TABLE OF CONTENTS _________________ Page No. ________ PART I. FINANCIAL INFORMATION ______________________________ Item 1. Financial Statements Consolidated Statement of Earnings for the Third 2 Quarter and Nine Months Ended October 2, 1994 and October 3, 1993 Consolidated Statement of Financial Position at 3 October 2, 1994 and December 31, 1993 Consolidated Statement of Cash Flows for the Nine 4 Months Ended October 2, 1994 and October 3, 1993 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Results of 7 Operations, Cash Flow and Financial Condition PART II. OTHER INFORMATION ___________________________ Item 6. Exhibits and Reports on Form 8-K 11 Index to Exhibits 13 CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1994 AND OCTOBER 3, 1993 Unaudited (Millions, Except per Share Amounts) Third Quarter Nine Months 1994 1993 1994 1993 ________ ______ ________ ________ NET SALES $1,155.5 $988.3 $3,459.6 $3,130.1 Cost of goods sold 861.4 748.9 2,597.2 2,379.1 ________ ______ ________ ________ GROSS PROFIT 294.1 239.4 862.4 751.0 Selling & administrative expenses 161.2 139.1 470.6 425.1 Research & engineering expenses 59.5 49.9 169.9 151.5 Interest expense 4.6 9.0 13.7 27.7 Other (income) expense, net (3.1) .6 (3.8) 2.0 _________ ______ _________ ________ Earnings before income taxes 71.9 40.8 212.0 144.7 Provision for income taxes 10.0 - 29.3 14.6 Minority interest - .1 - .1 ________ ______ ________ ________ NET EARNINGS 61.9 40.7 182.7 130.0 Preference stock dividends - 2.0 - 6.1 ________ ______ ________ ________ EARNINGS AVAILABLE FOR COMMON SHARES $ 61.9 $ 38.7 $ 182.7 $ 123.9 ________ ______ ________ ________ ________ ______ ________ ________ Primary earnings per common share $ 1.48 $ 1.11 $ 4.43 $ 3.54 Fully diluted earnings per common share 1.48 1.06 4.43 3.37 Cash dividends declared per share .125 .025 .375 .075 CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION Unaudited (Millions, Except per Share Amounts) 10/2/94 12/31/93 ________ ________ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 167.6 $ 77.3 Receivables less allowances of $10.7 & $9.5 495.8 426.3 Inventories 541.8 440.2 Other current assets 141.8 127.9 ________ ________ 1,347.0 1,071.7 INVESTMENTS AND OTHER ASSETS 197.6 190.7 PROPERTY, PLANT & EQUIPMENT less accumulated depreciation of $1,281.0 & $1,222.3 997.9 958.2 INTANGIBLES, DEFERRED TAXES & DEFERRED CHARGES 169.5 170.0 ________ ________ TOTAL ASSETS $2,712.0 $2,390.6 ________ ________ ________ ________ LIABILITIES AND SHAREHOLDERS' INVESTMENT CURRENT LIABILITIES: Loans payable $ 38.2 $ 13.4 Current maturities of long-term debt 31.8 32.6 Accounts payable 308.9 267.5 Other current liabilities 453.1 386.8 ________ ________ 832.0 700.3 ________ ________ LONG-TERM DEBT 184.2 189.6 ________ ________ OTHER LIABILITIES 686.7 679.6 ________ ________ SHAREHOLDERS' INVESTMENT: Convertible preference stock, no par value, .2 shares outstanding - 112.2 Common stock, $2.50 par value, 43.7 & 40.6 shares issued 109.2 101.5 Additional contributed capital 924.5 822.8 Retained earnings 171.2 4.1 Common stock in treasury, at cost, 2.1 shares (67.3) (67.3) Unearned ESOP compensation (55.0) (59.3) Cumulative translation adjustments (73.5) (92.9) ________ ________ 1,009.1 821.1 ________ ________ TOTAL LIABILITIES & SHAREHOLDERS' INVESTMENT $2,712.0 $2,390.6 ________ ________ ________ ________ CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Unaudited (Millions) Nine Months Ended 10/2/94 10/3/93 _______ _______ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $182.7 $130.0 _______ _______ Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 95.6 95.0 Accounts receivable (59.4) (69.8) Inventories (93.2) (19.9) Accounts payable and accrued expenses 96.7 ( 4.4) Other 11.2 12.8 ______ ______ Total adjustments 50.9 13.7 ______ ______ Net cash provided by operating activities 233.6 143.7 ______ ______ CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment: Additions (131.1) (101.0) Disposals 4.5 4.9 Investments in and advances to affiliates and unconsolidated companies (15.8) ( 4.8) Acquisitions of new businesses, net of cash acquired - 3.4 _______ _______ Net cash used for investing activities (142.4) (97.5) _______ _______ NET CASH FLOWS FROM OPERATING & INVESTING ACTIVITIES 91.2 46.2 ______ ______ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings - 56.5 Payments on borrowings ( 8.4) (140.3) Net borrowings under credit agreements 24.3 53.3 