10-Q
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 September 27, 2015
 
Commission File Number 1-4949 

CUMMINS INC.
(Exact name of registrant as specified in its charter)
Indiana
(State of Incorporation)
 
35-0257090
 (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 September 27, 2015, there were 177,621,278 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
 
 
 
Condensed Consolidated Statements of Income for the three and nine months ended September 27, 2015 and September 28, 2014
 
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 27, 2015 and September 28, 2014
 
Condensed Consolidated Balance Sheets at September 27, 2015 and December 31, 2014
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 27, 2015 and September 28, 2014
 
Condensed Consolidated Statements of Changes in Equity for the nine months ended September 27, 2015 and September 28, 2014
 
 
 
 
 

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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
 
Nine months ended
In millions, except per share amounts 
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
NET SALES (a)
 
$
4,620

 
$
4,890

 
$
14,344

 
$
14,131

Cost of sales
 
3,412

 
3,606

 
10,609

 
10,543

GROSS MARGIN
 
1,208

 
1,284

 
3,735

 
3,588

 
 
 
 
 
 
 
 
 
OPERATING EXPENSES AND INCOME
 
 

 
 

 
 

 
 

Selling, general and administrative expenses
 
530

 
529

 
1,584

 
1,527

Research, development and engineering expenses
 
197

 
198

 
558

 
567

Equity, royalty and interest income from investees (Note 5)
 
78

 
99

 
240

 
294

Other operating (expense) income, net
 
(2
)
 
3

 
(5
)
 
(4
)
OPERATING INCOME
 
557

 
659

 
1,828

 
1,784

 
 
 
 
 
 
 
 
 
Interest income
 
9

 
6

 
20

 
17

Interest expense
 
16

 
15

 
47

 
47

Other income, net
 
11

 
19

 
12

 
68

INCOME BEFORE INCOME TAXES
 
561

 
669

 
1,813

 
1,822

 
 
 
 
 
 
 
 
 
Income tax expense (Note 6)
 
169

 
230

 
521

 
553

CONSOLIDATED NET INCOME
 
392

 
439

 
1,292

 
1,269

 
 
 
 
 
 
 
 
 
Less: Net income attributable to noncontrolling interests
 
12

 
16

 
54

 
62

NET INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
380

 
$
423

 
$
1,238

 
$
1,207

 
 
 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
 
 

 
 

 
 

 
 

Basic
 
$
2.15

 
$
2.32

 
$
6.92

 
$
6.59

Diluted
 
$
2.14

 
$
2.32

 
$
6.90

 
$
6.58

 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE SHARES OUTSTANDING
 
 

 
 

 
 

 
 

Basic
 
177.0

 
182.2

 
178.9

 
183.1

Dilutive effect of stock compensation awards
 
0.4

 
0.5

 
0.4

 
0.4

Diluted
 
177.4

 
182.7

 
179.3

 
183.5

 
 
 
 
 
 
 
 
 
CASH DIVIDENDS DECLARED PER COMMON SHARE
 
$
0.975

 
$
0.78

 
$
2.535

 
$
2.03

____________________________________
(a) Includes sales to nonconsolidated equity investees of $274 million and $956 million and $518 million and $1,656 million for the three and nine month periods ended September 27, 2015 and September 28, 2014, respectively.
 
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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Table of Contents

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
Three months ended
 
Nine months ended
In millions 
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
CONSOLIDATED NET INCOME
 
$
392

 
$
439

 
$
1,292

 
$
1,269

Other comprehensive (loss) income, net of tax (Note 12)
 
 

 
 

 
 

 
 

Change in pension and other postretirement defined benefit plans
 
15

 
14

 
43

 
28

Foreign currency translation adjustments
 
(221
)
 
(172
)
 
(252
)
 
(62
)
Unrealized loss on marketable securities
 
(1
)
 
(1
)
 
(1
)
 
(12
)
Unrealized gain (loss) on derivatives
 
7

 
(5
)
 
15

 

Total other comprehensive loss, net of tax
 
(200
)
 
