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