TABLE OF CONTENTS
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Page No.
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Statement of Earnings for the Third 2
Quarter and Nine Months Ended October 2, 1994 and
October 3, 1993
Consolidated Statement of Financial Position at 3
October 2, 1994 and December 31, 1993
Consolidated Statement of Cash Flows for the Nine 4
Months Ended October 2, 1994 and October 3, 1993
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Results of 7
Operations, Cash Flow and Financial Condition
PART II. OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K 11
Index to Exhibits 13
CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED
OCTOBER 2, 1994 AND OCTOBER 3, 1993
Unaudited
(Millions, Except per Share Amounts)
Third Quarter Nine Months
1994 1993 1994 1993
________ ______ ________ ________
NET SALES $1,155.5 $988.3 $3,459.6 $3,130.1
Cost of goods sold 861.4 748.9 2,597.2 2,379.1
________ ______ ________ ________
GROSS PROFIT 294.1 239.4 862.4 751.0
Selling & administrative expenses 161.2 139.1 470.6 425.1
Research & engineering expenses 59.5 49.9 169.9 151.5
Interest expense 4.6 9.0 13.7 27.7
Other (income) expense, net (3.1) .6 (3.8) 2.0
_________ ______ _________ ________
Earnings before income taxes 71.9 40.8 212.0 144.7
Provision for income taxes 10.0 - 29.3 14.6
Minority interest - .1 - .1
________ ______ ________ ________
NET EARNINGS 61.9 40.7 182.7 130.0
Preference stock dividends - 2.0 - 6.1
________ ______ ________ ________
EARNINGS AVAILABLE FOR COMMON
SHARES $ 61.9 $ 38.7 $ 182.7 $ 123.9
________ ______ ________ ________
________ ______ ________ ________
Primary earnings per common share $ 1.48 $ 1.11 $ 4.43 $ 3.54
Fully diluted earnings per common
share 1.48 1.06 4.43 3.37
Cash dividends declared per share .125 .025 .375 .075
CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Unaudited
(Millions, Except per Share Amounts)
10/2/94 12/31/93
________ ________
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 167.6 $ 77.3
Receivables less allowances of $10.7 & $9.5 495.8 426.3
Inventories 541.8 440.2
Other current assets 141.8 127.9
________ ________
1,347.0 1,071.7
INVESTMENTS AND OTHER ASSETS 197.6 190.7
PROPERTY, PLANT & EQUIPMENT less accumulated
depreciation of $1,281.0 & $1,222.3 997.9 958.2
INTANGIBLES, DEFERRED TAXES & DEFERRED CHARGES 169.5 170.0
________ ________
TOTAL ASSETS $2,712.0 $2,390.6
________ ________
________ ________
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Loans payable $ 38.2 $ 13.4
Current maturities of long-term debt 31.8 32.6
Accounts payable 308.9 267.5
Other current liabilities 453.1 386.8
________ ________
832.0 700.3
________ ________
LONG-TERM DEBT 184.2 189.6
________ ________
OTHER LIABILITIES 686.7 679.6
________ ________
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 109.2 101.5
Additional contributed capital 924.5 822.8
Retained earnings 171.2 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 (73.5) (92.9)
________ ________
1,009.1 821.1
________ ________
TOTAL LIABILITIES & SHAREHOLDERS' INVESTMENT $2,712.0 $2,390.6
________ ________
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CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited (Millions)
Nine Months Ended
10/2/94 10/3/93
_______ _______
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $182.7 $130.0
_______ _______
Adjustments to reconcile net earnings to
net cash from operating activities:
Depreciation and amortization 95.6 95.0
Accounts receivable (59.4) (69.8)
Inventories (93.2) (19.9)
Accounts payable and accrued expenses 96.7 ( 4.4)
Other 11.2 12.8
______ ______
Total adjustments 50.9 13.7
______ ______
Net cash provided by operating activities 233.6 143.7
______ ______
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment:
Additions (131.1) (101.0)
Disposals 4.5 4.9
Investments in and advances to affiliates
and unconsolidated companies (15.8) ( 4.8)
Acquisitions of new businesses, net of cash
acquired - 3.4
_______ _______
Net cash used for investing activities (142.4) (97.5)
_______ _______
NET CASH FLOWS FROM OPERATING & INVESTING
ACTIVITIES 91.2 46.2
______ ______
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings - 56.5
Payments on borrowings ( 8.4) (140.3)
Net borrowings under credit agreements 24.3 53.3
Dividend payments (15.6) ( 8.6)
Other ( 3.0) ( 5.9)
_______ _______
Net cash used for financing activities ( 2.7) (45.0)
_______ _______
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1.8 .3
______ ______
NET CHANGE IN CASH & CASH EQUIVALENTS 90.3 1.5
Cash & cash equivalents at beginning of year 77.3 54.2
______ ______
CASH & CASH EQUIVALENTS AT END OF THE QUARTER $167.6 $ 55.7
______ ______
______ ______
CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES
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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 October 2, 1994 and October 3, 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 nine months of both 1994 and 1993, the Company recognized
approximately $32 related to a reduction in its valuation allowance for
tax benefit carryforwards. In the third quarter of 1993, the tax
provision included a one-time credit of $4.4 resulting from the Omnibus
Budget Reconciliation Act of 1993. This legislation increased the US
corporate income tax rate from 34 percent to 35 percent resulting in a
$4.4 increase in the value of the future tax benefits represented by the
Company's net deferred tax assets. The current effect of the rate
increase is absorbed by the use of carryforward tax benefits.
