TABLE OF CONTENTS ~~~~~~~~~~~~~~~~~ Page No. ~~~~~~~~ PART I. FINANCIAL INFORMATION ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Item 1. Financial Statements Consolidated Statement of Earnings for the Second 2 Quarter and First Half Ended July 3, 1994 and July 4, 1993 Consolidated Statement of Financial Position at 3 July 3, 1994 and December 31, 1993 Consolidated Statement of Cash Flows for the First 4 Half Ended July 3, 1994 and July 4, 1993 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Results of 6 Operations and Financial Condition PART II. OTHER INFORMATION ~~~~~~~~~~~~~~~~~~~~~~~~~~~ Item 6. Exhibits and Reports on Form 8-K 10 Index to Exhibits 12 CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CONSOLIDATED STATEMENT OF EARNINGS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Unaudited ~~~~~~~~~ (Millions, Except per Share Amounts) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Second Quarter First Half ~~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~~ 1994 1993 1994 1993 ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ NET SALES $1,204.9 $1,093.4 $2,304.1 $2,141.8 Cost of goods sold 907.2 832.8 1,735.8 1,630.2 ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ GROSS PROFIT 297.7 260.6 568.3 511.6 Selling & administrative expenses 160.8 145.4 309.4 286.0 Research & engineering expenses 56.4 52.0 110.4 101.6 Interest expense 4.6 9.1 9.1 18.7 Other (income) expense, net (.7) (2.0) (.7) 1.4 ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ Earnings before income taxes 76.6 56.1 140.1 103.9 Provision for income taxes 10.4 7.9 19.3 14.6 ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ NET EARNINGS 66.2 48.2 120.8 89.3 Preference stock dividends - 2.0 - 4.1 ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ EARNINGS AVAILABLE FOR COMMON SHARES $ 66.2 $ 46.2 $ 120.8 $ 85.2 ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ Primary earnings per common share $ 1.58 $ 1.32 $ 2.94 $ 2.44 Fully diluted earnings per common share 1.58 1.25 2.94 2.32 Cash dividends declared per common share 1.25 .025 .25 .05 CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION Unaudited (Millions, Except per Share Amounts) 7/3/94 12/31/93 ~~~~~~~~ ~~~~~~~~ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 150.1 $ 77.3 Receivables less allowances of $10.4 & $9.5 482.4 426.3 Inventories 508.9 440.2 Other current assets 136.3 127.9 ~~~~~~~~ ~~~~~~~~ 1,277.7 1,071.7 INVESTMENTS AND OTHER ASSETS 186.9 190.7 PROPERTY, PLANT & EQUIPMENT less accumulated depreciation of $1,263.1 & $1,222.3 977.3 958.2 INTANGIBLES, DEFERRED TAXES & DEFERRED CHARGES 169.5 170.0 ~~~~~~~~ ~~~~~~~~ TOTAL ASSETS $2,611.4 $2,390.6 ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ LIABILITIES AND SHAREHOLDERS' INVESTMENT CURRENT LIABILITIES: Loans payable $ 11.2 $ 13.4 Current maturities of long-term debt 32.5 32.6 Accounts payable 301.1 267.5 Other current liabilities 440.5 386.8 ~~~~~~~~ ~~~~~~~~ 785.3 700.3 ~~~~~~~~ ~~~~~~~~ LONG-TERM DEBT 188.4 189.6 ~~~~~~~~ ~~~~~~~~ OTHER LIABILITIES 687.7 679.6 ~~~~~~~~ ~~~~~~~~ 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 109.1 101.5 Additional contributed capital 923.0 822.8 Retained earnings 114.4 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 (74.2) (92.9) ~~~~~~~~ ~~~~~~~~ 950.0 821.1 ~~~~~~~~ ~~~~~~~~ TOTAL LIABILITIES & SHAREHOLDERS' INVESTMENT $2,611.4 $2,390.6 ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Unaudited (Millions) First Half Ended 7/3/94 7/3/93 ~~~~~~~~ ~~~~~~~~ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $120.8 $ 89.3 ~~~~~~ ~~~~~~ Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 62.0 63.8 Accounts receivable (45.2) (51.4) Inventories (60.3) (20.6) Accounts payable and accrued expenses 84.5 24.8 Other 8.6 3.3 ~~~~~~ ~~~~~~ Total adjustments 49.6 19.9 ~~~~~~ ~~~~~~ Net cash provided by operating activities 170.4 109.2 ~~~~~~ ~~~~~~ CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment: Additions (75.9) (58.9) Disposals 3.2 4.3 Investments in and advances to affiliates and unconsolidated companies ( 6.4) 19.7 Acquisitions of new business activities - 3.4 Net cash proceeds from the disposition of certain business activities - 1.3 ~~~~~~~ ~~~~~~~ Net cash used in investing activities (79.1) (30.2) ~~~~~~~ ~~~~~~~ NET CASH FLOWS FROM OPERATING & INVESTING ACTIVITIES 91.3 79.0 ~~~~~~ ~~~~~~ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings - 54.7 Payments on borrowings ( 2.6) (134.9) Net borrowings under credit agreements ( 2.7) 18.4 Dividend payments (10.4) ( 5.8) Other ( 4.6) ( 5.8) ~~~~~~~ ~~~~~~~ Net cash used for financing activities (20.3) (73.4) ~~~~~~~ ~~~~~~~ EFFECT OF EXCHANGE RATE CHANGES ON CASH 1.8 .4 ~~~~~~ ~~~~~~ NET CHANGE IN CASH & CASH EQUIVALENTS 72.8 6.0 Cash & cash equivalents at beginning of year 77.3 54.2 ~~~~~~ ~~~~~~ CASH & CASH EQUIVALENTS AT END OF FIRST HALF $150.1 $ 60.2 ~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~ 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 July 3, 1994 and July 4, 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 half of 1994 and 1993, the Company recognized approximately $25 and $22, respectively, related to a reduction in its valuation allowance for tax benefit carryforwards. NOTE 3. 