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 28, 2010

 

 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 28, 2010, there were 200,579,461 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

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

   

 

ITEM 1.

Condensed Consolidated Financial Statements (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Income for the three months ended March 28, 2010, and March 29, 2009

3

 

 

 

 

Condensed Consolidated Balance Sheets at March 28, 2010, and December 31, 2009

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 28, 2010, and March 29, 2009

5

 

 

 

 

Condensed Consolidated Statements of Changes in Equity for the three months ended March 28, 2010, and March 29, 2009

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

ITEM 2.

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

22

 

   

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

40

 

   

 

ITEM 4.

Controls and Procedures

41

 

   

 

 

PART II. OTHER INFORMATION

 

 

 

 

ITEM 1.

Legal Proceedings

41

 

 

 

ITEM 1A.

Risk Factors

42

 

   

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

 

 

 

ITEM 6.

Exhibits

42

 

   

 

 

Signatures

43

 

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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

 

 

 

March 28,

 

March 29,

 

In millions, except per share amounts

 

2010

 

2009

 

NET SALES (a)

 

$

2,478

 

$

2,439

 

Cost of sales

 

1,877

 

1,994

 

GROSS MARGIN

 

601

 

445

 

 

 

 

 

 

 

OPERATING EXPENSES AND INCOME

 

 

 

 

 

Selling, general and administrative expenses

 

335

 

300

 

Research, development and engineering expenses

 

92

 

85

 

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

 

76

 

33

 

Restructuring and other charges (Note 12)

 

 

66

 

Other operating (expense) income, net

 

(4

)

2

 

OPERATING INCOME

 

246

 

29

 

 

 

 

 

 

 

Interest income

 

3

 

2

 

Interest expense

 

9

 

7

 

Other income (expense), net

 

17

 

(3

)

INCOME BEFORE INCOME TAXES

 

257

 

21

 

 

 

 

 

 

 

Income tax expense

 

87

 

7

 

CONSOLIDATED NET INCOME

 

170

 

14

 

 

 

 

 

 

 

Less: net income attributable to noncontrolling interests

 

21

 

7

 

NET INCOME ATTRIBUTABLE TO CUMMINS INC.

 

$

149

 

$

7

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.

 

 

 

 

 

Basic

 

$

0.75

 

$

0.04

 

Diluted

 

$

0.75

 

$

0.04

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

 

 

 

 

Basic

 

198.4

 

196.8

 

Dilutive effect of stock compensation awards

 

0.3

 

0.2

 

Diluted

 

198.7

 

197.0

 

 

 

 

 

 

 

CASH DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.175

 

$

0.175

 

 


(a)          Includes sales to nonconsolidated equity investees of $428 million and $429 million for the three months ended March 28, 2010 and March 29, 2009, respectively.

 

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)

 

 

 

March 28,

 

December 31,

 

In millions, except par value

 

2010

 

2009

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

885

 

$

930

 

Marketable securities

 

217

 

190

 

Accounts and notes receivable, net

 

 

 

 

 

Trade and other

 

1,502

 

1,730

 

Nonconsolidated equity investees

 

225

 

274

 

Inventories (Note 6)

 

1,549

 

1,341

 

Deferred income taxes

 

302

 

295

 

Prepaid expenses and other current assets

 

240

 

243

 

Total current assets

 

4,920

 

5,003

 

Long-term assets

 

 

 

 

 

Property, plant and equipment

 

4,696

 

4,765

 

Accumulated depreciation

 

(2,834

)

(2,879

)

Property, plant and equipment, net

 

1,862

 

1,886

 

Investments and advances related to equity method investees

 

638

 

574

 

Goodwill

 

365

 

364

 

Other intangible assets, net

 

239

 

228

 

Deferred income taxes

 

413

 

436

 

Other assets

 

332

 

325

 

Total assets

 

$

8,769

 

$

8,816

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Current liabilities

 

 

 

