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 March 31, 2013
Commission File Number 1-4949
CUMMINS INC.
(Exact name of registrant as specified in its charter)
|
Indiana |
|
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 March 31, 2013, there were 189,738,852 shares of common stock outstanding with a par value of $2.50 per share.
Website Access to Company’s Reports
Cummins maintains an internet website at www.cummins.com. Investors can obtain copies of our filings from this website free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to the Securities and Exchange Commission.
CUMMINS INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
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Condensed Consolidated Balance Sheets at March 31, 2013, and December 31, 2012 |
5 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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ITEM 1. Condensed Consolidated Financial Statements
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three months ended |
| ||||
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In millions, except per share amounts |
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March 31, 2013 |
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April 1, 2012 |
| ||
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NET SALES (a) |
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$ |
3,922 |
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$ |
4,472 |
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|
Cost of sales |
|
2,965 |
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3,274 |
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GROSS MARGIN |
|
957 |
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1,198 |
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OPERATING EXPENSES AND INCOME |
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Selling, general and administrative expenses |
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444 |
|
475 |
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Research, development and engineering expenses |
|
182 |
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181 |
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Equity, royalty and interest income from investees (Note 4) |
|
82 |
|
104 |
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Other operating income (expense), net |
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1 |
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2 |
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OPERATING INCOME |
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414 |
|
648 |
| ||
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Interest income |
|
5 |
|
8 |
| ||
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Interest expense |
|
6 |
|
8 |
| ||
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Other income (expense), net |
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18 |
|
2 |
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INCOME BEFORE INCOME TAXES |
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431 |
|
650 |
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Income tax expense (Note 5) |
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119 |
|
175 |
| ||
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CONSOLIDATED NET INCOME |
|
312 |
|
475 |
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|
|
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Less: Net income attributable to noncontrolling interests |
|
30 |
|
20 |
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NET INCOME ATTRIBUTABLE TO CUMMINS INC. |
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$ |
282 |
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$ |
455 |
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EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. |
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Basic |
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$ |
1.50 |
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$ |
2.39 |
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Diluted |
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$ |
1.49 |
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$ |
2.38 |
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WEIGHTED AVERAGE SHARES OUTSTANDING |
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Basic |
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188.4 |
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190.4 |
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Dilutive effect of stock compensation awards |
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0.4 |
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0.4 |
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Diluted |
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188.8 |
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190.8 |
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CASH DIVIDENDS DECLARED PER COMMON SHARE |
|
$ |
0.50 |
|
$ |
0.40 |
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(a) Includes sales to nonconsolidated equity investees of $552 million and $669 million for the three months ended March 31, 2013 and April 1, 2012, respectively.
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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Three months ended |
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In millions |
|
March 31, 2013 |
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April 1, 2012 |
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CONSOLIDATED NET INCOME |
|
$ |
312 |
|
$ |
475 |
|
|
Other comprehensive income (loss), net of tax (Note 13) |
|
|
|
|
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Foreign currency translation adjustments |
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(150 |
) |
106 |
| ||
|
Unrealized gain (loss) on marketable securities |
|
(10 |
) |
(1 |
) | ||
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Unrealized gain (loss) on derivatives |
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(6 |
) |
19 |
| ||
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Change in pension and other postretirement defined benefit plans |
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19 |
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11 |
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Total other comprehensive income (loss), net of tax |
|
(147 |
) |
135 |
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COMPREHENSIVE INCOME |
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165 |
|
610 |
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Less: Comprehensive income attributable to noncontrolling interest |
|
28 |
|
30 |
| ||
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COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC. |
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$ |
137 |
|
$ |
580 |
|
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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In millions, except par value |
|
March 31, 2013 |
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December 31, 2012 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
1,483 |
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$ |
1,369 |
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Marketable securities (Note 6) |
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196 |
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247 |
