UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549


FORM 8-K
 
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report:  October 28, 2014
 
  CUMMINS INC.
(Exact name of registrant as specified in its charter)
Indiana
(State or other Jurisdiction of
Incorporation)
1-4949
 (Commission File Number)
35-0257090
 (I.R.S. Employer Identification No.)

500 Jackson Street
P. O. Box 3005
Columbus, IN  47202-3005
(Principal Executive Office)  (Zip Code)

Registrant's telephone number, including area code:  (812) 377-5000
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
 
[ ]
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
[ ]
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
[ ]
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
[ ]
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
  
 



Item 2.02. Results of Operations and Financial Condition.
 
On October 28, 2014, Cummins Inc. (“Cummins,” “the Company,” “the registrant,” “we,” “our,” or “us”) issued the attached press release reporting its financial results for the third quarter of 2014, which is furnished herewith as Exhibit 99.

This Current Report on Form 8-K includes supplemental unaudited historical "Cost of sales" and "Selling, general and administrative expenses" information.

The information furnished pursuant to this Item 2.02, including Exhibit 99, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Exchange Act.


 Item 9.01. Financial Statements and Exhibits.
 
(d)
The following exhibit is furnished pursuant to Item 2.02 herewith: 
99-Press Release dated October 28, 2014


SIGNATURE

 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
Date: October 28, 2014
 
CUMMINS INC.
 /s/ Marsha L. Hunt
Marsha L. Hunt
Vice President - Corporate Controller
(Principal Accounting Officer)

 


CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (a)



 
 
Three months ended
In millions, except per share amounts
 
September 28, 2014
 
June 29,
2014
 
September 29, 2013
NET SALES
 
$
4,890

 
$
4,835

 
$
4,266

Cost of sales (b)
 
3,606

 
3,630

 
3,185

GROSS MARGIN
 
1,284

 
1,205

 
1,081

 
 
 
 
 
 
 
OPERATING EXPENSES AND INCOME
 
 
 
 
 
 
Selling, general and administrative expenses (b)
 
529

 
513

 
464

Research, development and engineering expenses
 
198

 
179

 
173

Equity, royalty and interest income from investees (Note 1)
 
99

 
105

 
91

Other operating income (expense), net
 
3

 
(6
)
 
(11
)
OPERATING INCOME
 
659

 
612


524

 
 
 
 
 
 
 
Interest income
 
6

 
6

 
6

Interest expense
 
15

 
15

 
8

Other income, net
 
19

 
39

 
6

INCOME BEFORE INCOME TAXES
 
669

 
642

 
528

 
 
 
 
 
 
 
Income tax expense  (Note 2)
 
230

 
170

 
154

CONSOLIDATED NET INCOME
 
439

 
472

 
374

 
 
 
 
 
 
 
Less: Net income attributable to noncontrolling interests
 
16

 
26

 
19

NET INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
423

 
$
446

 
$
355

 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
 
 
 
 
 
 
Basic
 
$
2.32

 
$
2.44

 
$
1.91

Diluted
 
$
2.32

 
$
2.43

 
$
1.90

 
 
 
 
 
 
 
WEIGHTED AVERAGE SHARES OUTSTANDING
 
 

 
 
 
 
Basic
 
182.2

 
182.8

 
186.0

Diluted
 
182.7

 
183.2

 
186.5

 
 
 
 
 
 
 
CASH DIVIDENDS DECLARED PER COMMON SHARE
 
$
0.78

 
$
0.625

 
$
0.625

 
(a)     Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.
(b) We revised the classification of certain amounts for "Cost of sales" and "Selling, general and administrative expenses." See
supplemental schedules for additional information.






CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (a)


 
 
Nine months ended
In millions, except per share amounts
 
September 28, 2014
 
September 29, 2013
NET SALES
 
$
14,131

 
$
12,713

Cost of sales (b)
 
10,543

 
9,570

GROSS MARGIN
 
3,588

 
3,143

 
 
 
 
 
OPERATING EXPENSES AND INCOME
 
 
 
 
Selling, general and administrative expenses (b)
 
1,527

 
1,344

Research, development and engineering expenses
 
567

 
532

Equity, royalty and interest income from investees  (Note 1)
 
294

 
281

Other operating income (expense), net
 
(4
)
 
—

OPERATING INCOME
 
1,784

 
1,548

 
 
 
 
 
Interest income
 
17

 
21

Interest expense
 
47

 
22

Other income, net
 
68

 
25

INCOME BEFORE INCOME TAXES
 
1,822

 
1,572

 
 