(164
)
 
(195
)
 
(46
)
COMPREHENSIVE INCOME
 
192

 
275

 
1,097

 
1,223

Less: Comprehensive income attributable to noncontrolling interests
 
(1
)
 
10

 
39

 
59

COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
193

 
$
265

 
$
1,058

 
$
1,164

 
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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Table of Contents

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
In millions, except par value
 
September 27,
2015
 
December 31,
2014
ASSETS
 
 

 
 

Current assets
 
 

 
 

Cash and cash equivalents
 
$
1,688

 
$
2,301

Marketable securities (Note 7)
 
35

 
93

Total cash, cash equivalents and marketable securities
 
1,723

 
2,394

Accounts and notes receivable, net
 
 
 
 
Trade and other
 
2,915

 
2,744

Nonconsolidated equity investees
 
244

 
202

Inventories (Note 8)
 
3,059

 
2,866

Prepaid expenses and other current assets
 
921

 
849

Total current assets
 
8,862

 
9,055

Long-term assets
 
 

 
 

Property, plant and equipment
 
7,262

 
7,123

Accumulated depreciation
 
(3,545
)
 
(3,437
)
Property, plant and equipment, net
 
3,717

 
3,686

Investments and advances related to equity method investees
 
959

 
981

Goodwill
 
481

 
479

Other intangible assets, net
 
337

 
343

Pension assets
 
785

 
637

Other assets
 
656

 
595

Total assets
 
$
15,797

 
$
15,776

 
 
 
 
 
LIABILITIES
 
 

 
 

Current liabilities
 
 

 
 

Accounts payable (principally trade)
 
$
1,824

 
$
1,881

Loans payable
 
27

 
86

Current portion of accrued product warranty (Note 9)
 
388

 
363

Accrued compensation, benefits and retirement costs
 
505

 
508

Current portion of deferred revenue
 
414

 
401

Other accrued expenses
 
779

 
759

Current maturities of long-term debt (Note 10)
 
31

 
23

Total current liabilities
 
3,968

 
4,021

Long-term liabilities
 
 

 
 

Long-term debt (Note 10)
 
1,595

 
1,589

Postretirement benefits other than pensions
 
347

 
369

Pensions
 
292

 
289

Other liabilities and deferred revenue
 
1,514

 
1,415

Total liabilities
 
$
7,716

 
$
7,683

 
 
 
 
 
Commitments and contingencies (Note 11)
 


 


 
 
 

 
 

EQUITY
 
 
 
 
Cummins Inc. shareholders’ equity
 
 

 
 

Common stock, $2.50 par value, 500 shares authorized, 222.3 and 222.3 shares issued
 
$
2,173

 
$
2,139

Retained earnings
 
10,331

 
9,545

Treasury stock, at cost, 44.7 and 40.1 shares
 
(3,486
)
 
(2,844
)
Common stock held by employee benefits trust, at cost, 1.0 and 1.1 shares
 
(11
)
 
(13
)
Accumulated other comprehensive loss (Note 12)
 
(1,258
)
 
(1,078
)
Total Cummins Inc. shareholders’ equity
 
7,749

 
7,749

Noncontrolling interests
 
332

 
344

Total equity
 
$
8,081

 
$
8,093

Total liabilities and equity
 
$
15,797

 
$
15,776


The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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Table of Contents

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine months ended
In millions
 
September 27,
2015
 
September 28,
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

Consolidated net income
 
$
1,292

 
$
1,269

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

 
 

Depreciation and amortization
 
383

 
330

Gain on fair value adjustment for consolidated investees (Note 3)
 
(17
)
 
(38
)
Deferred income taxes
 
(120
)
 
(37
)
Equity in income of investees, net of dividends
 
(68
)
 
(103
)
Pension contributions in excess of expense
 
(119
)
 
(154
)
Other post-retirement benefits payments in excess of expense
 
(18
)
 
(22
)
Stock-based compensation expense
 
24

 
27

Translation and hedging activities
 
22

 
(19
)
Changes in current assets and liabilities, net of acquisitions
 
 
 