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Total cash, cash equivalents and marketable securities |
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1,679 |
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1,616 |
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Accounts and notes receivable, net |
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Trade and other |
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2,250 |
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2,235 |
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Nonconsolidated equity investees |
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246 |
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240 |
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Inventories (Note 8) |
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2,387 |
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2,221 |
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Prepaid expenses and other current assets |
|
658 |
|
855 |
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Total current assets |
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7,220 |
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7,167 |
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Long-term assets |
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Property, plant and equipment |
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5,942 |
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5,876 |
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Accumulated depreciation |
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(3,173 |
) |
(3,152 |
) | ||
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Property, plant and equipment, net |
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2,769 |
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2,724 |
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Investments and advances related to equity method investees |
|
944 |
|
897 |
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Goodwill |
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444 |
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445 |
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Other intangible assets, net |
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366 |
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369 |
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Other assets |
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1,013 |
|
946 |
| ||
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Total assets |
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$ |
12,756 |
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$ |
12,548 |
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LIABILITIES |
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Current liabilities |
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Loans payable |
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$ |
13 |
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$ |
16 |
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Accounts payable (principally trade) |
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1,554 |
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1,339 |
| ||
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Current maturities of long-term debt (Note 9) |
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54 |
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61 |
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Current portion of accrued product warranty (Note 10) |
|
396 |
|
386 |
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Accrued compensation, benefits and retirement costs |
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280 |
|
400 |
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Deferred revenue |
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230 |
|
215 |
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Taxes payable (including taxes on income) |
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203 |
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173 |
| ||
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Other accrued expenses |
|
527 |
|
546 |
| ||
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Total current liabilities |
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3,257 |
|
3,136 |
| ||
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Long-term liabilities |
|
|
|
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| ||
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Long-term debt (Note 9) |
|
736 |
|
698 |
| ||
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Postretirement benefits other than pensions |
|
422 |
|
432 |
| ||
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Other liabilities and deferred revenue |
|
1,296 |
|
1,308 |
| ||
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Total liabilities |
|
5,711 |
|
5,574 |
| ||
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|
|
|
|
|
| ||
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Commitments and contingencies (Note 11) |
|
— |
|
— |
| ||
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EQUITY |
|
|
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Cummins Inc. shareholders’ equity |
|
|
|
|
| ||
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Common stock, $2.50 par value, 500 shares authorized, 222.2 and 222.4 shares issued |
|
2,064 |
|
2,058 |
| ||
|
Retained earnings |
|
7,530 |
|
7,343 |
| ||
|
Treasury stock, at cost, 32.5 and 32.6 shares |
|
(1,827 |
) |
(1,830 |
) | ||
|
Common stock held by employee benefits trust, at cost, 1.4 and 1.5 shares |
|
(17 |
) |
(18 |
) | ||
|
Accumulated other comprehensive loss (Note 13) |
|
|
|
|
| ||
|
Defined benefit postretirement plans |
|
(775 |
) |
(794 |
) | ||
|
Other |
|
(320 |
) |
(156 |
) | ||
|
Total accumulated other comprehensive loss |
|
(1,095 |
) |
(950 |
) | ||
|
Total Cummins Inc. shareholders’ equity |
|
6,655 |
|
6,603 |
| ||
|
Noncontrolling interests |
|
390 |
|
371 |
| ||
|
Total equity |
|
7,045 |
|
6,974 |
| ||
|
Total liabilities and equity |
|
$ |
12,756 |
|
$ |
12,548 |
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Three months ended |
| ||||
|
In millions |
|
March 31, 2013 |
|
April 1, 2012 |
| ||
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
| ||
|
Consolidated net income |
|
$ |
312 |
|
$ |
475 |
|
|
Adjustments to reconcile consolidated net income to net cash provided by operating activities |
|
|
|
|
| ||
|
Depreciation and amortization |
|
98 |
|
85 |
| ||
|
Gain on fair value adjustment for consolidated investee |
|
(7 |
) |
— |
| ||
|
Deferred income taxes |
|
5 |
|
(27 |
) | ||
|
Equity in income of investees, net of dividends |
|
(36 |
) |
(59 |
) | ||
|
Pension contributions in excess of expense (Note 3) |
|
(54 |
) |
(27 |
) | ||
|
Other post-retirement benefits payments in excess of expense (Note 3) |
|
(8 |
) |
(4 |
) | ||
|
Stock-based compensation expense |
|
7 |
|
7 |
| ||
|
Excess tax benefits on stock-based awards |
|
(7 |
) |
(11 |
) | ||
|
Translation and hedging activities |
|
(5 |
) |
10 |
| ||
|
Changes in current assets and liabilities, net of acquisitions |
|
|
|
|
| ||
|
Accounts and notes receivable |
|
(29 |
) |
(135 |
) | ||
|
Inventories |
|
(177 |
) |
(209 |
) | ||
|
Other current assets |
|
158 |
|
(28 |
) | ||
|
Accounts payable |
|
204 |
|
148 |
| ||
|
Accrued expenses |
|
(142 |
) |
(196 |
) | ||
|
