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

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 

 

For the Quarterly Period Ended March 29, 2009

 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 o 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 Accelerated filer o             

Non-accelerated filer    Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of March 29, 2009, there were 201,816,557 shares of common stock outstanding with a par value of $2.50 per share.

Website Access to Company's Reports

Cummins maintains an internet website at www.cummins.com. Investors can obtain copies of our filings from this website free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to the Securities and Exchange Commission.



 

CUMMINS INC. AND SUBSIDIARIES

TABLE OF CONTENTS

QUARTERLY REPORT ON FORM 10-Q

 

 

  

 

Page

 

 

 

 

PART I.  FINANCIAL INFORMATION

 

 

 

 

 

   

 

ITEM 1.

Condensed Financial Statements (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Income for the three months ended March 29, 2009 and March 30, 2008

3

 

 

 

 

Condensed Consolidated Balance Sheets at March 29, 2009 and December 31, 2008

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 29, 2009 and March 30, 2008

5

 

 

 

 

Condensed Consolidated Statements of Changes in Equity for the three months ended March 29, 2009 and March 30, 2008

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

ITEM 2.

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

18

 

   

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

   

 

ITEM 4.

Controls and Procedures

35

 

   

 

 

PART II.  OTHER INFORMATION

 

 

 

 

ITEM 1.

Legal Proceedings

36

 

 

 

ITEM 1A.

Risk Factors Relating to Our Business

36

 

   

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

 

 

 

ITEM 6.

Exhibits

42

 

   

 

 

Signatures

43

 

 

 

 


 


PART I.  FINANCIAL INFORMATION

 

ITEM 1. Condensed Financial Statements

 

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three months ended

 

 

 

March 29,

 

March 30,

 

In millions (except per share amounts)

 

2009

 

2008

 

NET SALES (a)

 

$

2,439

 

$

3,474

 

Cost of  sales

 

1,994

 

2,767

 

GROSS MARGIN

 

445

 

707

 

 

 

 

 

 

 

OPERATING EXPENSES AND INCOME

 

 

 

 

 

Selling, general and administrative expenses

 

300

 

351

 

Research, development and engineering expenses

 

85

 

103

 

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

 

33

 

67

 

Restructuring charges (Note 6)

 

66

 

 

Other operating income (expense), net

 

2

 

(1

)

 

 

 

 

 

 

OPERATING INCOME

 

29

 

319

 

 

 

 

 

 

 

Interest income

 

2

 

6

 

Interest expense

 

7

 

11

 

Other (expense) income, net

 

(3

)

(10

)

INCOME BEFORE INCOME TAXES

 

21

 

304

 

 

 

 

 

 

 

Income tax expense

 

7

 

102

 

NET INCOME

 

14

 

202

 

 

 

 

 

 

 

Less: net income attributable to noncontrolling interests

 

7

 

12

 

NET INCOME ATTRIBUTABLE TO CUMMINS INC.

 

$

7

 

$

190

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.

 

 

 

 

 

Basic

 

$

0.04

 

$

0.97

 

Diluted

 

$

0.04

 

$

0.97

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

 

 

 

 

Basic

 

196.8

 

195.1

 

Dilutive effect of stock compensation awards

 

0.2

 

1.3

 

Diluted

 

197.0

 

196.4

 

 

 

 

 

 

 

CASH DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.175

 

$

0.125

 

 

(a) Includes sales to nonconsolidated equity investees of $429 million and $512 million for the three months ended March 29, 2009 and March 30, 2008, respectively.

 

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

 



CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

March 29,

 

December 31,

 

 In millions (except par value)

 

2009

 

2008

 

ASSETS

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

353

 

 

$

426

 

 

Marketable securities

 

 

65

 

 

 

77

 

 

Accounts and notes receivable, net

 

 

 

 

 

 

 

 

 

   Trade and other

 

 

1,538

 

 

 

1,551

 

 

   Nonconsolidated equity investees

 

 

191

 

 

 

231

 

 

Inventories (Note 7)

 

 

1,738

 

 

 

1,783

 

 

Deferred income taxes

 

 

353

 

 

 

347

 

 

Prepaid expenses and other current assets

 

 

196

 

 

 

298

 

 

Total current assets

 

 

4,434

 

 

 

4,713

 

 

Long-term assets

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

4,574

 

 

 

4,539

 

 

     Accumulated depreciation

 

 

(2,741

)

 

 

(2,698

)

 

     Property, plant and equipment, net

 

 

1,833

 

 

 

1,841

 

 

Investments and advances related to equity method investees

 

 

526

 

 

 

588

 

 

Goodwill and other intangible assets, net

 

 

607

 

 

 

585

 

 

Deferred income taxes

 

 

507

 

 

 

491

 

 

Other assets

 

 

271

 

 

 

301

 

 

Total assets

 

$

8,178

 

 

$

8,519

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Current portion of long-term debt and loans payable

 

$

76

 

 

$

69

 

 

Accounts payable (principally trade)

 

 

912

 

 

 

1,009

 

 

Current portion of accrued product warranty (Note 8)

 

 

382

 

 

 

434

 

 

Accrued compensation, benefits and retirement costs

 

 

251

 

 

 

364

 

 

Other accrued expenses

 

 

660

 

 

 

763

 

 

Total current liabilities

 

 

2,281

 

 

 

2,639

 

 

Long-term liabilities

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

651

 

 

 

629

 

 

Pensions

 

 

590

 

 

 

574

 

 

Postretirement benefits other than pensions

 

 