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 convert their shares of preference stock into 2.9 million shares of common stock prior to the redemption date. NOTE 4. EARNINGS PER COMMON 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 granted to employees, was 41.7 million in the second quarter of 1994 and 41.1 million in the first half of 1994 and 34.9 million in both the second quarter and first half of 1993. Fully diluted earnings per share are computed by dividing net earnings by the weighted average number of shares assuming the exercise of stock options and conversion of debt and preference stock to common stock. 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 business conditions in most of its markets in the second quarter of 1994, which resulted in the highest quarterly sales and earnings in the Company's 75-year history. Net sales of $1.2 billion were 10 percent higher than in the second quarter of 1993. In the first half of 1994, the Company's net sales were $2.3 billion, compared to $2.1 billion in the first half of 1993. The Company's net earnings were $66.2, or $1.58 per share, in the second quarter of 1994, compared to $48.2, or $1.32 per share, in the second quarter of 1993. For the first half of 1994, net earnings were $120.8, or $2.94 per share, compared to $89.3, or $2.44 per share, in the first half 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: Second Quarter First Half ~~~~~~~~~~~~~~ ~~~~~~~~~~~~ Percent of Net Sales 1994 1993 1994 1993 ~~~~~~~~~~~~~~~~~~~~ ~~~~~ ~~~~~ ~~~~~ ~~~~~ Net sales 100.0 100.0 100.0 100.0 Cost of goods sold 75.3 76.2 75.4 76.1 ~~~~~ ~~~~~ ~~~~~ ~~~~~ Gross profit 24.7 23.8 24.6 23.9 Selling and administrative expenses 13.3 13.3 13.4 13.3 Research and engineering expenses 4.7 4.8 4.8 4.7 Interest expense .4 .8 .4 .9 Other (income) expense, net (.1) (.2) - .1 ~~~~~~ ~~~~~~ ~~~~~ ~~~~~ Earnings before income taxes 6.4 5.1 6.0 4.9 Provision for income taxes .9 .7 .8 .7 ~~~~~ ~~~~~ ~~~~~ ~~~~~ Net earnings 5.5 4.4 5.2 4.2 ~~~~~ ~~~~~ ~~~~~ ~~~~~ ~~~~~ ~~~~~ ~~~~~ ~~~~~ Sales by Market ~~~~~~~~~~~~~~~ Sales for each of the Company's markets for the comparative reporting periods were: Second Quarter First Half ~~~~~~~~~~~~~~ ~~~~~~~~~~~~~ 1994 1993 1994 1993 ~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~ Heavy-duty truck $ 354 $ 336 $ 689 $ 660 Midrange truck 135 101 234 187 Power generation 268 237 497 450 Bus and light commercial vehicles 146 116 303 264 Industrial products 142 133 266 251 Government 15 27 30 55 Marine 21 21 38 38 Fleetguard, Holset and Cummins Electronics (a) 124 122 247 237 ~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~ Net sales $1,205 $1,093 $2,304 $2,142 ~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~ (a) The second quarter and first half of 1993 included McCord's sales of $14.6 and $20.5, respectively. Sales to the heavy-duty truck market in the second quarter and first half of 1994 were approximately 5 percent higher than the comparable periods of 1993. The increase in 1994 reflects the strength of the North American heavy-duty truck market, which is forecasted to produce at a record in excess of 200,000 units for the year. The Company continues to lead this market with a 35-percent year-to-date market share. Shipments of the Company's heavy-duty truck engines for international markets in the second quarter of 1994 also were higher than in the second quarter of 1993, as a result of improved market conditions in the United Kingdom. Midrange truck engine sales in the second quarter of 1994 were 34 percent higher than in the second quarter of 1993 and 25 percent higher in the first half of 1994, compared to the first half of 1993. The increase in sales in 1994 was due to higher engine shipments in both North America and Europe. Power generation sales in the second quarter of 1994 were $268, compared to $237 in the second quarter of 1993. The Company has benefited this year from strong demand in this market for industrial generator sets, particularly in the international markets, and for power units in recreational vehicles. In the bus and light commercial vehicle market, the Company's sales were $146 in the second quarter of 1994, compared to $116 million in the second quarter of 1993. The increase in sales during 1994 was due to sales of Cummins' midrange engines for light commercial vehicles in North America. Demand for the Company's midrange engines for these vehicles continued to be strong in the first half of 