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
For the Quarterly Period Ended September 25, 2011
Commission File Number 1-4949
CUMMINS INC.
(Exact name of registrant as specified in its charter)
|
Indiana |
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35-0257090 |
500 Jackson Street
Box 3005
Columbus, Indiana 47202-3005
(Address of principal executive offices)
Telephone (812) 377-5000
(Registrant’s telephone number, including area code)
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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer x |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of September 25, 2011, there were 192,851,583 shares of common stock outstanding with a par value of $2.50 per share.
Website Access to Company’s Reports
Cummins maintains an internet website at www.cummins.com. Investors can obtain copies of our filings from this website free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to the Securities and Exchange Commission.
CUMMINS INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
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Condensed Consolidated Balance Sheets at September 25, 2011, and December 31, 2010 |
4 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
24 | |
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48 |
ITEM 1. Condensed Consolidated Financial Statements
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three months ended |
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Nine months ended |
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In millions, except per share amounts |
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September 25, |
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September 26, |
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September 25, |
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September 26, |
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NET SALES (a) |
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$ |
4,626 |
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$ |
3,401 |
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$ |
13,127 |
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$ |
9,087 |
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Cost of sales |
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3,438 |
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2,571 |
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9,779 |
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6,903 |
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GROSS MARGIN |
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1,188 |
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830 |
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3,348 |
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2,184 |
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OPERATING EXPENSES AND INCOME |
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Selling, general and administrative expenses |
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489 |
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375 |
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1,341 |
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1,064 |
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Research, development and engineering expenses |
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164 |
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103 |
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450 |
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291 |
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Equity, royalty and interest income from investees (Note 5) |
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102 |
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88 |
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315 |
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261 |
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Gain on sale of business (Note 4) |
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— |
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— |
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68 |
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— |
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Other operating (expense) income, net |
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2 |
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(5 |
) |
(4 |
) |
(13 |
) | ||||
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OPERATING INCOME |
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639 |
|
435 |
|
1,936 |
|
1,077 |
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Interest income |
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9 |
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6 |
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25 |
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14 |
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Interest expense |
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11 |
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11 |
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34 |
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29 |
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Other income (expense), net |
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(8 |
) |
8 |
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(14 |
) |
25 |
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INCOME BEFORE INCOME TAXES |
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629 |
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438 |
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1,913 |
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1,087 |
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Income tax expense (Note 7) |
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157 |
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129 |
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539 |
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338 |
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CONSOLIDATED NET INCOME |
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472 |
|
309 |
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1,374 |
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749 |
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Less: Net income attributable to noncontrolling interests |
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20 |
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26 |
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74 |
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71 |
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NET INCOME ATTRIBUTABLE TO CUMMINS INC. |
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$ |
452 |
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$ |
283 |
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$ |
1,300 |
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$ |
678 |
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EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. |
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Basic |
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$ |
2.35 |
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$ |
1.45 |
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$ |
6.71 |
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$ |
3.44 |
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Diluted |
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$ |
2.35 |
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$ |
1.44 |
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$ |
6.69 |
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$ |
3.43 |
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WEIGHTED AVERAGE SHARES OUTSTANDING |
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Basic |
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192.1 |
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195.8 |
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193.8 |
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197.0 |
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Dilutive effect of stock compensation awards |
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0.6 |
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0.5 |
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0.6 |
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0.4 |
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Diluted |
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192.7 |
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196.3 |
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194.4 |
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197.4 |
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CASH DIVIDENDS DECLARED PER COMMON SHARE |
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$ |
0.40 |
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$ |
0.2625 |
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$ |
0.925 |
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$ |
0.6125 |
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(a) Includes sales to nonconsolidated equity investees of $640 million and $1,874 million and $580 million and $1,524 million for the three and nine months ended September 25, 2011 and September 26, 2010, respectively.
The accompanying notes are an integral part of the condensed consolidated financial statements.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 25, |
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December 31, |
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In millions, except par value |
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2011 |
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2010 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
1,165 |
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$ |
1,023 |
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Marketable securities (Note 6) |
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273 |
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339 |
