Table of Contents

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

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 29, 2015
 
Commission File Number 1-4949 

CUMMINS INC.
(Exact name of registrant as specified in its charter)
Indiana
(State of Incorporation)
 
35-0257090
 (IRS Employer Identification No.)
500 Jackson Street
Box 3005
Columbus, Indiana 47202-3005
(Address of principal executive offices)
 
Telephone (812) 377-5000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files).  Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x
 
As of March 29, 2015, there were 181,311,804 shares of common stock outstanding with a par value of $2.50 per share.
 
Website Access to Company’s Reports
 
Cummins maintains an internet website at www.cummins.com.  Investors can obtain copies of our filings from this website free of charge as soon as reasonably practicable after they are electronically filed with, or furnished, to the Securities and Exchange Commission.
 


Table of Contents

CUMMINS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
 
 
 
Page
 
 
 
Condensed Consolidated Statements of Income for the three months ended March 29, 2015 and March 30, 2014
 
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 29, 2015 and March 30, 2014
 
Condensed Consolidated Balance Sheets at March 29, 2015 and December 31, 2014
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 29, 2015 and March 30, 2014
 
Condensed Consolidated Statements of Changes in Equity for the three months ended March 29, 2015 and March 30, 2014
 
 
 
 
 

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PART I.  FINANCIAL INFORMATION
 
ITEM 1.  Condensed Consolidated Financial Statements
 
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
 
Three months ended
In millions, except per share amounts 
 
March 29,
2015
 
March 30,
2014
NET SALES (a)
 
$
4,709

 
$
4,406

Cost of sales
 
3,514

 
3,307

GROSS MARGIN
 
1,195

 
1,099

 
 
 
 
 
OPERATING EXPENSES AND INCOME
 
 

 
 

Selling, general and administrative expenses
 
517

 
485

Research, development and engineering expenses
 
195

 
190

Equity, royalty and interest income from investees (Note 4)
 
68

 
90

Other operating income (expense), net
 
(3
)
 
(1
)
OPERATING INCOME
 
548

 
513

 
 
 
 
 
Interest income
 
5

 
5

Interest expense
 
14

 
17

Other income, net
 
9

 
10

INCOME BEFORE INCOME TAXES
 
548

 
511

 
 
 
 
 
Income tax expense (Note 5)
 
144

 
153

CONSOLIDATED NET INCOME
 
404

 
358

 
 
 
 
 
Less: Net income attributable to noncontrolling interests
 
17

 
20

NET INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
387

 
$
338

 
 
 
 
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
 
 

 
 

Basic
 
$
2.14

 
$
1.83

Diluted
 
$
2.14

 
$
1.83

 
 
 
 
 
WEIGHTED AVERAGE SHARES OUTSTANDING
 
 

 
 

Basic
 
180.6

 
184.3

Dilutive effect of stock compensation awards
 
0.4

 
0.4

Diluted
 
181.0

 
184.7

 
 
 
 
 
CASH DIVIDENDS DECLARED PER COMMON SHARE
 
$
0.78

 
$
0.625

____________________________________
(a) Includes sales to nonconsolidated equity investees of $325 million and $592 million for the three month periods ended March 29, 2015 and March 30, 2014, respectively.
 
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
Three months ended
In millions 
 
March 29,
2015
 
March 30,
2014
CONSOLIDATED NET INCOME
 
$
404

 
$
358

Other comprehensive (loss) income, net of tax (Note 11)
 
 

 
 

Change in pension and other postretirement defined benefit plans
 
13

 
4

Foreign currency translation adjustments
 
(176
)
 
31

Unrealized loss on marketable securities
 
(1
)
 
(2
)
Unrealized gain on derivatives
 

 
2

Total other comprehensive (loss) income, net of tax
 
(164
)
 
35

COMPREHENSIVE INCOME
 
240

 
393

Less: Comprehensive income attributable to noncontrolling interests
 
20

 
26

COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
220

 
$
367

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

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CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
In millions, except par value
 
March 29,
2015
 
December 31,
2014
ASSETS
 
 

 
 

Current assets
 
 

 
 

Cash and cash equivalents
 
$
1,997

 
$
2,301

Marketable securities (Note 6)
 
115

 
93

Total cash, cash equivalents and marketable securities
 
2,112

 
2,394

Accounts and notes receivable, net
 
 
 
 
Trade and other
 
2,930

 
2,744

Nonconsolidated equity investees
 
310

 
202

Inventories (Note 7)
 
2,936

 
2,866

Prepaid expenses and other current assets
 
712

 
849

Total current assets
 
9,000

 
9,055

Long-term assets
 
 

 
 

Property, plant and equipment
 
7,046

 
7,123

Accumulated depreciation
 
(3,409
)
 
(3,437
)
Property, plant and equipment, net
 
3,637

 
3,686

Investments and advances related to equity method investees
 
968

 
981

Goodwill
 
470

 
479

Other intangible assets, net
 
340

 
343

Prepaid pensions
 
714

 
637

Other assets
 
607

 
595

Total assets
 
$
15,736

 
$
15,776

 
 
 
 
 
LIABILITIES
 
 

 
 

Current liabilities
 
 

 
 

Loans payable
 
$
71

 
$
86

Accounts payable (principally trade)
 
2,013

 
1,881

Current maturities of long-term debt (Note 8)
 
33

 
23

Current portion of accrued product warranty (Note 9)
 
379

 
363

Accrued compensation, benefits and retirement costs
 
390

 
508

Deferred revenue
 
393

 
401

Other accrued expenses
 
778

 
759

Total current liabilities
 
4,057

 
4,021

Long-term liabilities
 
 