 
 
 
Income tax expense  (Note 2)
 
553

 
445

CONSOLIDATED NET INCOME
 
1,269

 
1,127

 
 
 
 
 
Less: Net income attributable to noncontrolling interests
 
62

 
76

NET INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
1,207

 
$
1,051

 
 
 
 
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
 
 
 
 
Basic
 
$
6.59

 
$
5.61

Diluted
 
$
6.58

 
$
5.60

 
 
 
 
 
WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
 
Basic
 
183.1

 
187.4

Diluted
 
183.5

 
187.8

 
 
 
 
 
CASH DIVIDENDS DECLARED PER COMMON SHARE
 
$
2.03

 
$
1.625


(a)     Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.
(b) We revised the classification of certain amounts for "Cost of sales" and "Selling, general and administrative expenses." See
supplemental schedules for additional information.




CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (a)


In millions, except par value
 
September 28, 2014
 
December 31, 2013
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
2,328

 
$
2,699

Marketable securities
 
53

 
150

Total cash, cash equivalents and marketable securities
 
2,381

 
2,849

Accounts and notes receivable, net
 
3,059

 
2,649

Inventories
 
2,833

 
2,381

Prepaid expenses and other current assets
 
795

 
760

Total current assets
 
9,068

 
8,639

Long-term assets
 
 
 
 
Property, plant and equipment
 
6,899

 
6,410

Accumulated depreciation
 
(3,435
)
 
(3,254
)
Property, plant and equipment, net
 
3,464

 
3,156

Investments and advances related to equity method investees
 
981

 
931

Goodwill
 
465

 
461

Other intangible assets, net
 
346

 
357

Prepaid pensions
 
701

 
514

Other assets
 
619

 
670

Total assets
 
$
15,644

 
$
14,728

 
 
 
 
 
LIABILITIES
 
 
 
 
Current liabilities
 
 
 
 
Loans payable
 
$
78

 
$
17

Accounts payable (principally trade)
 
1,930

 
1,557

Current maturities of long-term debt
 
27

 
51

Current portion of accrued product warranty
 
351

 
360

Accrued compensation, benefits and retirement costs
 
507

 
433

Deferred revenue
 
328

 
285

Taxes payable (including taxes on income)
 
134

 
99

Other accrued expenses
 
683

 
566

Total current liabilities
 
4,038

 
3,368

Long-term liabilities
 
 
 
 
Long-term debt
 
1,584

 
1,672

Pensions
 
234

 
232

Postretirement benefits other than pensions
 
333

 
356

Other liabilities and deferred revenue
 
1,358

 
1,230

Total liabilities
 
7,547

 
6,858

 
 
 
 
 
EQUITY
 
 
 
 
Cummins Inc. shareholders’ equity
 
 
 
 
Common stock, $2.50 par value, 500 shares authorized, 222.3 and 222.3 shares issued
 
2,125

 
2,099

Retained earnings
 
9,243

 
8,406

Treasury stock, at cost, 39.6 and 35.6 shares
 
(2,779
)
 
(2,195
)
Common stock held by employee benefits trust, at cost, 1.1 and 1.3 shares
 
(14
)
 
(16
)
Accumulated other comprehensive loss
 
 
 
 
Defined benefit postretirement plans
 
(583
)
 
(611
)
Other
 
(244
)
 
(173
)
Total accumulated other comprehensive loss
 
(827
)
 
(784
)
Total Cummins Inc. shareholders’ equity
 
7,748

 
7,510

Noncontrolling interests
 
349

 
360

Total equity
 
8,097

 
7,870

Total liabilities and equity
 
$
15,644

 
$
14,728

 (a)     Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (a)



 
 
Nine months ended
In millions
 
September 28, 2014
 
September 29, 2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Consolidated net income
 
$
1,269

 
$
1,127

Adjustments to reconcile consolidated net income to net cash provided by operating activities
 
 
 
 
Depreciation and amortization
 
330

 
305

Gain on fair value adjustment for consolidated investees
 
(38
)
 
(12
)
Deferred income taxes
 
(37
)
 
78

Equity in income of investees, net of dividends
 
(103
)
 
(98
)
Pension contributions in excess of expense
 
(154
)
 
(96
)
Other post-retirement benefits payments in excess of expense
 
(22
)
 
(20
)
Stock-based compensation expense
 
27

 
29

Excess tax benefits on stock-based awards
 
(5
)
 
(13
)
Translation and hedging activities
 
(19
)
 
26

Changes in current assets and liabilities, net of acquisitions
 
 
 