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Total cash, cash equivalents and marketable securities |
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1,438 |
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1,362 |
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Accounts and notes receivable, net |
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Trade and other |
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2,398 |
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1,935 |
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Nonconsolidated equity investees |
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268 |
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308 |
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Inventories (Note 9) |
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2,295 |
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1,977 |
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Deferred income taxes |
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277 |
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314 |
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Prepaid expenses and other current assets |
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350 |
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393 |
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Total current assets |
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7,026 |
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6,289 |
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Long-term assets |
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Property, plant and equipment |
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5,131 |
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4,927 |
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Accumulated depreciation |
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(2,963 |
) |
(2,886 |
) | ||
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Property, plant and equipment, net |
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2,168 |
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2,041 |
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Investments and advances related to equity method investees |
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830 |
|
734 |
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Goodwill |
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346 |
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367 |
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Other intangible assets, net |
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215 |
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222 |
| ||
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Deferred income taxes |
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125 |
|
203 |
| ||
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Other assets |
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628 |
|
546 |
| ||
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Total assets |
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$ |
11,338 |
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$ |
10,402 |
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LIABILITIES |
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Current liabilities |
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Loans payable |
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$ |
48 |
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$ |
82 |
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Accounts payable (principally trade) |
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1,659 |
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1,362 |
| ||
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Current portion of accrued product warranty (Note 10) |
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417 |
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421 |
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Accrued compensation, benefits and retirement costs |
|
481 |
|
468 |
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Deferred revenue |
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208 |
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182 |
| ||
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Taxes payable (including taxes on income) |
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251 |
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202 |
| ||
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Other accrued expenses |
|
678 |
|
543 |
| ||
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Total current liabilities |
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3,742 |
|
3,260 |
| ||
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Long-term liabilities |
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Long-term debt |
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665 |
|
709 |
| ||
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Pensions |
|
75 |
|
195 |
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Postretirement benefits other than pensions |
|
446 |
|
439 |
| ||
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Other liabilities and deferred revenue |
|
866 |
|
803 |
| ||
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Total liabilities |
|
5,794 |
|
5,406 |
| ||
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Commitments and contingencies (Note 12) |
|
— |
|
— |
| ||
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EQUITY |
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Cummins Inc. shareholders’ equity |
|
|
|
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| ||
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Common stock, $2.50 par value, 500 shares authorized, 222.2 and 221.8 shares issued |
|
1,982 |
|
1,934 |
| ||
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Retained earnings |
|
5,567 |
|
4,445 |
| ||
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Treasury stock, at cost, 29.3 and 24.0 shares |
|
(1,505 |
) |
(964 |
) | ||
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Common stock held by employee benefits trust, at cost, 1.9 and 2.1 shares |
|
(22 |
) |
(25 |
) | ||
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Accumulated other comprehensive loss |
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|
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| ||
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Defined benefit postretirement plans |
|
(606 |
) |
(646 |
) | ||
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Other |
|
(205 |
) |
(74 |
) | ||
|
Total accumulated other comprehensive loss |
|
(811 |
) |
(720 |
) | ||
|
Total Cummins Inc. shareholders’ equity |
|
5,211 |
|
4,670 |
| ||
|
Noncontrolling interests |
|
333 |
|
326 |
| ||
|
Total equity |
|
5,544 |
|
4,996 |
| ||
|
Total liabilities and equity |
|
$ |
11,338 |
|
$ |
10,402 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Nine months ended |
| ||||
|
|
|
September 25, |
|
September 26, |
| ||
|
In millions |
|
2011 |
|
2010 |
| ||
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
| ||
|
Consolidated net income |
|
$ |
1,374 |
|
$ |
749 |
|
|
Adjustments to reconcile consolidated net income to net cash provided by operating activities: |
|
|
|
|
| ||
|
Depreciation and amortization |
|
243 |
|
239 |
| ||
|
Gain on sale of business (Note 4) |
|
(68 |
) |
— |
| ||
|
Gain on fair value adjustment for consolidated investee (Note 4) |
|
— |
|
(12 |
) | ||
|
Deferred income taxes |
|
148 |
|
83 |
| ||
|
Equity in income of investees, net of dividends |
|
7 |
|
(95 |
) | ||
|
Pension contributions in excess of expense (Note 11) |
|
(71 |
) |
(114 |
) | ||
|
Excess tax benefits on stock based awards |
|
(4 |
) |
(8 |
) | ||
|
Other post-retirement benefits payments in excess of expense (Note 11) |
|
(10 |
) |
(22 |
) | ||
|
Stock-based compensation expense |
|
28 |
|
17 |
| ||
|
Translation and hedging activities |
|
(14 |
) |
10 |
| ||
|
Changes in current assets and liabilities, net of acquisitions and divestitures: |
|
|
|
|
| ||
|
Accounts and notes receivable |
|
(469 |
) |
(198 |
) | ||
|
Inventories |
|
(367 |
) |
(524 |
) | ||
|
Other current assets |
|
(5 |
) |
(16 |
) | ||
|
Accounts payable |
|
317 |
|
336 |
| ||
|
Accrued expenses |
|
173 |
|
102 |
| ||
|
Changes in other liabilities and deferred revenue |
|
93 |
|
97 |
| ||
|
Other, net |
|
(7 |
) |
(25 |
) | ||
|
Net cash provided by operating activities |
|
1,368 |
|
619 |
| ||
|
|
|
|
|
|
| ||
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CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
| ||
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Capital expenditures |
|
(377 |
) |
(170 |
) | ||
|
Investments in internal use software |
|
(31 |
) |
(28 |
) | ||
|
Proceeds from disposals of property, plant and equipment |
|
5 |
|
46 |
| ||
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Investments in and advances to equity investees |
|
(104 |
) |
(17 |
) | ||
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Proceeds from sale of business, net of cash sold (Note 4) |
|
111 |
|
— |
| ||
|
Acquisition of businesses, net of cash acquired (Note 4) |
|
— |
|
(77 |
) | ||
|
Investments in marketable securities—acquisitions (Note 6) |
|
(538 |
) |
(560 |
) | ||
|
Investments in marketable securities—liquidations (Note 6) |
|
572 |
|
452 |
| ||
|
Purchases of other investments |
|
— |
|
(54 |
) | ||
|
Cash flows from derivatives not designated as hedges |
|
4 |
|
2 |
| ||
|
Other, net |
|
2 |
|
— |
| ||
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Net cash used in investing activities |
|
(356 |
) |
(406 |
) | ||
|
|
|
|
|
|
| ||
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CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
| ||
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Proceeds from borrowings |
|
96 |
|
163 |
| ||
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Payments on borrowings and capital lease obligations |
|
(174 |
) |
(64 |
) | ||
|
Net borrowings under short-term credit agreements |
|
(5 |
) |
(4 |
) | ||
|
Distributions to noncontrolling interests |
|
(50 |
) |
(21 |
) | ||
|
Dividend payments on common stock |