NOTE 3. EARNINGS PER 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 grated to
employees, was 41.7 million in the third quarter of 1994 and 41.3 million
in the first nine months of 1994. In the third quarter and first nine
months of 1993, the weighted average number of shares was 34.9 million and
35.0 million, respectively. Fully diluted earnings per share are computed
by dividing net earnings by the weighted average number of shares
outstanding assuming the exercise of stock options and conversion of debt
and preference stock to common stock.
NOTE 4. LONG-TERM DEBT: On September 16, 1994, the Company's $300
million revolving credit agreement was amended, lowering fees and interest
costs and extending the 3-year term that was entered in 1993 to a 5-year
term. There were no outstanding borrowings under the facility at October
2, 1994.
NOTE 5. 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 covert their shares of preference stock into 2.9 million shares
of common stock prior to the redemption date.
NOTE 6. COMMON STOCK DIVIDEND AND STOCK REPURCHASE PROGRAM: On October
11, 1994, the Board of Directors increased the Company's quarterly common
stock dividend from 12.5 cents per share to 25 cents per share and
declared a quarterly common stock dividend of 25 cents per share payable
on December 15, 1994 to shareholders of record on December 1. The Board
also authorized repurchase by the Company of up to 2.5 million shares of
its common stock. At the Company's discretion, repurchases of the stock
will be made from time to time in the open market and through privately
negotiated transactions.
NOTE 7. ACQUISITION: On October 3, 1994, the Company announced the
acquisition of Power Group International (PGI) from 3i Group and Barclays.
PGI, based in Kent, England, is a developer and manufacturer of a broad
range of power generation equipment sold under the trade names of Petbow,
Auto Diesel and Agreba. The acquisition will be accounted for as a
purchase. Accordingly, PGI's results of operations will be included in
the Company's Consolidated Statement of Earnings effective in the fourth
quarter of 1994.
CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES
______________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS,
CASH FLOW AND FINANCIAL CONDITION
______________________________________________________________
(Dollars in Millions, Unless Otherwise Stated)
OVERVIEW
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The Company's net sales of $1.2 billion in the third quarter of
1994 were $167.2 higher than in the third quarter of 1993. This 17-
percent increase was attributable to continued strong demand in most of
the Company's markets. In the first nine months of 1994, the Company's
net sales were $3.5 billion, compared to $3.1 billion in the first nine
months of 1993.
