Table of Contents

 

 

 

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 27, 2011

 

Commission File Number 1-4949

 

 


 

CUMMINS INC.

(Exact name of registrant as specified in its charter)

 

Indiana

 

35-0257090

(State of Incorporation)

 

(IRS Employer Identification No.)

 

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):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

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 27, 2011, there were 196,243,169 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.

 

 

 



Table of Contents

 

CUMMINS INC. AND SUBSIDIARIES

TABLE OF CONTENTS

QUARTERLY REPORT ON FORM 10-Q

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

ITEM 1.

Condensed Consolidated Financial Statements (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Income for the three months ended March 27, 2011, and March 28, 2010

3

 

 

 

 

Condensed Consolidated Balance Sheets at March 27, 2011, and December 31, 2010

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 27, 2011, and March 28, 2010

5

 

 

 

 

Condensed Consolidated Statements of Changes in Equity for the three months ended March 27, 2011, and March 28, 2010

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

37

 

 

 

ITEM 4.

Controls and Procedures

37

 

 

 

PART II. OTHER INFORMATION

 

 

 

ITEM 1.

Legal Proceedings

38

 

 

 

ITEM 1A.

Risk Factors

38

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

 

 

 

ITEM 6.

Exhibits

39

 

 

 

 

Signatures

40

 

 

 

 

Cummins Inc. Exhibit Index

41

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  Condensed Consolidated Financial Statements

 

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three months ended

 

In millions, except per share amounts 

 

March 27, 2011

 

March 28, 2010

 

NET SALES (a)

 

$

3,860

 

$

2,478

 

Cost of sales

 

2,903

 

1,877

 

GROSS MARGIN

 

957

 

601

 

 

 

 

 

 

 

OPERATING EXPENSES AND INCOME

 

 

 

 

 

Selling, general and administrative expenses

 

389

 

335

 

Research, development and engineering expenses

 

129

 

92

 

Equity, royalty and interest income from investees (Note 4)

 

96

 

76

 

Other operating (expense) income, net

 

(6

)

(4

)

OPERATING INCOME

 

529

 

246

 

 

 

 

 

 

 

Interest income

 

6

 

3

 

Interest expense

 

10

 

9

 

Other (expense) income, net

 

(3

)

17

 

INCOME BEFORE INCOME TAXES

 

522

 

257

 

 

 

 

 

 

 

Income tax expense

 

157

 

87

 

CONSOLIDATED NET INCOME

 

365

 

170

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interests

 

22

 

21

 

NET INCOME ATTRIBUTABLE TO CUMMINS INC.

 

$

343

 

$

149

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.

 

 

 

 

 

Basic

 

$

1.75

 

$

0.75

 

Diluted

 

$

1.75

 

$

0.75

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

 

 

 

 

Basic

 

195.5

 

198.4

 

Dilutive effect of stock compensation awards

 

0.6

 

0.3

 

Diluted

 

196.1

 

198.7

 

 

 

 

 

 

 

CASH DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.2625

 

$

0.175

 

 


(a) Includes sales to nonconsolidated equity investees of $599 million and $428 million for the three months ended March 27, 2011 and March 28, 2010, respectively.

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

3



Table of Contents

 

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

March 27,

 

December 31,

 

In millions, except par value 

 

2011

 

2010

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

779

 

$

1,023

 

Marketable securities

 

307

 

339

 

Accounts and notes receivable, net

 

 

 

 

 

Trade and other

 

2,288

 

1,935

 

Nonconsolidated equity investees

 

282

 

308

 

Inventories (Note 6)

 

2,202

 

1,977

 

Deferred income taxes

 

307

 

314

 

Prepaid expenses and other current assets

 

329

 

393

 

Total current assets

 

6,494

 

6,289

 

Long-term assets

 

 

 

 

 

Property, plant and equipment

 

5,026

 

4,927

 

Accumulated depreciation

 

(2,962

)

(2,886

)

Property, plant and equipment, net

 

2,064

 

2,041

 

Investments and advances related to equity method investees

 

822

 

734

 

