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 30, 1996 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 30, 1996, the number of shares outstanding of the
registrant's only class of common stock was 39.7 million.
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 Second 3
Quarter and First Half Ended June 30, 1996 and
July 2, 1995
Consolidated Statement of Financial Position at 4
June 30, 1996 and December 31, 1995
Consolidated Statement of Cash Flows for the First 5
Half Ended June 30, 1996 and July 2, 1995
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of 7
Operations and Financial Condition
PART II. OTHER INFORMATION
___________________________
Item 1. Legal Proceedings 12
Item 5. Other Information 12
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 30, 1996 AND JULY 2, 1995
Unaudited
_____________________________________
Second Quarter First Half
________________ ________________
Millions, Except per Share Amounts 1996 1995 1996 1995
__________________________________ ______ ______ ______ ______
Net sales $1,316 $1,361 $2,632 $2,695
Cost of goods sold 1,016 1,021 2,016 2,012
______ ______ ______ ______
Gross profit 300 340 616 683
Selling & administrative expenses 180 181 360 364
Research & engineering expenses 66 67 128 133
Expense (income) from joint ventures
and alliances 3 (1) 5 (2)
Interest expense 4 3 8 7
Other (income) expense, net (15) - (18) 4
_______ ______ ______ ______
Earnings before income taxes 62 90 133 177
Provision for income taxes 18 21 40 41
______ ______ ______ ______
Net earnings $ 44 $ 69 $ 93 $ 136
______ ______ ______ ______
______ ______ ______ ______
Earnings per share $ 1.10 $ 1.69 $ 2.31 $ 3.32
Cash dividends declared per share .25 .25 .50 .50
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Unaudited
____________________________________________
Millions, Except per Share Amounts 6/30/96 12/31/95
__________________________________ _______ ________
Assets
Current assets:
Cash and cash equivalents $ 169 $ 60
Receivables 699 597
Inventories 575 513
Other current assets 214 218
______ ______
1,657 1,388
Investments and other assets 272 326
Property, plant & equipment less accumulated
depreciation of $1,347 and $1,327 1,138 1,148
Intangibles, deferred taxes and deferred charges 203 194
______ _____
Total assets $3,270 $3,056
______ ______
______ ______
Liabilities and shareholders' investment
Current liabilities:
Loans payable $ 16 $ 60
Current maturities of long-term debt 49 42
Accounts payable 414 376
Other current liabilities 566 575
______ ______
1,045 1,053
______ ______
Long-term debt 262 117
______ ______
Other liabilities 736 703
______ ______
Shareholders' investment:
Common stock, $2.50 par value, 43.9 shares issued 110 110
Additional contributed capital 925 926
Retained earnings 478 406
Common stock in treasury, at cost, 4.2 and 3.7
shares (157) (135)
Unearned compensation ( 46) (51)
Cumulative translation adjustments ( 83) (73)
______ ______
1,227 1,183
______ ______
Total liabilities and shareholders' investment $3,270 $3,056
______ ______
______ ______
CUMMINS ENGINE COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
____________________________________
First Half Ended
_____________________
Millions 6/30/96 7/2/95
________ _______ ______
Cash flows from operating activities:
Net earnings $ 93 $136
____ ____
Adjustments to reconcile net earnings
to net cash from operating activities:
Depreciation and amortization 76 70
Restructuring actions ( 23) -
Accounts receivable (111) (110)
Inventories ( 64) ( 60)
Accounts payable and accrued expenses 62 101
Income taxes payable 21 8
Other ( 2) 19
____ ____
Total adjustments (41) 28
____ ____
Net cash provided by operating activities 52 164
____ ____
Cash flows from investing activities:
Property, plant and equipment:
Additions (84) (84)
Disposals 18 2
Investments in and advances from (to)
joint ventures and alliances 40 (45)
Disposition of business activities 11 -
Other 7 ( 1)
_____ _____
Net cash used in investing activities ( 8) (128)
_____ _____
Net cash flows from operating & investing
activities 44 36
____ ____
Cash flows from financing activities:
Proceeds from borrowings 160 -
Payments on borrowings ( 8) ( 3)
Net payments under credit agreements ( 44) (16)
Payments of dividends ( 20) (20)
Repurchases of common stock ( 21) (53)
Other ( 2) 1
_____ ____
Net cash provided from (used for) financing
activities 65 (91)
_____ ____
Effect of exchange rate changes on cash - 1
____ ___
Net change in cash and cash equivalents 109 (54)
Cash & cash equivalents at beginning of year 60 147
____ ____
Cash & cash equivalents at end of first half $169 $ 93
____ ____
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CUMMINS ENGINE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
__________________________________________
Note 1. Accounting Policies: The Consolidated Financial Statements
for the interim periods ended June 30, 1996 and July 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 half of 1995, the Company recognized
approximately $21 million related to a reduction in its valuation
allowance for tax benefit carryforwards.