 
 

Long-term debt (Note 8)
 
1,602

 
1,589

Pensions
 
290

 
289

Postretirement benefits other than pensions
 
359

 
369

Other liabilities and deferred revenue
 
1,359

 
1,415

Total liabilities
 
$
7,667

 
$
7,683

 
 
 
 
 
Commitments and contingencies (Note 10)
 
 
 
 
 
 
 

 
 

EQUITY
 
 
 
 
Cummins Inc. shareholders’ equity
 
 

 
 

Common stock, $2.50 par value, 500 shares authorized, 222.3 and 222.3 shares issued
 
$
2,146

 
$
2,139

Retained earnings
 
9,792

 
9,545

Treasury stock, at cost, 41.0 and 40.1 shares
 
(2,975
)
 
(2,844
)
Common stock held by employee benefits trust, at cost, 1.0 and 1.1 shares
 
(12
)
 
(13
)
Accumulated other comprehensive loss (Note 11)
 
(1,245
)
 
(1,078
)
Total Cummins Inc. shareholders’ equity
 
7,706

 
7,749

Noncontrolling interests
 
363

 
344

Total equity
 
$
8,069

 
$
8,093

Total liabilities and equity
 
$
15,736

 
$
15,776


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

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CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Three months ended
In millions
 
March 29,
2015
 
March 30,
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

Consolidated net income
 
$
404

 
$
358

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

 
 

Depreciation and amortization
 
128

 
105

Deferred income taxes
 
(1
)
 
22

Equity in income of investees, net of dividends
 
(53
)
 
(52
)
Pension contributions in excess of expense
 
(96
)
 
(100
)
Other post-retirement benefits payments in excess of expense
 
(8
)
 
(8
)
Stock-based compensation expense
 
5

 
10

Translation and hedging activities
 
7

 
(3
)
Changes in current assets and liabilities, net of acquisitions
 
 
 
 

Accounts and notes receivable
 
(276
)
 
(232
)
Inventories
 
(98
)
 
(135
)
Other current assets
 
20

 
2

Accounts payable
 
147

 
302

Accrued expenses
 
(35
)
 
(95
)
Changes in other liabilities and deferred revenue
 
59

 
50

Other, net
 
(30
)
 
39

Net cash provided by operating activities
 
173

 
263

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Capital expenditures
 
(100
)
 
(107
)
Investments in internal use software
 
(8
)
 
(14
)
Investments in and advances to equity investees
 
10

 
(6
)
Acquisitions of businesses, net of cash acquired
 
(11
)
 
(90
)
Investments in marketable securities—acquisitions (Note 6)
 
(95
)
 
(84
)
Investments in marketable securities—liquidations (Note 6)
 
71

 
108

Cash flows from derivatives not designated as hedges
 
4

 
5

Other, net
 
4

 
1

Net cash used in investing activities
 
(125
)
 
(187
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Proceeds from borrowings
 
2

 
7

Payments on borrowings and capital lease obligations
 
(18
)
 
(25
)
Distributions to noncontrolling interests
 
(1
)
 
(13
)
Dividend payments on common stock
 
(140
)
 
(115
)
Repurchases of common stock
 
(137
)
 
(419
)
Other, net
 
(2
)
 
(37
)
Net cash used in financing activities
 
(296
)
 
(602
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
 
(56
)
 
5

Net decrease in cash and cash equivalents
 
(304
)
 
(521
)
Cash and cash equivalents at beginning of year
 
2,301

 
2,699

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
1,997

 
$
2,178


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

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

 
$
1,543

 
$
8,406

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

 
$
360

 
$
7,870

Net income


 


 
338

 


 


 


 
338

 
20

 
358

Other comprehensive income (loss)


 


 


 


 


 
29

 
29

 
6

 
35

Issuance of shares


 
1

 


 


 


 


 
1

 

 
1

Employee benefits trust activity


 
9

 


 


 
1

 


 
10

 

 
10

Acquisition of shares


 


 


 
(419
)
 


 


 
(419
)
 

 
(419
)
Cash dividends on common stock


 


 
(115
)
 


 


 


 
(115
)
 

 
(115
)
Distributions to noncontrolling interests


 


 


 


 


 


 

 
(13
)
 
(13
)
Stock based awards


 
(8
)
 


 
14

 


 


 
6

 

 
6

Other shareholder transactions


 


 


 


 


 


 

 
1

 
1

BALANCE AT MARCH 30, 2014
$
556

 
$
1,545

 
$
8,629

 
$
(2,600
)
 
$
(15
)
 
$
(755
)
 
$
7,360

 
$
374

 
$
7,734

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AT DECEMBER 31, 2014
$
556

 
$
1,583

 
$
9,545

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

 
$
344

 
$
8,093

Net income


 


 
387

 


 


 


 
387

 
17

 
404

Other comprehensive income (loss)


 


 


 


 


 
(167
)
 
(167
)
 
3

 
(164
)
Issuance of shares


 
1

 


 


 


 


 
1

 

 
1

Employee benefits trust activity


 
11

 


 


 
1

 


 
12

 

 
12

Acquisition of shares


 


 


 
(137
)
 


 


 
(137
)
 

 
(137
)
Cash dividends on common stock


 


 
(140
)
 


 


 


 
(140
)
 

 
(140
)
Distributions to noncontrolling interests


 


 


 


 


 


 

 
(1
)
 
(1
)
Stock based awards


 
(5
)
 


 
6

 


 


 
1

 

 
1

BALANCE AT MARCH 29, 2015
$
556

 
$
1,590

 
$
9,792

 
$
(2,975
)
 
$
(12
)
 
$
(1,245
)
 
$
7,706

 
$
363

 
$
8,069

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

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CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 1. NATURE OF OPERATIONS
 
Cummins Inc. (“Cummins,” “we,” “our” or “us”) was founded in 1919 as a corporation in Columbus, Indiana and as one of the first diesel engine manufacturers. We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We serve our customers through a network of approximately 600 company-owned and independent distributor locations and approximately 7,200 dealer locations in more than 190 countries and territories.

