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 June 29, 1997 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 June 29, 1997, the number of shares outstanding of the registrant's only class of common stock was 42.0 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 June 29, 1997 and June 30, 1996 Consolidated Statement of Financial Position at 4 June 29, 1997 and December 31, 1996 Consolidated Statement of Cash Flows for the First 5 Half Ended June 29, 1997 and June 30, 1996 Notes to Consolidated Financial Statements 6 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 12 Index to Exhibits 13 CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF EARNINGS FOR THE SECOND QUARTER AND FIRST HALF ENDED JUNE 29, 1997 AND JUNE 30, 1996 Unaudited _____________________________________ Second Quarter First Half ________________ ________________ Millions, Except per Share Amounts 1997 1996 1997 1996 __________________________________ ______ ______ ______ ______ Net sales $1,396 $1,316 $2,700 $2,632 Cost of goods sold 1,072 1,016 2,090 2,016 ______ ______ ______ ______ Gross profit 324 300 610 616 Selling & administrative expenses 186 180 364 360 Research & engineering expenses 64 66 125 128 Net (income) expense from joint ventures and alliances (2) 3 (9) 5 Interest expense 7 4 12 8 Other (income) expense, net (5) (15) (12) (18) _______ ______ ______ ______ Earnings before income taxes 74 62 130 133 Provision for income taxes 21 18 36 40 ______ ______ ______ ______ Net earnings $ 53 $ 44 $ 94 $ 93 ______ ______ ______ ______ ______ ______ ______ ______ Earnings per share $ 1.39 $ 1.10 $ 2.45 $ 2.31 Cash dividends declared per share .275 .25 .525 .50 CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF FINANCIAL POSITION Unaudited ____________________________________________ Millions, Except per Share Amounts 6/29/97 12/31/96 __________________________________ _______ ________ Assets Current assets: Cash and cash equivalents $ 111 $ 108 Receivables 805 669 Inventories 633 587 Other current assets 201 189 ______ ______ 1,750 1,553 Investments and other assets 304 326 Property, plant & equipment less accumulated depreciation of $1,394 and $1,375 1,396 1,286 Intangibles, deferred taxes and deferred charges 207 204 ______ _____ Total assets $3,657 $3,369 ______ ______ ______ ______ Liabilities and shareholders' investment Current liabilities: Loans payable $ 38 $ 93 Current maturities of long-term debt 46 39 Accounts payable 406 380 Other current liabilities 624 509 ______ ______ 1,114 1,021 ______ ______ Long-term debt 468 283 ______ ______ Other liabilities 752 753 ______ ______ Shareholders' investment: Common stock, $2.50 par value, 47.8 and 43.9 shares issued 119 110 Additional contributed capital 1,100 929 Retained earnings 607 535 Common stock in treasury, at cost, 5.8 and 4.5 shares (227) (169) Common stock held in trust for employee benefit plans, 3.7 shares (178) - Unearned compensation (ESOP) ( 42) ( 46) Cumulative translation adjustments ( 56) ( 47) ______ ______ 1,323 1,312 ______ ______ Total liabilities and shareholders' investment $3,657 $3,369 ______ ______ ______ ______ CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Unaudited ____________________________________ First Half Ended _____________________ Millions 6/29/97 6/30/96 ________ _______ _______ Cash flows from operating activities: Net earnings $ 94 $ 93 ____ ____ Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 80 76 Restructuring actions ( 10) ( 23) Accounts receivable (140) (111) Inventories ( 49) ( 64) Accounts payable and accrued expenses 74 62 Income taxes payable 10 21 Other 8 ( 2) ____ _____ Total adjustments ( 27) ( 41) ____ ____ Net cash provided by operating activities 67 52 ____ ____ Cash flows from investing activities: Property, plant and equipment: Additions (205) (84) Disposals 8 18 Investments in joint ventures and alliances 2 40 Disposition of business activities 80 11 Other ( 3) 7 _____ _____ Net cash used in investing activities (118) ( 8) _____ _____ Net cash flows (used for) provided from operating and investing activities ( 51) 44 _____ ___ Cash flows from financing activities: Proceeds from borrowings 201 160 Payments on borrowings ( 10) ( 8) Net borrowings under credit agreements ( 52) (44) Repurchase of common stock ( 58) (21) Dividend payments ( 22) (20) Other ( 4) ( 2) _____ ____ Net cash provided from financing activities 55 65 ____ ___ Effect of exchange rate changes on cash ( 1) - _____ ___ Net change in cash and cash equivalents 3 109 Cash & cash equivalents at beginning of year 108 60 ____ ____ Cash & cash equivalents at