Note 3. Long-term Debt: The Company maintains a revolving credit
agreement, under which there were no outstanding borrowings at June 30,
1996. In the second quarter of 1996, the agreement was amended,
increasing the available amount to $400 million and extending the term
to 2001. The revolving credit agreement supported commercial paper
borrowings of $50 million at June 30, 1996. The commercial paper
borrowings were issued as replacement financing for an arrangement
whereby the Company sold up to $110 million receivables without
recourse. The agreement for the sale of receivables expired in the
second quarter of 1996 and was not renewed by the Company. In the
first quarter of 1996, a subsidiary of the Company issued 8.2 percent
notes, which resulted in net proceeds of $100 million.
Note 4. 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 half of 1996, the Company
repurchased on the open market 492,100 shares at an aggregate purchase
price of $21 million, or average price of $43.49 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 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 includes the exercise of certain stock options
granted to employees, was 40.1 million in the second quarter of 1996
and 40.2 million shares in the first half of 1996. The weighted-
average number of shares was 40.8 million shares in the second quarter
of 1995 and 41.0 million shares in the first half of 1995.
CUMMINS ENGINE COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
_____________________________________________
OVERVIEW
________
Sales of $1.3 billion in the second quarter of 1996 were 3 percent
below the Company's record second-quarter 1995 sales of $1.4 billion,
reflecting the decrease in market size for heavy-duty truck engines in
both North America and Europe. The decline in heavy-duty truck markets
was partially offset by strong demand in international markets for
power generation, whose sales of $310 million were a quarterly record.
In the first half of 1996, the Company's net sales were $2.6 billion, 2
percent below the first half of 1995.
The Company shipped 174,500 engines in the first half of 1996, which
was 3 percent lower than first-half 1995.
Second Quarter First Half
_______________ ________________
Engine Shipments 1996 1995 1996 1995
________________ ______ ______ _______ _______
Midrange engines 61,100 60,400 123,600 118,500
Heavy-duty engines 21,900 28,900 46,400 57,300
High-horsepower engines 2,400 2,400 4,500 4,800
______ ______ _______ _______
Total 85,400 91,700 174,500 180,600
______ ______ _______ _______
______ ______ _______ _______
Net earnings were $44 million, or $1.10 per share, in the second
quarter of 1996, compared to $69 million, or $1.69 per share, in the
second quarter of 1995. For the first half of 1996, net earnings were
$93 million, or $2.31 per share, compared to $136 million, or $3.32 per
share, in the first half 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:
Second Quarter First Half
______________ _____________
Percent of Net Sales 1996 1995 1996 1995
____________________ ______ _____ _____ _____
Net sales 100.0 100.0 100.0 100.0
Cost of goods sold 77.2 75.0 76.6 74.7
_____ _____ _____ _____
Gross profit 22.8 25.0 23.4 25.3
Selling and administrative expenses 13.7 13.3 13.7 13.5
Research and engineering expenses 5.0 4.9 4.9 4.9
Expense (income) from joint ventures
and alliances .2 - .2 -
Interest expense .3 .2 .3 .3
Other (income) expense, net (1.1) - (.8) .1
______ ______ _____ _____
Earnings before income taxes 4.7 6.6 5.1 6.5
Provision for income taxes 1.4 1.5 1.6 1.5
_____ _____ _____ _____
Net earnings 3.3 5.1 3.5 5.0
_____ _____ _____ _____
_____ _____ _____ _____
Net Sales
_________
Sales for each of the Company's markets for the comparative reporting
periods were:
Second Quarter First Half
______________ ______________
Dollars in Millions 1996 1995 1996 1995
___________________ ______ ______ ______ ______
Heavy-duty truck $ 309 $ 398 $ 655 $ 794
Midrange truck 151 159 314 303
Bus and light commercial vehicles 194 180 396 363
Power generation 310 278 570 555
Industrial products 183 181 357 350
Marine 30 25 62 46
Fleetguard and Holset 139 140 278 284
______ ______ ______ ______
Net sales $1,316 $1,361 $2,632 $2,695
______ ______ ______ ______
______ ______ ______ ______
Heavy-duty truck engine sales of $309 million in the second quarter and
$655 million in the first half of 1996 were 22 percent and 18 percent
lower than the respective periods of 1995. The decline in sales in
1996 was due primarily to a declining market size in North America.