448

 

 

 

452

 

13 

Other liabilities and deferred revenue

 

 

781

 

 

 

745

 

 

Total liabilities

 

 

4,751

 

 

 

5,039

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

 

 

 

Cummins Inc. shareholders’ equity

 

 

 

 

 

 

 

 

 

Common stock, $2.50 par value, 500 shares authorized, 222.1 and 221.7 shares issued

 

 

1,790

 

 

 

1,793

 

 

Retained earnings

 

 

3,260

 

 

 

3,288

 

 

Treasury stock, at cost, 20.3 and 20.4 shares

 

 

(714

)

 

 

(715

)

 

Common stock held by employee benefits trust, at cost, 4.8 and 5.1 shares

 

 

(58

)

 

 

(61

)

 

Unearned compensation

 

 

(3

)

 

 

(5

)

 

Accumulated other comprehensive loss

 

 

 

 

 

 

 

 

 

Defined benefit postretirement plans

 

 

(801

)

 

 

(798

)

 

Other

 

 

(251

)

 

 

(268

)

 

Total accumulated other comprehensive loss

 

 

(1,052

)

 

 

(1,066

)

 

Total Cummins Inc. shareholders’ equity

 

 

3,223

 

 

 

3,234

 

 

Noncontrolling interests

 

 

204

 

 

 

246

 

 

Total equity

 

 

3,427

 

 

 

3,480

 

 

Total liabilities and equity

 

$

8,178

 

 

$

8,519

 

 

 

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

 

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Three months ended

 

 

 

March 29,

 

March 30,

 

In millions

 

2009

 

2008

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

Net income

 

$

14

 

$

202

 

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

 

 

 

 

 

Restructuring charges, net of cash payments (Note 6)

 

48

 

 

Depreciation and amortization

 

76

 

75

 

Deferred income taxes                                   

 

(21

)

(7

)

Equity in income of investees, net of dividends

 

52

 

(39

)

Pension expense, net of pension contributions (Note 4)

 

15

 

1

 

Other post-retirement benefits expense, net of cash payments

 

(8

)

(6

)

Stock-based compensation expense

 

6

 

8

 

Excess tax (benefits) deficiencies on stock-based awards

 

3

 

(10

)

Translation and hedging activities

 

19

 

6

 

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

 

 

 

 

 

Accounts and notes receivable

 

49

 

(193

)

Inventories

 

44

 

(165

)

Other current assets

 

9

 

(5

)

Accounts payable

 

(103

)

164

 

Accrued expenses

 

(173

)

(23

)

Changes in long-term liabilities

 

36

 

25

 

Other, net

 

10

 

4

 

Net cash provided by operating activities

 

76

 

37

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(64

)

(90

)

Investments in internal use software

 

(11

)

(14

)

Proceeds from disposals of property, plant and equipment

 

6

 

1

 

Investments in and advances (to) from equity investees

 

5

 

(20

)

Acquisition of businesses, net of cash acquired

 

(2

)

(29

)

Investments in marketable securities—acquisitions

 

(69

)

(60

)

Investments in marketable securities—liquidations

 

78

 

69

 

Cash flows from derivatives not designated as hedges

 

(33

)

(12

)

Other, net

 

 

3

 

Net cash used in investing activities

 

(90

)

(152

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from borrowings

 

7

 

42

 

Payments on borrowings and capital lease obligations

 

(19

)

(47

)

Net borrowings under short-term credit agreements

 

4

 

14

 

Distributions to noncontrolling interests

 

(9

)

(6

)

Dividend payments on common stock

 

(35

)

(25

)

Repurchases of common stock

 

 

(11

)

Excess tax benefits (deficiencies) on stock-based awards

 

(3

)

10

 

Other, net

 

2

 

1

 

Net cash used in financing activities

 

(53

)

(22

)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

 

(6

)

6

 

Net decrease in cash and cash equivalents

 

(73

)

(131

)

Cash and cash equivalents at beginning of year

 

426

 

577

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

353

 

$

446

 

 

 

 

 

 

 

 

 

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



 

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Common

 

 

 

Total Cummins

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

Stock

 

 

 

Inc.

 

 

 

 

 

 

Common

 

paid-in

 

Retained

 

Comprehensive

 

Treasury

 

Held in

 

Unearned

 

Shareholders’

 

Noncontrolling

 

Total

 

In millions

Stock

 

Capital

 

Earnings

 

 Loss

 

Stock

 

Trust

 

Compensation

 

Equity

 

Interests

 

Equity

 

BALANCE AT DECEMBER 31, 2007

$

551

 

$

1,168

 

$

2,660

 

$

(286

)

$

(593

)

$

(79

)

$

(11

)

$

3,410

 

$

292

 

$

3,702

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net income

 

 

 

 

190

 

 

 

 

 

 

 

 

 

190

 

12

 

202

 

   Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on derivatives

 

 

 

 

 

 

20

 

 

 

 

 

 

 

20

 

 

 

20

 

Foreign currency translation adjustments

 

 

 

 

 

 

19

 

 

 

 

 

 

 

19

 

(3

)

16

 

Change in pensions and other postretirement defined benefit plans

 

 

 

 

 

 

7

 

 

 

 

 

 

 

7

 

 

7

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

236

 

9

 

245

 

Effect of changing pension plan measurement date pursuant to SFAS No. 158

 

 

 

 

(5

)

(2

)

 

 

 

 

 

 

(7

)

 

(7

)

Issuance of shares

3

 

2

 

 

 

 

 