Goodwill

 

368

 

367

 

Other intangible assets, net

 

217

 

222

 

Deferred income taxes

 

187

 

203

 

Other assets

 

574

 

546

 

Total assets

 

$

10,726

 

$

10,402

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Current liabilities

 

 

 

 

 

Loans payable

 

$

82

 

$

82

 

Accounts payable (principally trade)

 

1,626

 

1,362

 

Current portion of accrued product warranty (Note 7)

 

435

 

421

 

Accrued compensation, benefits and retirement costs

 

323

 

468

 

Deferred revenue

 

189

 

182

 

Taxes payable (including taxes on income)

 

224

 

202

 

Other accrued expenses

 

572

 

543

 

Total current liabilities

 

3,451

 

3,260

 

Long-term liabilities

 

 

 

 

 

Long-term debt

 

685

 

709

 

Pensions

 

146

 

195

 

Postretirement benefits other than pensions

 

435

 

439

 

Other liabilities and deferred revenue

 

810

 

803

 

Total liabilities

 

5,527

 

5,406

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

Cummins Inc. shareholders’ equity

 

 

 

 

 

Common stock, $2.50 par value, 500 shares authorized, 222.1 and 221.8 shares issued

 

1,949

 

1,934

 

Retained earnings

 

4,737

 

4,445

 

Treasury stock, at cost, 25.8 and 24.0 shares

 

(1,153

)

(964

)

Common stock held by employee benefits trust, at cost, 2.0 and 2.1 shares

 

(24

)

(25

)

Accumulated other comprehensive loss

 

 

 

 

 

Defined benefit postretirement plans

 

(620

)

(646

)

Other

 

(22

)

(74

)

  Total accumulated other comprehensive loss

 

(642

)

(720

)

Total Cummins Inc. shareholders’ equity

 

4,867

 

4,670

 

Noncontrolling interests

 

332

 

326

 

Total equity

 

5,199

 

4,996

 

Total liabilities and equity

 

$

10,726

 

$

10,402

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

4



Table of Contents

 

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three months ended

 

 

 

March 27,

 

March 28,

 

In millions 

 

2011

 

2010

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Consolidated net income

 

$

365

 

$

170

 

Adjustments to reconcile consolidated net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

79

 

79

 

Gain on fair value adjustment for consolidated investee

 

 

(12

)

Deferred income taxes

 

21

 

13

 

Equity in income of investees, net of dividends

 

(62

)

(53

)

Pension contributions in excess of expense

 

(24

)

(93

)

Other post-retirement benefits payments in excess of expense

 

(5

)

(1

)

Stock-based compensation expense

 

5

 

6

 

Excess tax benefits on stock based awards

 

(2

)

(6

)

Translation and hedging activities

 

4

 

(9

)

Changes in current assets and liabilities, net of acquisitions and dispositions:

 

 

 

 

 

Accounts and notes receivable

 

(306

)

275

 

Inventories

 

(210

)

(189

)

Other current assets

 

(2

)

3

 

Accounts payable

 

251

 

54

 

Accrued expenses

 

(28

)

(154

)

Changes in other liabilities and deferred revenue

 

24

 

29

 

Other, net

 

(22

)

14

 

Net cash provided by operating activities

 

88

 

126

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(91

)

(47

)

Investments in internal use software

 

(10

)

(17

)

Proceeds from disposals of property, plant and equipment

 

5

 

38

 

Investments in and advances to equity investees

 

(21

)

(11

)

Acquisition of businesses, net of cash acquired

 

 

(71

)

Investments in marketable securities—acquisitions

 

(101

)

(133

)

Investments in marketable securities—liquidations

 

134

 

108

 

Cash flows from derivatives not designated as hedges

 

4

 

(11

)

Other, net

 

2

 

 

Net cash used in investing activities

 

(78

)

(144

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from borrowings

 

38

 

70

 

Payments on borrowings and capital lease obligations

 

(45

)

(20

)

Net borrowings under short-term credit agreements

 

1

 

5

 

Distributions to noncontrolling interests

 

(21

)

(1

)

Dividend payments on common stock

 

(51

)

(35

)

Repurchases of common stock

 

(190

)

(39

)

Excess tax benefits on stock-based awards

 

2

 

6

 

Other, net

 

4

 

7

 

Net cash used in financing activities

 

(262

)

(7

)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

 

8

 

(20

)

Net increase (decrease) in cash and cash equivalents

 

(244

)

(45

)

Cash and cash equivalents at beginning of year

 

1,023

 

930

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

779

 

$

885

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

5



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CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Common

 

 

 

Total

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

Stock

 

 

 

Cummins Inc.