NOTE 2. BASIS OF PRESENTATION
 
The unaudited Condensed Consolidated Financial Statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows. All such adjustments are of a normal recurring nature. The Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations. Certain reclassifications have been made to prior period amounts to conform to the presentation of the current period condensed financial statements.
 
Our reporting period usually ends on the Sunday closest to the last day of the quarterly calendar period. The first quarters of 2015 and 2014 ended on March 29 and March 30, respectively. Our fiscal year ends on December 31, regardless of the day of the week on which December 31 falls.
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the Condensed Consolidated Financial Statements. Significant estimates and assumptions in these Condensed Consolidated Financial Statements require the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, estimates of future cash flows and other assumptions associated with goodwill and long-lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, determination of discount and other rate assumptions for pension and other postretirement benefit expenses, income taxes and deferred tax valuation allowances, lease classifications and contingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.
 
The weighted-average diluted common shares outstanding exclude the anti-dilutive effect of certain stock options since such options had an exercise price in excess of the monthly average market value of our common stock. The options excluded from diluted earnings per share for the three month periods ended March 29, 2015 and March 30, 2014, were as follows:
 
 
Three months ended
 
March 29,
2015
 
March 30,
2014
Options excluded
339,878

 
1,430

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







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NOTE 3. PENSION AND OTHER POSTRETIREMENT BENEFITS
 
The components of net periodic pension and other postretirement benefit costs under our plans were as follows:
 
 
Pension
 
 
 
 
 
 
U.S. Plans
 
U.K. Plans
 
Other Postretirement Benefits
 
 
Three months ended
In millions
 
March 29, 2015
 
March 30, 2014
 
March 29, 2015
 
March 30, 2014
 
March 29, 2015
 
March 30, 2014
Service cost
 
$
20

 
$
17

 
$
7

 
$
6

 
$

 
$

Interest cost
 
25

 
26

 
14

 
16

 
4

 
4

Expected return on plan assets
 
(47
)
 
(44
)
 
(23
)
 
(22
)
 

 

Recognized net actuarial loss
 
11

 
8

 
9

 
7

 
1

 

Net periodic benefit cost
 
$
9

 
$
7

 
$
7

 
$
7

 
$
5

 
$
4

 
 

NOTE 4. EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES
 
Equity, royalty and interest income from investees included in our Condensed Consolidated Statements of Income for the interim reporting periods was as follows:
 
 
 
Three months ended
In millions
 
March 29,
2015
 
March 30,
2014
Distribution Entities
 
 
 
 
North American distributors
 
$
10

 
$
32

Komatsu Cummins Chile, Ltda.
 
7

 
6

All other distributors
 
1

 
1

Manufacturing Entities
 
 
 
 
Dongfeng Cummins Engine Company, Ltd.
 
14

 
14

Chongqing Cummins Engine Company, Ltd.
 
12

 
11

Beijing Foton Cummins Engine Co., Ltd. (Light-duty)
 
8

 
6

Beijing Foton Cummins Engine Co., Ltd. (Heavy-duty)
 
(1
)
 
(6
)
All other manufacturers
 
7

 
15

Cummins share of net income
 
58

 
79

Royalty and interest income
 
10

 
11

Equity, royalty and interest income from investees
 
$
68

 
$
90


NOTE 5. INCOME TAXES
 
Our effective tax rate for the year is expected to approximate 29.5 percent, excluding any one-time items that may arise. The expected tax rate does not include the benefits of the research tax credit, which expired December 31, 2014 and has not yet been renewed by Congress. If the research credit is reinstated during 2015, we would anticipate the 2015 effective tax rate to be reduced to 28.5 percent. Our tax rate is generally less than the 35 percent U.S. statutory income tax rate primarily due to lower tax rates on foreign income. 

The effective tax rate for the three month period ended March 29, 2015, was 26.3 percent. This tax rate included an $18 million discrete tax benefit to reflect the release of reserves for uncertain tax positions related to a favorable federal audit settlement.
Our effective tax rate for the three month period ended March 30, 2014, was 29.9 percent. This tax rate included a $12 million discrete tax expense attributable primarily to state deferred tax adjustments, as well as a $5 million discrete net tax benefit resulting from a $70 million dividend paid from China earnings generated prior to 2012.
The decrease in the three month effective tax rate from 2014 to 2015 is primarily due to the 2015 favorable discrete tax item.


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NOTE 6. MARKETABLE SECURITIES
 
A summary of marketable securities, all of which are classified as current, was as follows:
 
 
 
March 29, 2015
 
December 31, 2014
In millions
 
Cost
 
Gross unrealized
gains/(losses)
 
Estimated
fair value
 
Cost
 
Gross unrealized
gains/(losses)
 
Estimated
fair value
Available-for-sale
 
 

 
 

 
 

 
 

 
 

 
 

Level 2(1)
 
 
 
 
 
 
 
 
 
 
 
 
Debt mutual funds
 
$
90

 
$

 
$
90

 
$
75

 
$
1

 
$
76

Equity mutual funds
 
9

 

 
9

 
9

 

 
9

Bank debentures
 
14

 

 
14

 
6

 

 
6

Government debt securities
 
2

 

 
2

 
2

 

 
2

Total marketable securities
 
$
115

 
$

 
$
115

 
$
92

 
$
1

 
$
93

____________________________________
(1) The fair value of Level 2 securities is estimated primarily using actively quoted prices for similar instruments from brokers and observable inputs, including market transactions and third-party pricing services. We do not currently have any Level 3 securities, and there were no transfers between Level 2 or 3 during the first three months of 2015 and 2014.  
 