 

 

Loans payable

 

$

95

 

$

37

 

Accounts payable (principally trade)

 

1,030

 

957

 

Current portion of accrued product warranty (Note 7)

 

387

 

426

 

Accrued compensation, benefits and retirement costs

 

308

 

366

 

Deferred revenue

 

144

 

128

 

Other accrued expenses

 

522

 

518

 

Total current liabilities

 

2,486

 

2,432

 

Long-term liabilities

 

 

 

 

 

Long-term debt

 

640

 

637

 

Pensions

 

406

 

514

 

Postretirement benefits other than pensions

 

466

 

453

 

Other liabilities and deferred revenue

 

719

 

760

 

Total liabilities

 

4,717

 

4,796

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

Cummins Inc. shareholders’ equity

 

 

 

 

 

Common stock, $2.50 par value, 500 shares authorized, 221.9 and 222.0 shares issued

 

1,862

 

1,860

 

Retained earnings

 

3,689

 

3,575

 

Treasury stock, at cost, 21.3 and 20.7 shares

 

(769

)

(731

)

Common stock held by employee benefits trust, at cost, 3.0 and 3.0 shares

 

(36

)

(36

)

Accumulated other comprehensive loss

 

 

 

 

 

Defined benefit postretirement plans

 

(794

)

(788

)

Other

 

(161

)

(107

)

Total accumulated other comprehensive loss

 

(955

)

(895

)

Total Cummins Inc. shareholders’ equity

 

3,791

 

3,773

 

Noncontrolling interests

 

261

 

247

 

Total equity

 

4,052

 

4,020

 

Total liabilities and equity

 

$

8,769

 

$

8,816

 

 

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

 

 

 

March 28,

 

March 29,

 

In millions

 

2010

 

2009

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Consolidated net income

 

$

170

 

$

14

 

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

 

 

 

 

 

Restructuring charges, net of cash payments

 

 

48

 

Depreciation and amortization

 

79

 

76

 

Gain on fair value adjustment for consolidated investee (Note 13)

 

(12

)

 

Deferred income tax provision (benefit)

 

13

 

(21

)

Equity in income of investees, net of dividends

 

(53

)

52

 

Pension expense, net of pension contributions

 

(93

)

15

 

Other post-retirement benefits expense, net of cash payments

 

(1

)

(8

)

Stock-based compensation expense

 

6

 

6

 

Translation and hedging activities

 

(9

)

19

 

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

 

 

 

 

 

Accounts and notes receivable

 

275

 

49

 

Inventories

 

(189

)

44

 

Other current assets

 

3

 

9

 

Accounts payable

 

54

 

(103

)

Accrued expenses

 

(154

)

(173

)

Changes in long-term liabilities

 

29

 

36

 

Other, net

 

8

 

13

 

Net cash provided by operating activities

 

126

 

76

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(47

)

(64

)

Investments in internal use software

 

(17

)

(11

)

Proceeds from disposals of property, plant and equipment

 

38

 

6

 

Investments in and advances (to) from equity investees

 

(11

)

5

 

Acquisition of businesses, net of cash acquired (Note 13)

 

(71

)

(2

)

Investments in marketable securities—acquisitions

 

(133

)

(69

)

Investments in marketable securities—liquidations

 

108

 

78

 

Cash flows from derivatives not designated as hedges

 

(11

)

(33

)

Net cash used in investing activities

 

(144

)

(90

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from borrowings

 

70

 

7

 

Payments on borrowings and capital lease obligations

 

(20

)

(19

)

Net borrowings under short-term credit agreements

 

5

 

4

 

Distributions to noncontrolling interests

 

(1

)

(9

)

Dividend payments on common stock

 

(35

)

(35

)

Repurchases of common stock

 

(39

)

 

Other, net

 

13

 

(1

)

Net cash used in financing activities

 

(7

)

(53

)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

 

(20

)

(6

)