Changes in other liabilities and deferred revenue |
|
47 |
|
29 |
| ||
|
Other, net |
|
62 |
|
(37 |
) | ||
|
Net cash provided by operating activities |
|
428 |
|
21 |
| ||
|
|
|
|
|
|
| ||
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
| ||
|
Capital expenditures |
|
(114 |
) |
(126 |
) | ||
|
Investments in internal use software |
|
(12 |
) |
(16 |
) | ||
|
Investments in and advances to equity investees |
|
(24 |
) |
(5 |
) | ||
|
Acquisition of businesses, net of cash acquired |
|
(17 |
) |
(5 |
) | ||
|
Investments in marketable securities—acquisitions (Note 6) |
|
(133 |
) |
(146 |
) | ||
|
Investments in marketable securities—liquidations (Note 6) |
|
187 |
|
184 |
| ||
|
Cash flows from derivatives not designated as hedges |
|
(30 |
) |
11 |
| ||
|
Other, net |
|
— |
|
1 |
| ||
|
Net cash used in investing activities |
|
(143 |
) |
(102 |
) | ||
|
|
|
|
|
|
| ||
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
| ||
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Proceeds from borrowings |
|
— |
|
12 |
| ||
|
Payments on borrowings and capital lease obligations |
|
(27 |
) |
(38 |
) | ||
|
Net borrowings (payments) under short-term credit agreements |
|
15 |
|
— |
| ||
|
Distributions to noncontrolling interests |
|
(19 |
) |
(22 |
) | ||
|
Dividend payments on common stock |
|
(95 |
) |
(77 |
) | ||
|
Repurchases of common stock |
|
— |
|
(8 |
) | ||
|
Excess tax benefits on stock-based awards |
|
7 |
|
11 |
| ||
|
Other, net |
|
16 |
|
9 |
| ||
|
Net cash used in financing activities |
|
(103 |
) |
(113 |
) | ||
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
|
(68 |
) |
27 |
| ||
|
Net increase (decrease) in cash and cash equivalents |
|
114 |
|
(167 |
) | ||
|
Cash and cash equivalents at beginning of year |
|
1,369 |
|
1,484 |
| ||
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
1,483 |
|
$ |
1,317 |
|
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)
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
Common |
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Total |
|
|
|
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|
|
|
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Additional |
|
|
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Other |
|
|
|
Stock |
|
Cummins Inc. |
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|
|
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| |||||||||
|
|
|
Common |
|
paid-in |
|
Retained |
|
Comprehensive |
|
Treasury |
|
Held in |
|
Shareholders’ |
|
Noncontrolling |
|
Total |
| |||||||||
|
In millions |
|
Stock |
|
Capital |
|
Earnings |
|
Loss |
|
Stock |
|
Trust |
|
Equity |
|
Interests |
|
Equity |
| |||||||||
|
BALANCE AT DECEMBER 31, 2011 |
|
$ |
555 |
|
$ |
1,446 |
|
$ |
6,038 |
|
$ |
(938 |
) |
$ |
(1,587 |
) |
$ |
(22 |
) |
$ |
5,492 |
|
$ |
339 |
|
$ |
5,831 |
|
|
Net income |
|
|
|
|
|
455 |
|
|
|
|
|
|
|
455 |
|
20 |
|
475 |
| |||||||||
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
125 |
|
|
|
|
|
125 |
|
10 |
|
135 |
| |||||||||
|
Issuance of shares |
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
— |
|
1 |
| |||||||||
|
Employee benefits trust activity |
|
|
|
12 |
|
|
|
|
|
|
|
2 |
|
14 |
|
— |
|
14 |
| |||||||||
|
Acquisition of shares |
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
(8 |
) |
— |
|
(8 |
) | |||||||||
|
Cash dividends on common stock |
|
|
|
|
|
(77 |
) |
|
|
|
|
|
|
(77 |
) |
— |
|
(77 |
) | |||||||||
|
Distribution to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
(35 |
) |
(35 |
) | |||||||||
|
Stock option exercises |
|
|
|
|
|
|
|
|
|
5 |
|
|
|
5 |
|
— |
|
5 |
| |||||||||
|
Other shareholder transactions |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
3 |
|
14 |
|
17 |
| |||||||||
|
BALANCE AT APRIL 1, 2012 |
|
$ |
556 |
|
$ |
1,461 |
|
$ |
6,416 |
|
$ |
(813 |
) |
$ |
(1,590 |
) |
$ |
(20 |
) |
$ |
6,010 |
|
$ |
348 |
|
$ |
6,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
BALANCE AT DECEMBER 31, 2012 |
|
$ |
556 |
|
$ |
1,502 |
|
$ |
7,343 |
|
$ |
(950 |
) |
$ |
(1,830 |
) |
$ |
(18 |
) |
$ |
6,603 |
|
$ |
371 |
|
$ |
6,974 |
|
|
Net income |
|
|
|
|
|
282 |
|
|
|
|
|
|
|
282 |
|
30 |
|
312 |
| |||||||||
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
(145 |
) |
|
|
|
|
(145 |
) |
(2 |
) |
(147 |
) | |||||||||
|
Issuance of shares |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
1 |
|
— |
|
1 |
| |||||||||
|
Employee benefits trust activity |
|
|
|
8 |
|
|
|
|
|
|
|
1 |
|
9 |
|
— |
|
9 |
| |||||||||
|
Cash dividends on common stock |
|
|
|
|
|
(95 |
) |
|
|
|
|
|
|
(95 |
) |
— |
|
(95 |
) | |||||||||
|
Distribution to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
(19 |
) |
(19 |
) | |||||||||
|
Stock option exercises |
|
|
|
|
|
|
|
|
|
3 |
|
|
|
3 |
|
— |
|
3 |
| |||||||||
|
Other shareholder transactions |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
(3 |
) |
10 |
|
7 |
| |||||||||
|
BALANCE AT MARCH 31, 2013 |
|
$ |
556 |
|
$ |
1,508 |
|
$ |
7,530 |
|
$ |
(1,095 |
) |
$ |
(1,827 |
) |
$ |
(17 |
) |
$ |
6,655 |
|
$ |
390 |
|
$ |
7,045 |
|
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,” “we,” “our” or “us”) was founded in 1919 as a corporation in Columbus, Indiana, as one of the first diesel engine manufacturers. We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We serve our customers through a network of approximately 600 company-owned and independent distributor locations and approximately 6,500 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 first quarters of 2013 and 2012 ended on March 31, and April 1, respectively. The interim period for both 2013 and 2012 contained 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.
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 month periods ended March 31, 2013, and April 1, 2012, were as follows:
|
|
|
Three months ended |
| ||
|
|
|
March 31, 2013 |
|
April 1, 2012 |
|
|
Options excluded |
|
563,350 |
|
143,300 |
|
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, 2012. Our interim period financial results for the three 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. PENSION AND OTHER POSTRETIREMENT BENEFITS
We sponsor funded and unfunded domestic and foreign defined benefit pension and other postretirement plans. Contributions to these plans were as follows:
|
|
|
Three months ended |
| ||||
|
In millions |
|
March 31, 2013 |
|
April 1, 2012 |
| ||
|
Defined benefit pension and other postretirement plans |
|
|
|
|
| ||
|
Voluntary contribution |
|
$ |
39 |
|
$ |
38 |
|
|
Mandatory contribution |
|
37 |
|
5 |
| ||
|
Defined benefit pension contributions |
|
76 |
|
43 |
| ||
|
Other postretirement plans |
|
14 |
|
9 |
| ||
|
Total defined benefit plans |
|
$ |
90 |
|
$ |
52 |
|
|
|
|
|
|
|
| ||
|
Defined contribution pension plans |
|
$ |
22 |
|
$ |
27 |
|
We made $76 million of pension contributions in the three month period ended March 31, 2013, and we anticipate making an additional $89 million of contributions during the remainder of 2013. We paid $14 million of claims and premiums for other postretirement benefits in the three month period ended March 31, 2013; payments for the remainder of 2013 are expected to be $33 million. The $165 million of contributions for the full year include voluntary contributions of approximately $110 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. Our expected pension expense for 2013 has been reduced $10 million, to $87 million, from the amount we had expected at year-end, due to a remeasurement of the U.S. plan for changes in employee census data.