The proceeds from sales and maturities of marketable securities and gross realized gains and losses from the sale of available-for-sale securities were as follows:
 
 
Three months ended
In millions
 
March 29,
2015
 
March 30,
2014
Proceeds from sales and maturities of marketable securities
 
$
71

 
$
108

Gross realized gains from the sale of available-for-sale securities
 
1

 
1


At March 29, 2015, the fair value of available-for-sale investments in debt securities that utilize a Level 2 fair value measure by contractual maturity was as follows:
 
Maturity date
 
Fair value
(in millions)
1 year or less
 
$
91

1 - 5 years
 
6

5 - 10 years
 
9

Total
 
$
106

NOTE 7. INVENTORIES
 
Inventories are stated at the lower of cost or market. Inventories included the following:
 
In millions
 
March 29,
2015
 
December 31,
2014
Finished products
 
$
1,896

 
$
1,859

Work-in-process and raw materials
 
1,161

 
1,129

Inventories at FIFO cost
 
3,057

 
2,988

Excess of FIFO over LIFO
 
(121
)
 
(122
)
Total inventories
 
$
2,936

 
$
2,866



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NOTE 8. DEBT
A summary of long-term debt was as follows:
 
In millions
 
March 29,
2015
 
December 31,
2014
Long-term debt
 
 

 
 

Senior notes, 3.65%, due 2023
 
$
500

 
$
500

Debentures, 6.75%, due 2027
 
58

 
58

Debentures, 7.125%, due 2028
 
250

 
250

Senior notes, 4.875%, due 2043
 
500

 
500

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

 
165

Credit facilities related to consolidated joint ventures
 
3

 
3

Other debt
 
51

 
31

Unamortized discount
 
(47
)
 
(47
)
Fair value adjustments due to hedge on indebtedness
 
73

 
65

Capital leases
 
82

 
87

Total long-term debt
 
1,635

 
1,612

Less: Current maturities of long-term debt
 
(33
)
 
(23
)
Long-term debt
 
$
1,602

 
$
1,589

Principal payments required on long-term debt during the next five years are as follows:
 
 
Required Principal Payments
In millions
 
2015
 
2016
 
2017
 
2018
 
2019
Principal payments
 
$
25

 
$
39

 
$
15

 
$
16

 
$
11


Fair Value of Debt
Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our risk premium, the fair value and carrying value of total debt, including current maturities, was as follows:
 
In millions
 
March 29,
2015
 
December 31,
2014
Fair value of total debt(1)
 
$
2,043

 
$
1,993

Carrying value of total debt
 
1,706

 
1,698

_________________________________________________
(1) The fair value of debt is derived from Level 2 inputs.
NOTE 9. PRODUCT WARRANTY LIABILITY
 
A tabular reconciliation of the product warranty liability, including the deferred revenue related to our extended warranty coverage and accrued recall programs was as follows:
 
In millions 
 
March 29,
2015
 
March 30,
2014
Balance, beginning of year
 
$
1,283

 
$
1,129

Provision for warranties issued
 
109

 
84

Deferred revenue on extended warranty contracts sold
 
56

 
53

Payments
 
(94
)
 
(102
)
Amortization of deferred revenue on extended warranty contracts
 
(43
)
 
(34
)
Changes in estimates for pre-existing warranties
 
15

 
2

Foreign currency translation
 
(6
)
 
1

Balance, end of period
 
$
1,320

 
$
1,133

 

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Warranty related deferred revenue, supplier recovery receivables and the long-term portion of the warranty liability on our March 29, 2015, balance sheet were as follows:
In millions
 
March 29,
2015
 
Balance Sheet Location
Deferred revenue related to extended coverage programs
 
 

 
 
Current portion
 
$
173

 
Deferred revenue
Long-term portion
 
447

 
Other liabilities and deferred revenue
Total
 
$
620

 
 
 
 
 
 
 
Receivables related to estimated supplier recoveries
 
 

 
 
Current portion
 
$
8

 
Trade and other receivables
Long-term portion
 
4

 
Other assets
Total
 
$
12

 
 
 
 
 
 
 
Long-term portion of warranty liability
 
$
321

 
Other liabilities and deferred revenue

 
NOTE 10. COMMITMENTS AND CONTINGENCIES
 
We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We also have been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are material individually or in the aggregate. While we believe we have also established adequate accruals for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition or cash flows.
 
We conduct significant business operations in Brazil that are subject to the Brazilian federal, state and local labor, social security, tax and customs laws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding the application of these laws to particular circumstances.
 
U.S. Distributor Commitments
Our distribution agreements with independent and partially-owned distributors generally have a renewable three-year term and are restricted to specified territories. Our distributors develop and maintain a network of dealers with which we have no direct relationship. Our distributors are permitted to sell other, noncompetitive products only with our consent. We license all of our distributors to use our name and logo in connection with the sale and service of our products, with no right to assign or sublicense the trademarks, except to authorized dealers, without our consent. Products are sold to the distributors at standard domestic or international distributor net prices, as applicable. Net prices are wholesale prices we establish to permit our distributors an adequate margin on their sales. Subject to local laws, we can generally refuse to renew these agreements upon expiration or terminate them upon written notice for inadequate sales, change in principal ownership and certain other reasons. Distributors also have the right to terminate the agreements upon 60-day notice without cause, or 30-day notice for cause. Upon termination or failure to renew, we are required to purchase the distributor’s current inventory, signage and special tools and may, at our option purchase other assets of the distributor, but are under no obligation to do so.