1

 

 

 

 

 

6

 

2

 

8

 

Acquisition of shares

 

 

 

 

 

 

 

 

(11

)

 

 

 

 

(11

)

 

 

(11

)

Cash dividends on common stock

 

 

 

 

(25

)

 

 

 

 

 

 

 

 

(25

)

 

 

(25

)

Distribution to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6

)

(6

)

Stock option exercises

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

Other shareholder transactions

 

 

3

 

 

 

 

 

 

 

 

 

3

 

6

 

10

 

16

 

BALANCE AT MARCH 30, 2008

$

554

 

$

1,172

 

$

2,820

 

$

(242

)

$

(603

)

$

(79

)

$

(8

)

$

3,614

 

$

307

 

$

3,921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2008

$

554

 

$

1,239

 

$

3,288

 

$

(1,066

)

$

(715

)

$

(61

)

$

(5

)

$

3,234

 

$

246

 

$

3,480

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net income

 

 

 

 

7

 

 

 

 

 

 

 

 

 

7

 

7

 

14

 

   Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on derivatives

 

 

 

 

 

 

29

 

 

 

 

 

 

 

29

 

 

29

 

Foreign currency translation adjustments

 

 

 

 

 

 

(12

)

 

 

 

 

 

 

(12

)

(5

)

(17

)

Change in pensions and other postretirement defined benefit plans

 

 

 

 

 

 

(3

)

 

 

 

 

 

 

(3

)

 

(3

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21

 

2

 

23

 

Issuance of shares

1

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 ―

 

1

 

Cash dividends on common stock

 

 

 

 

(35

)

 

 

 

 

 

 

 

 

(35

)

 ―

 

(35

)

Distribution to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9

)

(9

)

Stock option exercises

 

 

(1

)

 

 

 

 

1

 

 

 

 

 

 

 ―

 

 

Conversion to capital lease (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 ―

 

(35

)

(35

)

Other shareholder transactions

 

 

(3

)

 

 

 

 

 

 

3

 

2

 

2

 

 ―

 

2

 

BALANCE AT MARCH 29, 2009

$

555

 

$

1,235

 

$

3,260

 

$

(1,052

)(1)

$

(714

)

$

(58

)

$

(3

)

$

3,223

 

$

204

 

$

3,427

 

(1) Comprised of defined benefit postretirement plans of $(801) million, foreign currency translation adjustments of $(215) million, unrealized gain on marketable securities of $2 million and unrealized loss on derivatives of $(38) million.

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



CUMMINS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1NATURE OF OPERATIONS

Cummins Inc. (“Cummins,” “the Company,” “the registrant,” “we,” “our,” or “us”) is a leading global power provider that designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration and emissions solutions, turbochargers, fuel systems, controls and air handling systems.  We were founded in 1919 as one of the first manufacturers of diesel engines and are headquartered in Columbus, Indiana.  We sell our products to Original Equipment Manufacturers (OEMs), distributors and other customers worldwide.  We serve our customers through a network of more than 500 company-owned and independent distributor locations and approximately 5,200 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 (SEC) and in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information.  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations.  Certain reclassifications have been made to prior period amounts to conform to the presentation of the current period condensed financial statements.

Our reporting period ends on the Sunday closest to the last day of the quarterly calendar period.  The first quarter of 2009 and 2008 ended on March 29, and March 30, respectively.  The interim periods for both 2009 and 2008 contain 13 weeks.  Our fiscal year ends on December 31, regardless of the day of the week on which December 31 falls.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the Condensed Consolidated Financial Statements.  Significant estimates and assumptions in these Condensed Consolidated Financial Statements require the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, estimates of future cash flows and other assumptions associated with goodwill and long-lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, determination of discount and other rate assumptions for pension and other postretirement benefit expenses, income taxes and deferred tax valuation allowances 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 as of March 29, 2009, and March 30, 2008, excludes the effect of approximately 58,050 and 9,513 weighted-average shares of common stock, respectively, since such options had an exercise price in excess of the monthly average market value of our common stock during both three month periods.

You should read these interim condensed financial statements in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2008.  Our interim period financial results for the three-month interim periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year.  The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

 

NOTE 3.  RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Accounting Pronouncements Recently Adopted

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 157, “Fair Value Measurements” (SFAS 157), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  The adoption of SFAS 157, effective January 1, 2008, did not have a material impact on our Condensed Consolidated Financial Statements.  See Note 10 for further information regarding the adoption of this standard.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS 158).  This statement requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans.  In addition, the measurement date (the date at which plan assets and the benefit obligation are measured) is required to be the company’s fiscal year end.  During 2006, we adopted the provisions (except for the measurement date change) of SFAS 158, "Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)," which resulted in a $94 million noncash charge to equity.  We adopted the measurement date provisions of SFAS 158 effective January 1, 2008.  The majority of our pension and postretirement plans previously used a November 30 measurement date.  All plans are now measured at December 31, consistent with the company’s fiscal year end.  The noncash effect of the adoption of the measurement date provisions of SFAS 158 decreased shareholders’ equity by approximately $10 million ($7 million after-tax) and increased long-term liabilities by approximately $10 million.  There was no effect on our results of operations.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS 160), which is effective for fiscal years beginning after December 15, 2008.  SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements” (ARB 51) and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the accounting for future ownership changes with respect to those subsidiaries.  This standard defines a noncontrolling interest, previously called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent.  SFAS 160 requires, among other items, that a noncontrolling interest be included in the consolidated balance sheet within equity separate from the parent’s equity; consolidated net income to be reported at amounts inclusive of both the parent’s and noncontrolling interest’s shares and, separately, the amounts of consolidated net income attributable to the parent and noncontrolling interest all on the consolidated statements of income; and if a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be measured at fair value and a gain or loss be recognized in net income based on such fair value.  We adopted SFAS 160 effective January 1, 2009, and applied it retrospectively.  As a result, we reclassified noncontrolling interests in amounts of $246 million and $307 million from the mezzanine section to equity in the December 31, 2008 and March 30, 2008, balance sheets, respectively.  Certain reclassifications have been made to prior period amounts to conform to the presentation of the current period under SFAS 160.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS 161), which is effective for fiscal years beginning after November 15, 2008.  SFAS 161 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133) and requires enhanced disclosures about a company’s derivative and hedging activities.  The new disclosures required by this standard are included in Note 11.