 

Accounts and notes receivable
 
(163
)
 
(236
)
Inventories
 
(179
)
 
(302
)
Other current assets
 
133

 
(6
)
Accounts payable
 
(52
)
 
316

Accrued expenses
 
(153
)
 
162

Changes in other liabilities and deferred revenue
 
219

 
184

Other, net
 
(53
)
 
17

Net cash provided by operating activities
 
1,131

 
1,388

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Capital expenditures
 
(393
)
 
(409
)
Investments in internal use software
 
(38
)
 
(40
)
Investments in and advances to equity investees
 
(9
)
 
(39
)
Acquisitions of businesses, net of cash acquired (Note 3)
 
(102
)
 
(266
)
Investments in marketable securities—acquisitions (Note 7)
 
(175
)
 
(213
)
Investments in marketable securities—liquidations (Note 7)
 
228

 
316

Cash flows from derivatives not designated as hedges
 
17

 

Other, net
 
(5
)
 
11

Net cash used in investing activities
 
(477
)
 
(640
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Proceeds from borrowings
 
24

 
39

Payments on borrowings and capital lease obligations
 
(64
)
 
(72
)
Net payments under short-term credit agreements
 
(38
)
 
(41
)
Distributions to noncontrolling interests
 
(35
)
 
(52
)
Dividend payments on common stock
 
(452
)
 
(370
)
Repurchases of common stock
 
(650
)
 
(605
)
Other, net
 

 
2

Net cash used in financing activities
 
(1,215
)
 
(1,099
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
 
(52
)
 
(20
)
Net decrease in cash and cash equivalents
 
(613
)
 
(371
)
Cash and cash equivalents at beginning of year
 
2,301

 
2,699

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
1,688

 
$
2,328


 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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Table of Contents

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
 
In millions
Common
Stock
 
Additional
paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Common
Stock
Held in
Trust
 
Accumulated
Other
Comprehensive
Loss
 
Total
Cummins Inc.
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
BALANCE AT DECEMBER 31, 2013
$
556

 
$
1,543

 
$
8,406

 
$
(2,195
)
 
$
(16
)
 
$
(784
)
 
$
7,510

 
$
360

 
$
7,870

Net income


 


 
1,207

 


 


 


 
1,207

 
62

 
1,269

Other comprehensive income (loss) (Note 12)


 


 


 


 


 
(43
)
 
(43
)
 
(3
)
 
(46
)
Issuance of shares


 
8

 


 


 


 


 
8

 

 
8

Employee benefits trust activity


 
19

 


 


 
2

 


 
21

 

 
21

Acquisition of shares


 


 


 
(605
)
 


 


 
(605
)
 

 
(605
)
Cash dividends on common stock


 


 
(370
)
 


 


 


 
(370
)
 

 
(370
)
Distributions to noncontrolling interests


 


 


 


 


 


 

 
(63
)
 
(63
)
Stock based awards


 
(5
)
 


 
21

 


 


 
16

 

 
16

Other shareholder transactions


 
4

 


 


 


 


 
4

 
(7
)
 
(3
)
BALANCE AT SEPTEMBER 28, 2014
$
556

 
$
1,569

 
$
9,243

 
$
(2,779
)
 
$
(14
)
 
$
(827
)
 
$
7,748

 
$
349

 
$
8,097

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AT DECEMBER 31, 2014
$
556

 
$
1,583

 
$
9,545

 
$
(2,844
)
 
$
(13
)
 
$
(1,078
)
 
$
7,749

 
$
344

 
$
8,093

Net income


 


 
1,238

 


 


 


 
1,238

 
54

 
1,292

Other comprehensive income (loss) (Note 12)


 


 


 


 


 
(180
)
 
(180
)
 
(15
)
 
(195
)
Issuance of shares


 
7

 


 


 


 


 
7

 

 
7

Employee benefits trust activity


 
21

 


 


 
2

 


 
23

 

