NELSON RETIREMENT AND
SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
1. description of
the plan
The following description of the Nelson Retirement
and Savings Plan (the “Plan”) provides only general information. Participants
should refer to the Plan document for a more complete description of the Plan’s
provisions. As of December 31, 2009, the Plan was merged into the Cummins Inc.
and Affiliates Retirement and Savings Plan for Salaried and Non-Bargaining
Hourly Employees.
General
The Plan was a defined contribution plan designed to
provide participants with a systematic method of savings and at the same time
enable such participants to benefit from contributions made to the Plan by Cummins
Inc. and Affiliates (collectively, the “Company”). Eligible employees were employees
of Nelson Industries, Inc. (“Nelson”). The Plan was subject to the provisions
of the Employee Retirement Income Security Act of 1974 (“ERISA”).
Master Trust
The Cummins Inc. and Affiliates Retirement and
Savings Plans Master Trust (“Master Trust”) held the assets of the Plan and the
following Company-sponsored plans:
The trustee for the Master Trust is State Street
Corporation. As participants transfer between different locations within the
Company, their related Plan account transfers to the appropriate Plan, if
applicable. Such transfers are reflected in the accompanying financial
statements as “Fund transfers with Affiliate Plans”.
Contributions
Participants could contribute up to 50% of their
eligible pay through a combination of pre-tax and after-tax contributions.
Participants could direct their contributions in any of twenty-one investment
options.
Matching Contribution
The Company contributed to the Plan by matching 100%
of the first 1% contributed plus 50% of the next 5% contributed.
4
NELSON RETIREMENT AND
SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
Participant Accounts
Each participant’s account was credited with the
participant’s contributions, the Company’s contributions and an allocation of
Plan earnings. Allocations of Plan earnings were made daily and were based upon
the participant’s weighted average account balance for the day, as described in
the Plan document.
Vesting
Participants were fully vested in all employee and
employer contributions and earnings thereon at all times.
Benefit Payments
Upon termination of employment or retirement, account
balances were paid either as a lump-sum distribution or annual installments not
to exceed the lesser of 15 years or the life expectancy of the participant and/or
joint life expectancy of the participant and beneficiary, and commence no later
than the participant reaching age 70-1/2. The Plan also permitted hardship
withdrawals from participant pre-tax contributions and actual earnings thereon.
Participants could also withdraw their after-tax contributions.
Participant Loans
A participant could obtain a loan up to a maximum of
the lesser of $50,000 or 50% of the participant’s account balance. Loans were
secured by the participant’s account balance and accumulated interest at the
prime rate plus one percent, and matured no later than 4½ years from the date
of the loan.
Plan Termination
As aforementioned, the Plan was merged into the
Cummins, Inc. and Affiliates Retirement and Savings Plan for Salaried and
Non-Bargaining Hourly Employees effective December 31, 2009. Plan participants
were not impacted by the merger as the prior provisions of the Plan continue to
apply to them subsequent the merger.
2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The financial statements of the Plan have been
prepared on an accrual basis of accounting.
5
NELSON RETIREMENT AND
SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
Investments
The Plan’s investment in the Master Trust is stated
at fair value based on the fair value of the underlying investments of the
Master Trust, determined primarily by quoted market prices, except for the Stable
Value fund and common/collective trust investments. The Stable Value fund
consists primarily of insurance contracts and bank investment contracts with
various companies. Insurance contracts and bank contracts are nontransferable,
but provide for benefit-responsive withdrawals by plan participants at contract
value. Alternative investment contracts consist of investments together with
contracts under which a bank or other institution provides for
benefit-responsive withdrawals by plan participants at contract value. Fair
value is determined using a discounted cash flow method by considering such
factors as the benefit-responsiveness of the investment contracts, the ability
of the parties to perform in accordance with the terms of the contracts, and
the likelihood that plan-directed withdrawals would cause payment to plan
participants to be at amounts other than contract value. There are no
limitations on liquidity guarantees and no valuation reserves are being
recorded to adjust contract amounts.