Dividend payments (15.6) ( 8.6) Other ( 3.0) ( 5.9) _______ _______ Net cash used for financing activities ( 2.7) (45.0) _______ _______ EFFECT OF EXCHANGE RATE CHANGES ON CASH 1.8 .3 ______ ______ NET CHANGE IN CASH & CASH EQUIVALENTS 90.3 1.5 Cash & cash equivalents at beginning of year 77.3 54.2 ______ ______ CASH & CASH EQUIVALENTS AT END OF THE QUARTER $167.6 $ 55.7 ______ ______ ______ ______ CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES ______________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS __________________________________________ Unaudited (Dollars in Millions, Unless Otherwise Stated) NOTE 1. ACCOUNTING POLICIES: The CONSOLIDATED FINANCIAL STATEMENTS for the interim periods ended October 2, 1994 and October 3, 1993 have been prepared in accordance with the accounting policies described in the Company's Annual Report to Shareholders and Form 10-K. Management believes the statements include all adjustments of a normal recurring nature necessary to present fairly the results of operations for the interim periods. Inventory values at interim reporting dates are based upon estimates of the annual adjustments for taking physical inventory and for the change in cost of LIFO inventories. NOTE 2. INCOME TAXES: Income tax expense is reported during the interim reporting periods on the basis of the estimated annual effective tax rate for the taxable jurisdictions in which the Company operates. In the first nine months of both 1994 and 1993, the Company recognized approximately $32 related to a reduction in its valuation allowance for tax benefit carryforwards. In the third quarter of 1993, the tax provision included a one-time credit of $4.4 resulting from the Omnibus Budget Reconciliation Act of 1993. This legislation increased the US corporate income tax rate from 34 percent to 35 percent resulting in a $4.4 increase in the value of the future tax benefits represented by the Company's net deferred tax assets. The current effect of the rate increase is absorbed by the use of carryforward tax benefits. NOTE 3. EARNINGS PER SHARE: Primary earnings per share of common stock are computed by subtracting preference stock dividend requirements from net earnings and dividing that amount by the weighted average number of common shares outstanding during the period. The weighted average number of shares, which assumes the exercise of certain stock options grated to employees, was 41.7 million in the third quarter of 1994 and 41.3 million in the first nine months of 1994. In the third quarter and first nine months of 1993, the weighted average number of shares was 34.9 million and 35.0 million, respectively. Fully diluted earnings per share are computed by dividing net earnings by the weighted average number of shares outstanding assuming the exercise of stock options and conversion of debt and preference stock to common stock. NOTE 4. LONG-TERM DEBT: On September 16, 1994, the Company's $300 million revolving credit agreement was amended, lowering fees and interest costs and extending the 3-year term that was entered in 1993 to a 5-year term. There were no outstanding borrowings under the facility at October 2, 1994. NOTE 5. PREFERENCE STOCK REDEMPTION: On January 24, 1994, the Company called for redemption, at a price of $51.05 per depositary share, plus accrued dividends, of its outstanding Convertible Exchangeable Preference Stock, which had a face value of $112.2 at December 31, 1993. Holders elected to covert their shares of preference stock into 2.9 million shares of common stock prior to the redemption date. NOTE 6. COMMON STOCK DIVIDEND AND STOCK REPURCHASE PROGRAM: On October 11, 1994, the Board of Directors increased the Company's quarterly common stock dividend from 12.5 cents per share to 25 cents per share and declared a quarterly common stock dividend of 25 cents per share payable on December 15, 1994 to shareholders of record on December 1. The Board also authorized repurchase by the Company of up to 2.5 million shares of its common stock. At the Company's discretion, repurchases of the stock will be made from time to time in the open market and through privately negotiated transactions. NOTE 7. ACQUISITION: On October 3, 1994, the Company announced the acquisition of Power Group International (PGI) from 3i Group and Barclays. PGI, based in Kent, England, is a developer and manufacturer of a broad range of power generation equipment sold