 
Accounts and notes receivable
 
(236
)
 
(216
)
Inventories
 
(302
)
 
(206
)
Other current assets
 
(6
)
 
182

Accounts payable
 
316

 
252

Accrued expenses
 
162

 
(146
)
Changes in other liabilities and deferred revenue
 
184

 
147

Other, net
 
22

 
(6
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
 
1,388

 
1,333

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Capital expenditures
 
(409
)
 
(417
)
Investments in internal use software
 
(40
)
 
(43
)
Investments in and advances to equity investees
 
(39
)
 
(12
)
Acquisitions of businesses, net of cash acquired
 
(266
)
 
(145
)
Investments in marketable securities—acquisitions
 
(213
)
 
(360
)
Investments in marketable securities—liquidations
 
316

 
433

Cash flows from derivatives not designated as hedges
 
—

 
(15
)
Other, net
 
11

 
14

Net cash used in investing activities
 
(640
)
 
(545
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Proceeds from borrowings
 
39

 
987

Payments on borrowings and capital lease obligations
 
(72
)
 
(62
)
Net (payments) borrowings under short-term credit agreements
 
(41
)
 
34

Distributions to noncontrolling interests
 
(52
)
 
(53
)
Dividend payments on common stock
 
(370
)
 
(305
)
Repurchases of common stock
 
(605
)
 
(289
)
Excess tax benefits on stock-based awards
 
5

 
13

Other, net
 
(3
)
 
19

Net cash (used in) provided by financing activities
 
(1,099
)
 
344

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
 
(20
)
 
(2
)
Net (decrease) increase in cash and cash equivalents
 
(371
)
 
1,130

Cash and cash equivalents at beginning of year
 
2,699

 
1,369

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
2,328

 
$
2,499


(a)     Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.

CUMMINS INC. AND SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)


 
In millions
 
Engine
 
Components
 
Power Generation
 
Distribution
 
Non-segment
Items(1)
 
Total
 
Three months ended September 28, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
2,181

 
$
946

 
$
481

 
$
1,282

 
$
—

 
$
4,890

 
Intersegment sales
 
635

 
341

 
273

 
10

 
(1,259
)
 
—

 
Total sales
 
2,816

 
1,287

 
754

 
1,292

 
(1,259
)
 
4,890

 
Depreciation and amortization(2)
 
50

 
27

 
13

 
22

 
—

 
112

 
Research, development and engineering expenses
 
114

 
64

 
18

 
2

 
—

 
198

 
Equity, royalty and interest income from investees
 
40

 
9

 
13

 
37

 
—

 
99

 
Interest income
 
3

 
1

 
1

 
1

 
—

 
6

 
Segment EBIT
 
330

 
172

 
60

 
131

(3) 
(9
)
 
684

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment EBIT as a percentage of total sales
 
11.7
%
 
13.4
%
 
8.0
%
 
10.1
%
 
 
 
14.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 29, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
2,178

 
$
953

 
$
475

 
$
1,229

 
$
—

 
$
4,835

 
Intersegment sales
 
566

 
327

 
268

 
9

 
(1,170
)
 
—

 
Total sales
 
2,744

 
1,280

 
743

 
1,238

 
(1,170
)
 
4,835

 
Depreciation and amortization(2)
 
52

 
26

 
13

 
20

 
—

 
111

 
Research, development and engineering expenses
 
105

 
53

 
18

 
3

 
—

 
179

 
Equity, royalty and interest income from investees
 
45

 
9

 
9

 
42

 
—

 
105

 
Interest income
 
4

 
1

 
1

 
—

 
—

 
6

 
Segment EBIT
 
311

 
185

 
61

 
126

(3) 
(26
)
 
657

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment EBIT as a percentage of total sales
 
11.3
%
 
14.5
%
 
8.2
%
 
10.2
%
 
 
 
13.6
%
 
 
 

 
 
 
 
 
 
 
 
 
 
 
Three months ended September 29, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
2,045

 
$
784

 
$
499

 
$
938

 
$
—

 
$
4,266

 
Intersegment sales
 
447

 
288

 
213

 
6

 
(954
)
 
—

 
Total sales
 
2,492

 
1,072

 
712

 
944

 
(954
)
 
4,266

 
Depreciation and amortization(2)
 
53

 
24

 
13

 
15

 
—

 
105

 
Research, development and engineering expenses
 
103

 
51

 
18

 
1

 
—

 
173

 
Equity, royalty and interest income from investees
 
31

 
5

 
13

 
42

 
—

 
91

 
Interest income
 
4

 
1

 
1

 
—

 
—

 
6

 
Segment EBIT
 
272

 
132

 
45

 
86

 
1

 
536

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment EBIT as a percentage of total sales
 
10.9
%
 
12.3
%
 
6.3
%
 
9.1
%
 
 
 
12.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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 September 28, 2014, June 29, 2014 and September 29, 2013.
(2
)
Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Income as "Interest expense."
(3
)
Distribution segment EBIT for the three months ended September 28, 2014 and June 29, 2014 included gains of $18 million and $14 million on the fair value adjustments resulting from the acquisitions of controlling interests in North American distributors in each period, respectively.