 

Accounting Pronouncements Issued But Not Yet Effective

In April 2009, the FASB issued three new FASB Staff Positions (FSPs) all of which impact the accounting and disclosure related to certain financial instruments.  FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" (FSP FAS 157-4) provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased.  It also includes guidance on identifying circumstances that indicate a transaction is not orderly.  FSP FAS 115-2 and FAS 124-2, "Recognition of Other-Than-Temporary Impairment" (FSP FAS 115-2 and FAS 124-2) amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements.  FSP FAS 107-1 and APB 28-1 "Interim Disclosures about Fair Value of Financial Instruments" (FSP FAS 107-1 and APB 28-1) amends FASB Statement No. 107 to require disclosures about the fair value of financial instruments on an interim basis in addition to the annual disclosure requirements.  All three FSPs are required to be adopted for interim periods ending after June 15, 2009.  We do not expect adoption of these staff positions to have a material impact on our Condensed Consolidated Financial Statements.

 


 

NOTE 4.  PENSION AND OTHER POSTRETIREMENT BENEFITS

We sponsor both funded and unfunded domestic and foreign defined benefit pension and other postretirement plans. Cash contributions to these plans for the three month periods ended March 29, 2009 and March 30, 2008, respectively, were as follows:

 

 

Three months ended

 

 

 

March 29,

 

March 30,

 

In millions

 

2009

 

2008

 

Defined benefit pension and postretirement plans:

 

 

 

Voluntary

 

$

 

$

12

 

Mandatory

 

21

 

16

 

Total defined benefit plans

 

$

21

 

$

28

 

Defined contribution pension plans

 

$

16

 

$

10

 

We presently anticipate contributing $125 million to $135 million to our defined benefit pension plans in 2009 and paying approximately $53 million in claims and premiums for other postretirement benefits.  The $125 million to $135 million of contributions for the full year include voluntary contributions of $100 million to $105 million.  These contributions and payments include payments from Company funds either to increase pension assets or to make direct payments to plan participants.

The components of net periodic pension and other postretirement benefit cost under our plans consisted of the following:

 

 

 

Pension

 

Other

Postretirement

 

 

 

U.S. Plans

 

Non-U.S. Plans

 

Benefits

 

 

 

Three months ended

 

 

 

March 29,

 

March 30,

 

March 29,

 

March 30,

 

March 29,

 

March 30,

 

In millions

 

2009

 

2008

 

2009

 

2008

 

2009

 

2008

 

Service cost

 

$

11

 

$

12

 

$

4

 

$

7

 

$

 

$

 

Interest cost

 

29

 

29

 

13

 

16

 

7

 

8

 

Expected return on plan assets

 

(35

)

(38

)

(14

)

(19

)

 

 

Amortization of prior service cost (credit)

 

 

 

1

 

1

 

(2

)

(3

)

Recognized net actuarial loss

 

8

 

5

 

5

 

5

 

 

 

Net periodic benefit cost

 

$

13

 

$

8

 

$

9

 

$

10

 

$

5

 

$

5

 

 

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

 

 

 

March 29,

 

March 30,

 

In millions

 

2009

 

2008

 

Distribution Entities

 

 

 

 

 

North American distributors

 

$

26

 

$

22

 

All other distributors

 

3

 

2

 

 

 

 

 

 

 

Manufacturing Entities

 

 

 

 

 

Chongqing Cummins Engine Company, Ltd

 

$

8

 

$

7

 

Shanghai Fleetguard Filter Co. Ltd.

 

1

 

3

 

Dongfeng Cummins Engine Company, Ltd

 

 

14

 

Cummins MerCruiser Diesel Marine LLC.

 

(1

)

4

 

Tata Cummins Ltd.

 

(2

)

5

 

All other manufacturers

 

(5

)

5

 

Cummins share of net income

 

30

 

62

 

Royalty and interest income

 

3

 

5

 

Equity, royalty and interest income from investees

 

$

33

 

$

67

 

 


 

NOTE 6.  RESTRUCTURING CHARGES

 

2009 Restructuring Actions

In the first quarter of 2009, we executed restructuring actions in response to a reduction in orders in most of our U.S. and foreign markets due to the continuing deterioration in the global economy.  We reduced our global workforce by approximately 800 professional employees.  In addition, we took numerous employee actions at many of our manufacturing locations, including significant downsizing at numerous facilities and complete closure of two facilities and several branch distributor locations.  Employee termination and severance costs were recorded based on approved plans developed by the businesses and corporate management which specified positions to be eliminated, benefits to be paid under existing severance plans, union contracts or statutory requirements and the expected timetable for completion of the plan.  Estimates of restructuring were made based on information available at the time charges were recorded.  Due to the inherent uncertainty involved, actual amounts paid for such activities may differ from amounts initially recorded and we may need to revise previous estimates.  Total workforce reductions as of March 29, 2009 were as follows:

 

2009 Plan

 

Terminations announced

2,854

 

Terminations completed

(2,683

)

Remaining terminations

171

 


In response to closures and downsizing noted above, we incurred $1 million of restructuring expenses for lease terminations and $5 million of restructuring expenses for asset impairments.  During the first quarter of 2009 we recorded a total pre-tax restructuring charge of $66 million in “Restructuring charges” in the Condensed Consolidated Statements of Income related to the 2009 actions. These restructuring actions included:

In millions

2009

 

Estimated Completion Date

 

Workforce reductions

$

60

 

June 2009

 

Exit activities

6

 

June 2009

 

The following table summarizes the balance of accrued restructuring charges by expense type and the changes in the accrued amounts for the applicable periods.  The restructuring related accruals were recorded in “Other accrued expenses” in the Condensed Consolidated Balance Sheets.

In millions

Severance Costs

 

Exit Activities

 

Total

 

2009 Restructuring charges

$

60

 

$

6

 

$

66

 

Cash payments for 2009 actions

(17

)

(1

)

(18

)

Noncash items

 

(4

)

(4

)

Balance at March 29, 2009

$

43

 

$

1

 

$

44

 

We do not include restructuring charges in our operating segment results.  The pretax impact of allocating restructuring charges to the segment results would have been as follows:
 

In millions

 

2009 Charges

Engine

 

$

31

Power Generation

 

3

Components

 

24

Distribution

 

4

Non-segment

 

4

Total restructuring charges

 

$

66

 

2008 Restructuring Actions

In 2008 we executed restructuring actions in response to the continued deterioration in our U.S. businesses and most key markets around the world in the second half of 2008, as well as a reduction in orders in most U.S. and foreign markets for 2009.  In 2008 we announced reductions of our global workforce by approximately 650 professional employees.  In addition, we took numerous employee actions at many of our manufacturing locations, including approximately 800 hourly employees.  Total workforce reductions as of March 29, 2009 were as follows:

 

2008 Plan

 

Terminations announced

1,450

 

Terminations completed

(1,416

)

Remaining terminations (1)

34

 

(1)The remaining terminations under the 2008 plan are expected to occur in 2009.

 

 

The charges recorded during the year ended December 31, 2008, included severance costs related to both voluntary and involuntary terminations.  During 2008, we incurred a pretax charge related to the professional and hourly restructuring initiatives of $37 million.  The following table summarizes the balance of accrued restructuring charges and the changes in the accrued amounts for the applicable periods.  The restructuring related accruals were recorded in “Other accrued expenses” in the Condensed Consolidated Balance Sheets.

In millions

Severance Costs

 

Balance at December 31, 2008

34

 

Cash payments for 2008 actions

(17

)

Balance at March 29, 2009

17

 

 


 

NOTE 7.  INVENTORIES

Inventories included the following:

      

 

 

March 29,

 

December 31,

 

 In millions

 

  2009  

 

  2008  

 

Finished products

 

$

906

 

$

860

 

Work-in-process and raw materials

 

933

 

1,021

 

Inventories at FIFO cost

 

1,839

 

1,881

 

Excess of FIFO over LIFO

 

(101

)

(98

)

Total inventories

 

$

1,738

 

$

1,783

 

 

NOTE 8.  PRODUCT WARRANTY LIABILITY

We charge the estimated costs of warranty programs, other than product recalls, to income at the time products are shipped to customers.  We use historical claims experience to develop the estimated liability.  We review product recall programs on a quarterly basis, and if necessary, record a liability when we commit to an action.  We also sell extended warranty coverage on several engines.  The following is a tabular reconciliation of the product warranty liability, including the deferred revenue related to our extended warranty coverage:

 

 

Three months ended

 

 

 

March 29,

 

March 30,

 

In millions 

 

2009

 

2008

 

Balance, beginning of period

 

$

962

 

$

749

 

Provision for warranties issued

 

77

 

107

 

Deferred revenue on extended warranty contracts sold

 

26

 

16

 

Payments

 

(117

)

(95

)

Amortization of deferred revenue on extended warranty contracts

 

(18

)

(15

)

Changes in estimates for pre-existing warranties

 

29

 

33

 

Foreign currency translation

 

 

1

 

Balance, end of period

 

$

959

 

$

796

 

The amount of deferred revenue related to extended coverage programs at March 29, 2009, was $233 million.  At March 29, 2009, we had $13 million of receivables related to estimated supplier recoveries of which $7 million was included in “Trade and other” receivables and $6 million was included in “Deferred income taxes and other assets” on our Condensed Consolidated Balance Sheets.

 

NOTE 9.  COMMITMENTS AND CONTINGENCIES

We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters.  We also have been identified as a potentially responsible party at multiple waste disposal sites under 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.  Some of these lawsuits, claims and proceedings involve substantial amounts.  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 operation, financial condition or cash flows.

 


 

U.S. Distributor Commitments

We have an operating agreement with a financial institution that provides financing to certain independent Cummins and Onan distributors in the U.S., and to certain distributors in which we own an equity interest. Under this agreement, if any distributor defaults under its financing arrangement with the financial institution, and the maturity of amounts owed under the agreement is accelerated, then we are required to purchase from the financial institution, at amounts approximating fair market value, certain property, inventory and rental generator sets manufactured by Cummins that are secured by the distributor's financing agreement.

