foreign and domestic competitors, including new entrants; rapid
technological developments and changes; the ability to continue to
introduce competitive new products on a timely, cost-effective basis;
the mix of products; the achievement of lower costs and expenses;
domestic and foreign governmental and public policy changes, including
environmental regulations; protection and validity of patent and other
intellectual property rights; reliance on large customers;
technological, implementation and cost/financial risks in increasing
use of large, multi-year contracts; the cyclical nature of Cummins'
business; the outcome of pending and future litigation and
governmental proceedings; and continued availability of financing,
financial instruments and financial resources in the amounts, at the
times and on the terms required to support Cummins' future business.
These are representative of the Future Factors that could affect the
outcome of the forward-looking statements. In addition, such
statements could be affected by general industry and market conditions
and growth rates, general domestic and international economic
conditions, including interest rate and currency exchange rate
fluctuations, and other Future Factors.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
_______ __________________________________________
See Index to Financial Statements on page 20.
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 7, 1998 ("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, 1997 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 and Business Experience
Name Age During Last 5 Years
_______________ ___ _________________________________________________
Jean S. Blackwell 43 Vice President - Human Resources (1997 to
present), Vice President - General Counsel (1997)
C. Roberto Cordaro 47 Executive Vice President, Group President -
Automotive (1996 to present), Group Vice
President - Marketing (1990 to 1996)
John K. Edwards 53 Executive Vice President, Group President - Power
Generation and International (1996 to present),
Vice President - International (1989 to 1996)
Mark R. Gerstle 42 Vice President - Cummins Business Services and
Secretary (1998 to present), Vice President -
Law and Corporate Affairs and Secretary (1997 to
1998), Vice President - General Counsel and
Secretary (1995 to 1997), Assistant General
Counsel (1991 to 1995)
James A. Henderson 63 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 50 Vice President - Filtration Group and President,
Fleetguard, Inc. (1996 to present), Vice
President - Aftermarket Group (1989 to 1996)
F. Joseph Loughrey 48 Executive Vice President, Group President -
Industrial and Chief Technical Officer (1996 to
present), Group Vice President - Worldwide
Operations & Technology (1995 to 1996), Group
Vice President - Worldwide Operations (1990 to
1995)
Rick J. Mills 50 Vice President - Corporate Controller (1996
to present), Vice President Pacific Rim and
Latin America - Fleetguard, Inc. (1993 to 1996),
President - Atlas, Inc. (1990-1993)
Kiran M. Patel 49 Vice President and Chief Financial Officer
(1996 to present), President - Fleetguard, Inc.
(1993 to 1996), President - CUMBRASIL
(1990 to 1993)
Theodore M. Solso 50 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)
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 600
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 20 for a list of
the financial statements filed as a part of this report.
2. See Exhibit Index on page 37 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 1997.
INDEX TO FINANCIAL STATEMENTS
_____________________________
Page
____
Responsibility for Financial Statements 21
Report of the Independent Public Accountants 21
Consolidated Statement of Earnings 22
Consolidated Statement of Financial Position 23
Consolidated Statement of Cash Flows 24
Consolidated Statement of Shareholders' Investment 25
Notes to Consolidated Financial Statements 26
Quarterly Financial Data 34
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 this page.
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 meets periodically 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, 1997 and 1996, and the related
consolidated statements of earnings, cash flows and shareholders'
investment for each of the three years in the period ended December
31, 1997. 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, 1997 and
1996, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois,
January 26, 1998.
