UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 CUMMINS ENGINE COMPANY, INC. ____________________________ For the Quarter Ended July 2, 1995 Commission File Number 1-4949 ____________ ______ Indiana 35-0257090 _______ __________ (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 500 Jackson Street, Box 3005 ____________________________ Columbus, Indiana 47202-3005 _________________ __________ (Address of Principal Executive Offices) (Zip Code) 812-377-5000 ____________ Registrant's Telephone Number Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months and (2) has been subject to such filing requirements for the past 90 days: Yes [x] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of July 2, 1995, the number of shares outstanding of the registrant's only class of common stock was 40.5 million. TABLE OF CONTENTS _________________ Page No. ________ PART I. FINANCIAL INFORMATION ______________________________ Item 1. Financial Statements Consolidated Statement of Earnings for the Second 3 Quarter and First Half Ended July 2, 1995 and July 3, 1994 Consolidated Statement of Financial Position at 4 July 2, 1995 and December 31, 1994 Consolidated Statement of Cash Flows for the First 5 Half Ended July 2, 1995 and July 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 11 Item 6. Exhibits and Reports on Form 8-K 11 Index to Exhibits 12 CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF EARNINGS FOR THE SECOND QUARTER AND FIRST HALF ENDED JULY 2, 1995 AND JULY 3, 1994 Unaudited (Millions, Except per Share Amounts) _________________________________________________________________________ Second Quarter First Half ________________ ________________ 1995 1994 1995 1994 ______ ______ ______ ______ NET SALES $1,361 $1,205 $2,695 $2,304 Cost of goods sold 1,021 908 2,012 1,736 ______ ______ ______ ______ GROSS PROFIT 340 297 683 568 Selling & administrative expenses 181 160 364 309 Research & engineering expenses 67 56 133 110 Interest expense 3 5 7 9 Other (income) expense, net (1) - 2 - _______ ______ ______ ______ Earnings before income taxes 90 76 177 140 Provision for income taxes 21 10 41 19 ______ ______ ______ ______ NET EARNINGS $ 69 $ 66 $ 136 $ 121 ______ ______ ______ ______ ______ ______ ______ ______ Earnings per share $ 1.69 $ 1.58 $ 3.32 $ 2.94 Cash dividends declared per share .25 .125 .50 .25 CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF FINANCIAL POSITION Unaudited (Millions, Except per Share Amounts) ____________________________________________ 7/2/95 12/31/94 ______ ________ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 93 $ 147 Receivables less allowances of $11 & $10 613 504 Inventories 580 515 Other current assets 131 132 ______ ______ 1,417 1,298 INVESTMENTS AND OTHER ASSETS 221 190 PROPERTY, PLANT & EQUIPMENT less accumulated depreciation of $1,330 and $1,279 1,113 1,090 INTANGIBLES, DEFERRED TAXES & DEFERRED CHARGES 128 128 ______ _____ TOTAL ASSETS $2,879 $2,706 ______ ______ ______ ______ LIABILITIES AND SHAREHOLDERS' INVESTMENT CURRENT LIABILITIES: Loans payable $ 25 $ 41 Current maturities of long-term debt 37 37 Accounts payable 357 322 Other current liabilities 513 440 ______ ______ 932 840 ______ ______ LONG-TERM DEBT 154 155 ______ ______ OTHER LIABILITIES 651 639 ______ ______ SHAREHOLDERS' INVESTMENT: Common stock, $2.50 par value, 43.8 shares issued 109 109 Additional contributed capital 923 927 Retained earnings 348 232 Common stock in treasury, at cost, 3.3 and 2.2 shares (119) (72) Unearned ESOP compensation ( 51) (55) Cumulative translation adjustments ( 68) (69) ______ ______ 1,142 1,072 ______ ______ TOTAL LIABILITIES & SHAREHOLDERS' INVESTMENT $2,879 $2,706 ______ ______ ______ ______ CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Unaudited (Millions) ____________________________________ First Half Ended _____________________ 7/2/95 7/3/94 ______ ______ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $136 $121 ____ ____ Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 70 62 Accounts receivable (110) (45) Inventories ( 60) (60) Accounts payable and accrued expenses 101 84 Income taxes payable 8 - Other 19 9 ____ ____ Total adjustments 28 50 ____ ____ Net cash provided by operating activities 164 171 ____ ____ CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment: Additions ( 84) (76) Disposals 2 3 Investments in and advances to affiliates and unconsolidated companies ( 45) ( 6) Other ( 1) - _____ _____ Net cash used in investing activities (128) (79) _____ _____ NET CASH FLOWS FROM OPERATING & INVESTING ACTIVITIES 36 92 ____ ____ CASH FLOWS FROM FINANCING ACTIVITIES: Payments on borrowings ( 3) ( 3) Net borrowings under credit agreements ( 16) ( 3) Payments of dividends ( 20) (10) Repurchases of common stock ( 53) - Other 1 ( 5) _____ ____ Net cash used for financing activities ( 91) (21) _____ ____ EFFECT OF EXCHANGE RATE CHANGES ON CASH 1 2 ____ ___ NET CHANGE IN CASH & CASH EQUIVALENTS ( 54) 73 Cash & cash equivalents at beginning of year 147 77 ____ ____ CASH & CASH EQUIVALENTS AT END OF FIRST HALF $ 93 $150 ____ ____ ____ ____ CUMMINS ENGINE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited __________________________________________ NOTE 1. ACCOUNTING POLICIES: The Consolidated Financial Statements for the interim periods ended July 2, 1995 and July 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 half of 1995 and 1994, the Company