under the trade names of Petbow, Auto Diesel and Agreba. The acquisition will be accounted for as a purchase. Accordingly, PGI's results of operations will be included in the Company's Consolidated Statement of Earnings effective in the fourth quarter of 1994. CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES ______________________________________________ MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, CASH FLOW AND FINANCIAL CONDITION ______________________________________________________________ (Dollars in Millions, Unless Otherwise Stated) OVERVIEW ________ The Company's net sales of $1.2 billion in the third quarter of 1994 were $167.2 higher than in the third quarter of 1993. This 17- percent increase was attributable to continued strong demand in most of the Company's markets. In the first nine months of 1994, the Company's net sales were $3.5 billion, compared to $3.1 billion in the first nine months of 1993. The Company net earnings were $61.9, or $1.48 per share, in the third quarter of 1994, compared to $40.7, or $1.11 per share, in the third quarter of 1993. For the first nine months of 1994, net earnings were $182.7, or $4.43 per share, compared to $130.0, or $3.54 per share, in the first nine months of 1993. RESULTS OF OPERATIONS _____________________ The percentage relationships between net sales and other elements of the Company's CONSOLIDATED STATEMENT OF EARNINGS for the comparative reporting periods were: Third Quarter Nine Months Percent of Net Sales 1994 1993 1994 1993 ____________________ _____ _____ _____ _____ Net sales 100.0 100.0 100.0 100.0 Cost of goods sold 74.5 75.8 75.1 76.0 _____ _____ _____ _____ Gross profit 25.5 24.2 24.9 24.0 Selling and administrative expenses 14.0 14.1 13.6 13.6 Research and engineering expenses 5.1 5.0 4.9 4.8 Interest expense .4 .9 .4 .9 Other (income) expense, net (.2) .1 (.1) .1 ______ _____ ______ _____ Earnings before income taxes 6.2 4.1 6.1 4.6 Provision for income taxes .8 - .8 .4 _____ _____ _____ _____ Net earnings 5.4 4.1 5.3 4.2 _____ _____ _____ _____ _____ _____ _____ _____ NET SALES _________ Sales for each of the Company's markets for the comparative reporting periods were: Third Quarter Nine Months 1994 1993 1994 1993 ______ ______ ______ ______ Heavy-duty truck $ 353 $ 268 $1,042 $ 928 Midrange truck 136 156 370 343 Power generation 249 244 746 694 Bus and light commercial vehicles 138 73 441 337 Industrial products 122 98 388 349 Government 15 33 45 88 Marine 17 13 56 51 Fleetguard, Holset and Cummins Electronics (a) 126 103 372 340 ______ ______ ______ ______ Net sales $1,156 $ 988 $3,460 $3,130 ______ ______ ______ ______ ______ ______ ______ ______ (a) Excludes sales of McCord effective with the third quarter of 1993 Sales to the heavy-duty truck market in the third quarter of 1994 were over 30 percent higher than in the third quarter of 1993. In the first nine months of 1994, sales to this market were approximately 12 percent higher than the 1993 level. Shipments of engines for heavy-duty trucks in North America in the third quarter and first nine months of 1994 were 16 percent and 12 percent higher, respectively, than the comparable period of 1993. This market continues to operate at record levels, with current projections for truck production to reach 205,000 units in 1994. In the third quarter and first nine months of 1994, shipments of the Company's heavy-duty truck engines for international markets were 48 percent and 30 percent higher, respectively, than in the comparable periods of 1993. In the United Kingdom, the Company's largest market for heavy-duty truck engines outside the United States, business conditions continue to improve, with engine shipments in the third quarter of 1994 approximately 6 percent higher than in the third quarter of 1993. Sales to the midrange truck market in the third quarter of 1994 were $20 lower than in the third quarter of 1993. However, sales to this market in the first nine months of 1994 were $370, compared to $343 in the first nine months of 1993, an increase of 8 percent. The increase in sales in 1994 has been due to higher engine shipments in both North American and international markets. Power generation sales in the third quarter of 1994 were $249, compared to $244 in the third quarter of 1993. In the first nine months of 1994, power generation sales were 7 percent higher than in the first nine months of 1993. The increase in sales