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF EARNINGS
__________________________________
Millions, except per share amounts 1997 1996 1995
__________________________________ ______ ______ ______
Net sales $5,625 $5,257 $5,245
Cost of goods sold 4,345 4,072 3,974
______ ______ ______
Gross profit 1,280 1,185 1,271
Selling & administrative expenses 744 725 692
Research & engineering expenses 260 252 263
(Income) expense from joint
ventures and alliances (10) - 2
Interest expense 26 18 13
Other (income) expense, net (26) (24) 6
Restructuring charges - - 118
_____ _____ _____
Earnings before income taxes 286 214 177
Provision (credit) for income taxes 74 54 (47)
_____ _____ _____
Net earnings $ 212 $ 160 $ 224
_____ _____ _____
Basic earnings per share $5.55 $4.02 $5.53
Diluted earnings per share 5.48 4.01 5.52
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,
__________________________________ 1997 1996
______ ______
Assets
Current assets:
Cash and cash equivalents $ 49 $ 108
Receivables 771 669
Inventories 677 587
Other current assets 213 189
_____ _____
1,710 1,553
_____ _____
Investments and other assets:
Investments in joint ventures and alliances 204 207
Other assets 142 119
_____ _____
346 326
_____ _____
Property, plant and equipment:
Land and buildings 495 460
Machinery, equipment and fixtures 2,079 1,931
Construction in progress 392 270
_____ _____
2,966 2,661
Less accumulated depreciation 1,434 1,375
_____ _____
1,532 1,286
_____ _____
Intangibles, deferred taxes & deferred charges 177 204
______ ______
Total assets $3,765 $3,369
______ ______
Liabilities and shareholders' investment
Current liabilities:
Loans payable $ 90 $ 93
Current maturities of long-term debt 42 39
Accounts payable 386 380
Accrued salaries and wages 87 84
Accrued product coverage & marketing expenses 120 126
Income taxes payable 18 16
Other accrued expenses 312 283
_____ _____
1,055 1,021
_____ _____
Long-term debt 522 283
_____ _____
Other liabilities 713 747
_____ _____
Minority interest 53 6
_____ _____
Shareholders' investment:
Common stock, $2.50 par value, 48.1 and 43.9
shares issued 120 110
Additional contributed capital 1,119 929
Retained earnings 713 535
Common stock in treasury,at cost,6.0 & 4.5 shares (245) (169)
Common stock held in trust for employee benefit
plans, 3.7 shares (175) -
Unearned compensation ( 42) (46)
Cumulative translation adjustments ( 68) (47)
_____ ______
1,422 1,312
_____ _____
Total liabilities & shareholders' investment $3,765 $3,369
______ ______
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
____________________________________
Millions 1997 1996 1995
________ ______ ______ ______
Cash flows from operating activities:
Net earnings $ 212 $ 160 $ 224
_____ _____ _____
Adjustments to reconcile net earnings
to net cash from operating activities:
Depreciation and amortization 158 149 143
Restructuring actions ( 24) ( 42) 114
Receivables ( 80) ( 56) ( 91)
Inventories ( 65) ( 62) 3
Accounts payable and accrued expenses ( 18) 28 99
Deferred income taxes 22 17 (100)
Other ( 5) ( 1) 14
____ ____ ____
Total adjustments ( 12) 33 182
____ ____ ____
200 193 406
____ ____ ____
Cash flows from investing activities:
Property, plant and equipment:
Additions (405) (304) (223)
Disposals 21 26 6
Investments in joint ventures and alliances ( 47) ( 5) (147)
Acquisitions and dispositions of business
activities 76 10 ( 1)
Other 1 14 ( 8)
_____ _____ _____
(354) (259) (373)
_____ _____ _____
Net cash (used in) provided by operating
and investing activities (154) ( 66) 33
_____ ____ ____
Cash flows from financing activities:
Proceeds from borrowings 281 200 2
Payments on borrowings ( 50) ( 47) ( 37)
Net (payments) borrowings under credit
agreements ( 12) 32 19
Repurchases of common stock ( 75) ( 34) ( 69)
Dividend payments ( 45) ( 40) ( 40)
Other ( 3) ( 1) 4
_____ _____ _____
96 110 (121)
____ ____ _____
Effect of exchange rate changes on cash ( 1) 4 1
_____ ____ _____
Net change in cash and cash equivalents ( 59) 48 ( 87)
Cash & cash equivalents at beginning of year 108 60 147
____ ____ ____
Cash & cash equivalents at end of year $ 49 $108 $ 60
____ ____ ____
Cash payments during the year for:
Interest $ 21 $ 16 $ 13
Income taxes 42 40 59
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
__________________________________________________
Millions, except per share amounts 1997 1996 1995
__________________________________ ______ ______ ______
Common stock:
Balance at beginning of year $ 110 $ 110 $ 109
Issued to trust for employee benefit plans 9 - -
Other 1 - 1
_____ _____ _____
Balance at end of year 120 110 110
_____ _____ _____
Additional contributed capital:
Balance at beginning of year 929 926 927
Issued to trust for employee benefit plans 171 - -
Other 19 3 ( 1)
_____ _____ _____
Balance at end of year 1,119 929 926
_____ _____ _____
Retained earnings:
Balance at beginning of year 535 406 232
Net earnings 212 160 224
Cash dividends ( 45) (40) ( 40)
Additional minimum liability for pensions 12 9 ( 10)
Other ( 1) - -
_____ _____ _____
Balance at end of year 713 535 406