The components of net periodic pension and other postretirement benefit cost under our plans consisted of the following:
|
|
|
Pension |
|
|
|
|
| ||||||||||||
|
|
|
U.S. Plans |
|
U.K. Plans |
|
Other Postretirement Benefits |
| ||||||||||||
|
|
|
Three months ended |
| ||||||||||||||||
|
|
|
March 31, |
|
April 1, |
|
March 31, |
|
April 1, |
|
March 31, |
|
April 1, |
| ||||||
|
In millions |
|
2013 |
|
2012 |
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||||
|
Service cost |
|
$ |
17 |
|
$ |
14 |
|
$ |
5 |
|
$ |
6 |
|
$ |
— |
|
$ |
— |
|
|
Interest cost |
|
24 |
|
26 |
|
14 |
|
14 |
|
4 |
|
5 |
| ||||||
|
Expected return on plan assets |
|
(42 |
) |
(39 |
) |
(18 |
) |
(20 |
) |
— |
|
— |
| ||||||
|
Amortization of prior service credit |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(1 |
) | ||||||
|
Recognized net actuarial loss |
|
16 |
|
12 |
|
6 |
|
3 |
|
2 |
|
1 |
| ||||||
|
Net periodic benefit cost |
|
$ |
15 |
|
$ |
13 |
|
$ |
7 |
|
$ |
3 |
|
$ |
6 |
|
$ |
5 |
|
NOTE 4. 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 |
| ||||
|
In millions |
|
March 31, 2013 |
|
April 1, 2012 |
| ||
|
Distribution Entities |
|
|
|
|
| ||
|
North American distributors |
|
$ |
35 |
|
$ |
40 |
|
|
Komatsu Cummins Chile, Ltda. |
|
5 |
|
5 |
| ||
|
All other distributors |
|
— |
|
1 |
| ||
|
Manufacturing Entities |
|
|
|
|
| ||
|
Chongqing Cummins Engine Company, Ltd. |
|
12 |
|
18 |
| ||
|
Dongfeng Cummins Engine Company, Ltd. |
|
12 |
|
16 |
| ||
|
Shanghai Fleetguard Filter Co., Ltd. |
|
3 |
|
3 |
| ||
|
Valvoline Cummins, Ltd. |
|
3 |
|
2 |
| ||
|
Tata Cummins, Ltd. |
|
1 |
|
4 |
| ||
|
Beijing Foton Cummins Engine Co., Ltd. |
|
1 |
|
(2 |
) | ||
|
Cummins Westport, Inc. |
|
— |
|
5 |
| ||
|
Komatsu manufacturing alliances |
|
(1 |
) |
(1 |
) | ||
|
All other manufacturers |
|
2 |
|
1 |
| ||
|
Cummins share of net income |
|
73 |
|
92 |
| ||
|
Royalty and interest income |
|
9 |
|
12 |
| ||
|
Equity, royalty and interest income from investees |
|
$ |
82 |
|
$ |
104 |
|
NOTE 5. INCOME TAXES
Our effective tax rate for the year is expected to approximate 29.5 percent, excluding any one-time items that may arise. Our tax rate is generally less than the 35 percent U.S. statutory income tax rate primarily due to lower tax rates on foreign income and research tax credits. The tax rate for the three month period ended March 31, 2013, was 27.6 percent. This tax rate includes a discrete tax benefit of $28 million attributable to the 2012 research credit as well as a discrete tax expense of $17 million, which primarily relates to the write-off of a deferred tax asset deemed unrecoverable. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law and reinstated the research tax credit. The expiration of this credit resulted in a higher income tax provision of $28 million in 2012. As tax law changes are accounted for in the period of enactment, we recognized the discrete tax benefit in the first quarter of 2013.
Our effective tax rate for the three months ended April 1, 2012, was 26.9 percent. The increase in the 2013 effective tax rate compared to 2012 is due primarily to an unfavorable change in the pre-tax mix of income taxed in higher rate jurisdictions, partially offset by $11 million of net discrete tax benefits.
NOTE 6. MARKETABLE SECURITIES
A summary of marketable securities, all of which are classified as current, was as follows:
|
|
|
March 31, 2013 |
|
December 31, 2012 |
| ||||||||||||||
|
|
|
|
|
Gross unrealized |
|
Estimated |
|
|
|
Gross unrealized |
|
Estimated |
| ||||||
|
In millions |
|
Cost |
|
gains/(losses) |
|
fair value |
|
Cost |
|
gains/(losses) |
|
fair value |
| ||||||
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Debt mutual funds |
|
$ |
110 |
|
$ |
1 |
|
$ |
111 |
|
$ |
139 |
|
$ |
3 |
|
$ |
142 |
|
|
Bank debentures |
|
22 |
|
— |
|
22 |
|
45 |
|
— |
|
45 |
| ||||||
|
Certificates of deposit |
|
59 |
|
— |
|
59 |
|
47 |
|
— |
|
47 |
| ||||||
|
Government debt securities-non-U.S. |
|
3 |
|
— |
|
3 |
|
3 |
|
— |
|
3 |
| ||||||
|
Corporate debt securities |
|
1 |
|
— |
|
1 |
|
1 |
|
— |
|
1 |
| ||||||
|
Equity securities and other(1) |
|
— |
|
— |
|
— |
|
— |
|
9 |
|
9 |
| ||||||
|
Total marketable securities |
|
$ |
195 |
|
$ |
1 |
|
$ |
196 |
|
$ |
235 |
|
$ |
12 |
|
$ |
247 |
|
(1) In the first quarter of 2013 we recognized a $9 million gain on the sale of equity securities.
At March 31, 2013, the fair value of available-for-sale investments in debt securities by contractual maturity was as follows:
|
Maturity date |
|
|
| |
|
In millions |
|
Fair value |
| |
|
|
|
|
| |
|
1 year or less |
|
$ |
23 |
|
|
1-5 years |
|
2 |
| |
|
5-10 years |
|
1 |
| |
|
Total |
|
$ |
26 |
|
NOTE 7. 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 three months of 2013 and 2012.