|
(178 |
) |
(120 |
) | ||
|
Proceeds from sale of common stock held by employee benefit trust |
|
— |
|
52 |
| ||
|
Repurchases of common stock |
|
(546 |
) |
(241 |
) | ||
|
Excess tax benefits on stock-based awards |
|
4 |
|
8 |
| ||
|
Other, net |
|
13 |
|
17 |
| ||
|
Net cash used in financing activities |
|
(840 |
) |
(210 |
) | ||
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
|
(30 |
) |
4 |
| ||
|
Net increase (decrease) in cash and cash equivalents |
|
142 |
|
7 |
| ||
|
Cash and cash equivalents at beginning of year |
|
1,023 |
|
930 |
| ||
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
1,165 |
|
$ |
937 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
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|
|
|
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Accumulated |
|
|
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Common |
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|
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Total |
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|
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Additional |
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|
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Other |
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|
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Stock |
|
|
|
Cummins Inc. |
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Common |
|
paid-in |
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Retained |
|
Comprehensive |
|
Treasury |
|
Held in |
|
Unearned |
|
Shareholders’ |
|
Noncontrolling |
|
Total |
| ||||||||||
|
In millions |
|
Stock |
|
Capital |
|
Earnings |
|
Loss |
|
Stock |
|
Trust |
|
Compensation |
|
Equity |
|
Interests |
|
Equity |
| ||||||||||
|
BALANCE AT DECEMBER 31, 2009 |
|
$ |
555 |
|
$ |
1,306 |
|
$ |
3,575 |
|
$ |
(895 |
) |
$ |
(731 |
) |
$ |
(36 |
) |
$ |
(1 |
) |
$ |
3,773 |
|
$ |
247 |
|
$ |
4,020 |
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
Net income attributable to Cummins Inc. |
|
|
|
|
|
678 |
|
|
|
|
|
|
|
|
|
678 |
|
71 |
|
749 |
| ||||||||||
|
Other comprehensive income (loss) (Note 13) |
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
31 |
|
9 |
|
40 |
| ||||||||||
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
709 |
|
80 |
|
789 |
| ||||||||||
|
Issuance of shares |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
— |
|
5 |
| ||||||||||
|
Employee benefits trust activity |
|
|
|
58 |
|
|
|
|
|
|
|
9 |
|
|
|
67 |
|
— |
|
67 |
| ||||||||||
|
Acquisition of shares |
|
|
|
|
|
|
|
|
|
(241 |
) |
|
|
|
|
(241 |
) |
— |
|
(241 |
) | ||||||||||
|
Cash dividends on common stock |
|
|
|
|
|
(120 |
) |
|
|
|
|
|
|
|
|
(120 |
) |
— |
|
(120 |
) | ||||||||||
|
Distribution to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
(23 |
) |
(23 |
) | ||||||||||
|
Stock option exercises |
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
5 |
|
— |
|
5 |
| ||||||||||
|
Deconsolidation of variable interest entity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
(11 |
) |
(11 |
) | ||||||||||
|
Other shareholder transactions |
|
|
|
(2 |
) |
2 |
|
|
|
|
|
|
|
1 |
|
1 |
|
2 |
|
3 |
| ||||||||||
|
BALANCE AT SEPTEMBER 26, 2010 |
|
$ |
555 |
|
$ |
1,367 |
|
$ |
4,135 |
|
$ |
(864 |
) |
$ |
(967 |
) |
$ |
(27 |
) |
$ |
— |
|
$ |
4,199 |
|
$ |
295 |
|
$ |
4,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
BALANCE AT DECEMBER 31, 2010 |
|
$ |
554 |
|
$ |
1,380 |
|
$ |
4,445 |
|
$ |
(720 |
) |
$ |
(964 |
) |
$ |
(25 |
) |
$ |
— |
|
$ |
4,670 |
|
$ |
326 |
|
$ |
4,996 |
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
Net income attributable to Cummins Inc. |
|
|
|
|
|
1,300 |
|
|
|
|
|
|
|
|
|
1,300 |
|
74 |
|
1,374 |
| ||||||||||
|
Other comprehensive income (loss) (Note 13) |
|
|
|
|
|
|
|
(91 |
) |
|
|
|
|
|
|
(91 |
) |
(22 |
) |
(113 |
) | ||||||||||
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,209 |
|
52 |
|
1,261 |
| ||||||||||
|
Issuance of shares |
|
1 |
|
12 |
|
|
|
|
|
|
|
|
|
|
|
13 |
|
— |
|
13 |
| ||||||||||
|
Employee benefits trust activity |
|
|
|
21 |
|
|
|
|
|
|
|
3 |
|
|
|
24 |
|
— |
|
24 |
| ||||||||||
|
Acquisition of shares |
|
|
|
|
|
|
|
|
|
(546 |
) |
|
|
|
|
(546 |
) |
— |
|
(546 |
) | ||||||||||
|
Cash dividends on common stock |
|
|
|
|
|
(178 |
) |
|
|
|
|
|
|
|
|
(178 |
) |
— |
|
(178 |
) | ||||||||||
|
Distribution to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
(52 |
) |
(52 |
) | ||||||||||
|
Stock option exercises |
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
5 |
|
— |
|
5 |
| ||||||||||
|
Other shareholder transactions |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
14 |
|
7 |
|
21 |
| ||||||||||
|
BALANCE AT SEPTEMBER 25, 2011 |
|
$ |
555 |
|
$ |
1,427 |
|
$ |
5,567 |
|
$ |
(811 |
)(1) |
$ |
(1,505 |
) |
$ |
(22 |
) |
$ |
— |
|
$ |
5,211 |
|
$ |
333 |
|
$ |
5,544 |
|
(1) Comprised of defined benefit postretirement plans of $(606) million, foreign currency translation adjustments of $(190) million, unrealized loss on derivatives of $(19) million and an unrealized gain on marketable securities of $4 million.
The accompanying notes are an integral part of the condensed consolidated financial statements.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS
Cummins Inc. (“Cummins,” “the Company,” “we,” “our,” or “us”) is a leading global power provider that designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration and emissions solutions, fuel systems, controls and air handling systems. We were founded in 1919 as one of the first manufacturers of diesel engines and are headquartered in Columbus, Indiana. We sell our products to Original Equipment Manufacturers (OEMs), distributors and other customers worldwide. We serve our customers through a network of more than 600 company-owned and independent distributor locations and approximately 6,000 dealer locations in more than 190 countries and territories.
NOTE 2. BASIS OF PRESENTATION
The unaudited Condensed Consolidated Financial Statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows. All such adjustments are of a normal recurring nature. The Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations. Certain reclassifications have been made to prior period amounts to conform to the presentation of the current period condensed financial statements.
Our reporting period usually ends on the Sunday closest to the last day of the quarterly calendar period. The third quarters of 2011 and 2010 ended on September 25, and September 26, respectively. The interim periods for both 2011 and 2010 contain 13 weeks. Our fiscal year ends on December 31, regardless of the day of the week on which December 31 falls.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the Condensed Consolidated Financial Statements. Significant estimates and assumptions in these Condensed Consolidated Financial Statements require the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, estimates of future cash flows and other assumptions associated with goodwill and long-lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, determination of discount and other rate assumptions for pension and other postretirement benefit expenses, income taxes and deferred tax valuation allowances, lease classifications and contingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.
In preparing our Condensed Consolidated Financial Statements, we evaluated subsequent events through the date our quarterly report was filed with the SEC.
The weighted-average diluted common shares outstanding exclude the anti-dilutive effect of certain stock options since such options had an exercise price in excess of the monthly average market value of our common stock. The options excluded from diluted earnings per share for the three and nine month periods ended September 25, 2011, and September 26, 2010, were as follows:
|
|
|
Three months ended |
|
Nine months ended |
| ||||
|
|
|
September 25, |
|
September 26, |
|
September 25, |
|
September 26, |
|
|
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
|
Options excluded |
|
285,937 |
|
3,795 |
|
142,750 |
|
9,993 |
|
You should read these interim condensed financial statements in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2010. Our interim period financial results for the three and nine month interim periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
NOTE 3. RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Accounting Pronouncements Recently Adopted
In October 2009, the Financial Accounting Standards Board (FASB) amended its rules regarding the accounting for multiple element revenue arrangements. The objective of the amendment is to allow vendors to account for revenue for different deliverables separately as opposed to part of a combined unit when those deliverables are provided at different times. Specifically, this amendment addresses how to separate deliverables and simplifies the process of allocating revenue to the different deliverables when more than one deliverable exists. The new rules were effective for us beginning January 1, 2011. This amendment did not have a significant impact on our Condensed Consolidated Financial Statements as multiple element revenue arrangements are not material to our business.
Accounting Pronouncements Issued But Not Yet Effective
In September 2011, the FASB amended its standards related to the testing of goodwill for impairment. The objective of this amendment is to simplify the annual goodwill impairment evaluation process. The amendment provides entities the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The two-step impairment test is now only required if an entity determines through this qualitative analysis that it is more likely than not that the fair value of the reporting unit is less than its carrying value. The new rules will become effective during interim and annual periods beginning after December 15, 2011, however entities are permitted to early adopt the standard. We plan to early adopt the standard and apply the qualitative analysis to certain reporting units in our 2011 goodwill impairment testing process. Because the measurement of a potential impairment loss has not changed, the standard will not have a significant impact on our Consolidated Financial Statements.