_____ _____ _____
Common stock in treasury:
Balance at beginning of year (169) (135) ( 72)
Repurchased ( 76) (34) ( 69)
Issued - - 6
______ ______ ______
Balance at end of year (245) (169) (135)
______ ______ ______
Common stock held in trust for employee
benefit plans:
Issued (180) - -
Shares allocated to benefit plans 5 - -
______ _____ _____
Balance at end of year (175) - -
Unearned compensation:
Balance at beginning of year ( 46) (51) ( 55)
Shares allocated to participants 4 5 4
______ ______ ______
Balance at end of year ( 42) (46) ( 51)
______ ______ ______
Cumulative translation adjustments:
Balance at beginning of year ( 47) (73) (69)
Adjustments ( 21) 26 ( 4)
______ ______ ______
Balance at end of year ( 68) (47) (73)
_____ _____ _____
Shareholders' investment $1,422 $1,312 $1,183
______ ______ ______
Shares of stock
Common stock, $2.50 par value, 150.0 shares
authorized
Balance at beginning of year 43.9 43.9 43.8
Shares issued 4.2 - -
Other - - .1
____ ____ ____
Balance at end of year 48.1 43.9 43.9
____ ____ ____
Common stock in treasury
Balance at beginning of year 4.5 3.7 2.2
Shares repurchased 1.5 .8 1.6
Shares issued - - (.1)
____ ____ _____
Balance at end of year 6.0 4.5 3.7
____ ____ ____
Common stock held in trust for employee
benefit plans 3.7 - -
____ ____ ____
The accompanying notes are an integral part of this statement.
CUMMINS ENGINE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________________________________
NOTE 1. ACCOUNTING POLICIES:
Principles of Consolidation: The consolidated financial statements
include all significant majority-owned subsidiaries. Affiliated
companies in which Cummins does not have a controlling interest, or
for which control is expected to be temporary, are accounted for using
the equity method. Use of estimates and assumptions as determined by
management is required in the preparation of consolidated financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates and
assumptions.
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. 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.
Foreign Currency: Assets and liabilities of foreign entities, where
the local currency is the functional currency, have been translated at
year-end exchange rates, and income and expenses have been translated
to US dollars at average-period rates. Adjustments resulting from
translation have been recorded in shareholders' investment and are
included in net earnings only upon sale or liquidation of the
underlying foreign investment.
For foreign entities where the US dollar is the functional currency,
including those operating in highly inflationary economies, inventory,
property, plant and equipment balances and related income statement
accounts have been translated using historical exchange rates. The
resulting gains and losses have been credited or charged to net
earnings.
Other Costs: Estimated costs of commitments for product coverage
programs are charged to earnings at the time the Company sells its
products.
Research & development expenditures, net of contract reimbursements,
are expensed when incurred and were $250 million in 1997, $235 million
in 1996 and $230 million in 1995.
Maintenance and repair costs are charged to earnings as incurred.
Inventories: Inventories are generally stated at cost or net
realizable value. Approximately 20 percent of domestic inventories
(primarily heavy-duty and high-horsepower engines and engine parts)
are valued using the last-in, first-out (LIFO) cost method.
Inventories at December 31 were as follows:
$ Millions 1997 1996
__________ ____ ____
Finished products $351 $334
Work-in-process and raw materials 388 319
____ ____
Inventories at FIFO cost 739 653
Excess of FIFO over LIFO (62) (66)
____ ____
$677 $587
____ ____
Property, Plant and Equipment: A modified units-of-production method,
which is based upon units produced subject to a minimum level, is used
to depreciate substantially all engine production equipment. The
straight-line depreciation method is used for all other equipment.
The estimated depreciable lives range from 20 to 40 years for
buildings and 3 to 20 years for machinery, equipment and fixtures.
Software: Costs of internally-developed software are expensed as
incurred. External software costs (excluding research, reengineering
and training) are capitalized and amortized over 5 years. Capitalized
software, net of amortization, was $32 million at December 31, 1997
and $19 million at December 31, 1996.
Earnings Per Share: Effective January 1, 1997, Cummins adopted SFAS
No. 128, a new accounting rule on calculating earnings per share.
Under the new rule, basic earnings per share are computed by dividing
net earnings by the weighted-average number of shares outstanding for
the period; diluted earnings per share are computed by dividing net
earnings by the weighted-average number of shares, assuming the
exercise of stock options. Shares of stock held by the employee
benefits trust are not included in outstanding shares for EPS until
distributed from the trust. Prior years have been restated to reflect
this new rule.