The common/collective trust investments are public
investment securities valued using the net asset value (NAV) provided by
Northern Trust. The NAV is quoted on a private market that is not active;
however, the unit price is based on underlying investments which are traded on
an active market.
Allocation of Master Trust Assets and Transactions
The investment income and expenses of the Master
Trust are allocated to each plan based on the relationship of the Plan’s
investment balances to the total Master Trust investment balances.
Use of Estimates
The preparation of financial statements, in
accordance with accounting principles generally accepted in the United States
of America, requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, and changes therein, and
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
Risks and Uncertainties
The Master Trust invests in various securities.
Investment securities, in general, are exposed to various risks, such as
interest rate, credit, and overall market volatility. Due to the level of risk
associated with certain investment securities, it is reasonably possible that
changes in the values of investment securities will occur in the near term and
that such changes could materially affect the amounts reported in the financial
statements.
6
NELSON RETIREMENT AND
SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
Payment of Benefits
Benefit payments are recorded when paid.
Voting Rights
Each participant is entitled to exercise voting
rights attributable to the Company shares allocated to his or her account. The
Trustee shall vote all Company shares for which no voting instructions were
received in the same manner and proportion as the shares for which voting
instructions were received.
Administrative Expenses
Substantially all costs of administering the Plan are
paid by the Company.
Reclassifications
Certain prior year amounts have been reclassified
herein to conform to the current method of presentation.
3. INVESTMENTS IN MASTER TRUST
The Plan’s investments are held in the Master Trust.
At December 31, 2009 and 2008, the Plan’s interest in the net assets of the
Master Trust was 0% and 3.5%, respectively. The following investments are held
by the Master Trust as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
Cummins Inc. Common Stock Fund
|
|
$
|
209,699,172
|
|
|
|
$
|
113,120,749
|
|
|
Cummins Inc. common stock - ESOP fund
|
|
|
|
|
|
|
|
|
(non-participant directed)
|
|
7,896,664
|
|
|
|
16,801,598
|
|
|
Stable Value fund investments
|
|
359,012,662
|
|
|
|
380,694,849
|
|
|
Stable Value fund wrapper contracts
|
|
-0-
|
|
|
|
1,150,592
|
|
|
Common / collective trust fund
|
|
119,834,914
|
|
|
|
102,060,792
|
|
|
Registered investment companies
|
|
715,870,383
|
|
|
|
549,086,595
|
|
|
Total
|
|
$
|
1,412,313,795
|
|
|
|
$
|
1,162,915,175
|
|
|
|
|
|
|
|
|
|
|
7
NELSON RETIREMENT AND
SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
The Stable Value fund portion of the Master Trust
comprises several fully benefit-responsive insurance and investment contracts.
This fund includes both open-ended, security-backed investments as well as
closed-ended, general account investments maturing through 2020. The contracts
have varying yields which averaged 4.54 percent and 5.68 percent during the
years ended December 31, 2009 and 2008, respectively. The contracts have
varying crediting interest rates which averaged 2.45 percent and 3.38 percent
during the years ended December 31, 2009 and 2008, respectively. The crediting
interest rates adjust on varying intervals by contract. There are no reserves
against contract value for credit risk of the contract issuer or otherwise.
The Stable Value fund’s key objectives are to provide
preservation of principal, maintain a stable interest rate, and provide daily
liquidity at contract value for participant withdrawals and transfers in
accordance with the provision of the Plans. To accomplish these objectives, the
Stable Value fund invests primarily in investment contracts such as traditional
guaranteed investment contracts (GICs) and wrapper contracts (also known as
synthetic GICs). In a traditional GIC, the issuer takes a deposit from the Stable
Value fund and purchases investments that are held in the issuer’s general
account. The issuer is contractually obligated to repay the principal and a
specified rate of interest guaranteed to the Stable Value fund.