In June 2011, the FASB amended its rules regarding the presentation of comprehensive income. The objective of this amendment is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. Specifically, this amendment requires that all non-owner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, the standard also requires disclosure of the location of reclassification adjustments between other comprehensive income and net income on the face of the financial statements. The new rules are scheduled to become effective during interim and annual periods beginning after December 15, 2011. The FASB recently added a project to its agenda to consider deferring certain aspects of this standard beyond the current anticipated effective date, specifically the provisions dealing with reclassification adjustments. Because the standard only impacts the display of comprehensive income and does not impact what is included in comprehensive income, the standard will not have a significant impact on our Consolidated Financial Statements.
In May 2011, the FASB amended its standards related to fair value measurements and disclosures. The objective of the amendment is to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards. Primarily, this amendment changed the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements in addition to clarifying the Board’s intent about the application of existing fair value measurement requirements. The new standard also requires additional disclosures related to fair value measurements categorized within Level 3 of the fair value hierarchy and requires disclosure of the categorization in the hierarchy for items which are not recorded at fair value but fair value is required to be disclosed. The new rules will become effective during interim and annual periods beginning after December 15, 2011. As of September 25, 2011, we had no fair value measurements categorized within Level 3. The only impact for us is expected to be the disclosure of the categorization in the fair value hierarchy for those items where fair value is only disclosed (primarily our debt obligations).
NOTE 4. DIVESTITURES AND ACQUISITIONS
Divestitures
In January 2011, we reached an agreement to sell certain assets and liabilities of our exhaust business which manufactures exhaust products and select components for emission systems for a variety of applications not core to our other product offerings. The transaction closed in the second quarter of 2011. This business was historically included in our Components segment. The sales price was $123 million. We recognized a pre-tax gain on the sale of $68 million, which included an allocation of goodwill of $19 million. The transaction had a working capital adjustment mechanism that was determined in the third quarter. There was not a significant change to the measurement of the gain. The gain was excluded from segment results as it was not considered by management in its evaluation of operating results for the nine months ended September 25, 2011.
Sales for this business were $171 million, $126 million and $169 million in 2010, 2009 and 2008, respectively. Income before income taxes for this business was approximately $22 million, $11 million and $19 million in 2010, 2009 and 2008, respectively.
During the third quarter, we signed an agreement to sell certain assets and liabilities of our light-duty filtration business which manufactures light-duty automotive and industrial filtration solutions. The transaction is expected to close in the fourth quarter of 2011. The sales price is expected to be approximately $90 million to $95 million, subject to a final financial statement review and includes a note receivable from the buyer of approximately $4 million. There are no earnouts or other contingencies associated with the sales price. We expect to recognize a pre-tax gain on the sale of approximately $45 million to $50 million, which includes an allocation of goodwill of approximately $11 million.
Sales for this business were $74 million, $54 million and $75 million in 2010, 2009 and 2008, respectively. Income before income taxes for this business was approximately $9 million, $2 million and $9 million in 2010, 2009 and 2008, respectively.
The assets and liabilities associated with these businesses have not been reclassified and separately presented in the Condensed Consolidated Balance Sheets as they are immaterial. We will enter into supply and other agreements with the operations that will represent ongoing involvement and as such, the results of these operations will not be presented as discontinued operations.
Acquisition
On January 4, 2010, we acquired the remaining 70 percent interest in Cummins Western Canada (CWC) from our former principal for consideration of approximately $71 million. We formed a new partnership with a new distributor principal where we own 80 percent of CWC and the new distributor principal owns 20 percent. The acquisition was effective on January 1, 2010. The $71 million of consideration consisted of:
|
In millions |
|
|
| |
|
Borrowings under credit revolver |
|
$ |
44 |
|
|
Capital contributed by Cummins Inc. |
|
10 |
| |
|
Capital contributed by new principal, as described below |
|
8 |
| |
|
Funded from first quarter operations |
|
9 |
| |
|
Total consideration |
|
$ |
71 |
|
The purchase price was approximately $97 million as presented below. The intangible assets are primarily customer related and are being amortized over periods ranging from one to three years. The acquisition of CWC was accounted for as a business combination, with the results of the acquired entity and the goodwill included in the Distribution operating segment as of the acquisition date. Distribution segment results also include a $12 million gain for the three months ended March 28, 2010, as we were required to re-measure our pre-existing 30 percent ownership interest in CWC to fair value in accordance with GAAP. Net sales for CWC were $272 million for the 12 months ended December 31, 2010, which was approximately two percent of Cummins Inc. consolidated sales.
The purchase price was allocated as follows:
|
In millions |
|
|
| |
|
Accounts receivable |
|
$ |
31 |
|
|
Inventory |
|
48 |
| |
|
Fixed assets |
|
45 |
| |
|
Intangible assets |
|
11 |
| |
|
Goodwill |
|
2 |
| |
|
Other assets |
|
2 |
| |
|
Current liabilities |
|
(42 |
) | |
|
Total purchase price |
|
$ |
97 |
|
|
Fair value of pre-existing 30 percent interest |
|
(26 |
) | |
|
Consideration given |
|
$ |
71 |
|
We provided a loan to our partner of approximately $8 million to fund the purchase of his 20 percent interest. The purchase transaction resulted in $8 million of noncontrolling interest (representing our partner’s 20 percent interest) which was completely offset by the $8 million receivable from our partner, reducing the noncontrolling interest impact to zero as of the acquisition date. The interest-bearing loan is expected to be repaid over a period of 3-5 years. The partner also has periodic options to purchase an additional 10 to 15 percent interest in CWC up to a maximum of an additional 30 percent (total ownership not to exceed 50 percent).