The following table summarizes our financial instruments recorded at fair value in our Condensed Consolidated Balance Sheets at March 31, 2013:
|
|
|
Fair Value Measurements Using |
| ||||||||||
|
|
|
Quoted prices in active |
|
Significant other |
|
Significant |
|
|
| ||||
|
In millions |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
| ||||
|
Available-for-sale debt securities |
|
|
|
|
|
|
|
|
| ||||
|
Debt mutual funds |
|
$ |
78 |
|
$ |
33 |
|
$ |
— |
|
$ |
111 |
|
|
Bank debentures |
|
— |
|
22 |
|
— |
|
22 |
| ||||
|
Certificates of deposit |
|
— |
|
59 |
|
— |
|
59 |
| ||||
|
Government debt securities-non-U.S. |
|
— |
|
3 |
|
— |
|
3 |
| ||||
|
Corporate debt securities |
|
— |
|
1 |
|
— |
|
1 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Derivative assets |
|
|
|
|
|
|
|
|
| ||||
|
Interest rate contracts |
|
— |
|
77 |
|
— |
|
77 |
| ||||
|
Commodity swap contracts |
|
— |
|
2 |
|
— |
|
2 |
| ||||
|
Foreign currency forward contracts |
|
— |
|
1 |
|
— |
|
1 |
| ||||
|
Commodity call option contracts |
|
— |
|
1 |
|
— |
|
1 |
| ||||
|
Total assets |
|
$ |
78 |
|
$ |
199 |
|
$ |
— |
|
$ |
277 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Derivative liabilities |
|
|
|
|
|
|
|
|
| ||||
|
Foreign currency forward contracts |
|
— |
|
8 |
|
— |
|
8 |
| ||||
|
Commodity swap contracts |
|
— |
|
2 |
|
— |
|
2 |
| ||||
|
Commodity put option contracts |
|
— |
|
1 |
|
— |
|
1 |
| ||||
|
Total liabilities |
|
$ |
— |
|
$ |
11 |
|
$ |
— |
|
$ |
11 |
|
The following table summarizes our financial instruments recorded at fair value in our Condensed Consolidated Balance Sheets at December 31, 2012:
|
|
|
Fair Value Measurements Using |
| ||||||||||
|
|
|
Quoted prices in active |
|
Significant other |
|
Significant |
|
|
| ||||
|
In millions |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
| ||||
|
Available-for-sale debt securities |
|
|
|
|
|
|
|
|
| ||||
|
Debt mutual funds |
|
$ |
100 |
|
$ |
42 |
|
$ |
— |
|
$ |
142 |
|
|
Bank debentures |
|
— |
|
45 |
|
— |
|
45 |
| ||||
|
Certificates of deposit |
|
— |
|
47 |
|
— |
|
47 |
| ||||
|
Government debt securities-non-U.S. |
|
— |
|
3 |
|
— |
|
3 |
| ||||
|
Corporate debt securities |
|
— |
|
1 |
|
— |
|
1 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Available-for-sale equity securities |
|
|
|
|
|
|
|
|
| ||||
|
Financial services industry |
|
9 |
|
— |
|
— |
|
9 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
Derivative assets |
|
|
|
|
|
|
|
|
| ||||
|
Interest rate contracts |
|
— |
|
88 |
|
— |
|
88 |
| ||||
|
Foreign currency forward contracts |
|
— |
|
3 |
|
— |
|
3 |
| ||||
|
Commodity swap contracts |
|
— |
|
1 |
|
— |
|
1 |
| ||||
|
Commodity call option contracts |
|
— |
|
1 |
|
— |
|
1 |
| ||||
|
Total assets |
|
$ |
109 |
|
$ |
231 |
|
$ |
— |
|
$ |
340 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
Derivative liabilities |
|
|
|
|
|
|
|
|
| ||||
|
Commodity swap contracts |
|
— |
|
2 |
|
— |
|
2 |
| ||||
|
Commodity put option contracts |
|
— |
|
1 |
|
— |
|
1 |
| ||||
|
Total liabilities |
|
$ |
— |
|
$ |
3 |
|
$ |
— |
|
$ |
3 |
|
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 five 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 us 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.
· Commodity call and put option contracts — 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.
· 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 March 31, 2013 and December 31, 2012, are set forth in the table below. The carrying values of all other receivables and liabilities approximated fair values. The fair value of financial instruments is derived from Level 2 inputs.
|
|
|
March 31, |
|
December 31, |
| ||
|
In millions |
|
2013 |
|
2012 |
| ||
|
Fair value of total debt |
|
$ |
954 |
|
$ |
926 |
|
|
Carrying value of total debt |
|
803 |
|
775 |
| ||
NOTE 8. INVENTORIES
Inventories are stated at the lower of cost or market. Inventories included the following:
|
|
|
March 31, |
|
December 31, |
| ||
|
In millions |
|
2013 |
|
2012 |
| ||
|
Finished products |
|
$ |
1,430 |
|
$ |
1,393 |
|
|
Work-in-process and raw materials |
|
1,072 |
|
939 |
| ||
|
Inventories at FIFO cost |
|
2,502 |
|
2,332 |
| ||
|
Excess of FIFO over LIFO |
|
(115 |
) |
(111 |
) | ||
|
Total inventories |
|
$ |
2,387 |
|
$ |
2,221 |
|
NOTE 9. DEBT
A summary of long-term debt was as follows:
|
|
|
March 31, |
|
December 31, |
| ||
|
In millions |
|
2013 |
|
2012 |
| ||
|
Long-term debt |
|
|
|
|
| ||
|
Export financing loan, 4.5%, due 2013 |
|
$ |
11 |
|
$ |
23 |
|
|
Debentures, 6.75%, due 2027 |
|
58 |
|
58 |
| ||
|
Debentures, 7.125%, due 2028 |
|
250 |
|
250 |
| ||
|
Debentures, 5.65%, due 2098 (effective interest rate 7.48%) |
|
165 |
|
165 |
| ||
|
Credit facilities related to consolidated joint ventures |
|
112 |
|
88 |
| ||
|
Other |
|
86 |
|
69 |
| ||
|
|
|
682 |
|
653 |
| ||
|
Unamortized discount |
|
(35 |
) |
(35 |
) | ||
|
Fair value adjustments due to hedge on indebtedness |
|
77 |
|
88 |
| ||
|
Capital leases |
|
66 |
|
53 |
| ||
|
Total long-term debt |
|
790 |
|
759 |
| ||
|
Less: Current maturities of long-term debt |
|
(54 |
) |
(61 |
) | ||
|
Long-term debt |
|
$ |
736 |
|
$ |
698 |
|
Principal payments required on long-term debt during the next five years are:
|
|
|
Required Principal Payments |
| |||||||||||||
|
In millions |
|
2013 |
|
2014 |
|
2015 |
|
2016 |
|
2017 |
| |||||
|
Payment |
|
$ |
47 |
|
$ |
46 |
|
$ |
66 |
|
$ |
77 |
|
$ |
13 |
|
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:
|
|
|
Three months ended |
| ||||
|
In millions |
|
March 31, 2013 |
|
April 1, 2012 |
| ||
|
Balance, beginning of year |
|
$ |
1,088 |
|
$ |
1,014 |
|
|
Provision for warranties issued |
|
116 |
|
116 |
| ||
|
Deferred revenue on extended warranty contracts sold |
|
49 |
|
46 |
| ||
|
Payments |
|
(102 |