In a wrapper contract structure, the underlying
investments are owned by the Stable Value fund and held in trust for
participants. The Stable Value fund purchases a wrapper contract from an
insurance company or bank. The wrapper contract amortizes the realized and
unrealized gains and losses on the underlying fixed income investments,
typically over the duration of the investments, through adjustments to the
future interest crediting rate (which is the rate earned by participants in the
Stable Value fund for the underlying investments). The issuer of the wrapper
contract provides assurance that the adjustments to the interest crediting rate
do not result in a future interest crediting rate that is less than zero. An
interest crediting rate less than zero would result in a loss of principal or
accrued interest.
The key factors that influence future interest
crediting rates for a wrapper contract include the level of market interest rates,
the amount and timing of participant contributions, transfers, and withdrawals
into and out of the wrapper contract, the investment returns generated by the
fixed income investments that back the wrapper contract and the duration of the
underlying investments backing the wrapper contract. Wrapper contracts’
interest crediting rates are typically reset on a monthly or quarterly basis.
While there may be slight variations from one contract to another, most wrapper
contracts use a formula to determine the interest crediting rate that is based
on the specific factors as aforementioned. Over time, the crediting rate
formula amortizes the Stable Value fund’s realized and unrealized market value
gains and losses over the duration of the underlying investments.
8
NELSON RETIREMENT AND
SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
Because changes in market interest rates affect the
yield to maturity and the market value of the underlying investments, they can
have a material impact on the wrapper contract’s interest crediting rate. In
addition, participant withdrawals and transfers from the Stable Value fund are
paid at contract value but funded through the market value liquidation of the
underlying investments, which also impacts the interest crediting rate. The
resulting gains and losses in the market value of the underlying investments
relative to the wrapper contract values are represented in the Statements of
Net Assets Available for Benefits as “Adjustment from fair value to contract
value”. If the adjustment from fair value to contract value is positive for a
given contract, this indicates that the wrapper contract value is greater than
the market value of the underlying investments. The embedded market value
losses will be amortized in the future through a lower interest crediting rate
than would otherwise be the case. If the adjustment from fair value to contract
value is negative, this indicates that the wrapper contract value is less than
the market value of the underlying investments. The amortization of the
embedded market value gains will cause the future interest crediting rate to be
higher than it otherwise would have been.
All wrapper contracts provide for a minimum interest
crediting rate of zero percent. In the event that the interest crediting rate
should fall to zero and the requirements of the wrapper contract are satisfied,
the wrapper issuers will pay to the Plans the shortfall needed to maintain the
interest crediting rate at zero. This helps to ensure that participants’
principal and accrued interest will be protected.
In certain circumstances, the amount withdrawn from
the wrapper contract would be payable at fair value rather than at contract
value. These events include termination of the Plans, a material adverse change
to the provisions of the Plans, if the employer elects to withdraw from a
wrapper contract in order to switch to a different investment provider, or if
the terms of a successor plan (in the event of the spin-off or sale of a
division) do not meet the wrapper contract issuer’s underwriting criteria for
issuance of a clone wrapper contract. These events described herein that could
result in the payment of benefits at market value rather than contract value
are not probable of occurring in the foreseeable future.
Examples of events that would permit a wrapper
contract issuer to terminate a wrapper contract upon short notice include the
Plans’ loss of its qualified status, uncured material breaches of
responsibilities, or material and adverse changes to the provisions of the
Plans. If one of these events was to occur, the wrapper contract issuer could
terminate the wrapper contract at the market value of the underlying
investments (or in the case of a traditional GIC, at the hypothetical market
value based upon a contractual formula).
9
NELSON RETIREMENT AND
SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
The contracts’ aggregate fair values were
approximately $3,700,000 and $28,000,000 lower than the reported contract
values at December 31, 2009 and 2008, respectively.