NOTE 5. EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES
Equity, royalty and interest income from investees included in our Condensed Consolidated Statements of Income for the interim reporting periods was as follows:
|
|
|
Three months ended |
|
Nine months ended |
| ||||||||
|
|
|
September 25, |
|
September 26, |
|
September 25, |
|
September 26, |
| ||||
|
In millions |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||
|
Distribution Entities |
|
|
|
|
|
|
|
|
| ||||
|
North American distributors |
|
$ |
35 |
|
$ |
26 |
|
$ |
100 |
|
$ |
72 |
|
|
Komatsu Cummins Chile, Ltda |
|
6 |
|
5 |
|
16 |
|
11 |
| ||||
|
All other distributors |
|
1 |
|
— |
|
3 |
|
2 |
| ||||
|
Manufacturing Entities |
|
|
|
|
|
|
|
|
| ||||
|
Chongqing Cummins Engine Company, Ltd. |
|
20 |
|
12 |
|
51 |
|
35 |
| ||||
|
Dongfeng Cummins Engine Company, Ltd. |
|
15 |
|
24 |
|
64 |
|
76 |
| ||||
|
Shanghai Fleetguard Filter Co., Ltd. |
|
4 |
|
3 |
|
12 |
|
9 |
| ||||
|
Cummins Westport, Inc. |
|
4 |
|
2 |
|
8 |
|
7 |
| ||||
|
Tata Cummins, Ltd. |
|
2 |
|
4 |
|
9 |
|
11 |
| ||||
|
Valvoline Cummins, Ltd. |
|
2 |
|
2 |
|
6 |
|
7 |
| ||||
|
Komatsu manufacturing alliances |
|
— |
|
2 |
|
1 |
|
7 |
| ||||
|
Beijing Foton Cummins Engine Co., Ltd. |
|
(2 |
) |
(6 |
) |
(5 |
) |
(12 |
) | ||||
|
All other manufacturers |
|
7 |
|
7 |
|
19 |
|
14 |
| ||||
|
Cummins share of net income |
|
94 |
|
81 |
|
284 |
|
239 |
| ||||
|
Royalty and interest income |
|
8 |
|
7 |
|
31 |
|
22 |
| ||||
|
Equity, royalty and interest income from investees |
|
$ |
102 |
|
$ |
88 |
|
$ |
315 |
|
$ |
261 |
|
NOTE 6. MARKETABLE SECURITIES
A summary of marketable securities, all of which are classified as current, is as follows:
|
|
|
September 25, 2011 |
|
December 31, 2010 |
| ||||||||||||||
|
In millions |
|
Cost |
|
Gross unrealized |
|
Estimated |
|
Cost |
|
Gross unrealized |
|
Estimated |
| ||||||
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Debt mutual funds |
|
$ |
110 |
|
$ |
4 |
|
$ |
114 |
|
$ |
179 |
|
$ |
1 |
|
$ |
180 |
|
|
Bank debentures |
|
79 |
|
— |
|
79 |
|
85 |
|
— |
|
85 |
| ||||||
|
Certificates of deposit |
|
67 |
|
— |
|
67 |
|
59 |
|
— |
|
59 |
| ||||||
|
Government debt securities-non-U.S. |
|
4 |
|
(1 |
) |
3 |
|
4 |
|
(1 |
) |
3 |
| ||||||
|
Corporate debt securities |
|
2 |
|
— |
|
2 |
|
2 |
|
— |
|
2 |
| ||||||
|
Equity securities and other |
|
— |
|
8 |
|
8 |
|
— |
|
10 |
|
10 |
| ||||||
|
Total marketable securities |
|
$ |
262 |
|
$ |
11 |
|
$ |
273 |
|
$ |
329 |
|
$ |
10 |
|
$ |
339 |
|
At September 25, 2011, the fair value of available-for-sale investments in debt securities by contractual maturity is as follows:
|
|
|
|
| |
|
Maturity date |
|
Fair value |
| |
|
In millions |
|
|
|
|
|
1 year or less |
|
$ |
54 |
|
|
1-5 years |
|
28 |
| |
|
5-10 years |
|
1 |
| |
|
After 10 years |
|
1 |
| |
|
Total |
|
$ |
84 |
|
NOTE 7. INCOME TAXES
Our tax rate is generally less than the 35 percent U.S. income tax rate primarily due to lower tax rates on foreign income and research tax credits. The tax rates for the three and nine month periods ended September 25, 2011, were 25.0 percent and 28.2 percent, respectively. The tax rate for the three and nine month periods ended September 25, 2011, includes a net discrete income tax benefit of $29 million (net of additional reserves for uncertain tax positions of $39 million) related to prior year refund claims filed for additional research tax credits, partially offset by additional foreign income net of foreign tax credits, as well as other adjustments. This benefit also includes discrete income tax charges of $2 million for prior year tax return true-up adjustments and $3 million related to the third quarter enactment of U.K. tax law changes in the three and nine month periods ended September 25, 2011. Additionally, the tax rate for the nine month period includes a second quarter discrete income tax charge of $4 million related to the enactment of state tax law changes in Indiana.
The balance of “unrecognized tax benefits,” the amount of related interest we have provided and what we believe to be the range of reasonably possible changes in the next 12 months were the following:
|
|
|
September 25, |
|
December 31, |
| ||
|
In millions |
|
2011 |
|
2010 |
| ||
|
Unrecognized tax benefits |
|
$ |
113 |
|
$ |
85 |
|
|
Portion that, if recognized, would reduce tax expense and effective tax rates |
|
73 |
|
33 |
| ||
|
Accrued interest on unrecognized tax benefits |
|
19 |
|
19 |
| ||
|
Reasonably possible reduction to the balance of unrecognized tax benefits in succeeding 12 months |
|
0 - 60 |
|
0 - 60 |
| ||
It is reasonably possible that the liability associated with the unrecognized tax benefits will increase or decrease within the next 12 months. These changes may be the result of the expiration of statutes of limitations or audits and could range from $0 to $60 million based on current estimates. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although we believe that adequate provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on our earnings. Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, thus having a positive impact on earnings. It is anticipated that the expiration of statutes of limitations during the next 12 months could have a significant earnings impact. Due to the uncertainty of amounts and in accordance with our accounting policies, we have not recorded any potential impact of these settlements.
Our effective tax rates for the comparable prior year periods were 29.5 percent and 31.1 percent, respectively. In July 2010, the U.K. passed legislation which reduced our U.K. tax rate from 28 percent to 27 percent in 2011. We had an additional charge to our third quarter tax provision of approximately $2 million to reduce the value of our U.K. deferred tax assets. The tax rate for the nine month period included a discrete income tax charge of $7 million related to the enactment of the “Patient Protection and Affordable Care Act.” The lower rate in 2011 compared to 2010 is a result of the geographic mix of earnings.
NOTE 8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The majority of the assets and liabilities we carry at fair value are available-for-sale (AFS) securities and derivatives. AFS securities are derived from level 1 or level 2 inputs. Derivative assets and liabilities are derived from level 2 inputs. The predominance of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. When material, we adjust the values of our derivative contracts for counter-party or our credit risk. There were no transfers into or out of Levels 2 or 3 in the first nine months of 2011.