) |
(103 |
) | ||
|
Amortization of deferred revenue on extended warranty contracts |
|
(27 |
) |
(26 |
) | ||
|
Changes in estimates for pre-existing warranties |
|
(9 |
) |
(14 |
) | ||
|
Foreign currency translation |
|
(5 |
) |
4 |
| ||
|
Balance, end of period |
|
$ |
1,110 |
|
$ |
1,037 |
|
Warranty related deferred revenue, supplier recovery receivables and the long-term portion of the warranty liability on our March 31, 2013, balance sheet were as follows:
|
In millions |
|
March 31, 2013 |
|
Balance Sheet Location |
| |
|
Deferred revenue related to extended coverage programs |
|
|
|
|
| |
|
Current portion |
|
$ |
117 |
|
Deferred revenue |
|
|
Long-term portion |
|
325 |
|
Other liabilities and deferred revenue |
| |
|
Total |
|
$ |
442 |
|
|
|
|
|
|
|
|
|
| |
|
Receivables related to estimated supplier recoveries |
|
|
|
|
| |
|
Current portion |
|
$ |
6 |
|
Trade and other receivables |
|
|
Long-term portion |
|
5 |
|
Other assets |
| |
|
Total |
|
$ |
11 |
|
|
|
|
|
|
|
|
|
| |
|
Long-term portion of warranty liability |
|
$ |
272 |
|
Other liabilities and deferred revenue |
|
NOTE 11. 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.
U.S. Distributor Commitments
Our distribution agreements with independent and partially-owned distributors generally have a renewable 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. Our 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 matters discussed above, from time to time we periodically enter into other guarantee arrangements, including guarantees of non-U.S. distributor financing, residual value guarantees on equipment under operating leases and other miscellaneous guarantees of third-party obligations. As of March 31, 2013, the maximum potential loss related to these other guarantees is summarized as follows (where the guarantee is in a foreign currency the amount below represents the amount in U.S. dollars at current exchange rates):
|
In millions |
|
|
| |
|
Cummins Olayan Energy Limited debt guarantee |
|
$ |
8 |
|
|
Residual value guarantees |
|
1 |
| |
|
Other debt guarantees |
|
5 |
| |
|
Maximum potential loss |
|
$ |
14 |
|
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 March 31, 2013, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $114 million, of which $83 million relates to a contract with an engine parts supplier that extends to 2016. In addition, we also have a “take or pay” contract with an emission solutions business supplier requiring us to purchase approximately $73 million annually through 2018. These arrangements enable us to secure critical components. We do not currently anticipate paying any penalties under these contracts.
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 were $69 million at March 31, 2013 and $70 million at December 31, 2012.
Indemnifications
Periodically, we enter into various contractual arrangements where we agree to indemnify a third-party against certain types of losses. Common types of indemnities 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 indemnities 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 March 31, 2013, we have committed to invest an additional $56 million into existing joint ventures of which $13 million is expected to be funded in 2013.
NOTE 12. DERIVATIVES
We are exposed to financial risk resulting from volatility in foreign exchange rates, commodity prices and interest rates. This risk is closely monitored and managed through the use of financial derivative instruments including foreign currency forward contracts, commodity swap contracts, commodity zero-cost collars and interest rate swaps. As stated in our policies and procedures, financial derivatives are used expressly for hedging purposes, and under no circumstances are they used for speculative purposes. When material, we adjust the value of our derivative contracts for counter-party or our credit risk. None of our derivative instruments are subject to collateral requirements. Substantially all of our derivative contracts are subject to master netting arrangements which provide us with the option to settle certain contracts on a net basis when they settle on the same day with the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event.
Foreign Exchange Rates
As a result of our international business presence, we are exposed to foreign currency exchange risks. We transact business in foreign currencies and, as a result, our income experiences some volatility related to movements in foreign currency exchange rates. To help manage our exposure to exchange rate volatility, we use foreign exchange forward contracts on a regular basis to hedge forecasted intercompany and third-party sales and purchases denominated in non-functional currencies. Our internal policy allows for managing anticipated foreign currency cash flows for up to one year. These foreign currency forward contracts are designated and qualify as foreign currency cash flow hedges under GAAP. The effective portion of the unrealized gain or loss on the forward contract is deferred and reported as a component of “Accumulated other comprehensive loss” (AOCL). When the hedged forecasted transaction (sale or purchase) occurs, the unrealized gain or loss is reclassified into income in the same line item associated with the hedged transaction in the same period or periods during which the hedged transaction affects income. The ineffective portion of the hedge, if any, is recognized in current income during the period of change. As of March 31, 2013, the amount we expect to reclassify from AOCL to income over the next year is an unrealized net loss of $6 million. For the three month periods ended March 31, 2013 and April 1, 2012, there were no circumstances that would have resulted in the discontinuance of a foreign currency cash flow hedge.