CUMMINS INC. AND SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)

In millions
 
Engine
 
Components
 
Power Generation
 
Distribution
 
Non-segment Items(1)
 
Total
Nine months ended September 28, 2014
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
6,449

 
$
2,821

 
$
1,408

 
$
3,453

 
$
—

 
$
14,131

Intersegment sales
 
1,674

 
976

 
728

 
27

 
(3,405
)
 
—

Total sales
 
8,123

 
3,797

 
2,136

 
3,480

 
(3,405
)
 
14,131

Depreciation and amortization(2)
 
153

 
79

 
38

 
58

 
—

 
328

Research, development and engineering expenses
 
335

 
170

 
55

 
7

 
—

 
567

Equity, royalty and interest income from investees
 
117

 
27

 
30

 
120

 
—

 
294

Interest income
 
9

 
3

 
3

 
2

 
—

 
17

Segment EBIT
 
910

 
524

 
146

 
333

(3) 
(44
)
 
1,869

 
 
 
 
 
 
 
 
 
 
 
 
 
Segment EBIT as a percentage of total sales
 
11.2
%
 
13.8
%
 
6.8
%
 
9.6
%
 
 
 
13.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 29, 2013
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
6,139

 
$
2,292

 
$
1,621

 
$
2,661

 
$
—

 
$
12,713

Intersegment sales
 
1,312

 
915

 
651

 
15

 
(2,893
)
 
—

Total sales
 
7,451

 
3,207

 
2,272

 
2,676

 
(2,893
)
 
12,713

Depreciation and amortization(2)
 
156

 
71

 
37

 
40

 
—

 
304

Research, development and engineering expenses
 
310

 
165

 
53

 
4

 
—

 
532

Equity, royalty and interest income from investees
 
106

 
21

 
30

 
124

 
—

 
281

Interest income
 
13

 
2

 
5

 
1

 
—

 
21

Segment EBIT
 
806

 
387

 
172

 
281

(3) 
(52
)
 
1,594

 
 
 
 
 
 
 
 
 
 
 
 
 
Segment EBIT as a percentage of total sales
 
10.8
%
 
12.1
%
 
7.6
%
 
10.5
%
 
 
 
12.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 

(1) Includes intersegment sales and profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the nine months ended September 28, 2014 and September 29, 2013.
(2) Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Income as "Interest expense." The amortization of debt discount and deferred costs were $2 million and $8 million for the nine months ended September 28, 2014 and September 29, 2013, respectively.
(3) Distribution segment EBIT for the nine months ended September 28, 2014 and September 29, 2013 included gains of $38 million and $12 million on the fair value adjustments resulting from the acquisitions of controlling interests in North American distributors in each period, respectively.

 
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
 
Nine months ended
In millions
 
September 28, 2014
 
June 29,
2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
Total EBIT
 
$
684

 
$
657

 
$
536

 
$
1,869

 
$
1,594

Less: Interest expense
 
15

 
15

 
8

 
47

 
22

Income before income taxes
 
$
669

 
$
642

 
$
528

 
$
1,822

 
$
1,572




CUMMINS INC. AND SUBSIDIARIES
SELECTED FOOTNOTE DATA
(Unaudited)



NOTE 1.  EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES

Equity, royalty and interest income from investees included in our Condensed Consolidated Statements of Income for the reporting periods was as follows:
 
 
Three months ended
 
Nine months ended
In millions
 
September 28, 2014
 
June 29,
2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
Distribution Entities
 
 
 
 
 
 
 
 
 
 
North American distributors
 
$
27

 
$
30

 
$
34

 
$
89

 
$
98

Komatsu Cummins Chile, Ltda.
 
8

 
8

 
6

 
22

 
17

All other distributors
 
—

 
1

 
1

 
2

 
1

Manufacturing Entities
 
 

 
 

 
 
 
 

 
 
Dongfeng Cummins Engine Company, Ltd.
 