 

 

 

 

 

 

 

Common

 

paid-in

 

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

 

 

 

 

 

149

 

 

 

 

 

 

 

 

 

149

 

21

 

170

 

Other comprehensive income (loss) (Note 10)

 

 

 

 

 

 

 

(60

)

 

 

 

 

 

 

(60

)

4

 

(56

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

89

 

25

 

114

 

Issuance of shares

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

1

 

 

1

 

Employee benefits trust activity

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

6

 

 

6

 

Acquisition of shares

 

 

 

 

 

 

 

 

 

(39

)

 

 

 

 

(39

)

 

(39

)

Cash dividends on common stock

 

 

 

 

 

(35

)

 

 

 

 

 

 

 

 

(35

)

 

(35

)

Distribution to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

(1

)

Stock option exercises

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

1

 

 

1

 

Deconsolidation of variable interest entity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11

)

(11

)

Other shareholder transactions

 

 

 

(6

)

 

 

 

 

 

 

 

 

1

 

(5

)

1

 

(4

)

BALANCE AT MARCH 28, 2010

 

$

555

 

$

1,307

 

$

3,689

 

$

(955

)

$

(769

)

$

(36

)

$

 

$

3,791

 

$

261

 

$

4,052

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2010

 

$

554

 

$

1,380

 

$

4,445

 

$

(720

)

$

(964

)

$

(25

)

$

 

$

4,670

 

$

326

 

$

4,996

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

343

 

 

 

 

 

 

 

 

 

343

 

22

 

365

 

Other comprehensive income (loss) (Note 10)

 

 

 

 

 

 

 

78

 

 

 

 

 

 

 

78

 

2

 

80

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

421

 

24

 

445

 

Issuance of shares

 

1

 

3

 

 

 

 

 

 

 

 

 

 

 

4

 

 

4

 

Employee benefits trust activity

 

 

 

11

 

 

 

 

 

 

 

1

 

 

 

12

 

 

12

 

Acquisition of shares

 

 

 

 

 

 

 

 

 

(190

)

 

 

 

 

(190

)

 

(190

)

Cash dividends on common stock

 

 

 

 

 

(51

)

 

 

 

 

 

 

 

 

(51

)

 

(51

)

Distribution to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21

)

(21

)

Stock option exercises

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

1

 

 

1

 

Other shareholder transactions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

3

 

BALANCE AT MARCH 27, 2011

 

$

555

 

$

1,394

 

$

4,737

 

$

(642

) (1)

$

(1,153

)

$

(24

)

$

 

$

4,867

 

$

332

 

$

5,199

 

 


(1)Comprised of defined benefit postretirement plans of $(620) million, foreign currency translation adjustments of $(38) million, unrealized gain on marketable securities of $4 million and unrealized gain on derivatives of $12 million.

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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Table of Contents

 

CUMMINS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1NATURE 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 the United States (U.S.) 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 first quarters of 2011 and 2010 ended on March 27, and March 28, respectively.  The interim periods for both 2011 and 2010 contain 12 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 Securities and Exchange Commission.

 

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 27, 2011, and March 28, 2010, were as follows:

 

 

 

Three months ended

 

 

 

March 27,

 

March 28,

 

 

 

2011

 

2010

 

Options excluded

 

3,750

 

18,638

 

 

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 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 Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

 

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NOTE 3.  RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

In October 2009, the 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.