The Company net earnings were $61.9, or $1.48 per share, in the third
quarter of 1994, compared to $40.7, or $1.11 per share, in the third
quarter of 1993. For the first nine months of 1994, net earnings were
$182.7, or $4.43 per share, compared to $130.0, or $3.54 per share, in the
first nine months 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:
Third Quarter Nine Months
Percent of Net Sales 1994 1993 1994 1993
____________________ _____ _____ _____ _____
Net sales 100.0 100.0 100.0 100.0
Cost of goods sold 74.5 75.8 75.1 76.0
_____ _____ _____ _____
Gross profit 25.5 24.2 24.9 24.0
Selling and administrative expenses 14.0 14.1 13.6 13.6
Research and engineering expenses 5.1 5.0 4.9 4.8
Interest expense .4 .9 .4 .9
Other (income) expense, net (.2) .1 (.1) .1
______ _____ ______ _____
Earnings before income taxes 6.2 4.1 6.1 4.6
Provision for income taxes .8 - .8 .4
_____ _____ _____ _____
Net earnings 5.4 4.1 5.3 4.2
_____ _____ _____ _____
_____ _____ _____ _____
NET SALES
_________
Sales for each of the Company's markets for the comparative reporting
periods were:
Third Quarter Nine Months
1994 1993 1994 1993
______ ______ ______ ______
Heavy-duty truck $ 353 $ 268 $1,042 $ 928
Midrange truck 136 156 370 343
Power generation 249 244 746 694
Bus and light commercial vehicles 138 73 441 337
Industrial products 122 98 388 349
Government 15 33 45 88
Marine 17 13 56 51
Fleetguard, Holset and Cummins
Electronics (a) 126 103 372 340
______ ______ ______ ______
Net sales $1,156 $ 988 $3,460 $3,130
______ ______ ______ ______
______ ______ ______ ______
(a) Excludes sales of McCord effective with the third quarter of 1993
Sales to the heavy-duty truck market in the third quarter of 1994 were
over 30 percent higher than in the third quarter of 1993. In the first
nine months of 1994, sales to this market were approximately 12 percent
higher than the 1993 level. Shipments of engines for heavy-duty trucks in
North America in the third quarter and first nine months of 1994 were 16
percent and 12 percent higher, respectively, than the comparable period of
1993. This market continues to operate at record levels, with current
projections for truck production to reach 205,000 units in 1994.
In the third quarter and first nine months of 1994, shipments of the
Company's heavy-duty truck engines for international markets were 48
percent and 30 percent higher, respectively, than in the comparable
periods of 1993. In the United Kingdom, the Company's largest market for
heavy-duty truck engines outside the United States, business conditions
continue to improve, with engine shipments in the third quarter of 1994
approximately 6 percent higher than in the third quarter of 1993.
Sales to the midrange truck market in the third quarter of 1994 were $20
lower than in the third quarter of 1993. However, sales to this market in
the first nine months of 1994 were $370, compared to $343 in the first
nine months of 1993, an increase of 8 percent. The increase in sales in
1994 has been due to higher engine shipments in both North American and
international markets.
Power generation sales in the third quarter of 1994 were $249, compared to
$244 in the third quarter of 1993. In the first nine months of 1994,
power generation sales were 7 percent higher than in the first nine months
of 1993. The increase in sales in 1994 was due to demand for industrial
generator sets, particularly in international markets, and for power units
in recreational vehicles. On October 3, 1994, the Company announced the
acquisition of Power Group International (PGI), a major developer and
manufacturer of a broad range of power generation equipment sold under the
trade names of Petbow, Auto Diesel and Agreba. PGI, based in Kent,
England, had sales of $86 in 1993.
Sales for bus and light commercial vehicles were $138 in the third quarter
of 1994, compared to $73 in the third quarter of 1993. In the first nine
months of 1994, sales for this market were over 30 percent higher than the
prior year's level. The increase in sales in 1994 was due primarily to
demand for midrange engines for the Chrysler Dodge Ram pickup truck.
During the third quarter of 1993, shipments of these engines were reduced
substantially due to Chrysler's changeover to its new T300 model.
Sales of industrial products, which traditionally are affected seasonally
in the third quarter, were 24 percent higher in the third quarter of 1994,
compared to the same quarter of 1993. The increase in sales was due to
improvements in both North American and international markets for
construction and agricultural equipment. Sales in the first nine months
of 1994 were 11 percent higher than the first nine months of 1993.
Engine shipments for all markets in the comparative reporting periods
were:
Third Quarter Nine Months
1994 1993 1994 1993
______ ______ _______ _______
Midrange engines 46,900 32,000 144,500 119,500
Heavy-duty engines 24,500 20,200 73,400 64,500
High-horsepower engines 2,100 2,300 6,600 6,500
______ ______ _______ _______
Total engine shipments 73,500 54,500 224,500 190,500
In the third quarter and first nine months of 1994, sales of filters,
turbochargers and electronic controls were 22 percent and 9 percent
higher, respectively, than the comparable periods of 1993. The increase
in sales of Fleetguard, Holset and Cummins Electronics during 1994 was due
primarily to demand worldwide for the Company's filter products, which
were approximately 15 percent higher in the third quarter of 1994,
compared to the third quarter of 1993, and increased demand for
turbochargers.
