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 March 31, 1996 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 March 31, 1996, the number of shares outstanding of the registrant's only class of common stock was 40.1 million. TABLE OF CONTENTS _________________ Page No. ________ PART I. FINANCIAL INFORMATION ______________________________ Item 1. Financial Statements Consolidated Statement of Earnings for the First 3 Quarter Ended March 31, 1996 and April 2, 1995 Consolidated Statement of Financial Position at 4 March 31, 1996 and December 31, 1995 Consolidated Statement of Cash Flows for the First 5 Quarter Ended March 31, 1996 and April 2, 1995 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of 7 Operations, Cash Flows and Financial Condition PART II. OTHER INFORMATION ___________________________ Item 1. Legal Proceedings 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Item 6. Exhibits and Reports on Form 8-K 12 Index to Exhibits 13 CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF EARNINGS Unaudited __________________________________ First Quarter Ended Millions, Except per Share Amounts 3/31/96 4/2/95 __________________________________ _______ ______ Net sales $1,316 $1,334 Cost of goods sold 1,000 991 ______ ______ Gross profit 316 343 Selling & administrative expenses 180 183 Research & engineering expenses 62 66 Interest expense 4 4 Expense (income) from joint ventures & alliances 2 (1) Other (income) expense, net (3) 4 ______ ______ Earnings before income taxes 71 87 Provision for income taxes 22 20 ______ ______ Net earnings $ 49 $ 67 ______ ______ ______ ______ Earnings per share $ 1.21 $ 1.63 Cash dividends declared per share .25 .25 CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF FINANCIAL POSITION Unaudited ____________________________________________ Millions, Except per Share Amounts 3/31/96 12/31/95 __________________________________ _______ ________ Assets Current assets: Cash and cash equivalents $ 153 $ 60 Receivables 602 597 Inventories 542 513 Other current assets 219 218 ______ ______ 1,516 1,388 Investments and other assets 288 326 Property, plant & equipment less accumulated depreciation of $1,327 1,134 1,148 Intangibles, deferred taxes & deferred charges 198 194 ______ ______ Total assets $3,136 $3,056 ______ ______ ______ ______ Liabilities and shareholders' investment Current liabilities: Loans payable $ 29 $ 60 Current maturities of long-term debt 38 42 Accounts payable 379 376 Other current liabilities 548 575 ______ ______ 994 1,053 ______ ______ Long-term debt 222 117 ______ ______ Other liabilities 710 703 ______ ______ Shareholders' investment: Common stock, $2.50 par value, 43.9 shares issued 110 110 Additional contributed capital 926 926 Retained earnings 444 406 Common stock in treasury, at cost, 3.8 & 3.7 shares (139) (135) Unearned ESOP compensation ( 46) (51) Cumulative translation adjustments ( 85) (73) ______ ______ 1,210 1,183 ______ ______ Total liabilities & shareholders' investment $3,136 $3,056 ______ ______ ______ ______ CUMMINS ENGINE COMPANY, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Unaudited ____________________________________ First Quarter Ended Millions 3/31/96 4/2/95 ________ _______ ______ Cash flows from operating activities: Net earnings $ 49 $ 67 _____ _____ Adjustments to reconcile net earnings to net cash from operating activities: Payments on restructuring actions (18) - Depreciation and amortization 38 35 Accounts receivable (13) (105) Inventories (35) (32) Accounts payable and accrued expenses ( 3) 60 Income taxes payable 13 4 Other ( 6) 9 ______ ______ Total adjustments ( 24) (29) _____ _____ Net cash provided by operating activities 25 38 _____ _____ Cash flows from investing activities: Property, plant and equipment: Additions ( 36) (32) Disposals 2 1 Investments in and advances from (to) joint ventures and alliances 26 ( 4) Disposition of business activities 6 - Other 14 ( 1) _____ _____ Net cash provided from (used in) investing activities 12 (36) _____ ______ Net cash flows from operating & investing activities 37 2 _____ _____ Cash flows from financing activities: Proceeds from borrowings 109 - Payments on borrowings ( 7) ( 2) Net borrowings under credit agreements ( 30) ( 2) Payments of dividends ( 10) (10) Repurchases of common stock ( 4) (37) Other ( 1) ( 4) ______ ______ Net cash provided from (used for) financing activities 57 (55) ______ ______ Effect of exchange rate changes on cash (1) 1 _____ ______ Net change in cash and cash equivalents 93 (52) Cash & cash equivalents at beginning of the year 60 147 _____ _____ Cash & cash equivalents at the end of the quarter $ 153 $ 95 _____ _____ _____ _____ CUMMINS ENGINE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited ______________________________________________ Note 1. Accounting Policies: The Consolidated Financial Statements for the interim periods ended March 31, 1996 and April 2, 1995 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 1995, the Company recognized approximately $11 million related to a reduction in its valuation allowance for tax benefit carryforwards. Note 3. Common 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 quarter of 1996, the Company repurchased on the open market 96,100 shares at an aggregate purchase