International engine shipments for heavy-duty trucks were also lower in
1996, due primarily to softer demand in Europe.
Sales of $151 million in the second quarter of 1996 for the midrange
truck market were 5 percent lower than the second quarter of 1995, due
to a decrease in demand for medium-duty trucks. In the first half of
1996, sales of $314 million for this market were 4 percent higher than
the first half of 1995. Midrange truck engines for international
markets in the second quarter and first half of 1996 were slightly
higher than the comparative periods of 1995.
In the bus and light commercial vehicles market, the Company's sales of
$194 million in the second quarter and $396 million in the first half
of 1996 were almost 10 percent higher than the respective periods of
1995. The increase in sales was due to engines for Chrysler. Engine
shipments for bus markets in 1996 have been approximately 5 percent
lower than the prior year's levels.
The Company expects sales of heavy-duty and midrange truck engines to
decline further in the second half of 1996. It also expects some
instability in the third quarter as truck manufacturers adjust build
rates due to the decline in the heavy-duty truck order backlog. In
addition, sales of light-duty truck engines in the third quarter of
1996 are expected to be lower than the second quarter of 1996, due to
seasonal plant shutdowns.
Sales to the power generation market represented 24 percent of the
Company's net sales in the second quarter of 1996. Sales of $310
million were $32 million higher, a 12-percent increase compared to the
second quarter of 1995. In the first half of 1996, power generation
sales were $570 million, 3 percent higher than the first half of 1995.
The increase in 1996 was all in international markets. Power
generation, however, has been affected by increasing price competition
in its international markets and a shift in sales to lower margin
products.
Sales of $183 million to industrial markets in the second quarter and
$357 million in the first half of 1996 were slightly higher than second-
quarter and first-half 1995 levels due to strong sales for construction
equipment in international markets, which offset lower demand in
agricultural markets in North America.
Sales of filtration products and turbochargers in the second quarter
and first half of 1996 were slightly lower than the prior year's
levels, due primarily to the softer demand in North American and
European heavy-duty markets.
Gross Profit
____________
In the second quarter of 1996, the Company's gross profit percentage
was 22.8 percent of net sales, compared to 25.0 percent in the second
quarter of 1995. In the first half of 1996, the gross profit
percentage was 23.4 percent of net sales, compared to 25.3 percent in
the first half of 1995. The reduction in gross profit was due to
several factors, the most significant of which was the decline in heavy-
duty production that resulted in lower fixed cost absorption.
Gross profit in 1996 also was affected by higher sales of lower margin
power generation products, costs of new product introductions and
expenses associated with restructuring actions. While the
restructuring and reduction of non-core businesses are proceeding, as
reflected by capital gains in "other income", expenses associated with
implementation of certain of these actions adversely affected 1996
gross profit. Depreciation expense has been higher in 1996, reflecting
capital spending levels over the last two years to fund new products
and fuel systems. In the second quarter and first half of 1996,
product coverage expense was 2.9 percent and 2.7 percent of net sales,
respectively, compared to 2.5 percent in both periods of 1995.