GROSS PROFIT
____________
In the third quarter and first nine months of 1994, the Company's gross
profit percentage was 25.5 percent and 24.9 percent of net sales,
respectively, compared to 24.2 percent and 24.0 percent in the comparative
periods 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, which includes both warranty and extended coverage programs, was
2.0 percent of net sales in the third quarter of 1994, compared to 2.3
percent in the third quarter of 1993. When the Company introduces new
products, it typically uses higher accrual rates for these programs.
Actual claims experience for the 1994 products has confirmed that these
engines are performing well in the field. The Company adjusted its
accrual rates accordingly, resulting in lower product coverage expense in
the third quarter of 1994. In the first nine months of 1994, the cost of
product coverage programs was 2.4 percent of net sales, compared to 2.3
percent in the first nine months of 1993.
OPERATING EXPENSES
__________________
Selling and administrative expenses of $161.2 in the third quarter of 1994
and $470.6 in the first nine months of 1994 were $22.1 and $45.5 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 $9.6 and
$18.4 million in research and engineering expenses in the third quarter
and first nine months 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 was $4.6 in the third quarter of 1994 and $13.7 in the
first nine months of 1994, compared to $9.0 and $27.7 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.
OTHER INCOME AND EXPENSE
________________________
Other income and expense includes a variety of items, such as translation,
interest income, earnings of unconsolidated companies and royalty income.
Income of $3.1 in the third quarter of 1994 was related to foreign
exchange gains, interest income and technical fees.
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 $32 in the first nine months of both 1994 and 1993. The tax
provision in the third quarter of 1993 included a one-time credit of $4.4
resulting from the Omnibus Budget Reconciliation Act of 1993.
CASH FLOW AND FINANCIAL CONDITION
_________________________________
Key elements of the CONSOLIDATED STATEMENT OF CASH FLOWS were:
First Nine Months
1994 1993
______ ______
Net cash provided by operating activities $233.6 $143.7
Net cash used for investing activities (142.4) (97.5)
______ ______
Net cash flows from operating and
investing activities 91.2 46.2
Net cash used for financing activities ( 2.7) (45.0)
Effect of exchange rate changes on cash 1.8 .3
______ _____
Net change in cash and cash equivalents $ 90.3 $ 1.5
______ _____
______ _____
The Company's cash reserves increased by $90.3 during the first nine
months of 1994 to $167.6. During the first nine months of 1994, the
Company generated cash flows from operating activities of $233.6, compared
to $143.7 in the first nine months of 1993, due to improved earnings and
net working capital requirements. Investing activities required net cash
resources of $142.4 for capital expenditures and investments in and
advances to affiliates and unconsolidated companies in the first nine
months of 1994.
As disclosed in NOTE 5 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
$254.2 million at the end of the third quarter of 1994. The Company's
debt-to-capital ratio was 20.1 percent at the end of the third quarter of
1994, compared to 22.3 percent at December 31, 1993. As disclosed in NOTE
4 to the CONSOLIDATED FINANCIAL STATEMENTS, the Company amended its $300
revolving credit agreement to extend the term to five years and to make
certain other changes.
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.
As disclosed in NOTE 6 to the CONSOLIDATED FINANCIAL STATEMENTS, on
October 11, 1994, the Board of Directors increased Cummins' quarterly
common stock dividend from 12.5 cents per share to 25 cents per share and
authorized repurchase by the Company of up to 2.5 million shares of its
common stock.
PART II. OTHER INFORMATION
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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 third
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) October 28, 1994
CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES
______________________________________________
INDEX TO EXHIBITS
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Page No.
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3(b) By-laws of Cummins Engine Company, Inc., as
amended and restated effective as of
August 12, 1994 (filed herewith) 14
10(b) Five-year Performance Plan (filed herewith) 29
10(d) Supplemental Life Insurance and Deferred Income
Plan (filed herewith) 35
10(h) Key Executive Compensation Protection Plan
(filed herewith) 43
10(i) Excess Benefit Retirement Plan (filed herewith) 47
11 Schedule of Computation of Per Share Earnings
for the Third Quarter and Nine Months Ended
October 2, 1994 and October 3, 1993 (filed
herewith) 53
27 Financial Data Schedule 54
4(b) Amended and Restated Credit Agreement (filed
herewith) 55