 
23

Acquisition of shares


 


 


 
(650
)
 


 


 
(650
)
 

 
(650
)
Cash dividends on common stock


 


 
(452
)
 


 


 


 
(452
)
 

 
(452
)
Distributions to noncontrolling interests


 


 


 


 


 


 

 
(46
)
 
(46
)
Stock based awards


 
(4
)
 


 
8

 


 


 
4

 

 
4

Other shareholder transactions


 
10

 


 


 


 


 
10

 
(5
)
 
5

BALANCE AT SEPTEMBER 27, 2015
$
556

 
$
1,617

 
$
10,331

 
$
(3,486
)
 
$
(11
)
 
$
(1,258
)
 
$
7,749

 
$
332

 
$
8,081

 
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 1. NATURE OF OPERATIONS
 
Cummins Inc. (“Cummins,” “we,” “our” or “us”) was founded in 1919 as a corporation in Columbus, Indiana and 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 7,200 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 and in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations. Certain reclassifications have been made to prior period amounts to conform to the presentation of the current period condensed financial statements.
 
Our reporting period usually ends on the Sunday closest to the last day of the quarterly calendar period. The third quarters of 2015 and 2014 ended on September 27 and September 28, respectively. 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 costs, income taxes and deferred tax valuation allowances, lease classifications, restructuring actions 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 and nine month periods ended September 27, 2015 and September 28, 2014, were as follows:
 
 
Three months ended
 
Nine months ended
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Options excluded
950,345

 
225,773

 
593,436

 
110,488

These interim condensed financial statements should be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2014. Our interim period financial results for the three and nine month interim periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
 

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NOTE 3. ACQUISITIONS
In September 2013, we announced our intention to acquire the equity that we do not already own in most of our partially-owned U.S. and Canadian distributors over a three to five year period.
The Distribution segment North American distributor acquisitions for the nine months ended September 27, 2015, versus the comparable period in 2014 were as follows:
Entity Acquired (Dollars in millions)
 
Date of Acquisition
 
Additional Percent Interest Acquired
 
Payments to Former Owners
 
Acquisition Related Debt Retirements
 
Total Purchase Consideration
 
Type of Acquisition(1)
 
Gain Recognized(1)
 
Goodwill Acquired
 
Intangibles Recognized(2)
 
Net Sales Previous Fiscal Year Ended(3)
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cummins Crosspoint LLC (4)
 
08/03/15
 
50%
 
$
20

 
$
36

 
$
65

(5) 
COMB
 
$
10

 
$
7

 
$
2

 
$
258

Cummins Atlantic LLC (4)
 
08/03/15
 
51%
 
14

 
28

 
48

(5) 
COMB
 
7

 
2

 
6

 
245

Cummins Central Power LLC
 
06/29/15
 
20.01%
 
8

 

 
8

 
EQUITY
 

 

 

 

2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cummins Eastern Canada LP
 
08/04/14
 
50%
 
$
30

 
$
32

 
$
62

 
COMB
 
$
18

 
$
5

 
$
4

 
$
228

Cummins Power Systems LLC
 
05/05/14
 
30%
 
14

 

 
14

 
EQUITY
 

 

 

 

Cummins Southern Plains LLC
 
03/31/14
 
50%
 
44

 
48

 
92

 
COMB
 
13

 
1

 
11

 
433

Cummins Mid-South LLC
 
02/14/14
 
62.2%
 
57

 
61

 
118

 
COMB
 
7

 
4

 
8

 
368

____________________________________________________
(1) 
All results from acquired entities were included in Distribution segment results subsequent to the acquisition date. Previously consolidated entities were accounted for as equity transactions (EQUITY). Newly consolidated entities were accounted for as business combinations (COMB) with gains recognized based on the requirement to remeasure our pre-existing ownership to fair value in accordance with GAAP and are included in the Condensed Consolidated Statements of Income as "Other income, net."
(2)  
Intangible assets acquired in business combinations were mostly customer related, the majority of which will be amortized over a period of up to five years from the date of the acquisition.
(3)
Sales amounts are not fully incremental to our consolidated sales as the amount would be reduced by the elimination of sales to the previously unconsolidated entity.
(4) Purchase accounting for these acquisitions are preliminary, awaiting customary adjustments to purchase price in accordance with the purchase agreements.
(5) 
The "Total Purchase Consideration" represents the total amount that will or is estimated to be paid to complete the acquisition. In some instances a portion of the acquisition payment has not yet been made and will be paid in future periods in accordance with the purchase contract. The total estimated remaining consideration at September 27, 2015, was $15 million.