To minimize the income volatility resulting from the remeasurement of net monetary assets and payables denominated in a currency other than the functional currency, we enter into foreign currency forward contracts, which are considered economic hedges. The objective is to offset the gain or loss from remeasurement with the gain or loss from the fair market valuation of the forward contract. These derivative instruments are not designated as hedges under GAAP.
The table below summarizes our outstanding foreign currency forward contracts. Only the U.S. dollar forward contracts are designated and qualify for hedge accounting as of each period presented below. The currencies in this table represent 93 percent and 95 percent of the notional amounts of contracts outstanding as of March 31, 2013 and December 31, 2012, respectively.
|
|
|
Notional amount in millions |
| ||
|
|
|
March 31, |
|
December 31, |
|
|
Currency denomination |
|
2013 |
|
2012 |
|
|
United States Dollar (USD) |
|
121 |
|
110 |
|
|
British Pound Sterling (GBP) |
|
197 |
|
227 |
|
|
Euro (EUR) |
|
31 |
|
28 |
|
|
Singapore Dollar (SGD) |
|
— |
|
3 |
|
|
Indian Rupee (INR) |
|
2,418 |
|
1,943 |
|
|
Japanese Yen (JPY) |
|
199 |
|
384 |
|
|
Canadian Dollar (CAD) |
|
54 |
|
59 |
|
|
South Korea Won (KRW) |
|
30,350 |
|
35,266 |
|
|
Chinese Renmimbi (CNY) |
|
60 |
|
45 |
|
Commodity Price Risk
We are exposed to fluctuations in commodity prices due to contractual agreements with component suppliers. In order to protect ourselves against future price volatility and, consequently, fluctuations in gross margins, we periodically enter into commodity swap contracts with designated banks to fix the cost of certain raw material purchases with the objective of minimizing changes in inventory cost due to market price fluctuations. Certain commodity swap contracts are derivative contracts that are designated as cash flow hedges under GAAP. We also have commodity swap contracts that represent an economic hedge but are not designated for hedge accounting and are marked to market through earnings. For those contracts that qualify for hedge accounting, the effective portion of the unrealized gain or loss is deferred and reported as a component of AOCL. When the hedged forecasted transaction (purchase) occurs, the unrealized gain or loss is reclassified into income in the same line item associated with the hedged transaction in the same period or periods during which the hedged transaction affects income. The ineffective portion of the hedge, if any, is recognized in current income in the period in which the ineffectiveness occurs. As of March 31, 2013, we expect to reclassify an unrealized net gain of $1 million from AOCL to income over the next year. Our internal policy allows for managing these cash flow hedges for up to three years.
The following table summarizes our outstanding commodity swap contracts that were entered into to hedge the cost of certain raw material purchases:
|
Dollars in millions |
|
March 31, 2013 |
|
December 31, 2012 |
| ||||||
|
Commodity |
|
Notional Amount |
|
Quantity |
|
Notional Amount |
|
Quantity |
| ||
|
Copper |
|
$ |
12 |
|
1,500 metric tons (1) |
|
$ |
24 |
|
3,025 metric tons (1) |
|
|
Platinum |
|
59 |
|
36,735 troy ounces (2) |
|
71 |
|
45,126 troy ounces (2) |
| ||
|
Palladium |
|
10 |
|
14,066 troy ounces (2) |
|
10 |
|
14,855 troy ounces (2) |
| ||
(1) A metric ton is a measurement of mass equal to 1,000 kilograms.
(2) A troy ounce is a measurement of mass equal to approximately 31 grams.
In 2012 we began to use a combination of call and put option contracts for copper in net-zero-cost collar arrangements (zero-cost collars) that establish ceiling and floor prices for copper. These contracts are used strictly for hedging and not for speculative purposes. For these zero-cost collars, if the average price of the copper during the calculation period is within the call and put price, the call and put contracts expire at no cost to us. If the price falls below the floor, the counter-party to the collar receives the difference from us, and if the price rises above the ceiling, the counter-party pays the difference to us. We believe that these zero-cost collars will act as economic hedges; however we have chosen not to designate them as hedges for accounting purposes, therefore we present the calls and puts on a gross basis on our Condensed Consolidated Balance Sheets.
The following table summarizes our outstanding commodity zero-cost collar contracts that were entered into to hedge the cost of copper purchases:
|
|
|
March 31, 2013 |
|
December 31, 2012 |
| ||||||
|
|
|
Average Floor |
|
Quantity in |
|
Average Floor |
|
Quantity in |
| ||
|
Commodity |
|
or Cap |
|
metric tons (1) |
|
or Cap |
|
metric tons (1) |
| ||
|
Copper call options |
|
$ |
8,294 |
|
5,312 |
|
$ |
8,196 |
|
4,100 |
|
|
Copper put options |
|
7,327 |
|
5,312 |
|
7,005 |
|
4,100 |
| ||
(1) A metric ton is a measurement of mass equal to 1,000 kilograms.
Interest Rate Risk
We are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through the use of interest rate swaps. The objective of the swaps is to more effectively balance our borrowing costs and interest rate risk.