recognized approximately $21 million and $25 million, respectively, 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 2,500,000 shares of its common stock. During the first half of 1995, the Company repurchased on the open market 1,177,000 shares at an aggregate purchase price of $53 million, or average price of $44.86 per share. The Company repurchased 103,100 shares at an aggregate purchase price of $4 million, 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 40.8 million in the second quarter of 1995 and 41.0 million in the first half of 1995. The weighted-average number of shares was 41.7 million in the second quarter of 1994 and 41.1 million in the first half of 1994. CUMMINS ENGINE COMPANY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION _____________________________________________ OVERVIEW ________ Cummins continued to benefit from strong demand in most markets in the second quarter of 1995, which resulted in record sales of $1.4 billion, 13 percent higher than the second quarter of 1994. In the first half of 1995, the Company's net sales were $2.7 billion, 17 percent higher than the first half of 1994. The Company shipped 180,600 engines in the first half of 1995, a 20- percent increase over first-half 1994. Second Quarter First Half _______________ ________________ 1995 1994 1995 1994 ______ ______ _______ _______ Midrange engines 60,400 52,600 118,500 97,600 Heavy-duty engines 28,900 25,900 57,300 48,900 High-horsepower engines 2,400 2,600 4,800 4,500 ______ ______ _______ _______ Total engine shipments 91,700 81,100 180,600 151,000 ______ ______ _______ _______ ______ ______ _______ _______ The Company also had record earnings before income taxes of $90 million in the second quarter of 1995, $14 million (18 percent) higher than the second quarter of 1994. The Company's net earnings were $69 million, or $1.69 per share, in the second quarter of 1995, compared to $66 million, or $1.58 per share, in the second quarter of 1994. For the first half of 1995, net earnings were $136 million, or $3.32 per share, compared to $121 million, or $2.94 per share, in the first half of 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: Second Quarter First Half ______________ _____________ Percent of Net Sales 1995 1994 1995 1994 ____________________ ______ _____ _____ _____ Net sales 100.0 100.0 100.0 100.0 Cost of goods sold 75.0 75.3 74.7 75.3 _____ _____ _____ _____ Gross profit 25.0 24.7 25.3 24.7 Selling and administrative expenses 13.3 13.3 13.5 13.4 Research and engineering expenses 4.9 4.6 4.9 4.8 Interest expense .2 .4 .3 .4 Other (income) expense, net - - .1 - ______ ______ _____ _____ Earnings before income taxes 6.6 6.4 6.5 6.1 Provision for income taxes 1.5 .9 1.5 .9 _____ _____ _____ _____ Net earnings 5.1 5.5 5.0 5.2 _____ _____ _____ _____ _____ _____ _____ _____ Net Sales _________ Sales for each of the Company's markets for the comparative reporting periods were: Second Quarter First Half ______________ ______________ 1995 1994 1995 1994 ______ ______ ______ ______ Millions ________ Heavy-duty truck $ 398 $ 354 $ 794 $ 689 Midrange truck 159 133 303 231 Power generation 278 268 555 498 Bus and light commercial vehicles 180 146 363 302 Industrial products 172 143 330 267 Marine 25 21 46 38 Government 9 16 20 33 Fleetguard, Holset and Cummins Electronics 140 124 284 246 ______ ______ ______ ______ Net sales $1,361 $1,205 $2,695 $2,304 ______ ______ ______ ______ ______ ______ ______ ______ Heavy-duty truck engine sales of $398 million in the second quarter and $794 million in the first half of 1995 were 12 percent and 15 percent higher than the respective periods of 1994. The increase in sales during 1995 was due to demand for engines for the North American heavy- duty truck market. Year-to-date, Cummins' share of this market was above 35 percent. Demand was strong in other markets, with the exception of Mexico, where engine sales have been at very low levels in 1995 due to economic conditions in that country. Midrange truck engine sales of $159 million in the second quarter and $303 million in the first half of 1995 were 20 percent and 31 percent higher, respectively, than the comparable periods of 1994. Engine shipments to Ford, where Cummins is the exclusive diesel power in its medium-duty trucks, were at record levels in the second quarter. Shipments for international markets, which represented approximately 30 percent of the Company's midrange truck engine sales, have been higher in the first half of 1995 due to increased demand in the United Kingdom and in Brazil. Sales to the power generation market continued to represent 20 percent of the Company's net sales. Sales of $278 million to this market in the second quarter and $555 million in the first half of 1995 were 4 percent and 11 percent higher than the respective periods of 1994. The increase in sales in 1995 was due to sales of Power Group International, which was acquired at the beginning of the fourth quarter of 1994. In the bus and light commercial vehicle market, the Company's sales of $180 million in the second quarter of 1995, were 23 percent higher than second-quarter 1994. Engines for the Chrysler Dodge Ram pickup have been at record levels in the first half of 1995. Engine shipments for bus markets were 26 percent higher than the first-half 1994 level, primarily due to demand for transit buses worldwide. Sales to industrial markets were 