 

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

 

 

 

March 27,

 

March 28,

 

In millions

 

2011

 

2010

 

Distribution Entities

 

 

 

 

 

North American distributors

 

$

30

 

$

23

 

Komatsu Cummins Chile, Ltda

 

4

 

3

 

All other distributors

 

1

 

1

 

Manufacturing Entities

 

 

 

 

 

Dongfeng Cummins Engine Company, Ltd.

 

23

 

18

 

Chongqing Cummins Engine Company, Ltd.

 

12

 

10

 

Tata Cummins, Ltd.

 

4

 

4

 

Shanghai Fleetguard Filter Co., Ltd.

 

4

 

2

 

Komatsu manufacturing alliances

 

2

 

2

 

Cummins Westport, Inc.

 

1

 

3

 

Valvoline Cummins, Ltd.

 

2

 

2

 

Beijing Foton Cummins Engine Co., Ltd.

 

(2

)

(2

)

All other manufacturers

 

6

 

3

 

Cummins share of net income

 

87

 

69

 

Royalty and interest income

 

9

 

7

 

Equity, royalty and interest income from investees

 

$

96

 

$

76

 

 

NOTE 5.  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 2011.

 

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The following table summarizes our financial instruments recorded at fair value in our Condensed Consolidated Balance Sheets at March 27, 2011:

 

 

 

Fair Value Measurements Using

 

 

 

Quoted prices in
active markets for
identical assets

 

Significant other
observable inputs

 

Significant
unobservable inputs

 

 

 

In millions

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

Debt mutual funds

 

$

30

 

$

117

 

$

 

$

147

 

Bank debentures

 

 

86

 

 

86

 

Certificates of deposit

 

 

60

 

 

60

 

Government debt securities-non-U.S.

 

 

3

 

 

3

 

Corporate debt securities

 

 

2

 

 

2

 

Total available-for-sale debt securities

 

30

 

268

 

 

298

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale equity securities:

 

 

 

 

 

 

 

 

 

Financial services industry

 

9

 

 

 

9

 

Total available-for-sale equity securities

 

9

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

Derivative assets:

 

 

 

 

 

 

 

 

 

Commodity swap contracts

 

 

15

 

 

15

 

Foreign currency forward contracts

 

 

2

 

 

2

 

Interest rate contracts

 

 

33

 

 

33

 

Total derivative assets

 

 

50

 

 

50

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

39

 

$

318

 

$

 

$

357

 

 

Fair value of total derivative liabilities on our Condensed Consolidated Balance Sheets are not material.

 

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
active markets for
identical assets

 

Significant other
observable inputs

 

Significant
unobservable inputs

 

 

 

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 foreign currency forward contacts and total derivative liabilities on our Condensed Consolidated Balance Sheets are not material.

 

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:

 

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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 one year.  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 March 27, 2011 and December 31, 2010, are set forth in the table below. The carrying values of all other receivables and liabilities approximated fair values.

 

 

 

March 27,

 

December 31,

 

In millions

 

2011

 

2010

 

Fair value of total debt

 

$

875

 

$

886

 

Carrying value of total debt

 

832

 

843

 

 

NOTE 6.  INVENTORIES

 

Inventories are stated at the lower of cost or market.  Inventories included the following:

 

 

 

March 27,

 

December 31,

 

In millions

 

2011

 

2010

 

Finished products

 

$

1,130

 

$

1,019

 

Work-in-process and raw materials

 

1,165

 

1,048

 

Inventories at FIFO cost

 

2,295

 

2,067

 

Excess of FIFO over LIFO

 

(93

)

(90

)

Total inventories

 

$

2,202

 

$

1,977

 

 

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NOTE 7.  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, 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

 

 

 

March 27,

 

March 28,

 

In millions 

 

2011

 

2010

 

Balance, beginning of period

 

$

980

 

$

989

 

Provision for warranties issued

 

109

 

62

 

Deferred revenue on extended warranty contracts sold

 

22

 

25

 

Payments

 

(84

)

(115

)

Amortization of deferred revenue on extended warranty contracts

 

(23

)

(21

)