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Other Guarantees and Commitments
In addition to the matters discussed above, from time to time we enter into other guarantee arrangements, including guarantees of non-U.S. distributor financings, residual value guarantees on equipment under operating leases and other miscellaneous guarantees of third-party obligations. As of March 29, 2015, the maximum potential loss related to these other guarantees was $5 million.
We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. The penalty amounts are less than our purchase commitments and essentially allow the supplier to recover their tooling costs in most instances. As of March 29, 2015, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $70 million, of which $36 million relates to a contract with an engine parts supplier that extends to 2016. These arrangements enable us to secure critical components. We do not currently anticipate paying any penalties under these contracts.
During 2014, we began entering into physical forward contracts with suppliers of platinum and palladium to purchase minimum volumes of the commodities at contractually stated prices for various periods, not to exceed two years. As of March 29, 2015, the total commitments under these contracts were $55 million. These arrangements enable us to fix the prices of these commodities, which otherwise are subject to market volatility.
We have guarantees with certain customers that require us to satisfactorily honor contractual or regulatory obligations, or compensate for monetary losses related to nonperformance. These performance bonds and other performance-related guarantees were $73 million at March 29, 2015 and $76 million at December 31, 2014.
 
Indemnifications
Periodically, we enter into various contractual arrangements where we agree to indemnify a third-party against certain types of losses. Common types of indemnities include:
product liability and license, patent or trademark indemnifications;
asset sale agreements where we agree to indemnify the purchaser against future environmental exposures related to the asset sold; and
any contractual agreement where we agree to indemnify the counter-party for losses suffered as a result of a misrepresentation in the contract.
We regularly evaluate the probability of having to incur costs associated with these indemnities and accrue for expected losses that are probable. Because the indemnifications are not related to specified known liabilities and due to their uncertain nature, we are unable to estimate the maximum amount of the potential loss associated with these indemnifications.

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NOTE 11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
Following are the changes in accumulated other comprehensive income (loss) by component:
In millions
 
Change in
pensions and
other
postretirement
defined benefit
plans
 
Foreign
currency
translation
adjustment
 
Unrealized gain
(loss) on
marketable
securities
 
Unrealized gain
(loss) on
derivatives
 
Total
attributable to
Cummins Inc.
 
Noncontrolling
interests
 
Total
Balance at December 31, 2013
 
$
(611
)
 
$
(179
)
 
$
7

 
$
(1
)
 
$
(784
)
 
 

 
 

Other comprehensive income before reclassifications
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Before tax amount
 
(7
)
 
24

 
(1
)
 
3

 
19

 
$
7

 
$
26

Tax (expense) benefit
 
1

 

 

 
(1
)
 

 

 

After tax amount
 
(6
)
 
24

 
(1
)
 
2

 
19

 
7

 
26

Amounts reclassified from accumulated other comprehensive income(1)(2)
 
10

 

 

 

 
10

 
(1
)
 
9

Net current period other comprehensive income (loss)
 
4

 
24

 
(1
)
 
2

 
29

 
$
6

 
$
35

Balance at March 30, 2014
 
$
(607
)
 
$
(155
)
 
$
6

 
$
1

 
$
(755
)
 
 

 
 

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

 
 

Other comprehensive income before reclassifications
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Before tax amount
 
(3
)
 
(204
)
 
1

 
1

 
(205
)
 
$
4

 
$
(201
)
Tax (expense) benefit
 
1

 
23

 

 

 
24

 

 
24

After tax amount
 
(2
)
 
(181
)
 
1

 
1

 
(181
)
 
4

 
(177
)
Amounts reclassified from accumulated other comprehensive income(1)(2)
 
15

 

 
(1
)
 

 
14

 
(1
)
 
13

Net current period other comprehensive income (loss)
 
13

 
(181
)
 

 
1

 
(167
)
 
$
3

 
$
(164
)
Balance at March 29, 2015
 
$
(656
)
 
$
(587
)
 
$
(1
)
 
$
(1
)
 
$
(1,245
)
 
 

 
 

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


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Table of Contents

Following are the items reclassified out of accumulated other comprehensive income (loss) and the related tax effects:
In millions
 
Three months ended
 
 
(Gain)/Loss Components
 
March 29,
2015
 
March 30,
2014
 
Statement of Income Location
 
 
 
 
 
 
 
Change in pension and other postretirement defined benefit plans
 
 

 
 
 
 
Recognized actuarial loss
 
$
22

 
$
15

 
(1) 
Total before taxes
 
22

 
15

 
 
Tax effect
 
(7
)
 
(5
)
 
Income tax expense
Net change in pensions and other postretirement defined benefit plans
 
$
15

 
$
10

 
 
 
 
 
 
 
 
 
Realized (gain) loss on marketable securities
 
$
(1
)
 
$
(1
)
 
Other income (expense), net
Tax effect
 
(1
)
 

 
Income tax expense
Net realized (gain) loss on marketable securities
 
$
(2
)

$
(1
)
 
 
 
 
 
 
 
 
 
Realized (gain) loss on derivatives
 
 

 
 
 
 
Foreign currency forward contracts
 
$

 
$
(2
)
 
Net sales
Commodity swap contracts
 

 
2

 
Cost of sales
Total before taxes
 



 
 
Tax effect
 

 

 
Income tax expense
Net realized (gain) loss on derivatives
 
$


$

 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
13


$
9

 
 
____________________________________
(1) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 3, ''PENSION AND OTHER POSTRETIREMENT BENEFITS'').  