The following table summarizes our financial instruments recorded at fair value in our Condensed Consolidated Balance Sheets at September 25, 2011:
|
|
|
Fair Value Measurements Using |
| ||||||||||
|
|
|
Quoted prices in |
|
Significant other |
|
Significant |
|
|
| ||||
|
In millions |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
| ||||
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
| ||||
|
Debt mutual funds |
|
$ |
31 |
|
$ |
83 |
|
$ |
— |
|
$ |
114 |
|
|
Bank debentures |
|
— |
|
79 |
|
— |
|
79 |
| ||||
|
Certificates of deposit |
|
— |
|
67 |
|
— |
|
67 |
| ||||
|
Government debt securities-non-U.S. |
|
— |
|
3 |
|
— |
|
3 |
| ||||
|
Corporate debt securities |
|
— |
|
2 |
|
— |
|
2 |
| ||||
|
Total available-for-sale debt securities |
|
31 |
|
234 |
|
— |
|
265 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Available-for-sale equity securities: |
|
|
|
|
|
|
|
|
| ||||
|
Financial services industry |
|
8 |
|
— |
|
— |
|
8 |
| ||||
|
Total available-for-sale equity securities |
|
8 |
|
— |
|
— |
|
8 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Derivative assets: |
|
|
|
|
|
|
|
|
| ||||
|
Interest rate contracts |
|
— |
|
81 |
|
— |
|
81 |
| ||||
|
Total derivative assets |
|
— |
|
81 |
|
— |
|
81 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Derivative liabilities: |
|
|
|
|
|
|
|
|
| ||||
|
Commodity swap contracts |
|
— |
|
17 |
|
— |
|
17 |
| ||||
|
Foreign currency forward contracts |
|
— |
|
11 |
|
— |
|
11 |
| ||||
|
Total derivative liabilities |
|
— |
|
28 |
|
— |
|
28 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Total |
|
$ |
39 |
|
$ |
287 |
|
$ |
— |
|
$ |
326 |
|
The following table summarizes our financial instruments recorded at fair value in our Condensed Consolidated Balance Sheets at December 31, 2010:
|
|
|
Fair Value Measurements Using |
| ||||||||||
|
|
|
Quoted prices in |
|
Significant other |
|
Significant |
|
|
| ||||
|
In millions |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
| ||||
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
| ||||
|
Debt mutual funds |
|
$ |
75 |
|
$ |
105 |
|
$ |
— |
|
$ |
180 |
|
|
Bank debentures |
|
— |
|
85 |
|
— |
|
85 |
| ||||
|
Certificates of deposit |
|
— |
|
59 |
|
— |
|
59 |
| ||||
|
Government debt securities-non-U.S. |
|
— |
|
3 |
|
— |
|
3 |
| ||||
|
Corporate debt securities |
|
— |
|
2 |
|
— |
|
2 |
| ||||
|
Total available-for-sale debt securities |
|
75 |
|
254 |
|
— |
|
329 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Available-for-sale equity securities: |
|
|
|
|
|
|
|
|
| ||||
|
Financial services industry |
|
10 |
|
— |
|
— |
|
10 |
| ||||
|
Total available-for-sale equity securities |
|
10 |
|
— |
|
— |
|
10 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Derivative assets: |
|
|
|
|
|
|
|
|
| ||||
|
Commodity swap contracts |
|
— |
|
21 |
|
— |
|
21 |
| ||||
|
Interest rate contracts |
|
— |
|
41 |
|
— |
|
41 |
| ||||
|
Total derivative assets |
|
— |
|
62 |
|
— |
|
62 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Total |
|
$ |
85 |
|
$ |
316 |
|
$ |
— |
|
$ |
401 |
|
Fair value of derivative assets for foreign currency forward contracts and total derivative liabilities at December 31, 2010, are not material to our Condensed Consolidated Balance Sheets.
The substantial majority of our assets were valued utilizing a market approach. A description of the valuation techniques and inputs used for our level 2 fair value measures are as follows:
Debt mutual funds — Assets in level 2 consist of exchange traded mutual funds that lack sufficient trading volume to be classified at level 1. The fair value measure for these investments is the daily net asset value published on a regulated governmental website. Daily quoted prices are available from the issuing brokerage and are used on a test basis to corroborate this level 2 input.
Bank debentures and Certificates of deposit — These investments provide us with a fixed rate of return and generally range in maturity from six months to three years. The counter-parties to these investments are reputable financial institutions with investment grade credit ratings. Since these instruments are not tradable and must be settled directly by Cummins with the respective financial institution, our fair value measure is the financial institutions’ month-end statement.
Government debt securities-non-U.S. and Corporate debt securities — The fair value measure for these securities are broker quotes received from reputable firms. These securities are infrequently traded on a national stock exchange and these values are used on a test basis to corroborate our level 2 input measure.
Foreign currency forward contracts — The fair value measure for these contracts are determined based on forward foreign exchange rates received from third-party pricing services. These rates are based upon market transactions and are periodically corroborated by comparing to third-party broker quotes.
Commodity swap contracts — The fair value measure for these contracts are current spot market data adjusted for the appropriate current forward curves provided by external financial institutions. The current spot price is the most significant component of this valuation and is based upon market transactions. We use third-party pricing services for the spot price component of this valuation which is periodically corroborated by market data from broker quotes.
Interest rate contracts — We currently have only one interest rate contract. We utilize the month-end statement from the issuing financial institution as our fair value measure for this investment. We corroborate this valuation through the use of a third-party pricing service for similar assets and liabilities.
Fair Value of Other Financial Instruments
Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our risk premium, the fair value and carrying value of total debt, including current maturities, at September 25, 2011 and December 31, 2010, are set forth in the table below. The carrying values of all other receivables and liabilities approximated fair values.