Operating Expenses
__________________
Selling and administrative expenses of $180 million in the second
quarter and $360 million in the first half of 1996 were essentially
level with the respective periods of 1995. In 1996, expenditures
associated with the restructuring actions to relocate and consolidate
operations and advertising programs offset a decrease in administrative
expenses.
In the second quarter and first half of 1996, research and engineering
expenses of $66 million and $128 million, respectively, were slightly
lower than the prior year's levels, reflecting a reduction in the
number of employees and lower costs in 1996.
Expense of $3 million in the second quarter and $5 million in the first
half of 1996 from joint ventures and alliances was associated with
product development and start-up costs of the joint venture with
Wartsila. The Company formed this joint venture in the second quarter
of 1995.
Interest and Other Income and Expense
_____________________________________
Interest expense in the second quarter and first half of 1996 was
slightly higher than the comparable periods of 1995 due to the increase
in long-term debt.
Other income and expense includes a variety of items, such as foreign
currency gains and losses, royalties, interest income, and gains and
losses associated with fixed asset dispositions. In the first half of
1996, other income of $18 million was generated primarily from capital
gains associated with various asset disposals.
Provision for Income Taxes
__________________________
The estimated effective tax rate for 1996 is 30 percent. This is lower
than the US federal statutory rate of 35 percent, primarily because of
export sales and lower taxes on foreign subsidiaries. In the first
half of 1995, the Company recognized approximately $21 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:
First Half
________________
Dollars in Millions 1996 1995
___________________ ____ ____
Net cash provided by operating activities $ 52 $164
Net cash used for investing activities (8) (128)
_____ _____
Net cash flows from operating and
investing activities 44 36
Net cash provided from (used for)
financing activities 65 (91)
Effect of exchange rate changes on cash - 1
_____ _____
Net change in cash and cash equivalents $109 $(54)
_____ _____
_____ _____
During the first half of 1996, the Company generated cash flows from
operating activities of $52 million. In the second quarter of 1996, an
agreement for the sale of up to $110 million of accounts receivable was
not renewed by the Company, which resulted in an increase in
receivables and the lower level of net cash flows provided by operating
activities. Investing activities required net cash resources of $8
million in the first half of 1996.
Net cash provided from financing activities was $65 million in the
first half of 1996. Total indebtedness was $327 million at June 30,
1996, compared to $219 million at December 31, 1995. As disclosed more
fully in Note 3 to the Consolidated Financial Statements, the Company
amended its revolving credit agreement in the second quarter of 1996 to
increase the available amount to $400 million and extend the term to
2001. There were no outstanding borrowings under the agreement at June
30, 1996. Commercial paper borrowings of $50 million were outstanding
at June 30, 1996. In the first quarter of 1996, a subsidiary of the
Company issued 8.2 percent notes, which resulted in net proceeds of
$100 million.
As disclosed more fully in Note 4 to the Consolidated Financial
Statements, the Company repurchased on the open market 492,100 shares
of its common stock at an average price of $43.49 per share in the
first half of 1996.
PART II. OTHER INFORMATION
___________________________
Item 1. Legal Proceedings:
___________________________
On July 8, 1996, the United States District Court for the Southern
District of Indiana entered an order approving the settlement of Warkel
v. Cummins Engine Company, et. al.
Item 5. Other Information:
___________________________
Certain information contained in this Form 10-Q is forward-looking and
involves risks and uncertainties, including general economic and
competitive conditions that could significantly affect expected results.
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 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
_________________
John McLachlan
Vice President - Corporate Controller
(Chief Accounting Officer) July 19, 1996
CUMMINS ENGINE COMPANY, INC.
____________________________
INDEX TO EXHIBITS
_________________
4(a) Amended and Restated Credit Agreement (filed herewith)
10(y) Guarantees of Perpetual Loan Facility of Cummins Finance
Limited dated January 31, 1996 with the Toronto Dominion
Bank, The Bank of New York and Societe Generale (filed
herewith)
11 Schedule of Computation of Per Share Earnings for the Second
Quarter and First Half Ended June 30, 1996 and July 2, 1995
(filed herewith)
27 Financial Data Schedule (filed herewith)