in 1994 was due to demand for industrial generator sets, particularly in international markets, and for power units in recreational vehicles. On October 3, 1994, the Company announced the acquisition of Power Group International (PGI), a major developer and manufacturer of a broad range of power generation equipment sold under the trade names of Petbow, Auto Diesel and Agreba. PGI, based in Kent, England, had sales of $86 in 1993. Sales for bus and light commercial vehicles were $138 in the third quarter of 1994, compared to $73 in the third quarter of 1993. In the first nine months of 1994, sales for this market were over 30 percent higher than the prior year's level. The increase in sales in 1994 was due primarily to demand for midrange engines for the Chrysler Dodge Ram pickup truck. During the third quarter of 1993, shipments of these engines were reduced substantially due to Chrysler's changeover to its new T300 model. Sales of industrial products, which traditionally are affected seasonally in the third quarter, were 24 percent higher in the third quarter of 1994, compared to the same quarter of 1993. The increase in sales was due to improvements in both North American and international markets for construction and agricultural equipment. Sales in the first nine months of 1994 were 11 percent higher than the first nine months of 1993. Engine shipments for all markets in the comparative reporting periods were: Third Quarter Nine Months 1994 1993 1994 1993 ______ ______ _______ _______ Midrange engines 46,900 32,000 144,500 119,500 Heavy-duty engines 24,500 20,200 73,400 64,500 High-horsepower engines 2,100 2,300 6,600 6,500 ______ ______ _______ _______ Total engine shipments 73,500 54,500 224,500 190,500 In the third quarter and first nine months of 1994, sales of filters, turbochargers and electronic controls were 22 percent and 9 percent higher, respectively, than the comparable periods of 1993. The increase in sales of Fleetguard, Holset and Cummins Electronics during 1994 was due primarily to demand worldwide for the Company's filter products, which were approximately 15 percent higher in the third quarter of 1994, compared to the third quarter of 1993, and increased demand for turbochargers. GROSS PROFIT ____________ In the third quarter and first nine months of 1994, the Company's gross profit percentage was 25.5 percent and 24.9 percent of net sales, respectively, compared to 24.2 percent and 24.0 percent in the comparative periods of 1993. The key factor contributing to the improved margin in 1994 was the increase in demand for the Company's products in all key domestic and international markets. The cost of product coverage programs, which includes both warranty and extended coverage programs, was 2.0 percent of net sales in the third quarter of 1994, compared to 2.3 percent in the third quarter of 1993. When the Company introduces new products, it typically uses higher accrual rates for these programs. Actual claims experience for the 1994 products has confirmed that these engines are performing well in the field. The Company adjusted its accrual rates accordingly, resulting in lower product coverage expense in the third quarter of 1994. In the first nine months of 1994, the cost of product coverage programs was 2.4 percent of net sales, compared to 2.3 percent in the first nine months of 1993. OPERATING EXPENSES __________________ Selling and administrative expenses of $161.2 in the third quarter of 1994 and $470.6 in the first nine months of 1994 were $22.1 and $45.5 higher, respectively, than the corresponding periods of 1993. The increase in expenditures in 1994 was primarily attributable to variable operating expenses related to the higher sales volumes. The increase of $9.6 and $18.4 million in research and engineering expenses in the third quarter and first nine months of 1994, compared to the respective periods of 1993, was due to continued expenditures for fuel systems and for ongoing product development. INTEREST EXPENSE ________________ Interest expense was $4.6 in the third quarter of 1994 and $13.7 in the first nine months of 1994, compared to $9.0 and $27.7 in the respective periods of 1993. The decrease in interest expense in 1994 was due to the Company's early retirement and redemption of debt obligations during 1993. OTHER INCOME AND EXPENSE ________________________ Other income and expense includes a variety of items, such as