NOTE 12. OPERATING SEGMENTS
 
Operating segments under GAAP are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Cummins' chief operating decision-maker (CODM) is the Chief Executive Officer.
 
Our reportable operating segments consist of the following: Engine, Distribution, Components and Power Generation. This reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines and parts for sale to customers in on-highway and various industrial markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, mining, agriculture, marine, oil and gas, rail and military equipment. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers and fuel systems. The Power Generation segment is an integrated provider of power systems, which sells engines, generator sets and alternators.
 
We use segment EBIT (defined as earnings before interest expense, taxes and noncontrolling interests) as a primary basis for the CODM to evaluate the performance of each of our operating segments. Segment amounts exclude certain expenses not specifically identifiable to segments.
 
The accounting policies of our operating segments are the same as those applied in our Condensed Consolidated Financial Statements. We prepared the financial results of our operating segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. We have allocated certain common costs and expenses, primarily corporate functions, among segments differently than we would for stand-alone financial information prepared in accordance with GAAP. These include certain costs and expenses of shared services, such as information technology, human resources, legal and finance. We also do not allocate debt-related items, actuarial gains or losses,

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prior service costs or credits, changes in cash surrender value of corporate owned life insurance or income taxes to individual segments. Segment EBIT may not be consistent with measures used by other companies.

Summarized financial information regarding our reportable operating segments for the three month periods is shown in the table below:
In millions
 
Engine
 
Distribution
 
Components
 
Power Generation
 
Non-segment
Items (1)
 
Total
Three months ended March 29, 2015
 
 

 
 
 
 

 
 

 
 

 
 

External sales
 
$
1,889

 
$
1,469

 
$
931

 
$
420

 
$

 
$
4,709

Intersegment sales
 
707

 
7

 
368

 
260

 
(1,342
)
 

Total sales
 
2,596

 
1,476

 
1,299

 
680

 
(1,342
)
 
4,709

Depreciation and amortization(2)
 
58

 
27

 
26

 
16

 

 
127

Research, development and engineering expenses
 
114

 
3

 
61

 
17

 

 
195

Equity, royalty and interest income from investees
 
30

 
20

 
9

 
9

 

 
68

Interest income
 
2

 
1

 
1

 
1

 

 
5

Segment EBIT
 
253

 
88

 
195

 
49

 
(23
)
 
562

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 30, 2014
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
2,090

 
$
942

 
$
922

 
$
452

 
$

 
$
4,406

Intersegment sales
 
473

 
8

 
308

 
187

 
(976
)
 

Total sales
 
2,563

 
950

 
1,230

 
639

 
(976
)
 
4,406

Depreciation and amortization(2)
 
51

 
16

 
26

 
12

 

 
105

Research, development and engineering expenses
 
116

 
2

 
53

 
19

 

 
190

Equity, royalty and interest income from investees
 
32

 
41

 
9

 
8

 

 
90

Interest income
 
2

 
1

 
1

 
1

 

 
5

Segment EBIT
 
269

 
76

(3) 
167

 
25

 
(9
)
 
528

____________________________________
(1) Includes intersegment sales and profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three months ended March 29, 2015 and March 30, 2014.
(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 $1 million and less than $1 million for the three months ended March 29, 2015 and March 30, 2014, respectively.
(3) Distribution segment EBIT included a gain of $6 million on the fair value adjustment resulting from the acquisition of a controlling interest in a North American distributor for the three months ended March 30, 2014.

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
In millions
 
March 29,
2015
 
March 30,
2014
Total EBIT
 
$
562

 
$
528

Less: Interest expense
 
14

 
17

Income before income taxes
 
$
548

 
$
511


NOTE 13. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 2015, the Financial Accounting Standards Board (FASB) amended its standards related to the consolidation of certain legal entities. The amendment will change the method of analysis that we must perform to determine whether certain types of legal entities should be consolidated, primarily limited partnerships and similar structures. The amendment will eliminate three of the original six conditions for evaluating whether a fee paid to a decision-maker or a service provider represents a variable interest in a variable interest entity (VIE). The new rules will become effective for annual and interim periods beginning December 15, 2015. Early adoption is permitted. We do not believe that this amendment will have a significant effect on our Consolidated Financial Statements.


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In May 2014, the FASB amended its standards related to revenue recognition. This amendment replaces all existing revenue recognition guidance and provides a single, comprehensive revenue recognition model for all contracts with customers. The standard contains principles that we will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that we will recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that we expect to be entitled to in exchange for those goods or services. The standard allows either full or modified retrospective adoption. Early adoption is not permitted. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendment also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. The new rules will become effective for annual and interim periods beginning January 1, 2017. In April 2015, the FASB proposed a one year delay of the effective date of the standard to provide adequate time for implementation. It is important to note that the FASB's proposed deferral is not a final decision. We are in the process of evaluating the impact the amendment will have on our Consolidated Financial Statements, and we are further considering the impact of each method of adoption.

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Cummins Inc. and its consolidated subsidiaries are hereinafter sometimes referred to as “Cummins,” “we,” “our” or “us.”
 