Weighted
Millions, except Net Average
per share amounts Earnings Shares Per share
_________________ ________ ________ _________
1997
____
Basic $212 38.2 $5.55
Options - .5 _____
____ ____
Diluted $212 38.7 $5.48
____ ____ _____
1996
____
Basic $160 39.8 $4.02
Options - .1 _____
____ ____
Diluted $160 39.9 $4.01
____ ____ _____
1995
____
Basic $224 40.6 $5.53
Options - .1 _____
____ ____
Diluted $224 40.7 $5.52
____ ____ _____
NOTE 2. SUBSEQUENT EVENT: In January 1998, Cummins completed the
acquisition of the stock of Nelson Industries, Inc., for $450 million.
Nelson, a filtration and exhaust systems manufacturer, will be
consolidated from the date of its acquisition. The purchase price in
excess of net assets will be amortized over 40 years.
NOTE 3. RESTRUCTURING CHARGES: Results of operations in 1995
included restructuring charges of $118 million ($77 million after
taxes) for costs to reduce the worldwide work force through a series
of actions, including voluntary and involuntary separations,
retirements and plant consolidations. Facility consolidations
included closing or restructuring selected operations in Europe,
Brazil and North America. In 1997, restructuring actions included the
sale of the Company's vibration attenuation business, continued
workforce reductions and the culmination of certain plant closings.
The earnings statement effect of this activity was not material. A
total of approximately $83 million has been charged to the liabilities
as of December 31, 1997.
NOTE 4. INVESTMENTS IN JOINT VENTURES AND ALLIANCES: Investments in
joint ventures and alliances at December 31 were as follows:
$ Millions 1997 1996
__________ ____ ____
Cummins Wartsila $ 88 $ 59
Consolidated Diesel 32 38
Kirloskar Cummins - 36
Chongqing Cummins 16 16
Tata Cummins 16 13
Behr America, Inc. 14 12
Other 38 33
____ ____
$204 $207
____ ____
In the fourth quarter of 1997, the Company increased its ownership
interest in Kirloskar Cummins to 51 percent and began consolidating
the subsidiary, which was renamed Cummins India Limited.
Net sales of the joint ventures and alliances were $1.3 billion in
1997 and 1996 and $1.1 billion in 1995. Summary balance sheet
information for the joint ventures and alliances was as follows:
December 31,
$ Millions 1997 1996
__________ ____ ____
Current assets $447 $458
Noncurrent assets 533 478
Current liabilities (258) (305)
Noncurrent liabilities (305) (248)
____ ____
Net assets $417 $383
____ ____
Cummins' share $204 $207
____ ____
In connection with various joint venture agreements, Cummins is
required to purchase products from the joint ventures in amounts to
provide for the recovery of specified costs of the ventures. Under
the agreement with Consolidated Diesel, Cummins' purchases were $538
million in 1997 and $540 million in 1996.
NOTE 5. LONG-TERM DEBT: Long-term debt at December 31 was:
$ Millions 1997 1996
__________ ____ ____
Commercial paper $242 $ 90
6.75% notes, due 2027 120 -
8.2% notes, due 2003 96 108
Guaranteed notes of ESOP Trust, due 1998 65 67
10.35%-10.65% medium-term notes, through 1998 14 35
Other 27 22
____ ____
Total 564 322
Current maturities (42) (39)
____ ____
Long-term debt $522 $283
____ ____
Maturities of long-term debt for the five years subsequent to December
31, 1997 are $42 million, $25 million, $21 million, $21 million and
$24 million. At both December 31, 1997 and 1996, the weighted-average
interest rates on loans payable and current maturities of long-term
debt approximated 7 percent.
In 1997, the Company issued $120 million of 6.75 percent debentures
that mature in 2027. Holders have a 1-time option in 2007 to redeem
the debentures and Cummins has a recall right after ten years. The
Company filed a Shelf Registration Statement with the Securities and
Exchange Commission in 1997 in the amount of $1 billion to issue from
time to time debt securities, preferred stock, preference stock,
common stock or warrants at prices and on terms to be determined at
the time of sale. In the first quarter of 1998, the Company issued
$765 million face amount of notes and debentures under this
registration statement to finance the acquisition of Nelson and pay
down other indebtedness outstanding at December 31, 1997. In 1996, a
subsidiary of the Company issued 8.2 percent notes that resulted in
net proceeds of $100 million.
At December 31, 1997, there were no outstanding borrowings under the
Company's $400 million revolving credit agreement. In January 1998,
the agreement was amended forming two $500 million agreements maturing
in 1999 and 2003. These agreements support the Company's commercial
paper borrowings. The commercial paper initially was issued in 1996
as replacement financing for an arrangement whereby the Company sold
up to $110 million in receivables without recourse. The agreement for
the sale of receivables expired in the second quarter of 1996 and was
not renewed by the Company. The Company also has other domestic and
international credit lines with approximately $250 million available
at December 31, 1997.