Net decrease in cash and cash equivalents

 

(45

)

(73

)

Cash and cash equivalents at beginning of year

 

930

 

426

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

885

 

$

353

 

 

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)

 

 

 

 

 

 

 

 

 

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, 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) (Note 11)

 

 

 

 

 

 

 

14

 

 

 

 

 

 

 

14

 

(5

)

9

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(35

)

(35

)

Other shareholder transactions

 

 

 

(3

)

 

 

 

 

 

 

3

 

2

 

2

 

 

2

 

BALANCE AT MARCH 29, 2009

 

$

555

 

$

1,235

 

$

3,260

 

$

(1,052

)

$

(714

)

$

(58

)

$

(3

)

$

3,223

 

$

204

 

$

3,427

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2009

 

$

555

 

$

1,306

 

$

3,575

 

$

(895

)

$

(731

)

$

(36

)

$

(1

)

$

3,773

 

$

247

 

$

4,020

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

149

 

 

 

 

 

 

 

 

 

149

 

21

 

170

 

Other comprehensive income (loss) (Note 11)

 

 

 

 

 

 

 

(60

)

 

 

 

 

 

 

(60

)

4

 

(56

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

89

 

25

 

114

 

Issuance of shares

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

1

 

 

1

 

Employee benefits trust activity

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

6

 

 

6

 

Acquisition of shares

 

 

 

 

 

 

 

 

 

(39

)

 

 

 

 

(39

)

 

(39

)

Cash dividends on common stock

 

 

 

 

 

(35

)

 

 

 

 

 

 

 

 

(35

)

 

(35

)

Distribution to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

(1

)

Stock option exercises

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

1

 

 

1

 

Deconsolidation of variable interest entity (Note 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11

)

(11

)

Other shareholder transactions

 

 

 

(6

)

 

 

 

 

 

 

 

 

1

 

(5

)

1

 

(4

)

BALANCE AT MARCH 28, 2010

 

$

555

 

$

1,307

 

$

3,689

 

$

(955

)(1)

$

(769

)

$

(36

)

$

 

$

3,791

 

$

261

 

$

4,052

 

 


(1) Comprised of defined benefit postretirement plans of $(794) million, foreign currency translation adjustments of $(166) million, unrealized gain on marketable securities of $2 million and unrealized gain on derivatives of $3 million.

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 1NATURE OF OPERATIONS

 

Cummins Inc. (“Cummins,” “the Company,” “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, 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 quarters of 2010 and 2009 ended on March 28, and March 29, respectively.  The interim periods for both 2010 and 2009 contain 13 weeks, 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, restructuring costs, 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.

 

In preparing our Condensed Consolidated Financial Statements, we evaluated subsequent events through the date our quarterly report was filed with the Securities and Exchange Commission.

 

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 28, 2010, and March 29, 2009, were as follows:

 

 

 

Three months ended

 

 

 

March 28, 2010

 

March 29, 2009

 

Options excluded

 

18,638

 

58,050

 

 

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, 2009.  Our interim period financial results for the three month interim periods presented are not necessarily indicative of results to be expected

 

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for any other interim period or for the entire year.  The year-end 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 January 2010, the Financial Accounting Standards Board (FASB) amended its standards related to fair value measurements and disclosures, which are effective for interim and annual fiscal periods beginning after December 15, 2009, except for disclosures about certain Level 3 activity which will not become effective until interim and annual periods beginning after December 15, 2010.  The new standard requires us to disclose transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers as well as activity in Level 3 fair value measurements.  The new standard also requires a more detailed level of disaggregation of the assets and liabilities being measured as well as increased disclosures regarding inputs and valuation techniques of the fair value measurements.  Our disclosures related to the new standard are included in Note 9.