10
NELSON RETIREMENT AND
SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
Investments that represent 5% or more of the Master
Trust’s assets are separately identified as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
American Funds Growth Fund of America
|
|
$
|
102,166,361
|
|
|
|
$
|
74,548,986
|
|
|
Cummins Inc. Common Stock Fund
|
|
217,595,836
|
|
|
|
129,922,347
|
|
|
NTGI S & P 500 Index Fund
|
|
119,834,914
|
|
|
|
102,060,792
|
|
|
PIMCO Total Return Fund
|
|
70,895,090
|
|
|
|
55,556,885
|
|
|
Vanguard Wellington Admiral Shares Fund
|
|
196,574,815
|
|
|
|
177,247,269
|
|
|
Aegon Wrapped Investment Contract
|
|
118,331,440
|
|
|
|
118,467,232
|
|
|
Royal Bank of Canada Wrapped
|
|
|
|
|
|
|
|
|
Investment Contract
|
|
118,331,335
|
|
|
|
118,467,236
|
|
|
State Street Bank Wrapped Investment
|
|
|
|
|
|
|
|
|
Contract
|
|
118,347,291
|
|
|
|
118,482,835
|
|
|
Other
|
|
350,236,713
|
|
|
|
268,161,593
|
|
|
Total
|
|
$
|
1,412,313,795
|
|
|
|
$
|
1,162,915,175
|
|
|
|
|
|
|
|
|
|
|
Investment
income for the Master Trust for the year ended December 31, 2009 is as follows:
|
|
|
|
|
|
|
Net appreciation in fair value of investments:
|
|
|
|
|
Cummins Inc. Common Stock Fund
|
|
$
|
88,642,989
|
|
|
Cummins Inc. common stock - ESOP fund
|
|
|
|
|
(non-participant directed)
|
|
1,852,573
|
|
|
Common / collective trust fund
|
|
25,986,926
|
|
|
Registered investment companies
|
|
145,381,582
|
|
|
Interest
|
|
9,564,269
|
|
|
Dividends
|
|
2,324,975
|
|
|
Dividends from Cummins Inc. common stock -
|
|
|
|
|
ESOP fund (non-participant directed)
|
|
1,624,515
|
|
|
|
|
|
|
Additional changes in net assets related to
non-participant directed investments in the Master Trust for the year ended December
31, 2009 include transfers of Cummins Inc. common stock from unallocated status
to allocated status totaling $10,109,325.
4. TAX STATUS
The Plan has not received a determination letter. The
Company and its counsel believe that the Plan is currently designed and being
operated in compliance with the applicable requirements of the Internal Revenue
Code. Therefore, no provision for income taxes has been included in the Plan’s
financial statements.
11
NELSON RETIREMENT AND
SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
5. RELATED PARTY TRANSACTIONS
Certain Master Trust investments are shares of mutual
funds managed by State Street Corporation and shares of Cummins Inc. State
Street Corporation is the Master Trust trustee. Cummins Inc. is the Plan
Sponsor. Hewitt Associates, LLC serves as the Plans’ third party administrator.
Blue & Co., LLC serves as the Plans’ auditor. JPMorgan Asset Management
serves as the Plans’ investment manager of the Stable Value fund. Transactions
with these parties qualify as party-in-interest transactions.