The Company has guaranteed the outstanding borrowings of its ESOP Trust.
The notes are due in July 1998 and the Trust intends to refinance the
notes with the Company continuing to guarantee the borrowings. Cash
contributions to the Trust, together with the dividends accumulated on
the common stock held by the Trust, are used to pay interest and
principal. Cash contributions and dividends to the Trust and the
Company's compensation expense approximated $10 million in each year.
The unearned compensation, which is reflected as a reduction to
shareholders' investment, represents the historical cost of the shares of
common stock that have not yet been allocated by the Trust to
participants.
NOTE 6. OTHER LIABILITIES: Other liabilities at December 31 included
the following:
$ Millions 1997 1996
__________ ____ ____
Accrued retirement & post-employment benefits $487 $530
Accrued product coverage & marketing expenses 111 112
Accrued compensation 34 28
Deferred income taxes 25 28
Other 56 49
____ ____
$713 $747
____ ____
NOTE 7. INCOME TAXES: The provision for income taxes was as follows:
$ Millions 1997 1996 1995
_____________ ____ ____ ____
Current:
U.S. Federal and state $16 $22 $ 30
Foreign 32 15 23
__ __ __
48 37 53
__ __ __
Deferred:
U.S. Federal and state 26 - ( 93)
Foreign - 17 ( 7)
__ __ _____
26 17 (100)
___ ___ _____
$74 $54 $(47)
___ ___ _____
The Company expects to realize all of its tax assets, including the
use of all carryforwards, before any expiration. A valuation
allowance previously maintained against tax carryforward benefits was
released to earnings as a reduction of income tax expense in the
amount of $68 million in 1995. Tax benefits of $35 million also were
recorded as a reduction to income tax expense in 1995 for changes in
the treatment of foreign tax credits and foreign sales corporation
benefits for prior years.
Significant components of net deferred tax assets related to the
following tax effects of differences between financial and tax
reporting at December 31:
$ Millions 1997 1996
__________ ____ ____
Employee Benefit plans $266 $247
Product coverage & marketing expenses 64 72
Restructuring charges 9 10
US plant & equipment (139) (125)
Net foreign taxable differences, primarily plant
and equipment ( 23) ( 23)
US Federal carryforward benefits:
General business tax credits, expiring 2009 to 2011 31 45
Minimum tax credits, no expiration 10 9
Other net differences 13 21
____ ____
$231 $256
____ ____
Balance Sheet Classification
____________________________
Current assets $129 $131
Noncurrent assets 127 153
Noncurrent liabilities (25) (28)
___ ____
$231 $256
____ ____
Earnings before income taxes and differences between the effective tax
rate and US Federal income tax rates were:
$ Millions 1997 1996 1995
__________ ____ ____ ____
Earnings before income taxes:
US $205 $134 $135
Foreign 81 80 42
____ ____ ____
$286 $214 $177
____ ____ ____
Tax at 35 percent US statutory rate $100 $ 75 $ 62
Adjustment to beginning-of-year
valuation allowance - - (68)
Change in treatment of foreign tax credit
and foreign sales corporation benefits
of prior years - - (35)
Research tax credits (11) ( 6) ( 6)
Current-year foreign sales corporation benefits (11) (11) ( 5)
Differences in rates and taxability of foreign
subsidiaries ( 3) - -
All other, net ( 1) ( 4) 5
____ _____ _____
$ 74 $ 54 $(47)
____ _____ _____
NOTE 8. RETIREMENT PLANS: The Company has various contributory and
noncontributory pension plans covering substantially all employees.
Benefits for salaried plans generally are based upon annual
compensation, and benefits under the hourly plans 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 plan
that provides officers and other key employees with term life
insurance during active employment and supplemental retirement
benefits.
It is the Company's policy to make contributions to pension plans
sufficient to meet the funding requirements of applicable laws and
regulations, plus such additional amounts as deemed to be appropriate.
Plan assets consisted principally of equity securities and corporate
and fixed-income Government obligations. Cummins common stock
represented 7 percent of plan assets at December 31, 1997.