end of first half $111 $169 ____ ____ ____ ____ CUMMINS ENGINE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited __________________________________________ Note 1. Accounting Policies: The Consolidated Financial Statements for the interim periods ended June 29, 1997 and June 30, 1996 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. Note 3. Long-term Debt: In February 1997, the Company issued $120 million of 6.75 percent debentures that mature in 2027. Net proceeds were used principally to repay commercial paper indebtedness incurred to repurchase shares of common stock. Holders of the debentures have a 1-time option in 2007 to redeem the debentures. The Company also has a recall right after ten years. In July 1997, the Company filed a Shelf Registration Statement with the Securities and Exchange Commission in the amount of $250 million 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. Note 4. Common Stock: In January 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 are not used in the calculation of the Company's earnings per share until distributed from the trust and allocated to a benefit plan. The Company also repurchased 1.3 million shares of its common stock from Ford Motor Company in January 1997 and was authorized by the Board of Directors to repurchase an additional 1.7 million shares from time to time in the open market. In April 1997, the Company announced an increase in its quarterly common stock dividend from 25 cents per share to 27.5 cents, effective with the dividend payment in June 1997. NOTE 5. 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 excludes shares of stock held by the employee benefits trust until distributed and allocated to a benefit plan, was 38.4 million in the second quarter and first half of 1997. The weighted-average number of shares was 40.1 million in the second quarter of 1996 and 40.2 million shares in the first half of 1996. The Financial Accounting Standards Board has released a new accounting rule on the calculation of earnings per share that is effective at year-end 1997. This rule, which does not permit early adoption, is not expected to have a material effect on the Company's reported earnings per share. CUMMINS ENGINE COMPANY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, CASH FLOW AND FINANCIAL CONDITION ________________________________________________________ OVERVIEW ________ Record sales of $1.4 billion in the second quarter of 1997 were 6 percent higher than the second quarter of 1996. The increase was primarily due to record quarterly sales to industrial markets and improvements in the heavy-duty truck market. For the first half, the Company's sales were $2.7 billion, 3 percent higher than the first half of 1996. The Company shipped 174,500 engines in the first half of 1997, the same as the first half of 1996. Increased shipments for industrial, power generation and bus markets in the first half of 1997 offset declines for truck markets as the Company's broader market and geographical revenue base continued to pay off. Second Quarter First Half _______________ ________________ Engine Shipments 1997 1996 1997 1996 ________________ ______ ______ _______ _______ Midrange 62,800 61,100 125,800 123,600 Heavy-duty 23,000 21,900 43,800 46,400 High-horsepower 2,600 2,400 4,900 4,500 ______ ______ _______ _______ Total 88,400 85,400 174,500 174,500 ______ ______ _______ _______ ______ ______ _______ _______ Net earnings were $53 million, or $1.39 per share, in the second quarter of 1997, compared to $44 million, or $1.10 per share, in the second quarter of 1996. This was the first time since the second quarter of 1995 that net earnings exceeded the year-ago quarter. For the first half of 1997, net earnings were $94 million, or $2.45 per share, compared to $93 million, or $2.31 per share, in the first half of 1996. 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 1997 1996 1997 1996 ____________________ _____ _____ _____ _____ Net sales 100.0 100.0 100.0 100.0 Cost of goods sold 76.8 77.2 77.4 76.6 _____ _____ _____ _____ Gross profit 23.2 22.8 22.6 23.4 Selling and administrative expenses 13.3 13.7 13.5 13.7 Research and engineering expenses 4.6 5.0 4.6 4.9 Net (income) expense from joint ventures and alliances (.1) .2 (.3) .2 Interest expense .5 .3 .4 .3 Other (income) expense, net (.4) (1.1) (.4) (.8) ______ ______ _____ _____ Earnings before income taxes 5.3 4.7 4.8 5.1 Provision for income taxes 1.5 1.4 1.3 1.6 _____ _____ _____ _____ Net earnings 3.8 3.3 3.5 3.5 _____ _____ _____ _____ _____ _____ _____ _____ Net Sales _________ Sales for each of the