6. reconciliation of
financial statements to form 5500
The following is a reconciliation of net assets
available for benefits per the financial statements to the Form 5500:
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
As reported per the financial statements
|
|
$
|
-0-
|
|
|
|
$
|
43,359,543
|
|
Adjustment from fair value to contract value
|
|
|
|
|
|
|
|
for fully benefit-responsive investment
|
|
|
|
|
|
|
|
contracts
|
|
-0-
|
|
|
|
(503,517)
|
|
As reported per the Form 5500
|
|
$
|
-0-
|
|
|
|
$
|
42,856,026
|
|
|
|
|
|
|
|
|
The following is a reconciliation of plan interest in
Cummins Inc. and Affiliates Retirement and Savings Plans Master Trust
investment income per the financial statements to the Form 5500 for the year
ended December 31, 2009:
|
|
|
|
|
As reported per the financial statements
|
$
|
9,121,981
|
|
Less: Adjustment from fair value to contract
|
|
|
value for fully benefit-responsive investment
|
|
|
contracts at December 31, 2009
|
-0-
|
|
Add: Adjustment from fair value to contract
|
|
|
value for fully benefit-responsive investment
|
|
|
contracts at December 31, 2008
|
503,517
|
|
As reported per the Form 5500
|
$
|
9,625,498
|
|
|
|
12
NELSON RETIREMENT AND
SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
7. fair value
measurements
Assets that are measured at fair value are
categorized according to a fair value hierarchy that prioritizes the inputs to
valuation techniques, giving the highest priority to quoted prices in active
markets for identical assets and liabilities and the lowest priority to
unobservable value inputs. If the inputs used fall within different levels of
the hierarchy, the categorization is based upon the lowest level input that is
significant to the fair value measurement.
The hierarchy of inputs is as follows:
-
Level 1 – Unadjusted quoted
prices for identical assets and liabilities in active markets
-
Level 2 – Quoted prices for
similar assets and liabilities in active markets (other than those included in
Level 1) which are observable for the asset or liability, either directly or
indirectly
-
Level 3 – Valuations derived from
valuation techniques in which one or more significant inputs or significant
value drivers are unobservable
Fair values of assets measured on a recurring basis
at December 31, 2008, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Master Trust level assets
|
|
|
|
|
|
|
|
|
|
Registered investment
|
|
|
|
|
|
|
|
|
|
|
companies
|
$
|
549,086,595
|
|
$
|
549,086,595
|
|
$
|
-0-
|
|
$
|
-0-
|
|
|
Common stocks
|
129,922,347
|
|
129,922,347
|
|
-0-
|
|
-0-
|
|
|
Common/collective trust
|
102,060,792
|
|
-0-
|
|
102,060,792
|
|
-0-
|
|
|
Stable Value fund:
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
31,982,171
|
|
31,982,171
|
|
-0-
|
|
-0-
|
|
|
Wrapped bonds
|
327,321,173
|
|
-0-
|
|
-0-
|
|
327,321,173
|
|
|
Guaranteed investment
|
|
|
|
|
|
|
|
|
|
contracts
|
22,542,097
|
|
-0-
|
|
22,542,097
|
|
-0-
|
|
Plan level assets
|
|
|
|
|
|
|
|
|
|
Participant loans
|
1,425,073
|
|
-0-
|
|
-0-
|
|
1,425,073
|
|
|
|
|
|
|
|
|
|
|
|
The valuation methodology used to measure the fair
values of registered investment companies and common stocks were derived from
quoted market prices in active markets. The valuation techniques used to
measure fair value of common/collective trust and Stable Value fund are
included in Notes 2 and 3, respectively. The valuation techniques used to
measure fair value of participant loans were derived using a discounted cash
flow model with inputs derived from unobservable market data.
13
NELSON RETIREMENT AND
SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
Following is a progression of the fair value of the
Level 3 assets included in the Master Trust and the plan for the year ended
December 31, 2008:
|
|
|
Wrapped bonds
|
|
|
Participant loans
|
|
|
Balance, beginning of year
|
$ |
308,893,698
|
|
$ |
1,460,645
|
|
|
Issuances, repayments and
|
|
|
|
|
|
|
|
settlements, net
|
|
27,000,000
|
|
|
(35,572)
|
|
|
Unrealized gains related to instruments
|
|
|
|
|
|
|
|
still held at the reporting date
|
|
(8,572,525)
|
|
|
-0-
|
|
|
Balance, end of year
|
$ |
327,321,173
|
|
$ |
1,425,073
|
|
14