The Company's pension expense under these plans was as follows:
$ Millions 1997 1996 1995
____________ ____ ____ ____
Service cost $ 41 $ 45 $ 40
Interest cost 115 104 99
Asset return:
Actual (414) (155) (214)
Deferred 280 39 110
Amortization of transition asset ( 9) ( 9) ( 9)
Other 13 16 14
____ ____ ____
$ 26 $ 40 $ 40
____ ____ ____
The liability for these plans at December 31 was as follows:
$ Millions 1997 1996
__________ ________ ________
Vested $(1,449) $(1,286)
Accumulated $(1,637) $(1,410)
_______ _______
Projected $(1,693) $(1,491)
Plan assets 1,905 1,555
______ ______
Funded status 212 64
Unrecognized:
Experience gain (a) ( 269) ( 114)
Prior service cost (b) 63 70
Transition asset (c) ( 11) ( 21)
Adjustment to recognize minimum
liability (d) - ( 35)
_______ _______
Prepaid pension liability $( 5) $( 36)
_______ _______
(a) The net deferred gain resulting from investments, other
experience and changes in assumptions.
(b) The prior service effect of plan amendments deferred for
recognition over remaining service.
(c) The balance of the initial difference between assets and
obligations deferred for recognition over a 15-year period.
(d) An adjustment to reflect the unfunded accumulated benefit
obligation for plans whose benefits exceed the assets.
The projected benefit obligation for under-funded plans was $418
million at December 31, 1997 and $694 million at December 31, 1996, of
which $13 million and $109 million, respectively, was recorded as a
liability. The assumed long-term rate of compensation increase for
salaried plans approximated expected inflation in both 1997 and 1996.
Other significant assumptions for the Company's principal plans were:
1997 1996
____ ____
Weighted-average discount rate for
benefit obligations 7.5% 7.75%
Long-term rate of return on plan assets 10.0% 9.25%
Cummins also provides various health care and life insurance benefits
to eligible retirees and their dependents but reserves the right to
change benefits covered under these plans. The plans are contributory
with retirees' contributions adjusted annually, and they contain other
cost-sharing features, such as deductibles, coinsurance and spousal
contributions. The general policy is to fund benefits as claims and
premiums are incurred.
The Company's expense under these plans was as follows:
$ Millions 1997 1996 1995
________________ ____ ____ ____
Service cost $ 8 $ 9 $ 8
Interest cost 41 36 38
Other 9 10 7
____ ____ ____
$ 58 $ 55 $ 53
____ ____ ____
The accrued liability for these plans at December 31 was:
$ Millions 1997 1996
_________________ ____ ____
Obligation for:
Retirees $339 $273
Eligible to retire 133 145
Others 124 127
Unrecognized:
Prior service cost 12 4
Experience loss (62) (38)
____ ____
$546 $511
____ ____
Significant assumptions:
Weighted-average discount rate 7.5% 7.75%
Present trend rate 8.0% 8.9%
Ultimate trend rate in ten years 5.25% 5.50%
Increasing the health care cost trend rate by one percent would
increase the obligation by $38 million and annual expense by $4
million.
NOTE 9. COMMON STOCK: The Company increased its quarterly common
stock dividend from 25 cents per share to 27.5 cents, effective with
the dividend payment in June 1997.
The Company has repurchased 3.9 million shares of its common stock
since 1994. In 1997, the Company repurchased 1.3 million shares from
Ford Motor Company and another .2 million shares on the open market at
an aggregate purchase price of $75 million. The Company repurchased
.8 million shares on the open market at an aggregate purchase price of
$34 million in 1996 and 1.6 million shares at an aggregate purchase
price of $69 million in 1995. All of the acquired shares are held as
common stock in treasury.
In 1997, the Company issued 3.75 million shares of its common stock to
an employee benefits trust to fund obligations of employee benefit and
compensation plans, principally retirement savings plans. Shares of
the stock held by this trust are not used in the calculation of
earnings per share until allocated to a benefit plan.
NOTE 10. 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.
NOTE 11. 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, 1997, there were 87,281 shares of common stock available
for grant and 852,700 options exercisable under the plans.
Number of Weighted-average
Options Shares exercise price
________ _________ ________________
December 31, 1994 864,797 $37.49
Granted 360,625 39.98
Exercised (22,520) 30.83
Cancelled (19,627) 41.03
_________
December 31, 1995 1,183,275 38.45
Granted 394,150 40.13
Exercised (47,475) 32.43
Cancelled (19,800) 41.00
_________
December 31, 1996 1,510,150 38.88
Granted 766,500 60.61
Exercised (294,025) 35.85
Cancelled ( 61,775) 42.66
_________
December 31, 1997 1,920,850 46.08
Options outstanding at December 31, 1997 have exercise prices between
$15.94 and $79.81 and a weighted-average remaining life of 8 years.