15

 
22

 
13

 
51

 
45

Chongqing Cummins Engine Company, Ltd.
 
13

 
15

 
15

 
39

 
44

Beijing Foton Cummins Engine Co., Ltd. (Light-duty)
 
10

 
8

 
4

 
24

 
14

Shanghai Fleetguard Filter Co., Ltd.
 
3

 
3

 
4

 
9

 
11

Tata Cummins, Ltd.
 
2

 
2

 
1

 
6

 
4

Cummins Westport, Inc.
 
2

 
—

 
2

 
3

 
5

Beijing Foton Cummins Engine Co., Ltd. (Heavy-duty)
 
(5
)
 
(7
)
 
(4
)
 
(18
)
 
(14
)
All other manufacturers
 
13

 
14

 
7

 
36

 
29

Cummins share of net income
 
88

 
96

 
83

 
263

 
254

Royalty and interest income
 
11

 
9

 
8

 
31

 
27

Equity, royalty and interest income from investees
 
$
99

 
$
105

 
$
91

 
$
294

 
$
281

 



NOTE 2.  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, 2013 and has not yet been renewed by Congress. 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 rates for the three and nine month periods ended September 28, 2014, were 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 second quarter $2 million discrete tax benefit for the release of reserves for uncertain tax positions related to multiple state audit settlements, a first quarter $12 million discrete tax expense attributable primarily to state deferred tax adjustments, as well as a first quarter $6 million discrete net tax benefit resulting from a $70 million dividend paid from China earnings generated prior to 2012.

Our effective tax rate for the three month period ended June 29, 2014, was 26.5 percent. The tax rate included a $2 million discrete tax benefit for the release of reserves for uncertain tax positions related to multiple state audit settlements.
Our effective tax rates for the three and nine month periods ended September 29, 2013, were 29.2 percent and 28.3 percent, respectively. These tax rates include a $7 million discrete net tax expense for the third quarter tax adjustments: $4 million expense attributable to prior year tax return true-up adjustments, $1 million benefit related to release of prior year tax reserves and a discrete tax charge for $4 million related to a third quarter enactment of U.K. tax law changes. In addition, the nine month tax rate includes a discrete tax benefit in the first quarter of 2013 of $28 million attributable to the reinstatement of the research credit back to 2012, as well as a discrete tax expense in the first quarter of 2013 of $17 million, which primarily relates to the write-off of a deferred tax asset deemed unrecoverable.
The increase in the three month effective tax rate from 2013 to 2014 is primarily due to unfavorable changes in the jurisdictional mix of pre-tax income and the 2014 unfavorable discrete tax items.




NOTE 3. ACQUISITION  
Cummins Eastern Canada LP
On August 4, 2014, we acquired the remaining 50 percent interest in Cummins Eastern Canada LP (Eastern Canada) from the former distributor principal. The preliminary purchase consideration was $62 million, which included $22 million in cash and an additional $32 million to eliminate outstanding debt. The remaining $8 million will be paid in future periods. The intangible assets are primarily customer related, the majority of which will be amortized within one year subject to customary purchase price adjustments. The acquisition was accounted for as a business combination and the results of the acquired entity were included in the Distribution operating segment subsequent to the acquisition date. As a result of this transaction, third quarter 2014 Distribution segment results included an $18 million gain, as we were required to re-measure our pre-existing 50 percent ownership interest in Eastern Canada to fair value. The transaction generated $5 million of goodwill based on the preliminary purchase price allocation. Net sales for Eastern Canada were $228 million for the year ended December 31, 2013. This amount is not fully incremental to our consolidated sales as the amount would be reduced by the elimination of sales to the previously unconsolidated entity.



CUMMINS INC. AND SUBSIDIARIES
FINANCIAL MEASURES THAT SUPPLEMENT GAAP
(unaudited)

 
Earnings before interest, taxes and noncontrolling interests
 
We define EBIT as earnings before interest expense, income tax expense and noncontrolling interests in income of consolidated subsidiaries (EBIT).  We use EBIT to assess and measure the performance of our operating segments and also as a component in measuring our variable compensation programs.  This measure is not in accordance with, or an alternative for, accounting principles generally accepted in the United States of America and may not be consistent with measures used by other companies. It should be considered supplemental data. Below is a reconciliation of EBIT to “Net income attributable to Cummins Inc.,” for each of the applicable periods:
 
 
Three months ended
 
Nine months ended
In millions
 
September 28, 2014
 
June 29,
2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
Earnings before interest expense and income taxes
 
$
684

 
$
657

 
$
536

 
$
1,869

 
$
1,594

 
 