Changes in estimates for pre-existing warranties

 

3

 

(20

)

Foreign currency translation

 

3

 

(5

)

Balance, end of period

 

$

1,010

 

$

915

 

 

Warranty related deferred revenue, supplier recovery receivables and the long-term portion of the warranty liability on our March 27, 2011, balance sheet were as follows:

 

 

 

March 27,

 

 

 

In millions

 

2011

 

Balance Sheet Locations

 

Deferred revenue related to extended coverage programs:

 

 

 

 

 

Current portion

 

$

94

 

Deferred revenue

 

Long-term portion

 

189

 

Other liabilities and deferred revenue

 

Total

 

$

283

 

 

 

 

 

 

 

 

 

Receivables related to estimated supplier recoveries:

 

 

 

 

 

Current portion

 

$

9

 

Trade and other receivables

 

Long-term portion

 

7

 

Other assets

 

Total

 

$

16

 

 

 

 

 

 

 

 

 

Long-term portion of warranty liability

 

$

292

 

Other liabilities and deferred revenue

 

 

NOTE 8. 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

 

 

 

March 27,

 

March 28,

 

In millions

 

2011

 

2010

 

Defined benefit pension and other postretirement plans:

 

 

 

 

 

Voluntary pension

 

$

35

 

$

60

 

Mandatory pension

 

6

 

51

 

Defined benefit pension contributions

 

41

 

111

 

Other postretirement plans

 

9

 

6

 

Total defined benefit plans

 

$

50

 

$

117

 

Defined contribution pension plans

 

$

24

 

$

11

 

 

We presently anticipate contributing approximately $130 million to our defined benefit pension plans in 2011 and paying approximately $51 million in claims and premiums for other postretirement benefits.  The $130 million of contributions for the full year include voluntary

 

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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

 

 

 

March 27,

 

March 28,

 

March 27,

 

March 28,

 

March 27,

 

March 28,

 

In millions

 

2011

 

2010

 

2011

 

2010

 

2011

 

2010

 

Service cost

 

$

13

 

$

11

 

$

5

 

$

5

 

$

 

$

 

Interest cost

 

27

 

28

 

15

 

15

 

6

 

7

 

Expected return on plan assets

 

(38

)

(37

)

(18

)

(18

)

 

 

Amortization of prior service (credit) cost

 

 

 

 

1

 

(2

)

(2

)

Recognized net actuarial loss

 

10

 

9

 

3

 

4

 

 

 

Net periodic benefit cost

 

$

12

 

$

11

 

$

5

 

$

7

 

$

4

 

$

5

 

 

NOTE 9.  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 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 March 27, 2011, we have 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.  Although we believe that we are insured against the full amount of our claim, there is no assurance that we will be successful recovering the amounts we believe are due under the policies.

 

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.

 

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Table of Contents

 

Other Guarantees and Commitments

 

We periodically enter into guarantee arrangements, including guarantees of non-U.S. distributor financing, residual value guarantees on equipment leased under operating leases and other miscellaneous guarantees of third-party obligations.  As of March 27, 2011, the maximum potential loss related to these other guarantees is $65 million ($36 million of which relates to the Beijing Foton guarantee discussed below and $25 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 March 27, 2011, if we were to stop purchasing from each of these suppliers, the amount of the penalty would be approximately $55 million, of which $51 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 $183 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 $92 million (at current exchange rates).  As of March 27, 2011, outstanding borrowings under this agreement were $71 million and our guarantee was $36 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 March 27, 2011, outstanding borrowings under this agreement were $52 million and our guarantee was $25 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 March 27, 2011, were $77 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 March 27, 2011, we have committed to invest an additional $84 million into existing joint ventures of which $51 million is expected to be funded in 2011.

 

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Table of Contents

 

NOTE 10.  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 month periods ended March 27, 2011 and March 28, 2010.

 

 

 

Three months ended

 

 

 

March 27, 2011

 

March 28, 2010

 

In millions

 

Attributable to
Cummins Inc.

 

Attributable to
Noncontrolling
Interests

 

Total
Consolidated

 

Attributable to
Cummins Inc.