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NOTE 4. PENSION AND OTHER POSTRETIREMENT BENEFITS
 
The components of net periodic pension and other postretirement benefit costs under our plans were as follows:
 
 
Pension
 
 
 
 
 
 
U.S. Plans
 
U.K. Plans
 
Other Postretirement Benefits
 
 
Three months ended
In millions
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Service cost
 
$
20

 
$
16

 
$
7

 
$
7

 
$

 
$

Interest cost
 
25

 
26

 
14

 
16

 
4

 
4

Expected return on plan assets
 
(47
)
 
(43
)
 
(23
)
 
(23
)
 

 

Recognized net actuarial loss
 
11

 
8

 
8

 
7

 
1

 

Net periodic benefit cost
 
$
9

 
$
7

 
$
6

 
$
7

 
$
5

 
$
4

 
 
Pension
 
 
 
 
 
 
U.S. Plans
 
U.K. Plans
 
Other Postretirement Benefits
 
 
Nine months ended
In millions
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Service cost
 
$
60

 
$
50

 
$
20

 
$
19

 
$

 
$

Interest cost
 
76

 
79

 
42

 
49

 
12

 
13

Expected return on plan assets
 
(142
)
 
(131
)
 
(68
)
 
(66
)
 

 

Recognized net actuarial loss
 
34

 
23

 
25

 
20

 
3

 

Net periodic benefit cost
 
$
28

 
$
21

 
$
19

 
$
22

 
$
15

 
$
13

 

NOTE 5. EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES
 
Equity, royalty and interest income from investees included in our Condensed Consolidated Statements of Income for the interim reporting periods was as follows:
 
 
 
Three months ended
 
Nine months ended
In millions
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Distribution Entities
 
 
 
 
 
 
 
 
North American distributors
 
$
9

 
$
27

 
$
27

 
$
89

Komatsu Cummins Chile, Ltda.
 
8

 
8

 
23

 
22

All other distributors
 
1

 

 
2

 
2

Manufacturing Entities
 
 
 
 
 
 

 
 

Beijing Foton Cummins Engine Co., Ltd
 
18

 
5

 
47

 
6

Dongfeng Cummins Engine Company, Ltd.
 
11

 
15

 
40

 
51

Chongqing Cummins Engine Company, Ltd.
 
9

 
13

 
32

 
39

All other manufacturers
 
13

 
20

 
41

 
54

Cummins share of net income
 
69

 
88

 
212

 
263

Royalty and interest income
 
9

 
11

 
28

 
31

Equity, royalty and interest income from investees
 
$
78

 
$
99

 
$
240

 
$
294



10

Table of Contents

NOTE 6. INCOME TAXES
 
Our effective tax rate for the year is expected to approximate 29.5 percent, excluding any one-time items that may arise. The expected tax rate does not include the benefits of the research tax credit, which expired December 31, 2014 and has not yet been renewed by Congress. If the research credit is reinstated during 2015, we anticipate the 2015 effective tax rate will be reduced to 28.5 percent. 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. 