 
 
 
 
 
 
 
 
 
EBIT as a percentage of net sales
 
14.0
%
 
13.6
%
 
12.6
%
 
13.2
%
 
12.5
%
 
 
 
 
 
 
 
 
 
 
 
Less
 
 
 
 
 
 
 
 
 
 
Interest expense
 
15

 
15

 
8

 
47

 
22

Income tax expense
 
230

 
170

 
154

 
553

 
445

Consolidated net income
 
439

 
472

 
374

 
1,269

 
1,127

 
 
 
 
 
 
 
 
 
 
 
Less
 
 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
 
16

 
26

 
19

 
62

 
76

Net income attributable to Cummins Inc.
 
$
423

 
$
446

 
$
355

 
$
1,207

 
$
1,051

 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Cummins Inc. as a percentage of net sales
 
8.7
%
 
9.2
%
 
8.3
%
 
8.5
%
 
8.3
%



CUMMINS INC. AND SUBSIDIARIES
SUPPLEMENTAL COST OF SALES AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(Unaudited)



Supplemental Information

This Current Report on Form 8-K includes supplemental unaudited historical "Cost of sales" and "Selling, general and administrative expenses" information. We revised the classification of certain amounts for "Cost of sales" and "Selling, general and administrative expenses" for 2014, 2013 and 2012. In connection with the integration of recently acquired North American distributors and anticipating the future acquisition and integration of the entire North American channel, our Distribution segment has developed a framework against which Distribution management intends to measure the performance of the distribution channel. The segment EBIT (defined as earnings before interest expense, taxes and noncontrolling interests) performance measure is unchanged, however, certain activities that were previously classified in "Selling, general and administrative expenses" will be classified as "Cost of sales" to align with the new framework and allow for consistent treatment across the channel. We revised the expense presentation of our Condensed Consolidated Statements of Income for the periods presented below to follow the new cost framework. The net impact of this revision for the six months ended June 29, 2014 and years ended December 31, 2013 and 2012 were $39 million, $103 million and $92 million, respectively. The revision had no impact on reported net income, cash flows or the balance sheet. We will begin to report comparative results under the new framework with the filing of our Quarterly Report for the quarter ending September 28, 2014.

2014 Revised
 
Three months ended
 
Six months ended
In millions
 
March 30,
2014
 
June 29,
2014
 
June 29,
2014
NET SALES
 
$
4,406

 
$
4,835

 
$
9,241

Cost of sales
 
3,307

 
3,630

 
6,937

GROSS MARGIN
 
1,099

 
1,205

 
2,304

OPERATING EXPENSES AND INCOME
 
 
 
 
 
 
Selling, general and administrative expenses
 
485

 
513

 
998

Research, development and engineering expenses
 
190

 
179

 
369

Equity, royalty and interest income from investees
 
90

 
105

 
195

Other operating income (expense), net
 
(1
)
 
(6
)
 
(7
)
OPERATING INCOME
 
513

 
612

 
1,125

Interest income
 
5

 
6

 
11

Interest expense
 
17

 
15

 
32

Other income (expense), net
 
10

 
39

 
49

INCOME BEFORE INCOME TAXES
 
511

 
642

 
1,153

Income tax expense
 
153

 
170

 
323

CONSOLIDATED NET INCOME
 
358

 
472

 
830

Less: Net income attributable to noncontrolling interests
 
20

 
26

 
46

NET INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
338

 
$
446

 
$
784





CUMMINS INC. AND SUBSIDIARIES
SUPPLEMENTAL COST OF SALES AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(Unaudited)




2013 and 2012 Revised
 
Three months ended
 
Years Ended
In millions
 
March 31,
2013
 
June 30,
2013
 
September 29,
2013
 
December 31,
2013
 
December 31,
2013
 
December 31,
2012
NET SALES
 
$
3,922

 
$
4,525

 
$
4,266

 
$
4,588

 
$
17,301

 
$
17,334

Cost of sales
 
2,988

 
3,397

 
3,185

 
3,451

 
13,021

 
12,918

GROSS MARGIN
 
934

 
1,128

 
1,081

 
1,137

 
4,280

 
4,416

OPERATING EXPENSES AND INCOME
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
421

 
459

 
464

 
473

 
1,817

 
1,808

Research, development and engineering expenses
 
182

 
177

 
173

 
181

 
713

 
728

Equity, royalty and interest income from investees
 
82

 
108

 
91

 
80

 
361

 
384

Other operating income (expense), net
 
1

 
10

 
(11
)
 