 

Attributable to
Noncontrolling
Interests

 

Total
Consolidated

 

Net income

 

$

343

 

$

22

 

$

365

 

$

149

 

$

21

 

$

170

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on derivatives

 

 

 

 

(5

)

 

(5

)

Foreign currency translation adjustments

 

52

 

2

 

54

 

(49

)

4

 

(45

)

Change in pensions and other postretirement defined benefit plans

 

26

 

 

26

 

(6

)

 

(6

)

Total other comprehensive income (loss)

 

78

 

2

 

80

 

(60

)

4

 

(56

)

Total comprehensive income

 

$

421

 

$

24

 

$

445

 

$

89

 

$

25

 

$

114

 

 

NOTE 11.  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 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.  The results and status of our hedging transactions are reported to senior management on a monthly and quarterly basis.

 

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, unrealized gain or loss, if any, is recognized in current income during the period of change.  As of March 27, 2011, the amount we expect to reclassify from AOCL to income over the next year is a net unrealized gain of $1 million.  For the three month periods ended March 27, 2011 and March 28, 2010, 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 96 percent and 97 percent of the notional amounts of contracts outstanding as of March 27, 2011 and December 31, 2010, respectively.

 

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Table of Contents

 

 

 

Notional amount in millions

 

 

 

March 27,

 

December 31,

 

Currency denomination

 

2011

 

2010

 

United States Dollar (USD)

 

149

 

142

 

British Pound Sterling (GBP)

 

149

 

87

 

Euro (EUR)

 

44

 

46

 

Singapore Dollar (SGD)

 

19

 

17

 

Indian Rupee (INR)

 

1,818

 

1,275

 

Japanese Yen (JPY)

 

3,766

 

3,722

 

Canadian Dollar (CAD)

 

37

 

39

 

South Korea Won (KRW)

 

31,682

 

28,028

 

Chinese Renmimbi (CNY)

 

448

 

60

 

 

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.  The swap contracts are derivative contracts that are designated as cash flow hedges under GAAP.  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 27, 2011, we expect to reclassify an unrealized net gain of $13 million from AOCL to income over the next year.  For the three month periods ended March 27, 2011 and March 28, 2010, there were no material circumstances that would have resulted in the discontinuance of a cash flow hedge.  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 27, 2011

 

December 31, 2010

 

Commodity

 

Notional Amount

 

Quantity

 

Notional Amount

 

Quantity

 

Copper

 

$

66

 

8,143 metric tons

(1)

$

55

 

7,560  metric tons

(1)

Platinum

 

8

 

5,671 troy ounces

(2)

11

 

9,157  troy ounces

(2)

Palladium

 

1

 

1,098 troy ounces

(2)

1

 

1,763  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.

 

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% 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 27, 2011

 

March 28, 2010

 

Income Statement
Classification

 

Gain/(Loss) on
Swaps

 

Gain/(Loss) on
Borrowings

 

Gain/(Loss) on
Swaps

 

Gain/(Loss) on
Borrowings

 

Interest expense

 

$

(8

)

$

8

 

$

 

$

 

 

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Table of Contents

 

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)
Recognized in

AOCL on Derivative
(Effective Portion)

 

Amount of Gain/(Loss)
Reclassified from

AOCL into Income
(Effective Portion)

 

In millions

 

Reclassified into Income

 

March 27,

 

March 28,

 

March 27,

 

March 28,

 

Derivatives in Cash Flow Hedging Relationships

 

(Effective Portion)

 

2011

 

2010

 

2011

 

2010

 

Foreign currency forward contracts

 

Net sales

 

$

4

 

$

(8

)

$

1

 

$

(1

)

Commodity swap contracts

 

Cost of sales

 

2

 

2

 

6

 

2

 

Total

 

 

 

$

 6

 

$

(6

)

$

7

 

$

1

 

 

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 Income on Derivatives

 

Derivatives Not Designated as

 

Recognized in Income

 

March 27,

 

March 28,

 

 Hedging Instruments

 

on Derivatives

 