The effective tax rate for the three and nine month periods ended September 27, 2015, was 30.1 percent and 28.7 percent, respectively. The tax rate for the nine month period ended September 27, 2015, included a net $14 million discrete tax benefit primarily to reflect the release of reserves for uncertain tax positions related to a favorable federal audit settlement.
Our effective tax rate for the three and nine month periods ended September 28, 2014, was 34.4 percent and 30.4 percent, respectively. The tax rate for the three months ended September 28, 2014, included a $19 million discrete tax expense to reflect the reduction in value of state tax credits as a result of a favorable state tax rate change that will lower future taxes. Additionally, the tax rate for the nine month period included a $2 million discrete tax benefit for the release of reserves for uncertain tax positions related to multiple state audit settlements, a $12 million discrete tax expense attributable primarily to state deferred tax adjustments, as well as a $6 million discrete net tax benefit resulting from a $70 million dividend paid from China earnings generated prior to 2012.
The decrease in the effective tax rate for the three months ended September 27, 2015, versus the comparable period in 2014 was primarily due to favorable changes in the jurisdictional mix of pre-tax income and the 2014 unfavorable discrete tax items.
It is reasonably possible that our existing liabilities for uncertain tax benefits may decrease in an amount ranging from $0 to $70 million within the next twelve months for U.S. and non-U.S. audits that are in process.

NOTE 7. MARKETABLE SECURITIES
 
A summary of marketable securities, all of which are classified as current, was as follows:
 
 
 
September 27, 2015
 
December 31, 2014
In millions
 
Cost
 
Gross unrealized
gains/(losses)
 
Estimated
fair value
 
Cost
 
Gross unrealized
gains/(losses)
 
Estimated
fair value
Available-for-sale
 
 

 
 

 
 

 
 

 
 

 
 

Level 2(1)
 
 
 
 
 
 
 
 
 
 
 
 
Debt mutual funds
 
$
25

 
$

 
$
25

 
$
75

 
$
1

 
$
76

Equity mutual funds
 
9

 
(1
)
 
8

 
9

 

 
9

Bank debentures
 

 

 

 
6

 

 
6

Government debt securities
 
2

 

 
2

 
2

 

 
2

Total marketable securities
 
$
36

 
$
(1
)
 
$
35

 
$
92

 
$
1

 
$
93

____________________________________
(1) The fair value of Level 2 securities is estimated primarily using actively quoted prices for similar instruments from brokers and observable inputs, including market transactions and third-party pricing services. We do not currently have any Level 3 securities, and there were no transfers between Level 2 or 3 during the first nine months of 2015 and 2014.  

The proceeds from sales and maturities of marketable securities and gross realized gains and losses from the sale of available-for-sale securities were as follows:
 
 
Three months ended
 
Nine months ended
In millions
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Proceeds from sales and maturities of marketable securities
 
$
73

 
$
137

 
$
228

 
$
316

Gross realized gains from the sale of marketable securities
 

 
1

 
1

 
14


11



At September 27, 2015, the fair value of available-for-sale investments in debt securities that utilize a Level 2 fair value measure by contractual maturity was as follows:
 
Maturity date
 
Fair value
(in millions)
1 year or less
 
$
25

1 - 5 years
 
1

5 - 10 years
 
1

Total
 
$
27

NOTE 8. INVENTORIES
 
Inventories are stated at the lower of cost or market. Inventories included the following:
 
In millions
 
September 27,
2015
 
December 31,
2014
Finished products
 
$
2,001

 
$
1,859

Work-in-process and raw materials
 
1,168

 
1,129

Inventories at FIFO cost
 
3,169

 
2,988

Excess of FIFO over LIFO
 
(110
)
 
(122
)
Total inventories
 
$
3,059

 
$
2,866


NOTE 9. PRODUCT WARRANTY LIABILITY
 
A tabular reconciliation of the product warranty liability, including the deferred revenue related to our extended warranty coverage and accrued recall programs was as follows:
 
In millions 
 
September 27,
2015
 
September 28,
2014
Balance, beginning of year
 
$
1,283

 
$
1,129

Provision for warranties issued
 
326

 
307

Deferred revenue on extended warranty contracts sold
 
217

 
175

Payments
 
(282
)
 
(313
)
Amortization of deferred revenue on extended warranty contracts
 
(132
)
 
(109
)
Changes in estimates for pre-existing warranties
 
18

 
28

Foreign currency translation
 
(10
)
 
