UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 CUMMINS ENGINE COMPANY, INC. ____________________________ For the Quarter Ended April 2, 1995 Commission File Number 1-4949 _____________ ______ Indiana 35-0257090 _______ __________ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 500 Jackson Street, Box 3005 ____________________________ Columbus, Indiana 47202-3005 _________________ __________ (Address of Principal Executive Offices) (Zip Code) 812-377-5000 ____________ Registrant's Telephone Number Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months and (2) has been subject to such filing requirements for the past 90 days: Yes [x] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of April 2, 1995, the number of shares outstanding of the registrant's only class of common stock was 40.8 million. TABLE OF CONTENTS _________________ Page No. ________ PART I. FINANCIAL INFORMATION ______________________________ Item 1. Financial Statements Consolidated Statement of Earnings for the First 3 Quarter Ended April 2, 1995 and April 3, 1994 Consolidated Statement of Financial Position at 4 April 2, 1995 and December 31, 1994 Consolidated Statement of Cash Flows for the First 5 Quarter Ended April 2, 1995 and April 3, 1994 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of 7 Operations and Financial Condition PART II. OTHER INFORMATION ___________________________ Item 1. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 Item 6. Exhibits and Reports on Form 8-K 12 Index to Exhibits 13 CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS Unaudited (Millions, Except per Share Amounts) ______________________________________________ First Quarter Ended 4/2/95 4/3/94 _______ ______ Net sales $1,334 $1,099 Cost of goods sold 991 828 ______ ______ Gross profit 343 271 Selling & administrative expenses 183 149 Research & engineering expenses 66 54 Interest expense 4 4 Other expense 3 - ______ ______ Earnings before income taxes 87 64 Provision for income taxes 20 9 ______ ______ Net earnings $ 67 $ 55 ______ ______ ______ ______ Earnings per share $ 1.63 $ 1.35 Cash dividends declared per share .25 .125 CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION Unaudited (Millions, Except per Share Amounts) ______________________________________________ 4/2/95 12/31/94 ______ ________ Assets Current assets: Cash and cash equivalents $ 95 $ 147 Receivables less allowances of $11 & $10 612 504 Inventories 555 515 Other current assets 133 132 ______ ______ 1,395 1,298 Investments and other assets 184 190 Property, plant & equipment less accumulated depreciation of $1,308 & $1,279 1,102 1,090 Intangibles, deferred taxes & deferred charges 128 128 ______ ______ Total assets $2,809 $2,706 ______ ______ ______ ______ Liabilities and shareholders' investment Current liabilities: Loans payable $ 40 $ 41 Current maturities of long-term debt 37 37 Accounts payable 351 322 Other current liabilities 477 440 ______ ______ 905 840 ______ ______ Long-term debt 153 155 ______ ______ Other liabilities 648 639 ______ ______ Shareholders' investment: Common stock, $2.50 par value, 43.8 shares issued 109 109 Additional contributed capital 924 927 Retained earnings 289 232 Common stock in treasury, at cost, 3.0 & 2.2 shares (109) (72) Unearned ESOP compensation ( 51) (55) Cumulative translation adjustments ( 59) (69) ______ ______ 1,103 1,072 ______ ______ Total liabilities & shareholders' investment $2,809 $2,706 ______ ______ ______ ______ CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Unaudited (Millions) ______________________________________________ First Quarter Ended 4/2/95 4/3/94 ______ ______ Cash flows from operating activities: Net earnings $ 67 $ 55 _____ _____ Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 35 29 Accounts receivable (105) (45) Inventories ( 32) (44) Accounts payable and accrued expenses 64 51 Other 9 7 _____ _____ Total adjustments ( 29) ( 2) _____ _____ Net cash provided by operating activities 38 53 _____ _____ Cash flows from investing activities: Property, plant and equipment: Additions ( 32) (34) Disposals 1 3 Investments in and advances to affiliates and unconsolidated companies ( 5) (16) _____ ____ Net cash used in investing activities ( 36) (47) _____ _____ Net cash flows from operating & investing activities 2 6 _____ _____ Cash flows from financing activities: Payments on borrowings ( 2) ( 2) Net borrowings under credit