price of $4 million, or average price of $40.75 per share. The Company repurchased 1,575,400 shares at an aggregate purchase price of $69 million, or average price of $43.57 per share in 1995 and 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 40.3 million in the first quarter of 1996 and 41.3 million in the first quarter of 1995. CUMMINS ENGINE COMPANY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, CASH FLOWS AND FINANCIAL CONDITION _____________________________________________________________ OVERVIEW ________ Sales of $1.32 billion in the first quarter of 1996 were essentially level with net sales in the first quarter of 1995. Sales in the first quarter of 1996 reflected lower demand for heavy-duty truck engines, particularly in North America, that was offset by strong demand for the Company's midrange engines. The Company expects a further softening in the heavy-duty truck market in the second half of 1996 but anticipates that sales in other markets will help offset the decline in heavy-duty engines. Shipments by engine family for the comparative periods were: First Quarter Engine Shipments 1996 1995 ________________ ______ ______ Midrange engines 62,600 58,100 Heavy-duty engines 24,600 28,500 High-horsepower engines 2,000 2,300 ______ ______ Total 89,200 88,900 ______ ______ ______ ______ Net earnings were $49 million, or $1.21 per share, in the first quarter of 1996, compared to $67 million, or $1.63 per share, in the first quarter of 1995. 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 1996 1995 ____________________ _____ _____ Net sales 100.0 100.0 Cost of goods sold 76.0 74.3 _____ _____ Gross profit 24.0 25.7 Selling and administrative expenses 13.7 13.7 Research and engineering expenses 4.7 4.9 Interest expense .3 .3 Expense (income) from joint ventures & alliances .1 (.1) Other (income) expense, net (.2) .4 _____ _____ Earnings before income taxes 5.4 6.5 Provision for income taxes 1.7 1.5 _____ _____ Net earnings 3.7 5.0 _____ _____ _____ _____ Net Sales _________ Sales for each of the Company's markets for the comparative reporting periods were: First Quarter 1996 First Quarter 1995 Dollars Percent Dollars Percent _______ _______ _______ _______ Heavy-duty truck 346 26 396 30 Midrange truck 163 12 144 11 Power generation 260 20 277 21 Bus & light commercial vehicles 202 15 183 13 Industrial products 174 13 169 13 Marine 32 3 21 1 Fleetguard and Holset 139 11 144 11 _____ ___ _____ ___ Net sales 1,316 100 1,334 100 _____ ___ _____ ___ _____ ___ _____ ___ First-quarter 1996 sales of $346 million to the heavy-duty truck market were 13 percent lower than the first quarter of 1995, due to the reduced market size in North America. Midrange truck engine sales of $163 million in the first quarter of 1996 were 13 percent higher than the first quarter of 1995 due to shipments for North American markets. International markets were essentially level with the first quarter of 1995. In the first quarter of 1996, power generation sales of $260 million were 6 percent lower than the first quarter of 1995. Both recreational vehicle and alternator markets were strong in the first quarter of 1996, while sales of generator sets to industrial and power generation markets declined. In the bus and light commercial vehicles market, sales of $202 million in the first quarter of 1996 were 10 percent higher than the first quarter of 1995. The increase in sales in the first quarter of 1996 was due to higher shipments to Chrysler, which are expected to exceed the 1995 record. In the first quarter of 1996, engine shipments for bus markets were essentially level with the first quarter of 1995. Sales of $174 million to industrial markets in the first quarter of 1996 were 3 percent higher than first-quarter 1995, reflecting strong sales for construction equipment in North America. International sales in the first quarter of 1996 were essentially flat compared to the first quarter of 1995. In the first quarter of 1996, sales of filtration products and turbochargers were $139 million, 3 percent lower than the first quarter of 1995 due primarily to the softer demand in North American heavy-duty markets. Gross Profit ____________ The Company's gross profit percentage in the first quarter of 1996 was 24.0 percent of net sales compared to 25.7 percent in the first quarter of 1995. The reduction in gross margin in the first quarter of 1996 was due to several factors, the most significant of which was the decline in heavy-duty engine production that resulted in lower fixed cost absorption. Gross margin also was affected by expenses associated with the restructuring actions announced in the fourth quarter of 1995 and material cost increases. Depreciation expense in the first quarter of 1996 was $3 million higher than first-quarter 1995, reflecting capital spending levels during the last two years to fund new products and fuel systems. Product coverage expense was 2.5 percent of sales in both first-quarter periods. Operating Expenses __________________ Selling and administrative expenses of $180 million in the first quarter of 1996 were 13.7 percent of net sales, level with the first quarter of 1995 as a percent of net sales. Expenditures associated with the restructuring actions to relocate and consolidate operations