(4
)
Balance, end of period
 
$
1,420

 
$
1,213

 
Warranty related deferred revenue, supplier recovery receivables and the long-term portion of the warranty liability on our September 27, 2015, balance sheet were as follows:
In millions
 
September 27,
2015
 
Balance Sheet Location
Deferred revenue related to extended coverage programs
 
 

 
 
Current portion
 
$
183

 
Deferred revenue
Long-term portion
 
508

 
Other liabilities and deferred revenue
Total
 
$
691

 
 
 
 
 
 
 
Receivables related to estimated supplier recoveries
 
 

 
 
Current portion
 
$
6

 
Trade and other receivables
Long-term portion
 
4

 
Other assets
Total
 
$
10

 
 
 
 
 
 
 
Long-term portion of warranty liability
 
$
341

 
Other liabilities and deferred revenue

12

Table of Contents

NOTE 10. DEBT
A summary of long-term debt was as follows:
 
In millions
 
September 27,
2015
 
December 31,
2014
Long-term debt
 
 

 
 

Senior notes, 3.65%, due 2023
 
$
500

 
$
500

Debentures, 6.75%, due 2027
 
58

 
58

Debentures, 7.125%, due 2028
 
250

 
250

Senior notes, 4.875%, due 2043
 
500

 
500

Debentures, 5.65%, due 2098 (effective interest rate 7.48%)
 
165

 
165

Credit facilities related to consolidated joint ventures
 
3

 
3

Other debt
 
43

 
31

Unamortized discount
 
(46
)
 
(47
)
Fair value adjustments due to hedge on indebtedness
 
68

 
65

Capital leases
 
85

 
87

Total long-term debt
 
1,626

 
1,612

Less: Current maturities of long-term debt
 
(31
)
 
(23
)
Long-term debt
 
$
1,595

 
$
1,589

Principal payments required on long-term debt during the next five years are as follows:
 
 
Required Principal Payments
In millions
 
2015
 
2016
 
2017
 
2018
 
2019
Principal payments
 
$
9

 
$
40

 
$
16

 
$
17

 
$
11


Fair Value of Debt
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, was as follows:
 
In millions
 
September 27,
2015
 
December 31,
2014
Fair value of total debt(1)
 
$
1,859

 
$
1,993

Carrying value of total debt
 
1,653

 
1,698

_________________________________________________
(1) The fair value of debt is derived from Level 2 inputs.
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.
 

13

Table of Contents

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.
 
Guarantees and Commitments
From time to time we enter into guarantee arrangements, including guarantees of non-U.S. distributor financings, residual value guarantees on equipment under operating leases and other miscellaneous guarantees of third-party obligations. As of September 27, 2015, the maximum potential loss related to these guarantees was $20 million.
We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. As of September 27, 2015, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $134 million, of which $78 million relates to a contract with a components supplier that extends to 2018. These arrangements enable us to secure critical components. We do not currently anticipate paying any penalties under these contracts.
During 2014, we began entering into physical forward contracts with suppliers of platinum and palladium to purchase minimum volumes of the commodities at contractually stated prices for various periods, not to exceed two years. As of September 27, 2015, the total commitments under these contracts were $38 million. These arrangements enable us to fix the prices of these commodities, which otherwise are subject to market volatility.
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 September 27, 2015 and $76 million at December 31, 2014.
 
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.

14

Table of Contents

NOTE 12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
Following are the changes in accumulated other comprehensive income (loss) by component for the three and nine months ended:
 
 
Three months ended
In millions
 
Change in
pensions and
other
postretirement
defined benefit
plans
 
Foreign
currency
translation
adjustment
 
Unrealized gain
(loss) on
marketable
securities
 
Unrealized gain
(loss) on
derivatives
 
Total
attributable to
Cummins Inc.
 