agreements ( 2) 24 Payments of dividends ( 10) ( 5) Repurchases of common stock ( 37) - Other ( 4) ( 5) _____ _____ Net cash (used for) provided by financing activities ( 55) 12 _____ _____ Effect of exchange rate changes on cash 1 - _____ _____ Net change in cash & cash equivalents ( 52) 18 Cash & cash equivalents at beginning of year 147 77 _____ _____ Cash & cash equivalents at end of quarter $ 95 $ 95 _____ _____ _____ _____ 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 April 2, 1995 and April 3, 1994 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 quarter of both 1995 and 1994, the Company recognized approximately $11 related to a reduction in its valuation allowance for tax benefit carryforwards. NOTE 3. Stock Repurchase Program: In October 1994, the Board of Directors authorized repurchase by the Company of up to 2.5 million shares of its common stock. During the first quarter of 1995, the Company repurchased on the open market 850,900 shares at an aggregate purchase price of $37, or average price of $44.36 per share. The Company repurchased 103,100 shares at an aggregate purchase price of $4, or average price of $42.47 per share, in 1994. NOTE 4. Earnings per Share: Earnings per share of common stock are computed by dividing net earnings by the weighted-average number of common shares outstanding during the period. The weighted-average number of shares, which includes the exercise of certain stock options granted to employees, was 41.3 million in the first quarter of 1995 and 40.3 million in the first quarter of 1994. CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Dollars In Millions, Unless Otherwise Stated) ________________________________________________________ OVERVIEW ________ Cummins continued to benefit from strong demand in most markets in the first quarter of 1995. The Company's record sales of $1,334 in the first quarter of 1995 were 21 percent higher than the first quarter of 1994. The Company shipped 88,900 engines in the first quarter of 1995, a 27- percent increase over first-quarter 1994: First Quarter 1995 1994 ______ ______ Midrange engines 58,100 45,000 Heavy-duty engines 28,500 23,000 High-horsepower engines 2,300 1,900 ______ ______ Total engine shipments 88,900 69,900 ______ ______ ______ ______ The Company also had record earnings before income taxes of $87 in the first quarter of 1995. Net earnings were $67, or $1.63 per share, in the first quarter of 1995, compared to $55, or $1.35 per share, in the first quarter of 1994. The Company's effective tax rate increased to 23 percent in 1995 from 14 percent in 1994. RESULTS OF OPERATIONS _____________________ The percentage relationships between net sales and other elements of the Company's Consolidated Statement of Earnings for the comparative reporting periods were: First Quarter Percent of Net Sales 1995 1994 ____________________ _____ _____ Net sales 100.0 100.0 Cost of goods sold 74.3 75.4 _____ _____ Gross profit 25.7 24.6 Selling and administrative expenses 13.7 13.5 Research and engineering expenses 4.9 4.9 Interest expense .3 .4 Other expense .3 - _____ _____ Earnings before income taxes 6.5 5.8 Provision for income taxes 1.5 .8 _____ _____ Net earnings 5.0 5.0 _____ _____ _____ _____ Net Sales _________ Sales for each of the Company's markets for the comparative reporting periods were: First Quarter 1995 First Quarter 1994 Dollars Percent Dollars Percent _______ _______ _______ _______ Heavy-duty truck 396 30 335 30 Midrange truck 144 11 98 9 Power generation 277 21 230 21 Bus & light commercial vehicles 183 13 156 14 Industrial products 158 12 124 11 Government 21 1 17 2 Marine 11 1 17 2 Fleetguard, Holset and Cummins Electronics 144 11 122 11 _____ ___ _____ ___ Net sales 1,334 100 1,099 100 _____ ___ _____ ___ _____ ___ _____ ___ Sales of $396 to the heavy-duty truck market in the first quarter of 1995 were 18 percent higher than in the first quarter of 1994. This increase in sales was primarily attributable to demand for engines for the North American heavy-duty truck market. Cummins increased its share of this market to nearly 36 percent in the first quarter of 1995. Shipments of the Company's heavy-duty truck engines for international markets in the first quarter of 1995 were essentially level with the first quarter of 1994. While the truck market in the United Kingdom continued to improve in the first quarter of 1995, demand for heavy- duty engines