The operating agreement will continue to be in effect until February 7, 2010 and is subject to an automatic one year renewal without requiring the action of either party.

 

Residual Value Guarantees

We have various residual value guarantees on equipment leased under operating leases.  The total amount of these residual value guarantees at March 29, 2009, was $8 million.

 

Other Guarantees and Commitments

In addition to the guarantees discussed above, from time to time we enter into other guarantee arrangements, including guarantees of non-U.S. distributor financing and other miscellaneous guarantees of third-party obligations. The maximum potential loss related to these other guarantees is $47 million ($45 million of which relates to the Beijing Foton discussion below) at March 29, 2009.

We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties.  The penalty amounts are less than our purchase commitments and essentially allow the supplier to recover their tooling costs in most instances.  At March 29, 2009, if we were to stop purchasing from each of these suppliers, the amount of the penalty would be approximately $93 million, of which $79 million relates to a six year contract with an engine parts supplier that extends from 2008 to 2013.  This arrangement enables us to secure critical components.  We do not anticipate paying any penalties under these contracts.  

In July 2008, Beijing Foton Cummins Engine Company, a 50 percent owned entity accounted for under the equity method, entered into a line of credit agreement with a borrowing capacity of up to $176 million (at current exchange rates).  The line will be used primarily to fund equipment purchases for a new manufacturing plant.  As a part of this transaction, we guaranteed 50 percent of any outstanding borrowings up to a maximum guarantee of $88 million (at current exchange rates).  As of March 29, 2009, outstanding borrowings under this agreement were $90 million and our guarantee was $45 million (at current exchange rates).  We recorded a liability for the fair value of this guarantee in accordance with FASB Interpretation No. 45, “Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34.”  The amount of the liability was less than $1 million.  The offset to this liability was an increase in our investment in the joint venture.

We have a standby commitment with Irwin Financial Corporation (Irwin) to purchase up to $25 million of its common shares in connection with a potential rights offering being planned by Irwin.  Our commitment is subject to the satisfaction of several conditions.  William I. Miller, Chairman and Chief Executive Officer of Irwin, is currently a member of the board of directors of Cummins and has agreed to resign from that position if the Company makes any investment in Irwin.  The decision by us to enter into our commitment or to make any investment in Irwin has been and will continue to be made by our Board of Directors without the participation of Mr. Miller.

 

Indemnifications

Periodically, we enter into various contractual arrangements where we agree to indemnify a third-party against certain types of losses.  Common types of indemnifications include:

We regularly evaluate the probability of having to incur costs associated with these indemnifications and accrue for expected losses that are probable.  Because the indemnifications are not related to specified known liabilities and due to their uncertain nature, we are unable to estimate the maximum amount of the potential loss associated with these indemnifications.

 

NOTE 10.  FAIR VALUE OF FINANCIAL INSTRUMENTS

The majority of the assets and liabilities we carry at fair value are available-for-sale (AFS) securities and derivatives.  AFS securities are derived from level 1 or level 2 inputs.  The predominance of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

The fair value measurement of derivatives results primarily from level 2 inputs.  Many of our derivative contracts are valued utilizing publicly available pricing data of contracts with similar terms.  In other cases, the contracts are valued using current spot market data adjusted for the appropriate current forward curves provided by external financial institutions.  We participate in commodity swap contracts, currency forward contracts, and interest rate swaps.  When material, we adjust the values of our derivative contracts for counter-party or our credit risk.

The following table summarizes our financial instruments recorded at fair value in our Condensed Consolidated Balance Sheets at March 29, 2009:

 

 

Fair Value Measurements Using

In millions

 

Quoted prices in active markets for identical assets 
(Level 1)

 

Significant other observable inputs 
(Level 2)

 

Significant
unobservable inputs
(Level 3)

 

Total

 

Available-for-sale securities

 

$

54

 

$

11

 

$

 

$

65

 

Derivative assets

 

 

55

 

 

55

 

Derivative liabilities

 

 

(32

)

 

(32

)

Total

 

$

54

 

$

                34

 

$

 

$

88

 

 

 

NOTE 11.  DERIVATIVES

We are exposed to financial risk resulting from volatility in foreign exchange rates, commodity prices and interest rates.  This risk is closely monitored and managed through the use of financial derivative instruments including foreign currency forward contracts, commodity forward contracts and interest rate swaps.  As stated in our policies and procedures, financial derivatives are used expressly for hedging purposes, and under no circumstances are they used for speculative purposes.  When material, we adjust the value of our derivative contracts for counter-party or our credit risk.  The results and status of our hedging transactions are reported to senior management on a monthly and quarterly basis.

 

Foreign Currency Exchange Rate Risk

As a result of our international business presence, we are exposed to foreign currency exchange risks.  We transact business in foreign currencies and, as a result our income experiences some volatility related to movements in foreign currency exchange rates.  To help manage our exposure to exchange rate volatility, we use foreign exchange forward contracts on a regular basis to hedge forecasted intercompany and third-party sales and purchases denominated in non-functional currencies.  Our internal policy allows for managing anticipated foreign currency cash flow for up to one year.  These foreign currency forward contracts are designated and qualify as foreign currency cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133).  The effective portion of the unrealized gain or loss on the forward contract is deferred and reported as a component of “Accumulated other comprehensive loss” (AOCL).  When the hedged forecasted transaction (sale or purchase) occurs, the unrealized gain or loss is reclassified into income in the same line item associated with the hedged transaction in the same period or periods during which the hedged transaction affects income.  The ineffective portion of the hedge, unrealized gain or loss, if any, is recognized in current income during the period of change.  As of March 29, 2009, the amount expected to be reclassified to income over the next twelve months is not material.  For the three month periods ended March 29, 2009 and March 30, 2008, there were no circumstances that would have resulted in the discontinuance of a cash flow hedge.