2011

 

2010

 

Foreign currency forward contracts

 

Cost of sales

 

$

(4

)

$

4

 

Foreign currency forward contracts

 

Other income (expense), net

 

5

 

(12

)

 

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 27,

 

December 31,

 

 

 

In millions

 

2011

 

2010

 

Balance Sheet Location

 

Derivatives Designated as Hedging Instruments

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

2

 

$

 

Prepaid expenses and other current assets

 

Commodity swap contracts

 

15

 

20

 

Prepaid expenses and other current assets

 

Commodity swap contracts

 

 

1

 

Other assets

 

Interest rate contract

 

33

 

41

 

Other assets

 

Total Derivatives Designated as Hedging Instruments

 

50

 

62

 

 

 

 

 

 

 

 

 

 

 

Total derivative assets

 

$

50

 

$

62

 

 

 

 

NOTE 12.  ANNOUNCED 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.   The transaction is expected to close in our fiscal second quarter of 2011.  This business has historically been included in our Components segment.  The sales price is expected to range from $125 million to $135 million, subject to a final financial statement review.  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 $65 million to $70 million, which includes an allocation of goodwill of approximately $21 million.

 

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.

 

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In February 2011, we signed a non-binding letter of intent 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 our fiscal third quarter of 2011.  The sales price is expected to be approximately $70 million to $75 million, subject to a final financial statement review.  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 $30 million to $35 million, which includes an allocation of goodwill of approximately $9 million.

 

Sales for this business were $68 million, $55 million and $73 million in 2010, 2009 and 2008, respectively. Income before income taxes for this business was approximately $10 million, $3 million and $8 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.

 

NOTE 13.  OPERATING SEGMENTS

 

Operating segments under GAAP are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance.  Cummins chief operating decision-maker (CODM) is the Chief Executive Officer.

 

Our reportable operating segments consist of the following: Engine, Power Generation, Components and Distribution.  This reporting structure is organized according to the products and markets each segment serves and allows management to focus its efforts on providing enhanced service to a wide range of customers.  The Engine segment produces engines and parts for sale to customers in on-highway and various industrial markets.  The engines are used in trucks of all sizes, buses and recreational vehicles, as well as various industrial applications including construction, mining, agriculture, marine, oil and gas, rail and military.  The Power Generation segment is an integrated provider of power systems which sells engines, generator sets and alternators.  The Components segment includes sales of filtration products, exhaust and aftertreatment systems, turbochargers and fuel systems.  The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets, and service parts, as well as performing service and repair activities on our products and maintaining relationships with various original equipment manufacturers.

 

We use segment EBIT (defined as earnings before interest expense, taxes and noncontrolling interests) as a primary basis for the CODM to evaluate the performance of each of our operating segments.  Segment amounts exclude certain expenses not specifically identifiable to segments.

 

The accounting policies of our operating segments are the same as those applied in the Condensed Consolidated Financial Statements.  We prepared the financial results of our operating segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions.  We have allocated certain common costs and expenses, primarily corporate functions, among segments differently than we would for stand-alone financial information prepared in accordance with GAAP.  These include certain costs and expenses of shared services, such as information technology, human resources, legal and finance.  We also do not allocate debt-related items, actuarial gains or losses, prior services costs or credits, changes in cash surrender value of corporate owned life insurance or income taxes to individual segments.  Segment EBIT may not be consistent with measures used by other companies.

 

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Summarized financial information regarding our reportable operating segments for the three month periods is shown in the table below:

 

In millions

 

Engine

 

Power
Generation

 

Components

 

Distribution

 

Non-segment
Items(1)

 

Total

 

Three months ended March 27, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

External sales

 

$

2,006

 

$

557

 

$

660

 

$

637

 

$

 

$

3,860

 

Intersegment sales

 

385

 

238

 

264

 

5

 

(892

)

 

Total sales

 

2,391

 

795

 

924

 

642

 

(892

)

3,860

 

Depreciation and amortization(2)

 

45

 

10

 

18

 

6

 

 

79

 