 

In June 2009, the FASB amended its standards for accounting for transfers of financial assets, which was effective for interim and annual fiscal periods beginning after November 15, 2009.  The new standard removes the concept of a qualifying special-purpose entity from GAAP.  The new standard modifies the financial components approach used in previous standards and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized.  The new standard also requires enhanced disclosure regarding transfers of financial interests and a transferor’s continuing involvement with transferred assets.  The new standard requires us to report any activity under our receivable sales program as secured borrowings.  As of March 28, 2010, there were no outstanding amounts under our receivable sales program and there was no significant activity during the quarter.

 

In June 2009, the FASB amended its existing standards related to the consolidation of variable interest entities, which was effective for interim and annual fiscal periods beginning after November 15, 2009.  The new standard requires entities to analyze whether their variable interests give it a controlling financial interest of a variable interest entity (VIE) and outlines what defines a primary beneficiary.  The new standard amends GAAP by: (a) changing certain rules for determining whether an entity is a VIE; (b) replacing the quantitative approach previously required for determining the primary beneficiary with a more qualitative approach; and (c) requiring entities to continuously analyze whether they are the primary beneficiary of a VIE among other amendments.  The new standard also requires enhanced disclosures regarding an entity’s involvement in a VIE.  The only significant impact of the adoption of this standard was to deconsolidate Cummins Komatsu Engine Corporation (CKEC) as of January 1, 2010 and to account for CKEC under GAAP accounting for equity method investees.  The impact of the deconsolidation on our Condensed Consolidated Statements of Income was minimal as all sales were eliminated in consolidation in the past.  The most significant impacts on our Condensed Consolidated Balance Sheets was to decrease current assets by $9 million, decrease long-term assets by $10 million, increase investments and advances related to equity method investees by $11 million and decrease noncontrolling interest by $11 million.

 

Accounting Pronouncements Issued But Not Yet Effective

 

In October 2009, the FASB amended its rules regarding the accounting for multiple element revenue arrangements.  The objective of the amendment is to allow vendors to account for revenue for different deliverables separately as opposed to part of a combined unit when those deliverables are provided at different times.  Specifically, this amendment addresses how to separate deliverables and simplifies the process of allocating revenue to the different deliverables when more than one deliverable exists.  The new rules are effective for us beginning January 1, 2011.  We are in the process of evaluating the impact that this amendment will have on our Consolidated Financial Statements.

 

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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

 

 

 

March 28,

 

March 29,

 

In millions

 

2010

 

2009

 

Distribution Entities

 

 

 

 

 

North American distributors

 

$

23

 

$

26

 

Komatsu Cummins Chile, Ltda.

 

3

 

2

 

All other distributors

 

1

 

1

 

 

 

 

 

 

 

Manufacturing Entities

 

 

 

 

 

Dongfeng Cummins Engine Company, Ltd.

 

18

 

 

Chongqing Cummins Engine Company, Ltd.

 

10

 

8

 

Tata Cummins Ltd.

 

4

 

(2

)

All other manufacturers

 

10

 

(5

)

Cummins share of net income

 

69

 

30

 

Royalty and interest income

 

7

 

3

 

Equity, royalty and interest income from investees

 

$

76

 

$

33

 

 

NOTE 5.  PENSION AND OTHER POSTRETIREMENT BENEFITS

 

We sponsor funded and unfunded domestic and foreign defined benefit pension and other postretirement plans.  Cash contributions to these plans were as follows:

 

 

 

Three months ended

 

 

 

March 28,

 

March 29,

 

In millions

 

2010

 

2009

 

Defined benefit pension and other postretirement plans:

 

 

 

 

 

Voluntary pension

 

$

60

 

$

 

Mandatory pension

 

51

 

7

 

Defined benefit pension contributions

 

111

 

7

 

Other postretirement plans

 

6

 

14

 

Total defined benefit plans

 

$

117

 

$

21

 

Defined contribution pension plans

 

$

11

 

$

16

 

 

We presently anticipate contributing approximately $170 million to our defined benefit pension plans in 2010 and paying approximately $53 million in claims and premiums for other postretirement benefits.  The $170 million of contributions for the full year include voluntary contributions of approximately $107 million.  These contributions and payments include payments from our funds either to increase pension assets or to make direct payments to plan participants.