To minimize the income volatility resulting from the remeasurement of net monetary assets and payables denominated in a currency other than the functional currency, we enter into foreign currency forward contracts, which are considered economic hedges.  The objective is to offset the gain or loss from remeasurement with the gain or loss from the fair market valuation of the forward contract.  These derivative instruments are not designated as hedges under SFAS 133.

The table below summarizes our outstanding foreign currency forward contracts.  The currencies in this table represent 91% and 97% of the notional amounts of contracts outstanding for the three month periods ended March 29, 2009 and March 30, 2008, respectively.

In millions

 

Currency Denomination

 

Currency

 

March 29, 2009

 

March 30, 2008

 

United States Dollar (USD)

 

 

109

 

 

199

 

British Pound Sterling (GBP)

 

 

136

 

 

96

 

Euro (EUR)

 

 

40

 

 

99

 

Australian Dollar (AUD)

 

 

5

 

 

59

 

Indian Rupee (INR)

 

 

1,654

 

 

1,117

 

Japanese Yen (JPY)

 

 

1,599

 

 

1,066

 

 

  

Commodity Price Risk

We are exposed to fluctuations in commodity prices due to contractual agreements with component suppliers.  In order to protect ourselves against future price volatility and, consequently, fluctuations in gross margins, we periodically enter into commodity forward contracts with designated banks to fix the cost of certain raw material purchases with the objective of minimizing changes in inventory cost due to market price fluctuations.  The forward contracts are derivative contracts that are designated as cash flow hedges under SFAS 133.  The effective portion of the unrealized gain or loss is deferred and reported as a component of AOCL.  When the hedged forecasted transaction (purchase) occurs, the unrealized gain or loss is reclassified into income in the same line item associated with the hedged transaction in the same period or periods during which the hedged transaction affects income.  The ineffective portion of the hedge, if any, is recognized in current income in the period in which the ineffectiveness occurs.  As of March 29, 2009, we expect to reclassify unrealized net loss of $15 million from AOCL to income over the next twelve months.  For the three month period ended March 29, 2009, we discontinued hedge accounting on certain contracts where the forecasted transactions were no longer probable.  The amount reclassified to income as a result of this action was less than $1 million.  For the three month period ended March 30, 2008, there were no circumstances that would have resulted in the discontinuance of a cash flow hedge.

Our internal policy allows for managing these cash flow hedges for up to three years.  The following table summarizes our outstanding commodity forward contracts that were entered into to hedge the cost of certain raw material purchases:

Dollars in millions

 

March 29, 2009

 

March 30, 2008

 

Commodity

 

Notional Amount

 

Quantity

 

Notional Amount

 

Quantity

 

Copper

 

$

147

 

21,522 metric tons

 

$

117

 

18,469 metric tons

 

Platinum

 

28

 

29,055 troy ounces

 

49

 

25,522 troy ounces

 

Palladium

 

1

 

5,399 troy ounces

 

2

 

3,265 troy ounces

 

 

Interest Rate Risk

We are exposed to market risk from fluctuations in interest rates.  We manage our exposure to interest rate fluctuations through the use of interest rate swaps.  The objective of the swaps is to more effectively balance our borrowing costs and interest rate risk. Currently, we have one interest rate swap outstanding.

In November 2005, we entered into an interest rate swap to effectively convert our $250 million, due in 2028, debt from a fixed rate of 7.125% to a floating rate based on a LIBOR spread.  The terms of the swap mirror those of the debt, with interest paid semi-annually.  This swap qualifies as a fair value hedge under SFAS 133.  The gain or loss on this derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current income as “Interest expense”.

 

 

March 29, 2009

 

March 30, 2008

 

In millions

Income Statement Classification

 

Gain/(Loss) on Swaps

 

Gain/(Loss) on Borrowings

 

Gain/(Loss) on Swaps

 

Gain/(Loss) on Borrowings

 

Interest expense

 

$

(29

)

$

29

 

$

12

 

$

(12

)


The following table summarizes the location and fair value of derivative instruments on our Condensed Consolidated Balance Sheets:

 

 

 

Asset Derivatives

 

 

Fair Value

 

Balance Sheet Location

In millions

 

March 29, 2009

 

March 30, 2008

 

Derivatives designated as hedging instruments under SFAS 133

 

 

 

 

 

 

Commodity forward contracts

 

1

 

28

 

Prepaid expenses and other current assets

Commodity forward contracts

 

3

 

9

 

Other assets

Interest rate contract

 

 

19

 

Prepaid expenses and other current assets

Interest rate contract

 

50

 

 

Other assets

Total derivatives designated as hedging instruments under SFAS 133

 

$

54

 

$

56

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments under SFAS 133

 

 

 

 

 

 

Foreign currency forward contracts

 

$

1

 

$

 

Prepaid expenses and other current assets

Total derivatives not designated as hedging instruments under SFAS 133

 

$

1

 

$

 

 

 

 

 

 

 

 

 

Total derivatives

 

$

55

 

$

56

 

 

 

 

 

Liability Derivatives

 

 

 

Fair Value

 