1994, with shipments up approximately 9 percent over the first half of 1993. Sales to industrial markets increased approximately 6 percent in the second quarter and first half of 1994, compared to corresponding reporting periods of 1993. The increase in sales was due to improvements in both North American and international construction markets. Shipments for the agricultural market in North America also experienced modest gains in the second quarter of 1994, compared to the second quarter of 1993. The first half of the year traditionally is higher in these markets. Engine shipments for all markets in the second quarter and first half of 1994 were 81,100 and 151,000, respectively, compared to 68,100 and 136,000 in the respective periods of 1993: Second Quarter First Half ~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~ 1994 1993 1994 1993 ~~~~~~ ~~~~~~ ~~~~~~~ ~~~~~~~ Midrange engines 52,600 43,100 97,600 87,400 Heavy-duty engines 25,900 22,700 48 900 44,300 High-horsepower engines 2,600 2,300 4,500 4,300 ~~~~~~ ~~~~~~ ~~~~~~~ ~~~~~~~ Total engine shipments 81,100 68,100 151,000 136,000 ~~~~~~ ~~~~~~ ~~~~~~~ ~~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~~ ~~~~~~~ Sales of Fleetguard, Holset and Cummins Electronics were approximately 15 percent higher in both the second quarter and first half of 1994, compared to the same periods of 1993. The increase in sales of these subsidiaries during 1994 was due primarily to demand for the Company's filter products in international markets. Gross Profit ~~~~~~~~~~~~ In the second quarter of 1994, the Company's gross profit percentage was 24.7 percent of net sales, compared to 23.8 percent in the second quarter of 1993. In the first half of 1994, gross profit percentage was 24.6 percent of net sales, compared to 23.9 percent in the first half 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 was 2.5 percent of net sales in both the second quarter of 1994 and 1993. In the first half of 1994, the cost of product coverage programs was 2.6 percent of net sales, compared to 2.4 percent in the first half of 1993. Operating Expenses ~~~~~~~~~~~~~~~~~~ Selling and administrative expenses of $160.8 in the second quarter of 1994 and $309.4 in the first half of 1994 were $15.4 and $23.4 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 $4.4 and $8.8 in research and engineering expenses in the second quarter and first half 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 of $4.6 in the second quarter of 1994 and $9.1 in the first half of 1994, compared to $9.1 and $18.7 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. 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 $25 in the first half of 1994 and $22 in the first half of 1993. FINANCIAL CONDITION AND CASH FLOW ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Key elements of the Consolidated Statement of Cash Flows were: First Half ~~~~~~~~~~~~~~~~~~ 1994 1993 ~~~~~~ ~~~~~~ Net cash provided by operating activities $170.4 $109.2 Net cash used for investing activities (79.1) (30.2) ~~~~~~~ ~~~~~~~ Net cash flows from operating and investing activities 91.3 79.0 Net cash used for financing activities (20.3) (73.4) Effect of exchange rate changes on cash 1.8 .4 ~~~~~~ ~~~~~~ Net change in cash and cash equivalents $ 72.8 $ 6.0 ~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~ Cash reserves increased by $72.8 during the first half of 1994 to $150.1. During the first half of 1994, the Company generated cash flows from operating activities of $170.4, compared to $109.2 in the first half of 1993, due to improved earnings and net working capital requirements. Investing activities required net cash resources of $79.1 for capital expenditures and investments in and advances to affiliates and unconsolidated companies in the first half of 1994. As more fully disclosed in Note 3 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 $232.1 at the end of the second quarter of 1994. The Company's debt-to- capital ratio was 19.6 percent at the end of the second quarter of 1994, compared to 22.3 percent at December 31, 1993. 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. PART II. OTHER INFORMATION ~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 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) August 1, 1994 CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ INDEX TO EXHIBITS ~~~~~~~~~~~~~~~~~ Page No. ~~~~~~~~ 4(b) Revolving Credit Agreement (First Amendment filed herewith to agreement incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended July 4, 1993). 13 10(a) Target Bonus Plan (filed herewith) 17 10(c) Key Employee Stock Investment Plan, as amended (filed herewith) 22 10(e) Financial Counseling Program (filed herewith) 27 11 Schedule of Computation of Per Share Earnings for the Second Quarter and First Half Ended July 3, 1994 and July 4, 1993 (filed herewith) 28