The weighted-average fair value of options granted was $14.94 per
share in 1997 and $11.36 per share in 1996. The fair value of each
option was estimated on the date of grant using a risk-free interest
rate of 6.4 percent in 1997 and 6.7 percent in 1996, current annual
dividends, expected lives of 10 years and expected volatility of 23
percent. A fair-value method of accounting for awards subsequent to
January 1, 1995, would have had no material effect on results of
operations.
NOTE 12. 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 engines
are automotive (heavy and medium-duty trucks, buses and light
commercial vehicles), power generation and industrial. Manufacturing,
marketing and technical operations are maintained in major areas of
the world. Earnings 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.
Summary financial information is listed below for each geographic
area:
Europe/ All Corporate
$ Millions US CIS Other Items Combined
__________ _____ ______ _____ _________ ________
1997
____
Net sales:
To customers in the area $3098 $ 792 $811 $ - $4701
To customers outside the area 552 349 23 - 924
Intergeographic transfers 561 220 140 (921) -
_____ _____ _____ _____ _____
Total $4211 $1361 $974 $(921) $5625
Earnings before income taxes $ 168 $ 60 $ 48 $ 10 $ 286
Identifiable assets $2311 $ 682 $673 $ 99 $3765
1996
____
Net sales:
To customers in the area $2904 $ 770 $619 $ - $4293
To customers outside the area 581 363 20 - 964
Intergeographic transfers 415 180 129 (724) -
_____ _____ ____ ______ _____
Total $3900 $1313 $768 $(724) $5257
Earnings before income taxes $ 111 $ 75 $ 22 $ 6 $ 214
Identifiable assets $2069 $ 624 $517 $ 159 $3369
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
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.
Net sales by marketing territory were as follows:
$ Millions 1997 1996 1995
__________ ______ ______ ______
United States $3,123 $2,925 $3,018
Asia/Australia 898 868 723
Europe/CIS 796 759 783
Mexico/Latin America 364 260 233
Canada 318 313 384
South Africa/Middle East 126 132 104
______ ______ ______
$5,625 $5,257 $5,245
______ ______ ______
NOTE 13. GUARANTEES, COMMITMENTS AND OTHER CONTINGENCIES: At
December 31, 1997, the Company had the following minimum rental
commitments for noncancelable operating leases: $33 million in 1998,
$26 million in 1999, $21 million in 2000, $16 million in 2001, $14
million in 2002 and $47 million thereafter. Rental expense under
these leases approximated $60 million in 1997 and $55 million in 1996
and 1995.
Commitments under outstanding letters of credit, guarantees and
contingencies approximated $120 million. 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 $654
million at December 31, 1997 was $878 million. The carrying values of
all other receivables and liabilities approximated fair values.
In December 1997, the Company entered into an agreement to fix the
interest rates on the planned debt issuance in early 1998. The gain
or loss upon settlement will be amortized over the terms of the notes
and debentures.
The Company enters into forward exchange contracts to hedge the
effects of fluctuating currency rates on 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 offset in whole or in part the loss or
gain on the assets or liabilities being hedged. The Company had $257
million of contracts outstanding at December 31, 1997, which mature in
1998 and are denominated in a variety of foreign currencies where the
Company does business.
Commodity swap contracts at December 31, 1997, amounted to $41 million
and have the effect of fixing the Company's cost of certain future
material purchases. These contracts mature through 1999. Gains or
losses on the contracts are reflected in earnings concurrently with
the hedged items.
The Environmental Protection Agency, the U. S. Department of Justice
and the California Air Resources Board (collectively, the "government
agencies") have raised concerns with diesel engine manufacturers,
including Cummins, about the level of Nitrogen Oxide (NOx) emissions
from diesel engines under certain driving conditions. The government
agencies also have raised concerns about the strategies that diesel
manufacturers have employed to maximize fuel economy while also
meeting Clean Air Act standards for NOx emissions. The government
agencies have indicated that they may conclude that diesel
manufacturers have been in violation of the Clean Air Act and have,
therefore, issued conditional certificates of conformity on the 1998
heavy-duty, on-highway diesel engine models. Cummins believes that it
is in full compliance with all laws and regulations regarding
emissions. The government agencies have not made any final
determinations or allegations. The industry and Cummins are engaged
in confidential discussions regarding these emissions, the technical
challenges confronted if new emissions standards are imposed, the
commercial impact of the government's policy and legal positions and
related issues. Both the industry and the government agencies are
taking these concerns and discussions very seriously and are working
diligently toward a amicable resolution. It is premature to predict
the outcome of the discussions or whether the outcome will have a
material effect on Cummins.