In November 2005, we entered into an interest rate swap to effectively convert our $250 million debt issue, due in 2028, from a fixed rate of 7.125 percent to a floating rate based on a LIBOR spread. The terms of the swap mirror those of the debt, with interest paid semi-annually. This swap qualifies as a fair value hedge under GAAP. The gain or loss on this derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current income as “Interest expense.” The following table summarizes these gains and losses for the three month interim reporting periods presented below:
|
|
|
Three months ended |
| ||||||||||
|
In millions |
|
March 31, 2013 |
|
April 1, 2012 |
| ||||||||
|
Income Statement |
|
Gain/(Loss) on |
|
Gain/(Loss) on |
|
Gain/(Loss) on |
|
Gain/(Loss) on |
| ||||
|
Interest expense |
|
$ |
(11 |
) |
$ |
11 |
|
$ |
(12 |
) |
$ |
12 |
|
Cash Flow Hedging
The following table summarizes the effect on our Condensed Consolidated Statements of Income for derivative instruments classified as cash flow hedges for the three month interim reporting periods presented below. The table does not include amounts related to ineffectiveness as it was not material for the periods presented.
|
|
|
|
|
Three months ended |
| ||||||||||
|
|
|
Location of Gain/(Loss) |
|
Amount of Gain/(Loss) |
|
Amount of Gain/(Loss) |
| ||||||||
|
In millions |
|
|
|
March 31, |
|
April 1, |
|
March 31, |
|
April 1, |
| ||||
|
Derivatives in Cash Flow Hedging Relationships |
|
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
Foreign currency forward contracts |
|
Net sales |
|
$ |
(9 |
) |
$ |
8 |
|
$ |
— |
|
$ |
(2 |
) |
|
Commodity swap contracts |
|
Cost of sales |
|
3 |
|
13 |
|
2 |
|
(3 |
) | ||||
|
Total |
|
|
|
$ |
(6 |
) |
$ |
21 |
|
$ |
2 |
|
$ |
(5 |
) |
Derivatives Not Designated as Hedging Instruments
The following table summarizes the effect on our Condensed Consolidated Statements of Income for derivative instruments that are not classified as hedges for the three month interim reporting periods presented below.
|
|
|
|
|
Three months ended |
| ||||
|
In millions |
|
Location of Gain/(Loss) |
|
Amount of Gain/(Loss) Recognized in |
| ||||
|
Derivatives Not Designated as |
|
Recognized in Income |
|
March 31, |
|
April 1, |
| ||
|
Hedging Instruments |
|
on Derivatives |
|
2013 |
|
2012 |
| ||
|
Foreign currency forward contracts |
|
Cost of sales |
|
$ |
3 |
|
$ |
(3 |
) |
|
Foreign currency forward contracts |
|
Other income (expense), net |
|
(27 |
) |
14 |
| ||
|
Commodity zero-cost collars |
|
Cost of sales |
|
(2 |
) |
— |
| ||
|
Commodity swap contract |
|
Cost of sales |
|
— |
|
(2 |
) | ||
Fair Value Amount and Location of Derivative Instruments
The following tables summarize the location and fair value of derivative instruments on our Condensed Consolidated Balance Sheets:
|
|
|
Derivative Assets |
| ||||||
|
|
|
Fair Value |
| ||||||
|
|
|
March 31, |
|
December 31, |
|
|
| ||
|
In millions |
|
2013 |
|
2012 |
|
Balance Sheet Location |
| ||
|
Derivatives designated as hedging instruments |
|
|
|
|
|
|
| ||
|
Interest rate contract |
|
$ |
77 |
|
$ |
88 |
|
Other assets |
|
|
Commodity swap contracts |
|
2 |
|
1 |
|
Prepaid expenses and other current assets |
| ||
|
Foreign currency forward contracts |
|
— |
|
2 |
|
Prepaid expenses and other current assets |
| ||
|
Total derivatives designated as hedging instruments |
|
79 |
|
91 |
|
|
| ||
|
|
|
|
|
|
|
|
| ||
|
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
| ||
|
Foreign currency forward contracts |
|
1 |
|
1 |
|
Prepaid expenses and other current assets |
| ||
|
Commodity call option contracts |
|
1 |
|
1 |
|
Other assets |
| ||
|
Total derivatives not designated as hedging instruments |
|
2 |
|
2 |
|
|
| ||
|
Total derivative assets |
|
$ |
81 |
|
$ |
93 |
|
|
|
|
|
|
Derivative Liabilities |
| ||||||
|
|
|
Fair Value |
|
|
| ||||
|
|
|
March 31, |
|
December 31, |
|
|
| ||
|
In millions |
|
2013 |
|
2012 |
|
Balance Sheet Location |
| ||
|
Derivatives designated as hedging instruments |
|
|
|
|
|
|
| ||
|
Foreign currency forward contracts |
|
$ |
7 |
|
$ |
— |
|
Other accrued expenses |
|
|
Commodity swap contracts |
|
1 |
|
2 |
|
Other accrued expenses |
| ||
|
Total derivatives designated as hedging instruments |
|
8 |
|
2 |
|
|
| ||
|
|
|
|
|
|
|
|
| ||
|
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
| ||
|
Commodity put option contracts |
|
1 |
|
1 |
|
Other accrued expenses |
| ||
|
Commodity swap contracts |
|
1 |
|
— |
|
Other accrued expenses |
| ||
|
Foreign currency forward contracts |
|
1 |
|
— |
|
Other accrued expenses |
| ||
|
Total derivatives not designated as hedging instruments |
|
3 |
|
1 |
|
|
| ||
|
Total derivative liabilities |
|
$ |
11 |
|
$ |
3 |
|
|
|
We have elected to present our derivative contracts on a gross basis in our Condensed Consolidated Balance Sheets. Had we chosen to present on a net basis, we would have derivatives in a net asset position of $77 million and derivatives in a net liability position of $7 million.
NOTE 13. OTHER COMPREHENSIVE INCOME (LOSS)
Following are the changes in accumulated other comprehensive income (loss) by component:
|
In millions |
|
Change in |
|
Foreign |
|
Unrealized gain |
|
Unrealized gain |
|
Total |
|
Noncontrolling |
|
Total |
| |||||||
|
Balance at December 31, 2011 |
|
$ |
(724 |
) |
$ |
(198 |
) |
$ |
4 |
|
$ |
(20 |
) |
$ |
(938 |
) |
|
|
|
| ||
|
Other comprehensive income before reclassifications |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
Before tax amount |
|
3 |
|
100 |
|
— |
|
21 |
||||||||||||||