|
|
|
September 25, |
|
December 31, |
| ||
|
In millions |
|
2011 |
|
2010 |
| ||
|
Fair value of total debt |
|
$ |
897 |
|
$ |
886 |
|
|
Carrying value of total debt |
|
801 |
|
843 |
| ||
NOTE 9. INVENTORIES
Inventories are stated at the lower of cost or market. Inventories included the following:
|
|
|
September 25, |
|
December 31, |
| |||
|
In millions |
|
2011 |
|
2010 |
| |||
|
Finished products |
|
$ |
1,192 |
|
$ |
1,019 |
| |
|
Work-in-process and raw materials |
|
1,204 |
|
1,048 |
| |||
|
Inventories at FIFO cost |
|
2,396 |
|
2,067 |
| |||
|
Excess of FIFO over LIFO |
|
(101 |
) |
(90 |
) | |||
|
Total inventories |
|
$ |
2,295 |
|
$ |
1,977 |
| |
NOTE 10. PRODUCT WARRANTY LIABILITY
We charge the estimated costs of warranty programs, other than product recalls, to income at the time products are shipped to customers. We use historical claims experience to develop the estimated liability. We review product recall programs on a quarterly basis and, if necessary, record a liability when we commit to an action or when they become probable and estimable, which is reflected in the provision for warranties issued line. We also sell extended warranty coverage on several engines. The following is a tabular reconciliation of the product warranty liability, including the deferred revenue related to our extended warranty coverage and accrued recall programs:
|
|
|
Nine months ended |
| ||||
|
|
|
September 25, |
|
September 26, |
| ||
|
In millions |
|
2011 |
|
2010 |
| ||
|
Balance, beginning of period |
|
$ |
980 |
|
$ |
989 |
|
|
Provision for warranties issued |
|
329 |
|
250 |
| ||
|
Deferred revenue on extended warranty contracts sold |
|
82 |
|
78 |
| ||
|
Payments |
|
(292 |
) |
(310 |
) | ||
|
Amortization of deferred revenue on extended warranty contracts |
|
(71 |
) |
(64 |
) | ||
|
Changes in estimates for pre-existing warranties |
|
(4 |
) |
(16 |
) | ||
|
Foreign currency translation |
|
(6 |
) |
— |
| ||
|
Balance, end of period |
|
$ |
1,018 |
|
$ |
927 |
|
Warranty related deferred revenue, supplier recovery receivables and the long-term portion of the warranty liability on our September 25, 2011, balance sheet were as follows:
|
|
|
September 25, |
|
|
| |
|
In millions |
|
2011 |
|
Balance Sheet Locations |
| |
|
Deferred revenue related to extended coverage programs: |
|
|
|
|
| |
|
Current portion |
|
$ |
98 |
|
Deferred revenue |
|
|
Long-term portion |
|
197 |
|
Other liabilities and deferred revenue |
| |
|
Total |
|
$ |
295 |
|
|
|
|
|
|
|
|
|
| |
|
Receivables related to estimated supplier recoveries: |
|
|
|
|
| |
|
Current portion |
|
$ |
7 |
|
Trade and other receivables |
|
|
Long-term portion |
|
7 |
|
Other assets |
| |
|
Total |
|
$ |
14 |
|
|
|
|
|
|
|
|
|
| |
|
Long-term portion of warranty liability |
|
$ |
306 |
|
Other liabilities and deferred revenue |
|
NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFITS
We sponsor funded and unfunded domestic and foreign defined benefit pension and other postretirement plans. Cash contributions to these plans were as follows:
|
|
|
Three months ended |
|
Nine months ended |
| ||||||||
|
|
|
September 25, |
|
September 26, |
|
September 25, |
|
September 26, |
| ||||
|
In millions |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||
|
Defined benefit pension and other postretirement plans: |
|
|
|
|
|
|
|
|
| ||||
|
Voluntary pension |
|
$ |
36 |
|
$ |
11 |
|
$ |
106 |
|
$ |
106 |
|
|
Mandatory pension |
|
5 |
|
5 |
|
16 |
|
61 |
| ||||
|
Defined benefit pension contributions |
|
41 |
|
16 |
|
122 |
|
167 |
| ||||
|
Other postretirement plans |
|
4 |
|
20 |
|
22 |
|
37 |
| ||||
|
Total defined benefit plans |
|
$ |
45 |
|
$ |
36 |
|
$ |
144 |
|
$ |
204 |
|
|
Defined contribution pension plans |
|
$ |
20 |
|
$ |
10 |
|
$ |
57 |
|
$ |
33 |
|
We presently anticipate contributing at least $130 million to our defined benefit pension plans in 2011 and paying approximately $39 million, net of reimbursements, in claims and premiums for other postretirement benefits. The $130 million of contributions for the full year include voluntary contributions of approximately $109 million. These contributions and payments may be made from trusts or company funds either to increase pension assets or to make direct benefit payments to plan participants.
The components of net periodic pension and other postretirement benefit cost under our plans consisted of the following:
|
|
|
Pension |
|
|
|
|
| ||||||||||||
|
|
|
U.S. Plans |
|
Non-U.S. Plans |
|
Other Postretirement Benefits |
| ||||||||||||
|
|
|
Three months ended |
| ||||||||||||||||
|
|
|
September 25, |
|
September 26, |
|
September 25, |
|
September 26, |
|
September 25, |
|
September 26, |
| ||||||
|
In millions |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||||
|
Service cost |
|
$ |
13 |
|
$ |
11 |
|
$ |
5 |
|
$ |
5 |
|
$ |
— |
|
$ |
— |
|
|
Interest cost |
|
27 |
|
29 |
|
15 |
|
14 |
|
6 |
|
7 |
| ||||||
|
Expected return on plan assets |
|
(38 |
) |
(36 |
) |
(19 |
) |
(18 |
) |
— |
|
— |
| ||||||
|
Amortization of prior service (credit) cost |
|
— |
|
(1 |
) |
1 |
|
1 |
|
(2 |
) |
(2 |
) | ||||||
|
Recognized net actuarial loss |
|
10 |
|
9 |
|
3 |
|
4 |
|
— |
|
— |
| ||||||
|
Net periodic benefit cost |
|
$ |
12 |
|
$ |
12 |
|
$ |
5 |
|
$ |
6 |
|
$ |
4 |
|
$ |
5 |
|
|
|
|
Pension |
|
|
|
|
| ||||||||||||
|
|
|
U.S. Plans |
|
Non-U.S. Plans |
|
Other Postretirement Benefits |
| ||||||||||||
|
|
|
Nine months ended |
| ||||||||||||||||
|
|
|
September 25, |
|
September 26, |
|
September 25, |
|
September 26, |
|
September 25, |
|
September 26, |
| ||||||
|
In millions |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||||
|
Service cost |
|
$ |
39 |
|
$ |
34 |
|
$ |
15 |
|
$ |
14 |
|
$ |
— |
|
$ |
— |
|
|
Interest cost |
|
81 |
|
84 |
|
45 |
|
43 |
|
18 |
|
21 |
| ||||||
|
Expected return on plan assets |
|
(114 |
) |
(110 |
) |
(56 |
) |
(53 |
) |
— |
|
— |
| ||||||
|
Amortization of prior service (credit) cost |
|
— |
|
(1 |
) |
2 |
|
2 |
|
(6 |
) |
(6 |
) | ||||||
|
Recognized net actuarial loss |
|
30 |
|
27 |
|
9 |
|
13 |
|
— |
|
— |
| ||||||
|
Net periodic benefit cost |
|
$ |
36 |
|
$ |
34 |
|
$ |
15 |
|
$ |
19 |
|
$ |
12 |
|
$ |
15 |
|
NOTE 12. COMMITMENTS AND CONTINGENCIES
We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We also have been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are material individually or in the aggregate. While we believe we have also established adequate accruals for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition or cash flows.
We conduct significant business operations in Brazil that are subject to the Brazilian federal, state and local labor, social security, tax and customs laws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding the application of these laws to particular circumstances. In the third quarter of 2010, it was determined that we overpaid a Brazilian revenue based tax during the period 2004-2008. Our results include a pre-tax recovery of $32 million recorded in cost of sales ($21 million after-tax) related to tax credits on imported products arising from this overpayment. This recovery has been excluded from segment results as it was not considered by management in its evaluation of operating results for the year.
In June 2008, four of our sites in Southern Indiana, including our Technical Center, experienced extensive flood damage. We have submitted a claim for $220 million to our insurance carriers, which includes a claim for business interruption. As of September 25, 2011, we had received $92 million in recoveries from the insurance carriers. Our insurance carriers have disputed certain aspects of our claim and the parties have filed suit against each other.