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
 
Certain parts of this quarterly report contain forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those that are based on current expectations, estimates and projections about the industries in which we operate and management’s beliefs and assumptions. Forward-looking statements are generally accompanied by words such as "anticipates," "expects," "forecasts," "intends," "plans," "believes," "seeks," "estimates," "could," "should" or words of similar meaning. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which we refer to as "future factors," which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some future factors that could cause our results to differ materially from the results discussed in such forward-looking statements are discussed below and shareholders, potential investors and other readers are urged to consider these future factors carefully in evaluating forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. Future factors that could affect the outcome of forward-looking statements include the following:
 
 a sustained slowdown or significant downturn in our markets;

a slowdown in infrastructure development;

unpredictability in the adoption, implementation and enforcement of emission standards around the world;

the actions of, and income from, joint ventures and other investees that we do not directly control;

changes in the engine outsourcing practices of significant customers;

a downturn in the North American truck industry or financial distress of a major truck customer;

a major customer experiencing financial distress;

any significant problems in our new engine platforms;

supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers;

variability in material and commodity costs;

product recalls;

competitor pricing activity;


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increasing competition, including increased global competition among our customers in emerging markets; 

exposure to information technology security threats and sophisticated "cyber attacks;"

political, economic and other risks from operations in numerous countries;

changes in taxation;

global legal and ethical compliance costs and risks;

aligning our capacity and production with our demand;

product liability claims;

the development of new technologies;

obtaining additional customers for our new light-duty diesel engine platform and avoiding any related write-down in our investments in such platform;

increasingly stringent environmental laws and regulations;

foreign currency exchange rate changes;

the price and availability of energy;

the performance of our pension plan assets;
 
labor relations;

changes in accounting standards;

our sales mix of products;

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

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

the cyclical nature of some of our markets;

the outcome of pending and future litigation and governmental proceedings;

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

the consummation and integration of the planned acquisitions of our partially-owned United States and Canadian distributors; and

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

Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this quarterly report and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.


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Table of Contents

ORGANIZATION OF INFORMATION
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) was prepared to provide the reader with a view and perspective of our business through the eyes of management and should be read in conjunction with our Management's Discussion and Analysis of Financial Condition and Results of Operations section of our 2014 Form 10-K. Our MD&A is presented in the following sections:
 
Executive Summary and Financial Highlights
 
Outlook

Results of Operations

Operating Segment Results

Liquidity and Capital Resources

Application of Critical Accounting Estimates

Recently Issued Accounting Pronouncements




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Table of Contents

EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS
We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We have long-standing relationships with many of the leading manufacturers in the markets we serve, including PACCAR Inc, Daimler Trucks North America, Chrysler Group, LLC (Chrysler), Volvo AB, Komatsu, Navistar International Corporation, Aggreko plc, Ford Motor Company and MAN Nutzfahrzeuge AG. We serve our customers through a network of approximately 600 company-owned and independent distributor locations and approximately 7,200 dealer locations in more than 190 countries and territories.
Our reportable operating segments consist of the following: Engine, Distribution, Components and Power Generation. This reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines and parts for sale to customers in on-highway and various industrial markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, mining, agriculture, marine, oil and gas, rail and military equipment. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers and fuel systems. The Power Generation segment is an integrated provider of power systems, which sells engines, generator sets and alternators.
Our financial performance depends, in large part, on varying conditions in the markets we serve, particularly the on-highway, construction and general industrial markets. Demand in these markets tends to fluctuate in response to overall economic conditions. Our sales may also be impacted by OEM inventory levels and production schedules and stoppages. Economic downturns in markets we serve generally result in reduced sales of our products and can result in price reductions in certain products and/or markets. As a worldwide business, our operations are also affected by currency, political, economic and regulatory matters, including adoption and enforcement of environmental and emission standards, in the countries we serve. As part of our growth strategy, we invest in businesses in certain countries that carry high levels of these risks such as China, Brazil, India, Mexico, Russia and countries in the Middle East and Africa. At the same time, our geographic diversity and broad product and service offerings have helped limit the impact from a drop in demand in any one industry or customer or the economy of any single country on our consolidated results.
Worldwide revenues increased 7 percent in the three months ended March 29, 2015, as compared to the same period in 2014, primarily due to the consolidation of partially-owned North American distributors since December 31, 2013. Revenue in the U.S. and Canada improved by 17 percent primarily due to improved Distribution segment sales related to the consolidation of North American distributors and higher demand in the North American on-highway markets, partially offset by lower demand in off-highway mining and construction markets. Continued international economic uncertainty in the first quarter of 2015, negatively impacted our international revenues (excluding the U.S. and Canada) which declined by 6 percent with sales down or relatively flat in many of our markets, especially Europe and Brazil. The decline in international revenue was led by lower demand in the Engine segment, especially the on-highway markets in Brazil and Korea, declines in international construction and commercial marine demand and unfavorable currency impacts of 3 percent (primarily in Europe, Brazil, Australia and the U.K.). These decreases were partially offset by increased international demand for power generation products.

The following table contains sales and earnings before interest expense, income taxes and noncontrolling interests (EBIT) results by operating segment for the three month periods ended March 29, 2015 and March 30, 2014Refer to the section titled “Operating Segment Results” for a more detailed discussion of net sales and EBIT by operating segment, including the reconciliation of segment EBIT to income before taxes.