 

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

 

 

 

Pension

 

Other

 

 

 

U.S. Plans

 

Non-U.S. Plans

 

Postretirement Benefits

 

 

 

Three months ended

 

 

 

March 28,

 

March 29,

 

March 28,

 

March 29,

 

March 28,

 

March 29,

 

In millions

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

Service cost

 

$

11

 

$

11

 

$

5

 

$

4

 

$

 

$

 

Interest cost

 

28

 

29

 

15

 

13

 

7

 

7

 

Expected return on plan assets

 

(37

)

(35

)

(18

)

(14

)

 

 

Amortization of prior service cost (credit)

 

 

 

1

 

1

 

(2

)

(2

)

Recognized net actuarial loss

 

9

 

8

 

4

 

5

 

 

 

Net periodic benefit cost

 

$

11

 

$

13

 

$

7

 

$

9

 

$

5

 

$

5

 

 

NOTE 6.  INVENTORIES

 

Inventories included the following:

 

 

 

March 28,

 

December 31,

 

In millions

 

2010

 

2009

 

Finished products

 

$

857

 

$

785

 

Work-in-process and raw materials

 

771

 

638

 

Inventories at FIFO cost

 

1,628

 

1,423

 

Excess of FIFO over LIFO

 

(79

)

(82

)

Total inventories

 

$

1,549

 

$

1,341

 

 

NOTE 7.  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 28,

 

March 29,

 

In millions

 

2010

 

2009

 

Balance, beginning of period

 

$

989

 

$

962

 

Provision for warranties issued

 

62

 

77

 

Deferred revenue on extended warranty contracts sold

 

25

 

26

 

Payments

 

(115

)

(117

)

Amortization of deferred revenue on extended warranty contracts

 

(21

)

(18

)

Changes in estimates for pre-existing warranties

 

(20

)

29

 

Foreign currency translation

 

(5

)

 

Balance, end of period

 

$

915

 

$

959

 

 

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Warranty related deferred revenue, supplier recovery receivables and the long-term portion of the warranty liability on our March 28, 2010 balance sheet were as follows:

 

 

In millions

 

March 28, 2010

 

Balance Sheet Location

 

Deferred revenue related to extended coverage programs:

 

 

 

 

 

Current portion

 

$

82

 

Deferred revenue

 

Long-term portion

 

182

 

Other liabilities and deferred revenue

 

Total

 

$

264

 

 

 

 

 

 

 

 

 

Receivables related to estimated supplier recoveries:

 

 

 

 

 

Current portion

 

$

5

 

Trade and other receivables

 

Long-term portion

 

3

 

Other assets

 

Total

 

$

8

 

 

 

 

 

 

 

 

 

Long-term portion of warranty liability

 

$

264

 

Other liabilities and deferred revenue

 

 

NOTE 8.  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.

 

In June 2008, four of our sites in Southern Indiana, including our Technical Center, experienced extensive flood damage.  We have submitted a claim for $237 million to our insurance carriers, which includes a claim for business interruption.  As of March 28, 2010, we have received $91 million in recoveries from the insurance carriers.  Our insurance carriers have disputed certain aspects of our claim and the parties have filed suit against each other.  Although we believe that we are insured against the full amount of our claim, there is no assurance that we will be successful recovering the amounts we believe are due under the policies.

 

U.S. Distributor Commitments

 

Our distribution agreements with independent and partially-owned distributors generally have a 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.  The 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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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 28, 2010, 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.  As of March 28, 2010, the maximum potential loss related to these other guarantees is $108 million ($74 million of which relates to the Beijing Foton guarantee discussed below and $32 million relates to the Cummins Olayan Energy Limited guarantee discussed below).