U.S. Distributor Commitments
Our distribution agreements with independent and partially-owned distributors generally have a three-year term and are restricted to specified territories. Our distributors develop and maintain a network of dealers with which we have no direct relationship. The distributors are permitted to sell other, noncompetitive products only with our consent. We license all of our distributors to use our name and logo in connection with the sale and service of our products, with no right to assign or sublicense the trademarks, except to authorized dealers, without our consent. Products are sold to the distributors at standard domestic or international distributor net prices, as applicable. Net prices are wholesale prices we establish to permit our distributors an adequate margin on their sales. Subject to local laws, we can generally refuse to renew these agreements upon expiration or terminate them upon written notice for inadequate sales, change in principal ownership and certain other reasons. Distributors also have the right to terminate the agreements upon 60-day notice without cause, or 30-day notice for cause. Upon termination or failure to renew, we are required to purchase the distributor’s current inventory, signage and special tools, and may, at our option purchase other assets of the distributor, but are under no obligation to do so.
Other Guarantees and Commitments
In addition to the guarantees discussed above, from time to time we enter into other guarantee arrangements, including guarantees of non-U.S. distributor financing and other miscellaneous guarantees of third-party obligations. As of September 25, 2011, the maximum potential loss related to these other guarantees is $58 million ($37 million of which relates to the Beijing Foton guarantee discussed below and $21 million relates to the Cummins Olayan Energy Limited guarantee discussed below).
We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. The penalty amounts are less than our purchase commitments and essentially allow the supplier to recover their tooling costs in most instances. As of September 25, 2011, if we were to stop purchasing from each of these suppliers, the amount of the penalty would be approximately $55 million, of which $49 million relates to a contract with an engine parts supplier that extends to 2013. This arrangement enables us to secure critical components. We do not currently anticipate paying any penalties under these contracts.
In July 2008, Beijing Foton Cummins Engine Company, a 50 percent owned entity accounted for under the equity method, entered into a line of credit agreement with a borrowing capacity of up to $188 million (at current exchange rates). The line will be used primarily to fund equipment purchases for a new manufacturing plant. As a part of this transaction, we guaranteed 50 percent of any outstanding borrowings up to a maximum guarantee of $94 million (at current exchange rates). As of September 25, 2011, outstanding borrowings under this agreement were $73 million and our guarantee was $37 million (at current exchange rates). We recorded a liability for the fair value of this guarantee. The amount of the liability was less than $1 million. The offset to this liability was an increase in our investment in the joint venture.
In February 2010, Cummins Olayan Energy Limited, a 49 percent owned entity accounted for under the equity method, executed a four-year $101 million (at current exchange rates) debt financing arrangement to acquire certain rental equipment assets. As a part of this transaction, we guaranteed 49 percent of the total outstanding loan amount or $50 million (at current exchange rates). As of September 25, 2011, outstanding borrowings under this agreement were $43 million and our guarantee was $21 million (at current exchange rates). We recorded a liability for the fair value of this guarantee. The amount of the liability was less than $1 million. The offset to this liability was an increase in our investment in the joint venture.
We have guarantees with certain customers that require us to satisfactorily honor contractual or regulatory obligations, or compensate for monetary losses related to nonperformance. These performance bonds and other performance-related guarantees at September 25, 2011, were $78 million.
Indemnifications
Periodically, we enter into various contractual arrangements where we agree to indemnify a third-party against certain types of losses. Common types of indemnifications include:
· product liability and license, patent or trademark indemnifications,
· asset sale agreements where we agree to indemnify the purchaser against future environmental exposures related to the asset sold and
· any contractual agreement where we agree to indemnify the counter-party for losses suffered as a result of a misrepresentation in the contract.
We regularly evaluate the probability of having to incur costs associated with these indemnifications and accrue for expected losses that are probable. Because the indemnifications are not related to specified known liabilities and due to their uncertain nature, we are unable to estimate the maximum amount of the potential loss associated with these indemnifications.
Joint Venture Commitments
As of September 25, 2011, we have committed to invest an additional $122 million into existing joint ventures of which $83 million is expected to be funded in 2011.
Sale and Leaseback Transaction Amendment and Extension
During 2001, we entered into a sale-leaseback transaction with a financial institution with regard to certain heavy-duty engine manufacturing equipment. The lease was classified as an operating lease with a lease term of 11.5 years, expiring June 28, 2013. The financial institution created a grantor trust to act as the lessor in the arrangement. The financial institution owned all of the equity in the trust. The grantor trust had no assets other than the equipment and its rights to the lease agreement with us. The terms of the agreement contained a guarantee of the residual value of the equipment and in December 2003, the grantor trust which acts as the lessor in the sale and leaseback transaction described above was consolidated as a result of the adoption of new accounting standards for variable interest entities, due primarily to the existence of the residual value guarantee.
In February 2009, we amended the lease agreement to extend the lease for an additional two years to June 2015 and we removed the residual value guarantee. As a result of removing the residual value guarantee, we were no longer required to consolidate the grantor trust and we deconsolidated the trust in the first quarter of 2009. With the deconsolidation, we were required to account for the leasing arrangement with the trust which qualified as a capital lease. The deconsolidation of the trust had minimal impact on our Consolidated Financial Statements as the present value of the minimum lease payments (including the extension) approximated the amount that was reported as noncontrolling interest as of the date of the amendment. The reduction in noncontrolling interests and increase in our capital lease liabilities was $35 million.
In September 2011, we reached an agreement to purchase these assets from the lessor for approximately $48 million. The amount exceeded the existing capital lease obligation by approximately $14 million. This excess was recorded as an increase to the book value of those assets and is being depreciated over the estimated remaining useful life of approximately 10 years.
NOTE 13. COMPREHENSIVE INCOME
The table below provides a summary of total comprehensive income and the allocation of total comprehensive income between the shareholders of Cummins Inc. and the non-controlling interests for the three and nine month periods ended September 25, 2011 and September 26, 2010.
|
|
|
Three months ended |
| ||||||||||||||||
|
|
|
September 25, 2011 |
|
September 26, 2010 |
| ||||||||||||||
|
In millions |
|
Attributable to |
|
Attributable to |
|
Total |
|
Attributable to |
|
Attributable to |
|
Total |
| ||||||
|
Net income |
|
$ |
452 |
|
$ |
20 |
|
$ |
472 |
|
$ |
283 |
|
$ |
26 |
|
$ |
309 |
|
|
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Unrealized gain (loss) on marketable securities |
|
— |
|
1 |
|
1 |
|
1 |
|
2 |
|
3 |
| ||||||
|
Unrealized gain (loss) on derivatives |
|
(19 |
) |
— |
|
(19 |
) |
7 |
|
— |
|
7 |
| ||||||
|
Foreign currency translation adjustments |
|
||||||||||||||||||