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Three months ended
Operating Segments
 
March 29, 2015
 
March 30, 2014
 
Percent change
 
 
 
 
Percent
 
 
 
 
 
Percent
 
 
 
2015 vs. 2014
In millions
 
Sales
 
of Total
 
EBIT
 
Sales
 
of Total
 
EBIT
 
Sales
 
EBIT
Engine
 
$
2,596

 
55
 %
 
$
253

 
$
2,563

 
58
 %
 
$
269

 
1
%
 
(6
)%
Distribution
 
1,476

 
31
 %
 
88

 
950

 
22
 %
 
76

 
55
%
 
16
 %
Components
 
1,299

 
28
 %
 
195

 
1,230

 
28
 %
 
167

 
6
%
 
17
 %
Power Generation
 
680

 
14
 %
 
49

 
639

 
14
 %
 
25

 
6
%
 
96
 %
Intersegment eliminations
 
(1,342
)
 
(28
)%
 

 
(976
)
 
(22
)%
 

 
38
%
 

Non-segment
 

 

 
(23
)
 

 

 
(9
)
 

 
NM

Total
 
$
4,709

 
100
 %
 
$
562

 
$
4,406

 
100
 %
 
$
528

 
7
%
 
6
 %
"NM" - not meaningful information
 
 
 
 
 
 
 
 
 
Net income attributable to Cummins was $387 million, or $2.14 per diluted share, on sales of $4.7 billion for the three months ended March 29, 2015, versus the comparable prior year period with net income attributable to Cummins of $338 million, or $1.83 per diluted share, on sales of $4.4 billion. The increase in net income and earnings per share was driven by improved gross margin, partially offset by higher selling, general and administrative expenses and lower equity, royalty and interest income from investees. The increase in gross margin was primarily due to improved Distribution segment sales related to the consolidation of partially-owned North American distributors since December 31, 2013, higher volumes and lower material and commodity costs, partially offset by higher warranty costs and unfavorable foreign currency fluctuations. Diluted earnings per share for the three months ended March 29, 2015, benefited $0.01 from lower shares outstanding due to 2015 purchases under the stock repurchase program.
 
We generated $173 million of operating cash flows for the three months ended March 29, 2015, compared to $263 million for the same period in 2014. Refer to the section titled “Cash Flows” in the “Liquidity and Capital Resources” section for a discussion of items impacting cash flows.
In September 2013, we announced our intention to acquire the equity that we do not already own in most of our partially-owned U.S. and Canadian distributors over a three to five year period. We plan to spend an additional $160 million to $200 million on North American distributor acquisitions and the related debt retirements in the second half of 2015.
We repurchased $137 million of stock under the 2012 Board of Directors Authorized Plan (2012 Plan) during the first three months of 2015.
Our debt to capital ratio (total capital defined as debt plus equity) at March 29, 2015, was 17.5 percent, compared to 17.3 percent at December 31, 2014. We have $2.1 billion in cash and marketable securities on hand and access to our credit facilities, if necessary, to meet currently anticipated investment and funding needs. As of the date of filing this Quarterly Report on Form 10-Q, our credit ratings were as follows:
Credit Rating Agency
 
Senior L-T
Debt Rating
 
Outlook
 
Last Updated
Standard & Poor’s Rating Services
 
A+
 
Stable
 
August 2014
Fitch Ratings
 
A
 
Stable
 
October 2014
Moody’s Investors Service, Inc.
 
A2
 
Stable
 
December 2014
Our global pension plans, including our unfunded and non-qualified plans, were 108 percent funded at December 31, 2014. Our U.S. qualified plan, which represents approximately 56 percent of the worldwide pension obligation, was 119 percent funded and our U.K. plan was 113 percent funded. We expect to contribute $175 million to our global pension plans in 2015. We anticipate pension and other postretirement benefit cost in 2015 to increase by approximately $8 million pre-tax, or approximately $0.03 per diluted share, when compared to 2014 due to lower discount rates and unfavorable demographics mostly offset by favorable expected return on asset performance. Refer to Note 3, "PENSION AND OTHER POSTRETIREMENT BENEFITS" for additional information regarding our pension plans.
We expect our effective tax rate for the full year of 2015 to approximate 29.5 percent, excluding any one-time tax items.
 

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OUTLOOK
 
Near-Term
Our outlook reflects the following positive trends for the remainder of 2015:
We expect continued growth in the North American heavy-duty and medium-duty on-highway markets compared to 2014.
We expect North American light-duty demand to remain strong.
We expect the new ISG engine, which began production in the second quarter of 2014 with our Beijing Foton Cummins Engine Co., Ltd. joint venture, to continue to gain market share in China in its first full year of production.
We plan to acquire two more unconsolidated North American distributors in the second half of the year, which will increase our Distribution segment revenues and acquire the remaining equity in a consolidated North American distributor.
Demand in India is expected to improve in some end markets as the economy improves throughout the year. 
Our outlook reflects the following challenges to our business that may reduce our earnings potential for the remainder of 2015:

Power generation markets are expected to remain weak.
Weak economic growth in Brazil will continue to negatively impact our on-highway business.
We do not anticipate end markets in China to improve.
Demand in certain European markets could remain weak due to continued political and economic uncertainty.
Growth in emerging markets could be negatively impacted if emission regulations are not strictly enforced.
Foreign currency volatility could continue to put pressure on revenue and earnings.
We expect market demand to decline in the oil and gas markets as the result of low crude oil prices.
Domestic and international mining markets could continue to deteriorate if commodity prices continue to weaken.
Long-Term
We believe that, over the longer term, there will be economic improvements in most of our current markets and that our opportunities for long-term profitable growth will continue as the result of the following four macroeconomic trends that should benefit our businesses:
tightening emissions controls across the world;
infrastructure needs in emerging markets;
energy availability and cost issues; and
globalization of industries like ours.

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RESULTS OF OPERATIONS