Research, development and engineering expenses

 

80

 

11

 

37

 

1

 

 

129

 

Equity, royalty and interest income from investees

 

42

 

8

 

8

 

38

 

 

96

 

Interest income

 

3

 

1

 

1

 

1

 

 

6

 

Segment EBIT

 

290

 

89

 

105

 

89

 

(41

)

532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 28, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

External sales

 

$

1,173

 

$

378

 

$

453

 

$

474

 

$

 

$

2,478

 

Intersegment sales

 

250

 

139

 

177

 

2

 

(568

)

 

Total sales

 

1,423

 

517

 

630

 

476

 

(568

)

2,478

 

Depreciation and amortization(2)

 

41

 

10

 

20

 

7

 

 

78

 

Research, development and engineering expenses

 

60

 

7

 

25

 

 

 

92

 

Equity, royalty and interest income from investees

 

35

 

6

 

5

 

30

 

 

76

 

Interest income

 

2

 

1

 

 

 

 

3

 

Segment EBIT

 

133

 

34

 

57

 

72

 

(30

)

266

 

 


(1)     Includes intersegment sales and profit in inventory eliminations and unallocated corporate expenses.  There were no significant unallocated corporate expenses for the three months ended March 27, 2011, and March 28, 2010.

(2)     Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount that is included in the Condensed Consolidated Statements of Income as “interest expense.”

 

A reconciliation of our segment information to the corresponding amounts in the Condensed Consolidated Statements of Income is shown in the table below:

 

 

 

Three months ended

 

 

 

March 27,

 

March 28,

 

In millions

 

2011

 

2010

 

Segment EBIT

 

$

532

 

$

266

 

Less:

 

 

 

 

 

Interest expense

 

10

 

9

 

Income before income taxes

 

$

522

 

$

257

 

 

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ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cummins Inc. and its consolidated subsidiaries are hereinafter sometimes referred to as “Cummins,” “the Company,” “we,” “our,” or “us.”

 

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

 

Certain parts of this quarterly report contain forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995.  Forward-looking statements include those that are based on current expectations, estimates and projections about the industries in which we operate and management’s beliefs and assumptions.  Forward-looking statements are generally accompanied by words such as “anticipates,” “expects,” “forecasts,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “could,” “should,” or words of similar meaning.  These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which we refer to as “future factors,” which are difficult to predict.  Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements.  Some future factors that could cause our results to differ materially from the results discussed in such forward-looking statements are discussed below and shareholders, potential investors and other readers are urged to consider these future factors carefully in evaluating forward-looking statements.  Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof.  We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.  Future factors that could affect the outcome of forward-looking statements include the following:

 

·      price and product competition by foreign and domestic competitors, including new entrants;

·      rapid technological developments of diesel engines;

·      our ability to continue to introduce competitive new products in a timely, cost-effective manner;

·      our sales mix of products;

·      our continued achievement of lower costs and expenses;

·      domestic and foreign governmental and public policy changes, including environmental regulations;

·      protection and validity of our patent and other intellectual property rights;

·      our reliance on large customers;

·      technological, implementation and cost/financial risks in our increasing use of large, multi-year contracts;

·      the cyclical nature of some of our markets;

·      the outcome of pending and future litigation and governmental proceedings;

·      continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support our future business;

·      the overall stability of global economic markets and conditions; and

·      other risk factors described in our Form 10-K, Part 1, Item 1A under the caption “Risk Factors.”

 

In addition, such statements could be affected by general industry and market conditions and growth rates, general domestic and international economic conditions, including the price of crude oil (diesel fuel), interest rate and currency exchange rate fluctuations, commodity prices and other future factors.

 

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ORGANIZATION OF INFORMATION

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) was prepared to provide the reader with a view and perspective of our business through the eyes of management and should be read in conjunction with our Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements in the “Financial Statements” section of our 2010 Form 10-K.  Our MD&A is presented in the following sections:

 

·                  Executive Summary and Financial Highlights

·                  Outlook

·                  Results of Operations

·                  Operating Segment Results

·               &