Company's markets for the comparative reporting periods were: Second Quarter First Half ______________ ______________ Dollars in Millions 1997 1996 1997 1996 ___________________ ______ ______ ______ ______ Automotive: Heavy-duty truck $ 331 $ 310 $ 626 $ 674 Midrange truck 143 154 275 315 Bus and light commercial vehicles 152 151 323 310 Power generation 302 308 577 560 Industrial 263 209 520 411 Filtration and other 205 184 379 362 ______ ______ ______ ______ Net sales $1,396 $1,316 $2,700 $2,632 ______ ______ ______ ______ ______ ______ ______ ______ Automotive __________ Sales of $331 million to the heavy-duty truck market in the second quarter of 1997 were 7 percent higher than a year ago, due to increased engine shipments in international markets. International engine shipments were almost 60 percent higher than the second quarter of 1996, due to stronger demand in Mexico. In North America, engine shipments were 3 percent lower than the second quarter of 1996 due to a smaller market size. Compared to the first half of 1996, sales of $626 million to the heavy-duty truck market were 7 percent lower in 1997, due to the lower market size in North America. However, order intake rates for the North American market have been trending upward, and engine shipments in the second quarter were 13 percent higher than the first quarter of 1997. In the second quarter and first half of 1997, sales for the midrange truck market were 7 percent and 13 percent lower than the comparative periods of 1996, due primarily to a decrease in demand for medium-duty trucks in North America. Midrange engines for international markets were 21 percent higher than the second quarter of 1996 and 16 percent higher than the first half of 1996. The increase in 1997 was in Brazil, Southeast Asia and Mexico. In the bus and light commercial vehicles market, sales of $152 million in the second quarter were level with the second quarter of 1996. The Company's sales to Chrysler were negatively impacted in the second quarter of 1997 because of a 4-week work stoppage at Chrysler. Engine shipments to Chrysler were 13 percent below the second quarter of 1996. However, demand for the Company's engines in North American bus markets remained strong in the second quarter of 1997, with engine shipments 25 percent higher than the second quarter of 1996 and 11 percent higher than the first half of 1996. Power Generation ________________ Sales to the power generation market continued to represent over 20 percent of the Company's net sales in the second quarter and first half of 1997. Sales of $302 million in the second quarter of 1997 were 2 percent below the second quarter of 1996. Power generation sales of $577 million in the first half of 1997 were 3 percent higher than the 1996 level. Industrial __________ Record sales of $263 million to industrial markets were 26 percent higher than second-quarter 1996, reflecting strong sales for construction equipment in North America and for international agricultural markets. Shipments for marine markets were 37 percent higher than the year-ago quarter. Filtration and Other ____________________ Sales of $205 million in the second quarter and $379 million in the first half for filtration and other products were 11 percent and 5 percent higher than the respective periods of 1996. The increase in 1997 was due primarily to higher sales of filtration products and an improvement in European markets for turbochargers. Gross Profit ____________ In the second quarter of 1997, the Company's gross profit percentage was 23.2 percent of net sales compared to 22.8 percent in the second quarter of 1996. In the second quarter of 1997, the company benefited from higher volume absorption and lower expenses associated with the restructuring actions. In the first half of 1997, the Company's gross profit percentage was 22.6 percent of net sales, compared to 23.4 percent in 1996. Product coverage expense was 2.7 percent of net sales in the second quarter and first half of 1997, compared to 2.9 percent in the second quarter and 2.7 percent in the first half of 1996. Operating Expenses __________________ Selling and administrative expenses of $186 million in the second quarter of 1997 and $364 million in the first half were 13.3 percent and 13.5 percent of net sales, respectively, compared to 13.7 percent of net sales in the second quarter and first half of 1996. The increase in absolute dollars in 1997 was primarily due to expenditures for new product launches, software and systems development, and volume- related marketing programs. In the second quarter and first half of 