20 percent higher in the second quarter and 24 percent higher in the first half of 1995, compared to corresponding reporting periods of 1994. The increase in sales in 1995 was due to strong demand in worldwide construction markets and for US agricultural markets. Sales of Fleetguard, Holset and Cummins Electronics were approximately 15 percent higher in the first half of 1995, compared to the first half of 1994. The increase in sales of these subsidiaries during 1995 was due primarily to demand for the Company's filter products and turbochargers in international markets. Gross Profit ____________ In the second quarter of 1995, the Company's gross profit percentage was 25.0 percent of net sales, compared to 24.7 percent in the second quarter of 1994. In the first half of 1995, the gross profit percentage was 25.3 percent of net sales, compared to 24.7 percent in the first half of 1994. The key factor contributing to the improved margin in 1995 was the increase in demand for the Company's products, which represented more than 60 percent of the increase in gross profit. Other factors included the effects of cost-improvement measures and the full-year effect of price increases subsequent to the first quarter of 1994. Product coverage expense was 2.5 percent of sales in the second quarter and first half of 1995, compared to 2.5 percent in the second quarter and 2.6 percent in the first half of 1994. Operating Expenses __________________ Selling and administrative expenses of $181 million in the second quarter of 1995 and $364 million in the first half of 1995 were $21 million and $55 million higher, respectively, than the corresponding periods of 1994. The increase in expenditures in 1995 was primarily attributable to expenses related to the higher sales volumes. Research and engineering expenses were 4.9 percent of net sales in the second quarter and first half of 1995, compared to 4.6 percent in the second quarter and 4.8 percent in the first half of 1994. The increase in the first half of 1995 was associated with investments in fuel systems and new products. Interest and Other Income Expense _________________________________ Interest expense in the second quarter and first half of 1995 was $2 million lower than the comparable periods of 1994 due to the lower level of short-term borrowings. Other income and expense includes foreign exchange gains and losses, interest income, earnings and losses of unconsolidated companies and royalty income. 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 $21 million in the first half of 1995 and $25 million in the first half of 1994. CASH FLOW AND FINANCIAL CONDITION _________________________________ Key elements of the Consolidated Statement of Cash Flows were: First Half ________________ Millions 1995 1994 ________ ____ ____ Net cash provided by operating activities $164 $171 Net cash used for investing activities (128) (79) _____ _____ Net cash flows from operating and investing activities 36 92 Net cash used for financing activities (91) (21) Effect of exchange rate changes on cash 1 2 _____ ____ Net change in cash and cash equivalents $(54) $ 73 _____ ____ _____ ____ During the first half of 1995, the Company generated cash flows from operating activities of $164 million, compared to $171 million in the first half of 1995. A higher level of working capital was required in 1995 due to the increase in demand for the Company's products. Investing activities required net cash resources of $128 million for capital expenditures and investments in unconsolidated companies. Cash and cash equivalents at the end of the first half totaled $93 million. Total indebtedness (including the guaranteed notes of the ESOP Trust) was $154 million at the end of the second quarter of 1995. The Company's debt-to-capital ratio was 16 percent at the end of the second quarter of 1995 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. In June 1995, Moody upgraded its rating of the Company's senior debt to Baa1 from Baa2. As disclosed more fully in Note 3 to the Consolidated Financial Statements, the Company repurchased on the open market 1,177,000 shares of its common stock at an average price of $44.86 per share in the first half of 1995. PART II. OTHER INFORMATION ___________________________ Item 1. Legal Proceedings: ___________________________ On July 18, 1995, the US District Court for the Southern District of Indiana granted plaintiff motion to certify Warkel, etal. v. Cummins Engine Company, Inc., etal., as a class action on behalf of persons who purchased the Company's common stock between May 1, 1989 and October 11, 1989. The Company believes the allegations are without merit and intends to defend the action vigorously. Item 6. Exhibits and Reports on Form 8-K: __________________________________________ (a) See the Index to Exhibits on Page 12 for a list of exhibits filed herewith. (b) The Company was not required to file a Form 8-K during the second 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 _________________ John McLachlan Vice President - Corporate Controller (Chief Accounting Officer) July 31, 1995 CUMMINS ENGINE COMPANY, INC. ____________________________ INDEX TO EXHIBITS _________________ Page No. ________ 11 Schedule of Computation of Per Share Earnings for the Second Quarter and First Half Ended July 2, 1995 and July 3, 1994 (filed herewith) 12 27 Financial Data Schedule (filed herewith) 13