in the first quarter of 1996 offset a decrease in salaries and wages as a result of employee separations. Research and engineering expenses were $62 million in the first quarter of 1996, compared to $66 million in the first quarter of 1995. The lower level of expenditures was primarily due to timing but also reflected a reduction in the number of employees and lower costs. Expense of $2 million from joint ventures and alliances primarily was associated with product development and start-up costs of the joint venture with Wartsila. The Company entered this joint venture in the second quarter of 1995. Interest and Other Income and Expense _____________________________________ Interest expense of $4 million in the first quarter of 1996 was level with the first quarter of 1995. Other income and expense includes a variety of items, such as foreign currency exchange gains and losses, royalty and technical fees, interest income, and gains and losses associated with fixed asset dispositions. In the first quarter of 1996, income of $3 million was due to technical fee income and proceeds from the sale of excess property. Provision For Income Taxes __________________________ Income tax expense is based upon the estimated annual effective tax rate for the taxable jurisdictions in which the Company operates. The estimated effective tax rate for 1996 is 31.5 percent. In the first quarter of 1995, the Company recognized approximately $11 million related to a reduction in its valuation allowance for tax benefit carryforwards. CASH FLOW AND FINANCIAL CONDITION _________________________________ Key elements of the Consolidated Statement of Cash Flows were: Dollars in Millions 1996 1995 ___________________ ____ ____ Net cash provided by operating activities $25 $ 38 Net cash provided from (used in) investing activities 12 (36) ___ ____ Net cash flows from operating and investing activities 37 2 Net cash provided from (used for) financing activities 57 (55) Effect of exchange rate changes on cash (1) 1 ___ ____ Net change in cash and cash equivalents $93 $(52) ___ _____ ___ _____ Cash increased $93 million in the first quarter of 1996 to $153 million. Capital expenditures of $36 million in the first quarter of 1996 were slightly higher than the first quarter of 1995. The Company expects a significant increase in these expenditures during the remainder of 1996. Net cash from joint ventures and alliances of $26 million in the first quarter of 1996 included $39 million from Consolidated Diesel Company for repayment of a temporary advance. Total indebtedness (including the guaranteed notes of the ESOP Trust) was $289 million at the end of the first quarter of 1996, compared to $219 million at December 31, 1995. The Company's debt-to-capital ratio was 19 percent at March 31, 1996 and 16 percent at December 31, 1995. PART II. OTHER INFORMATION ___________________________ Item 1. Legal Proceedings __________________________ On April 18, 1996, the United States District Court for the Southern District of Indiana entered an order preliminarily approving the settlement of Warkel v. Cummins Engine Company, et al., and setting a schedule for the procedural steps leading to a decision by the Court on final approval. Item 4. Submission of Matters to a Vote of Security Holders ____________________________________________________________ The Company held its annual meeting of security holders on April 9, 1996 at which security holders: (a) elected 14 directors of the Company for the ensuing year and (b) ratified the appointment of Arthur Andersen LLP as auditors for the year 1996. Results of the voting in connection with each of the items were as follows: Voting on Directors: ____________________ For Withheld __________ ________ H. Brown 34,258,919 1,861,626 K. R. Dabrowski 34,431,230 1,689,315 R. Darnall 34,467,220 1,653,325 W. Y. Elisha 34,462,725 1,657,820 H. H. Gray 34,438,600 1,681,945 J. A. Henderson 34,451,723 1,668,822 J. I. Miller 34,455,772 1,664,773 W. I. Miller 34,459,804 1,660,741 D. S. Perkins 34,458,426 1,662,119 W. D. Ruckelshaus 34,449,938 1,670,607 H. B. Schacht 34,283,196 1,837,349 T. M. Solso 34,441,938 1,678,607 F. A. Thomas 34,459,103 1,661,442 J. L. Wilson 34,466,625 1,653,920 Ratify Appointment of Auditors: _______________________________ For Against Abstain __________ _______ _______ 34,900,594 131,419 88,532 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 the ratification of the appointment of Arthur Andersen LLP were counted as present for purposes of determining the existence of a quorum. Under the rules of the New York Stock Exchange, brokers who held shares in street names 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. Under applicable Indiana law, a broker non-vote had no effect on the outcome of the election of directors. 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 1996. 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 April 29, 1996 _________________ John McLachlan Vice President - Corporate Controller (Chief Accounting Officer) CUMMINS ENGINE COMPANY, INC. ____________________________ INDEX TO EXHIBITS _________________ 11 Schedule of Computation of Per Share Earnings for the First Quarter ended March 31, 1996 and April 2, 1995 (filed herewith) 27 Financial Data Schedule (filed herewith)