translation, interest income, earnings of unconsolidated companies and royalty income. Income of $3.1 in the third quarter of 1994 was related to foreign exchange gains, interest income and technical fees. PROVISION FOR INCOME TAXES __________________________ As disclosed in NOTE 2 to the CONSOLIDATED FINANCIAL STATEMENTS, the Company reduced its valuation allowance for tax benefit carryforwards approximately $32 in the first nine months of both 1994 and 1993. The tax provision in the third quarter of 1993 included a one-time credit of $4.4 resulting from the Omnibus Budget Reconciliation Act of 1993. CASH FLOW AND FINANCIAL CONDITION _________________________________ Key elements of the CONSOLIDATED STATEMENT OF CASH FLOWS were: First Nine Months 1994 1993 ______ ______ Net cash provided by operating activities $233.6 $143.7 Net cash used for investing activities (142.4) (97.5) ______ ______ Net cash flows from operating and investing activities 91.2 46.2 Net cash used for financing activities ( 2.7) (45.0) Effect of exchange rate changes on cash 1.8 .3 ______ _____ Net change in cash and cash equivalents $ 90.3 $ 1.5 ______ _____ ______ _____ The Company's cash reserves increased by $90.3 during the first nine months of 1994 to $167.6. During the first nine months of 1994, the Company generated cash flows from operating activities of $233.6, compared to $143.7 in the first nine months of 1993, due to improved earnings and net working capital requirements. Investing activities required net cash resources of $142.4 for capital expenditures and investments in and advances to affiliates and unconsolidated companies in the first nine months of 1994. As disclosed in NOTE 5 to the CONSOLIDATED FINANCIAL STATEMENTS, the Company called for redemption of its preference stock on January 24, 1994. In lieu of accepting the cash redemption price, holders elected to convert their shares of preference stock into common stock of the Company. Total indebtedness (including the guaranteed notes of the ESOP Trust) was $254.2 million at the end of the third quarter of 1994. The Company's debt-to-capital ratio was 20.1 percent at the end of the third quarter of 1994, compared to 22.3 percent at December 31, 1993. As disclosed in NOTE 4 to the CONSOLIDATED FINANCIAL STATEMENTS, the Company amended its $300 revolving credit agreement to extend the term to five years and to make certain other changes. On January 25, 1994, Moody's Investors Service upgraded the ratings of the senior debt of the Company to investment grade (from Ba1 to Baa2). Moody's stated that the action reflected the favorable intermediate- term outlook for the Company's sales and operating performance as a result of the Company's stronger and more diversified customer base, the expansion of its international presence and better cost controls. As disclosed in NOTE 6 to the CONSOLIDATED FINANCIAL STATEMENTS, on October 11, 1994, the Board of Directors increased Cummins' quarterly common stock dividend from 12.5 cents per share to 25 cents per share and authorized repurchase by the Company of up to 2.5 million shares of its common stock. PART II. OTHER INFORMATION ___________________________ Item 6. Exhibits and Reports on Form 8-K: __________________________________________ (a) See the Index to Exhibits on Page 13 for a list of exhibits filed herewith. (b) The Company was not required to file a Form 8-K during the third quarter of 1994. SIGNATURES __________ Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CUMMINS ENGINE COMPANY, INC. By: /s/John McLachlan ~~~~~~~~~~~~~~~~~ John McLachlan Vice President - Corporate Controller (Chief Accounting Officer) October 28, 1994 CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES ______________________________________________ INDEX TO EXHIBITS _________________ Page No. ________ 3(b) By-laws of Cummins Engine Company, Inc., as amended and restated effective as of August 12, 1994 (filed herewith) 14 10(b) Five-year Performance Plan (filed herewith) 29 10(d) Supplemental Life Insurance and Deferred Income Plan (filed herewith) 35 10(h) Key Executive Compensation Protection Plan (filed herewith) 43 10(i) Excess Benefit Retirement Plan (filed herewith) 47 11 Schedule of Computation of Per Share Earnings for the Third Quarter and Nine Months Ended October 2, 1994 and October 3, 1993 (filed herewith) 53 27 Financial Data Schedule 54 4(b) Amended and Restated Credit Agreement (filed herewith) 55