(10
)
 
(10
)
 
(10
)
OPERATING INCOME
 
414

 
610

 
524

 
553

 
2,101

 
2,254

Interest income
 
5

 
10

 
6

 
6

 
27

 
25

Interest expense
 
6

 
8

 
8

 
19

 
41

 
32

Other income (expense), net
 
18

 
1

 
6

 
7

 
32

 
24

INCOME BEFORE INCOME TAXES
 
431

 
613

 
528

 
547

 
2,119

 
2,271

Income tax expense
 
119

 
172

 
154

 
86

 
531

 
533

CONSOLIDATED NET INCOME
 
312

 
441

 
374

 
461

 
1,588

 
1,738

Less: Net income attributable to noncontrolling interests
 
30

 
27

 
19

 
29

 
105

 
93

NET INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
282

 
$
414

 
$
355

 
$
432

 
$
1,483

 
$
1,645

















CUMMINS INC. AND SUBSIDIARIES
SUPPLEMENTAL COST OF SALES AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(Unaudited)


The following schedule reflects the change in cost of sales, gross margin, gross margin percentage trend, selling, general and administrative expenses and the impact of the change on the trend for selling, general and administrative expenses and research, development and engineering expenses (SARS).
In millions
 
2012
 
2013
 
2014
 
 
FY
 
Q1
 
Q2
 
Q3
 
Q4
 
FY
 
Q1
 
Q2
 
Q2 YTD
REPORTED
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NET SALES
 
$
17,334

 
$
3,922

 
$
4,525

 
$
4,266

 
$
4,588

 
$
17,301

 
$
4,406

 
$
4,835

 
$
9,241

Cost of sales
 
12,826

 
2,965

 
3,372

 
3,157

 
3,424

 
12,918

 
3,290

 
3,608

 
6,898

GROSS MARGIN
 
4,508

 
957

 
1,153

 
1,109

 
1,164

 
4,383

 
1,116

 
1,227

 
2,343

GROSS MARGIN %
 
26.0
%
 
24.4
%
 
25.5
%
 
26.0
%
 
25.4
%
 
25.3
%
 
25.3
%
 
25.4
%
 
25.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
1,900

 
444

 
484

 
492

 
500

 
1,920

 
502

 
535

 
1,037

Research, development and engineering expenses
 
728

 
182

 
177

 
173

 
181

 
713

 
190

 
179

 
369

Total SARS
 
2,628

 
626

 
661

 
665

 
681

 
2,633

 
692

 
714

 
1,406

SARS %
 
15.2
%
 
16.0
%
 
14.6
%
 
15.6
%
 
14.8
%
 
15.2
%
 
15.7
%
 
14.8
%
 
15.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
REVISED
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NET SALES
 
$
17,334

 
$
3,922

 
$
4,525

 
$
4,266

 
$
4,588

 
$
17,301

 
$
4,406

 
$
4,835

 
$
9,241

Cost of sales
 
12,918

 
2,988

 
3,397

 
3,185

 
3,451

 
13,021

 
3,307

 
3,630

 
6,937

GROSS MARGIN
 
4,416

 
934

 
1,128

 
1,081

 
1,137

 
4,280

 
1,099

 
1,205

 
2,304

GROSS MARGIN %
 
25.5
%
 
23.8
%
 
24.9
%
 
25.3
%
 
24.8
%
 
24.7
%
 
24.9
%
 
24.9
%
 
24.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
1,808

 
421

 
459

 
464

 
473

 
1,817

 
485

 
513

 
998

Research, development and engineering expenses
 
728

 
182

 
177

 
173

 
181

 
713

 
190

 
179

 
369

Total SARS
 
2,536

 
603

 
636

 
637

 
654

 
2,530

 
675

 
692

 
1,367

SARS %
 
14.6
%
 
15.4
%
 
14.1
%
 
14.9
%
 
14.3
%
 
14.6
%
 
15.3
%
 
14.3
%
 
14.8
%



CUMMINS INC. AND SUBSIDIARIES
BUSINESS UNIT SALES DATA
(Unaudited)



Engine segment net sales by market:
2014
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Heavy-duty truck
 
$
722

 
$
796

 
$
823

 
$
—

 
$
2,341

Medium-duty truck and bus
 
601

 
646

 
631

 
—

 
1,878

Light-duty automotive and RV
 
361

 
336

 
354

 
—

 
1,051

Industrial
 
700

 
757

 
788

 
—

 
2,245

Stationary power
 
179

 
209

 
220

 
—

 
608

Total sales
 
$
2,563

 
$
2,744

 
$
2,816

 
$
—

 
$
8,123

 
 