Cummins and its subsidiaries are defendants in a number of pending
legal actions, including actions related 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 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 that 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 14. QUARTERLY FINANCIAL DATA (unaudited):
$ Millions, except First Second Third Fourth Full
per share amounts Quarter Quarter Quarter Quarter Year
__________________ _______ _______ _______ _______ ______
1997
____
Net sales $1,304 $1,396 $1,366 $1,559 $5,625
Gross profit 286 324 309 361 1,280
Net earnings 41 53 54 64 212
Basic earnings per share $ 1.07 $ 1.40 $ 1.41 $ 1.69 $ 5.55
Diluted earnings per share 1.06 1.38 1.38 1.66 5.48
1996
____
Net sales $1,316 $1,316 $1,264 $1,361 $5,257
Gross profit 316 300 270 299 1,185
Net earnings 49 44 26 41 160
Basic earnings per share $ 1.21 $ 1.11 $ .67 $ 1.03 $ 4.02
Diluted earnings per share 1.21 1.10 .67 1.03 4.01
Earnings per share for 1996 and the first three quarters of 1997 have been
restated to reflect the adoption of SFAS No. 128 as disclosed in Note 1.
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/K. M. Patel By /s/R. J. Mills
________________________ _________________
K. M. Patel R. J. Mills
Vice President and Chief Vice President -
Financial Officer Corporate Controller
(Principal Financial (Principal Accounting
Officer) Officer)
Date: March 1, 1998
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 3/1/98
* of Directors & Chief Executive
_____________________ Officer (Principal Executive Officer)
(James A. Henderson)
* Director and President & Chief 3/1/98
_____________________ Operating Officer
(Theodore M. Solso)
* 3/1/98
_____________________ Director
(Harold Brown)
*
_____________________ Director 3/1/98
(Robert J. Darnall)
*
_____________________ Director 3/1/98
(John M. Deutch)
*
_____________________ Director 3/1/98
(W. Y. Elisha)
*
_____________________ Director 3/1/98
(Hanna H. Gray)
*
_____________________ Director 3/1/98
(William I. Miller)
*
_____________________ Director 3/1/98
(Donald S. Perkins)
*
________________________ Director 3/1/98
(William D. Ruckelshaus)
*
_____________________ Director 3/1/98
(H. B. Schacht)
*
_____________________ Director 3/1/98
(F. A. Thomas)
*
_____________________ Director 3/1/98
(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 June 30, 1996).
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-A/A dated November 1, 1993, and by reference to
Form 8-A/A dated January 12, 1994 and by reference to
Form 8-A/A dated July 15, 1996).
10(a) Target Bonus Plan (incorporated by reference to Annual Report
on Form 10-K for the year ended December 31, 1996).
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 Annual Report on Form 10-K for
the year ended December 31, 1996).
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,
Exhibit 10(g)).
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, Exhibit 10(k)).
10(k) Retirement Plan for Non-Employee Directors of Cummins Engine
Company, Inc., as amended February 1997 (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended March 30, 1997).
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, Exhibit 10(m)).
10(m) Three Year Performance Plan as amended February 1997
(incorporated by reference to Quarterly Report on Form 10-Q
for the quarter ended March 30, 1997).
10(n) Consulting arrangement with Harold Brown (incorporated by
reference to the description thereof provided in the Company's
definitive Proxy Statement).
10(o) 1992 Stock Incentive Plan (incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1995,
Exhibit 10(s)).
10(p) Restricted Stock Plan for Non-Employee Directors as amended
February 11, 1997 (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended March 30, 1997).
10(q) Executive Retention Plan (incorporated by reference to Annual
Report on Form 10-K for the year ended December 31, 1995,
Exhibit 10(u)).
10(r) Performance Share Plan, as amended January 1989 (incorporated
by reference to Quarterly Report on Form 10-Q for the quarter
ended April 2, 1995, Exhibit 10(j)).
10(s) Senior Executive Bonus Plan (incorporated by reference to
Annual Report on Form 10-K for the year ended December 31, 1996).
10(t) Senior Executive Three Year Performance Plan as amended
February 11, 1997 (incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended March 30, 1997).
10(u) Guarantees of Perpetual Loan Facility of Cummins Finance
Limited dated January 31, 1996 with the Toronto Dominion Bank,
The Bank of New York and Societe Generale (incorporated by
reference to Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996, Exhibit 10(y)).
11 Schedule of Computation of Per Share Earnings for each of the
Three Years Ended December 31, 1997 (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).