Balance Sheet Location

 

In millions

 

March 29, 2009

 

March 30, 2008

 

 

Derivatives designated as hedging instruments under SFAS 133

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

1

 

$

2

 

Other accrued expenses

 

Commodity forward contracts

 

19

 

 

Other accrued expenses

 

Commodity forward contracts

 

12

 

 

Other liabilities and deferred revenue

 

Total derivatives designated as hedging instruments under SFAS 133

 

$

32

 

$

2

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments under SFAS 133

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

$

2

 

Other accrued expenses

 

Total derivatives not designated as hedging instruments under SFAS 133

 

$

 

$

2

 

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

$

32

 

$

4

 

 

 

 

The table below summarizes the effect on our Condensed Consolidated Statements of Income for derivative instruments classified as cash flow hedges for the three month interim reporting periods presented below.  The table does not include amounts related to ineffectiveness as it was not material for the periods presented.

 

In millions

 

Amount of Gain/(Loss) in AOCL on Derivative (Effective Portion)

 

Amount of Gain/(Loss) Reclassified from AOCL into Income
(Effective Portion)

 

Location of Gain/(Loss) Reclassified into Income (Effective Portion)

Derivatives in SFAS 133 Cash Flow Hedging Relationships

 

March 29, 2009

 

March 30, 2008

 

March 29, 2009

 

March 30, 2008

 

Foreign currency forward contracts

 

$

 

$

(1

)

$

(11

)

$

(1

)

Sales

Commodity forward contracts

 

(32

)

25

 

(8

)

3

 

Cost of sales

Total

 

$

(32

)

$

24

 

$

(19

)

$

2

 

 

 



The following table summarizes the effect on our Condensed Consolidated Statements of Income for derivative instruments that are not classified as hedges for the three month interim reporting periods presented below:

 

In millions

 

Amount of Gain/(Loss) Recognized in Income on Derivative

 

Derivatives Not Designated as Hedging Instruments under SFAS 133

 

Location of Gain/(Loss) Recognized in Income on Derivative

 

March 29, 2009

 

March 30, 2008

 

Foreign currency forward contracts

 

Other (expense) income, net

 

$

(1

)

$

(14

)

 

 

 

 

 

NOTE 12.  LEASE AMENDMENT AND EXTENSION

During 2001, we entered into a sale-leaseback transaction with a financial institution with regard to certain heavy-duty engine manufacturing equipment.  The lease was classified as an operating lease with a lease term of 11.5 years, expiring June 28, 2013.  The financial institution created a grantor trust to act as the lessor in the arrangement.  The financial institution owns 100 percent of the equity in the trust.  The grantor trust has no assets other than the equipment and its rights to the lease agreement with us.  On the initial sale, we received $125 million from the financial institution which was financed with $99 million of non-recourse debt and $26 million of equity. Our obligations to the grantor trust consisted of the payments due under the lease and a $9 million guarantee of the residual value of the equipment.  In addition, we had a fixed price purchase option that was exercisable on January 14, 2009, for approximately $35 million; however, we decided not to exercise this option.   

In December 2003, the grantor trust which acts as the lessor in the sale and leaseback transaction described above was consolidated due to the adoption of FIN 46(R), due primarily to the existence of the residual value guarantee.  As a result of the consolidation, the manufacturing equipment and the trust’s obligations under its non-recourse debt arrangement was included in our Condensed Consolidated Balance Sheets as property, plant and equipment and long-term debt, respectively.  The equity in the trust held by the financial institution was reported as noncontrolling interest.  The non-recourse debt arrangement is more fully discussed in Note 10 to our annual Consolidated Financial Statements included in our 2008 Form 10-K.  In addition, our Condensed Consolidated Statements of Income included interest expense on the lessor’s debt obligations and depreciation expense on the manufacturing equipment rather than rent expense under the lease agreement.  In April 2008, we made the final payment on the non-recourse debt.

In February 2009, we amended the lease agreement to (1) extend the lease for an additional 2 years to June 2015, and (2) remove the residual value guarantee.  As a result of removing the residual value guarantee, we have determined that we are no longer required to consolidate the grantor trust and deconsolidated the trust in the first quarter of 2009.  With the deconsolidation, we are now required to account for the leasing arrangement with the trust.  We evaluated the amended lease and determined that the lease qualified as a capital lease.  The deconsolidation of the trust had minimal impact on our Condensed Consolidated Financial Statements as the present value of the minimum lease payments (including the extension) approximated the amount that was reported as noncontrolling interest as of the date of the amendment.  The reduction in noncontrolling interests and increase in our capital lease liabilities was $35 million.

The future lease payments required under the amended lease are $8 million in 2009, $0 million in 2010, $0 million in 2011, $12 million in 2012, $10 million in 2013 and $18 million thereafter.  The lease agreement includes certain default provisions requiring us to make timely rent payments, maintain, service, repair and insure the equipment, procure residual value insurance and maintain minimum debt ratings for our long-term senior unsecured debt obligations.

 


 

NOTE 13.  OPERATING SEGMENTS

Our reportable operating segments consist of the following: Engine, Power Generation, Components and Distribution.  This reporting structure is organized according to the products and markets each segment serves.  We use segment EBIT (defined as earnings or loss before interest expense, income taxes and noncontrolling interests) as the primary basis for the chief operating decision-maker to evaluate the performance of each operating segment.  

A summary of operating results by segment for the three month period is shown below:

 

In millions 

 

Engine

 

Power
Generation

 

Components

 


Distribution