in Mexico was reduced significantly due to economic conditions in that country. Midrange truck engine sales in the first quarter of 1995 were $46 higher than in the first quarter of 1994. Engine shipments for the North American market increased significantly, with shipments to Ford 42 percent higher than the first-quarter 1994. Shipments for international markets, which represented approximately 30 percent of the Company's midrange truck engine sales, also were higher due to increased demand in the United Kingdom and in Brazil. Power generation sales of $277 were $47 higher in the first quarter of 1995, up 20 percent over first-quarter 1994. Sales to this market represented 21 percent of the Company's net sales. The increase in the first quarter of 1995 was due to sales of Power Group International, which was acquired at the beginning of the fourth quarter of 1994, and as a result of increased sales of industrial gensets. In the bus and light commercial vehicles market, the Company's sales of $183 were 17 percent higher than first-quarter 1994. Engines for the Chrysler Dodge Ram pickup were at record levels in the first quarter of 1995, 17 percent higher than in the first quarter of 1994. Engine shipments for bus markets were 35 percent higher than year-ago levels, primarily for transit buses in the United States. Sales of $158 for industrial products were $34 higher, with engine shipments up 27 percent. Industrial product sales continue to be strong worldwide, particularly for construction applications. Fleetguard, Holset and Cummins Electronics represented 11 percent of the Company's net sales. In the first quarter of 1995, sales of filters, turbochargers and electronic controls were 18 percent higher than in the first quarter of 1994. Gross Profit ____________ The Company's gross profit percentage was 25.7 percent in the first quarter of 1995, compared to 24.6 percent in the first quarter of 1994. The key factor contributing to the improved margin was the increase in demand for the Company's products, which represented over 70 percent of the increase in gross profit. Other factors included the effects of cost-improvement measures to improve production systems and throughput and the full-year effect of price increases subsequent to the first quarter of 1994. Product coverage was 2.5 percent of sales, compared to 2.7 percent of sales in the first quarter of 1994. Operating Expenses __________________ Selling and administrative expenses were $183, or 13.7 percent of net sales, in the first quarter of 1995, compared to $149, or 13.5 percent of net sales, in the first quarter of 1994. Research and engineering expenses were 4.9 percent of net sales in both first-quarter periods. Interest and Other Expenses ___________________________ Interest expense of $4 in the first quarter of 1995 was level with the first quarter of 1994. Other expense includes a variety of items, such as foreign exchange gains and losses, interest income, earnings and losses of unconsolidated companies and royalty income. In the first quarter of 1995, expense of $3 was due to foreign exchange translation and unconsolidated companies. 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 $11 in both first-quarter reporting periods. CASH FLOW AND FINANCIAL CONDITION _________________________________ Key elements of the Consolidated Statement of Cash Flows were: 1995 1994 ______ ______ Net cash provided by operating activities $ 38 $ 53 Net cash used in investing activities (36) (47) _____ _____ Net cash flows from operating and investing activities 2 6 Net cash (used for) provided by financing activities (55) 12 Effect of exchange rate changes on cash 1 - ____ ____ Net change in cash and cash equivalents $(52) $ 18 _____ ____ _____ ____ During the first quarter of 1995, the Company generated cash flows from operating activities of $38, compared to $53 in the first quarter of 1994. A higher level of working capital in the first quarter of 1995 was required due to the increase in demand for the Company's products. Investing activities required net cash resources of $36, primarily for capital expenditures. Cash and cash equivalents totaled $95 at the end of the first quarter of 1995. Total indebtedness (including the guaranteed notes of the ESOP Trust) was $230 at the end of the first quarter of 1995. The Company's debt- to-capital ratio was 17 percent at the end of the first quarter and 18 