 
 
 
 
 
 
 
 
 
2013
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Heavy-duty truck
 
$
654

 
$
723

 
$
690

 
$
638

 
$
2,705

Medium-duty truck and bus
 
448

 
595

 
570

 
572

 
2,185

Light-duty automotive and RV
 
260

 
345

 
330

 
365

 
1,300

Industrial
 
714

 
762

 
709

 
811

 
2,996

Stationary power
 
227

 
231

 
193

 
176

 
827

Total sales
 
$
2,303

 
$
2,656

 
$
2,492

 
$
2,562

 
$
10,013

 
Unit shipments by engine classification (including unit shipments to Power Generation):
2014
 
 
 
 
 
 
 
 
 
 
Units
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Midrange
 
118,900

 
118,700

 
117,700

 
—

 
355,300

Heavy-duty
 
28,800

 
30,300

 
32,300

 
—

 
91,400

High-horsepower
 
3,400

 
3,900

 
3,900

 
—

 
11,200

Total units
 
151,100

 
152,900

 
153,900

 
—

 
457,900

 
 
 
 
 
 
 
 
 
 
 
2013
 
 
 
 
 
 
 
 
 
 
Units
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Midrange
 
94,600

 
121,900

 
113,800

 
115,700

 
446,000

Heavy-duty
 
24,900

 
28,300

 
26,500

 
25,700

 
105,400

High-horsepower
 
4,200

 
3,600

 
3,500

 
3,500

 
14,800

Total units
 
123,700

 
153,800

 
143,800

 
144,900

 
566,200


Component segment sales by business:
2014
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Emission solutions
 
$
543

 
$
582

 
$
598

 
$
—

 
$
1,723

Turbo technologies
 
313

 
307

 
297

 
—

 
917

Filtration
 
265

 
275

 
268

 
—

 
808

Fuel systems
 
109

 
116

 
124

 
—

 
349

Total sales
 
$
1,230

 
$
1,280

 
$
1,287

 
$
—

 
$
3,797

 
 
 
 
 
 
 
 
 
 
 
2013
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Emission solutions
 
$
400

 
$
444

 
$
458

 
$
489

 
$
1,791

Turbo technologies
 
266

 
294

 
263

 
292

 
1,115

Filtration
 
255

 
271

 
248

 
254

 
1,028

Fuel systems
 
97

 
108

 
103

 
100

 
408

Total sales
 
$
1,018

 
$
1,117

 
$
1,072

 
$
1,135

 
$
4,342



CUMMINS INC. AND SUBSIDIARIES
BUSINESS UNIT SALES DATA
(Unaudited)


Power Generation segment sales by business:
2014
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Power products
 
$
373

 
$
445

 
$
439

 
$
—

 
$
1,257

Power systems
 
137

 
141

 
159

 
—

 
437

Alternators
 
105

 
126

 
115

 
—

 
346

Power solutions
 
24

 
31

 
41

 
—

 
96

Total sales
 
$
639

 
$
743

 
$
754

 
$
—

 
$
2,136

 
 
 
 
 
 
 
 
 
 
 
2013
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Power products
 
$
409

 
$
474

 
$
421

 
$
421

 
$
1,725

Power systems
 
179

 
187

 
122

 
168

 
656

Alternators
 
126

 
125

 
126

 
119

 
496

Power solutions
 
32

 
28

 
43

 
51

 
154

Total sales
 
$
746

 
$
814

 
$
712

 
$
759

 
$
3,031

 
Distribution segment sales by business:
2014
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Parts and filtration
 
$
382

 
$
461

 
$
491

 
$
—

 
$
1,334

Power generation
 
193

 
278

 
279

 
—

 
750

Engines
 
174

 
249

 
270

 
—

 
693

Service
 
201

 
250

 
252

 
—

 
703

Total sales
 
$
950

 
$
1,238

 
$
1,292

 
$
—

 
$
3,480

 
 
 
 
 
 
 
 
 
 
 
2013
 
 
 
 
 
 
 
 
 
 
In millions
 
Q1
 
Q2
 
Q3
 
Q4
 
YTD
Parts and filtration
 
$
322

 
$
369

 
$
377

 
$
397

 
$
1,465

Power generation
 
163

 
241

 
234

 
293

 
931

Engines
 
152

 
183

 
170

 
208

 
713

Service
 
141

 
161

 
163

 
175

 
640

Total sales
 
$
778

 
$
954

 
$
944

 
$
1,073

 
$
3,749