Noncontrolling
interests
 
Total
Balance at June 29, 2014
 
$
(597
)
 
$
(76
)
 
$

 
$
4

 
$
(669
)
 
 

 
 

Other comprehensive income before reclassifications
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Before tax amount
 

 
(184
)
 

 
(5
)
 
(189
)
 
$
(6
)
 
$
(195
)
Tax (expense) benefit
 

 
18

 

 
1

 
19

 

 
19

After tax amount
 

 
(166
)
 

 
(4
)
 
(170
)
 
(6
)
 
(176
)
Amounts reclassified from accumulated other comprehensive income(1)(2)
 
14

 

 
(1
)
 
(1
)
 
12

 

 
12

Net current period other comprehensive income (loss)
 
14

 
(166
)
 
(1
)
 
(5
)
 
(158
)
 
$
(6
)
 
$
(164
)
Balance at September 28, 2014
 
$
(583
)
 
$
(242
)
 
$
(1
)
 
$
(1
)
 
$
(827
)
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 28, 2015
 
$
(641
)
 
$
(435
)
 
$
(1
)
 
$
6

 
$
(1,071
)
 
 

 
 

Other comprehensive income before reclassifications
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Before tax amount
 

 
(239
)
 
(1
)
 
13

 
(227
)
 
$
(13
)
 
$
(240
)
Tax (expense) benefit
 

 
31

 

 
(1
)
 
30

 

 
30

After tax amount
 

 
(208
)
 
(1
)
 
12

 
(197
)
 
(13
)
 
(210
)
Amounts reclassified from accumulated other comprehensive income(1)(2)
 
15

 

 

 
(5
)
 
10

 

 
10

Net current period other comprehensive income (loss)
 
15

 
(208
)
 
(1
)
 
7

 
(187
)
 
$
(13
)
 
$
(200
)
Balance at September 27, 2015
 
$
(626
)
 
$
(643
)
 
$
(2
)
 
$
13

 
$
(1,258
)
 
 

 
 

____________________________________
(1) Amounts are net of tax.  
(2) See reclassifications out of accumulated other comprehensive income (loss) disclosure below for further details.  

15

Table of Contents

 
 
Nine months ended
In millions
 
Change in
pensions and
other
postretirement
defined benefit
plans
 
Foreign
currency
translation
adjustment
 
Unrealized gain
(loss) on
marketable
securities
 
Unrealized gain
(loss) on
derivatives
 
Total
attributable to
Cummins Inc.
 
Noncontrolling
interests
 
Total
Balance at December 31, 2013
 
$
(611
)
 
$
(179
)
 
$
7

 
$
(1
)
 
$
(784
)
 
 

 
 

Other comprehensive income before reclassifications
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Before tax amount
 
(7
)
 
(77
)
 
(1
)
 
5

 
(80
)
 
$
1

 
$
(79
)
Tax (expense) benefit
 
1

 
14

 

 
(2
)
 
13

 

 
13

After tax amount
 
(6
)
 
(63
)
 
(1
)
 
3

 
(67
)
 
1

 
(66
)
Amounts reclassified from accumulated other comprehensive income(1)(2)
 
34

 

 
(7
)
 
(3
)
 
24

 
(4
)
 
20

Net current period other comprehensive income (loss)
 
28

 
(63
)
 
(8
)
 

 
(43
)
 
$
(3
)
 
$
(46
)
Balance at September 28, 2014
 
$
(583
)
 
$
(242
)
 
$
(1
)
 
$
(1
)
 
$
(827
)
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
 
$
(669
)
 
$
(406
)
 
$
(1
)
 
$
(2
)
 
$
(1,078
)
 
 

 
 

Other comprehensive income before reclassifications
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Before tax amount
 
(3
)
 
(290
)
 

 
23

 
(270
)
 
$
(15
)
 
$
(285
)
Tax (expense) benefit
 
1

 
53

 

 
(3
)
 
51

 

 
51

After tax amount
 
(2
)
 
(237
)
 

 
20

 
(219
)
 
(15
)
 
(234
)
Amounts reclassified from accumulated other comprehensive income(1)(2)
 
45

 

 
(1
)
 
(5
)