percent at December 31, 1994. In March 1995, Standard & Poor upgraded the ratings of the Company's senior debt to BBB+ from BBB. As disclosed more fully in Note 3 to the Consolidated Financial Statements, the Company repurchased on the open market 850,900 shares of its common stock at an average price of $44.36 per share in the first quarter of 1995. PART II. OTHER INFORMATION ___________________________ Item 1. Legal Proceedings __________________________ On April 4, 1995, the U.S. Court of Appeals for the Seventh Circuit affirmed in part, reversed in part, and remanded in part the decision of the U.S. District Court for the Southern District of Indiana to dismiss all the claims of the Plaintiff Stransky with prejudice. The Company believes the allegations are without merit and intends to defend the action vigorously. Item 4. Submission of Matters to a Vote of Security Holders ____________________________________________________________ The Company held its annual meeting of security holders on April 4, 1995 at which security holders: (a) elected 15 directors of the Company for the ensuing year, (b) ratified the appointment of Arthur Andersen LLP as auditors for the year 1995, (c) approved the Cummins Engine Company, Inc. Senior Executive Bonus Plan and (d) approved the Cummins Engine Company, Inc. Senior Executive Three Year Performance Plan. Results of the voting in connection with each of the items were as follows: Voting on Directors: ____________________ For Withheld __________ ________ H. Brown 35,444,276 527,747 K. R. Dabrowski 35,637,811 334,212 R. Darnall 35,645,302 326,721 W. Y. Elisha 35,641,166 330,857 H. H. Gray 35,638,040 333,983 J. A. Henderson 35,644,768 327,255 D. G. Mead 34,981,818 990,205 J. I. Miller 35,641,643 330,380 W. I. Miller 35,645,026 326,997 D. S. Perkins 35,644,857 327,166 W. D. Ruckelshaus 35,639,254 332,769 H. B. Schacht 35,640,874 331,149 T. M. Solso 35,649,097 322,926 F. A. Thomas 35,638,367 333,656 J. L. Wilson 35,641,173 330,850 Ratify Appointment of Auditors: _______________________________ For Against Abstain __________ _______ _______ 35,699,840 125,209 146,974 Senior Executive Bonus Plan: ____________________________ For Against Abstain __________ _________ _______ 32,361,993 3,254,682 355,348 Senior Executive Three Year Performance Plan: _____________________________________________ For Against Abstain __________ _________ _______ 33,621,459 1,991,569 358,995 With regard to the election of directors, votes were cast in favor of or withheld from each nominee; votes that were withheld were excluded entirely from the vote and had no effect. Abstentions on all proposals (except the election of directors) were counted as present for purposes of determining the existence of a quorum regarding the item on which the abstention was voted. Abstentions on the adoption of the Senior Executive Bonus Plan and the Senior Executive Three Year Performance Plan (the "Plans") were treated as negative votes. Under the rules of the New York Stock Exchange, brokers who held shares in street name had the authority to vote on certain items when they did not receive instructions from beneficial owners. Brokers that did not receive instructions were entitled to vote on the election of directors and the adoption of the Plans. Under applicable Indiana law, a broker non-vote had no effect on the outcome of the election of directors or the approval of the Plans. 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 first quarter of 1995. 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 May 9, 1995 _________________ John McLachlan Vice President - Corporate Controller (Chief Accounting Officer) CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES ______________________________________________ INDEX TO EXHIBITS _________________ Page No. ________ 10(j) Performance Share Plan, as amended January 1989 14 (filed herewith) 10(l) Retirement Plan for Non-employee Directors, 22 effective September 1989 (filed herewith) 10(m) Stock Unit Appreciation Plan, effective October 26 1990 (filed herewith) 10(q) Three Year Performance Plan, effective December 30 1992 (filed herewith) 10(u) Senior Executive Bonus Plan (filed herewith) 35 10(v) Senior Executive Three Year Performance Plan 40 (filed herewith) 11 Schedule of Computation of Per Share Earnings 45 for the First Quarter ended April 2, 1995 and April 3, 1994 (filed herewith) 27 Financial Data Schedule 46