 

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 28, 2010, if we were to stop purchasing from each of these suppliers, the amount of the penalty would be approximately $69 million, of which $62 million relates to a contract with an engine parts supplier that extends to 2013.  This arrangement enables us to secure critical components.  We do not currently 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 28, 2010, outstanding borrowings under this agreement were $148 million and our guarantee was $74 million (at current exchange rates).  We recorded a liability for the fair value of this guarantee.  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.

 

In February 2010, Cummins Olayan Energy Limited, a 49 percent owned entity accounted for under the equity method, executed a four-year $66 million (at current exchange rates) debt financing arrangement to acquire certain rental equipment assets.  As a part of this transaction, we guaranteed 49 percent of the total outstanding loan amount or $32 million (at current exchange rates).  We recorded a liability for the fair value of this guarantee.  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 guarantees with certain customers that require us to satisfactorily honor contractual or regulatory obligations, or compensate for monetary losses related to nonperformance.  Performance bonds and other performance-related guarantees at March 28, 2010, were $72 million.

 

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:

 

· 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.

 

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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.

 

Joint Venture Commitments

 

As of March 28, 2010, we have committed to invest an additional $4 million into existing joint ventures.  It is expected that $4 million will be funded in 2010.

 

NOTE 9.  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.  Derivative assets and liabilities are derived from 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.  When material, we adjust the values of our derivative contracts for counter-party or our credit risk.  There were no transfers into or out of Levels 2 or 3 in the first quarter of 2010.

 

The following table summarizes our financial instruments recorded at fair value in our Condensed Consolidated Balance Sheets at March 28, 2010:

 

 

 

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 debt securities:

 

 

 

 

 

 

 

 

 

Debt mutual funds

 

$

 125

 

$

13

 

$

 —

 

$

 138

 

Bank debentures

 

 

34

 

 

34

 

Certificates of deposit

 

 

33

 

 

33

 

Government debt securities-non-U.S.

 

 

3

 

 

3

 

Corporate debt securities

 

 

2

 

 

2

 

Total available-for-sale debt securities

 

125

 

85

 

 

210

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale equity securities:

 

 

 

 

 

 

 

 

 

Financial services industry

 

7

 

 

 

7

 

Total available-for-sale equity securities

 

7

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

Derivative assets:

 

 

 

 

 

 

 

 

 

Commodity swap contracts

 

 

17

 

 

17

 

Interest rate contracts

 

 

25

 

 

25

 

Total derivative assets

 

 

42

 

 

42

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

 

(8

)

 

(8

)

Total derivative liabilities

 

 

(8

)

 

(8

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

132

 

$

119

 

$

 

$

251

 

 

The substantial majority of our assets were valued utilizing a market approach.  A description of the valuation techniques and inputs used for our level 2 fair value measures are as follows:

 

Debt mutual funds — Assets in level 2 consist of exchange traded mutual funds that lack sufficient trading volume to be classified at level 1.  The fair value measure for these investments is the daily net asset value published on a regulated governmental website.  Daily quoted prices are available from the issuing brokerage and are used on a test basis to corroborate this level 2 input.

 

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Bank debentures and Certificates of deposit — These investments provide us with a fixed rate of return and generally range in maturity from six months to one year.  The counterparties to these investments are reputable financial institutions with investment grade credit ratings.  Since these instruments are not tradable and must be settled directly by Cummins with the respective financial institution, our fair value measure is the financial institutions’ month-end statement.

 

Government debt securities-non-U.S. and Corporate debt securities — The fair value measure for these securities are broker quotes received from reputable firms.  These securities are infrequently traded on a national stock exchange and these values are used on a test basis to corroborate our level 2 input measure.

 

Foreign currency forward contracts — The fair value measure for these contracts are determined based on forward foreign exchange rates received from third-party pricing services.  These rates are based upon market transactions and are periodically corroborated by comparing to third-party broker quotes.