1997, research and engineering expenses of $64 million and $125 million, respectively, were slightly lower than the comparative periods of 1996. Net income from joint ventures and alliances was $2 million in the second quarter and $9 million in the first half of 1997. The increase in income over 1996 was due higher earnings and royalties from KCL and the joint ventures with Komatsu and Dongfeng and lower start-up losses at the Company's joint venture with Wartsila. Interest and Other Income and Expense _____________________________________ Interest expense of $7 million in the second quarter and $12 million in first half of 1997 was higher than the comparable periods of 1996 due to a higher level of debt in 1997. In the second quarter of 1997, other income was $10 million lower than the year-ago quarter, which included capital gains associated with various asset disposals. Provision for Income Taxes __________________________ The estimated effective tax rate for 1997 is 28 percent. This is lower than the US statutory tax rate of 35 percent, primarily because of lower taxes on US export sales and the incremental research tax credit that expired on May 31, 1997. CASH FLOW AND FINANCIAL CONDITION _________________________________ Key elements of the Consolidated Statement of Cash Flows were: First Half ________________ Dollars in Millions 1997 1996 ___________________ ____ ____ Net cash provided by operating activities $ 67 $ 52 Net cash used for investing activities (118) (8) _____ _____ Net cash flows (used for) provided from operating and investing activities ( 51) 44 Net cash provided from financing activities 55 65 Effect of exchange rate changes on cash ( 1) - _____ ____ Net change in cash and cash equivalents $ 3 $109 _____ _____ _____ _____ During the first half of 1997, the Company generated cash flows from operating activities of $67 million, compared to $52 million in the first half of 1996. Investing activities required net cash resources of $118 million in the first half of 1997. Capital expenditures were $205 million in the first half of 1997, compared to $84 million in the first half of 1996. The increased level of expenditures in 1997 was related to continued investments for new products. At the end of the second quarter of 1997, the Company sold its vibration attenuation business to Simpson Industries for approximately $74 million. The sale of this business, effective June 29, is part of the Company's continuing restructuring program announced previously and had no net effect on reported results in the second quarter. Net cash provided from financing activities was $55 million in the first half of 1997. As disclosed in Note 3 to the Consolidated Financial Statements, the Company issued $120 million in debentures under its shelf registration statement in February 1997. In January 1997, the Company repurchased 1.3 million shares of its common stock from Ford Motor Company and was authorized by the Board of Directors to repurchase an additional 1.7 million shares in the open market. In January 1997, the Company also issued 3.75 million shares of its common stock to an employee benefits trust. In April 1997, the Company announced a 10-percent increase in its quarterly common stock dividend from 25 cents per share to 27.5 cents, effective with the dividend payment in June 1997. FORWARD-LOOKING STATEMENTS __________________________ The Company has included certain forward-looking statements in this Management's Discussion and Analysis of Results of Operations, Cash Flow and Financial Condition. These statements are based on current expectations, estimates and projections about the industries in which the Company operates, management's beliefs and various assumptions made by management which are difficult to predict. Among the factors that could affect the outcome of the statements are general industry and market conditions and growth rates. Therefore, actual outcomes and their impact on the Company may differ materially from what is expressed or forecasted. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. 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 second quarter of 1997. 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/Rick J. Mills _________________ Rick J. Mills Vice President - Corporate Controller (Chief Accounting Officer) July 21, 1997 CUMMINS ENGINE COMPANY, INC. ____________________________ INDEX TO EXHIBITS _________________ 11 Schedule of Computation of Per Share Earnings for the Second Quarter and First Half Ended June 29, 1997 and June 30, 1996 (filed herewith) 27 Financial Data Schedule (filed herewith)