 

Commodity swap contracts — The fair value measure for these contracts are current spot market data adjusted for the appropriate current forward curves provided by external financial institutions.  The current spot price is the most significant component of this valuation and is based upon market transactions.  We use third-party pricing services for the spot price component of this valuation which is periodically corroborated by market data from broker quotes.

 

Interest rate contracts — We currently have only one interest rate contract.  We utilize the month-end statement from the issuing financial institution as our fair value measure for this investment.  We corroborate this valuation through the use of a third party pricing service for similar assets and liabilities.

 

Fair Value of Other Financial Instruments

 

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, at March 28, 2010 and December 31, 2009, was as follows:

 

 

 

March 28,

 

December 31,

 

In millions

 

2010

 

2009

 

Fair value of total debt

 

$

785

 

$

674

 

Carrying value of total debt

 

758

 

703

 

 

The carrying values of all other receivables and liabilities approximated fair values.

 

NOTE 10.  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 swap 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 Exchange Rates

 

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 flows for up to one year.  These foreign currency forward contracts are designated and qualify as foreign currency cash flow hedges under GAAP.  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

 

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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 28, 2010, we expect to reclassify an unrealized net loss of $6 million from AOCL to income over the next year.  For the three month periods ended March 28, 2010 and March 29, 2009, there were no circumstances that would have resulted in the discontinuance of a foreign currency 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 GAAP.

 

The table below summarizes our outstanding foreign currency forward contracts.  The currencies in this table represent 96 percent and 95 percent of the notional amounts of contracts outstanding as of March 28, 2010 and December 31, 2009, respectively.

 

 

 

Notional amount in millions

 

Currency denomination

 

March 28, 2010

 

December 31, 2009

 

United States Dollar (USD)

 

83

 

107

 

British Pound Sterling (GBP)

 

88

 

70

 

Euro (EUR)

 

25

 

12

 

Singapore Dollar (SGD)

 

10

 

15

 

Indian Rupee (INR)

 

1,934

 

616

 

Japanese Yen (JPY)

 

1,656

 

1,335

 

Romanian Leu (RON)

 

 

44

 

Canadian Dollar (CAD)

 

24

 

 

Chinese Renmimbi (CNY)

 

79

 

39

 

 

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 swap 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 swap contracts are derivative contracts that are designated as cash flow hedges under GAAP.  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 28, 2010, we expect to reclassify an unrealized net gain of $7 million from AOCL to income over the next year.  For the period ended March 28, 2010, there were no material circumstances that would have resulted in the discontinuance of a cash flow hedge.  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 a less than one million dollars for the three months ended March 29, 2009.  Our internal policy allows for managing these cash flow hedges for up to three years.

 

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Table of Contents

 

The following table summarizes our outstanding commodity swap contracts that were entered into to hedge the cost of certain raw material purchases:

 

 

 

Three months ended

 

Dollars in millions

 

March 28, 2010

 

March 29, 2009

 

Commodity

 

Notional Amount

 

Quantity

 

Notional Amount

 

Quantity

 

Copper

 

$

61

 

9,179 metric tons

(1)

$

147

 

21,522 metric tons

(1)

Platinum

 

12

 

12,952 troy ounces

(2)

28

 

29,055 troy ounces

(2)

Palladium

 

1

 

2,619 troy ounces

(2)

1

 

5,399 troy ounces

(2)

 


(1) A metric ton is a measurement of mass equal to 1,000 kilograms.

 

(2) A troy ounce is a measurement of mass equal to approximately 31 grams.

 

 

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.

 

In November 2005, we entered into an interest rate swap to effectively convert our $250 million debt issue, due in 2028, 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 GAAP.  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.”  The following table summarizes these gains and losses for the three month interim reporting periods presented below:

 

 

 

Three months ended

 

 

 

March 28, 2010

 

March 29, 2009

 

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

 

 

Cash Flow Hedging

 

The following table 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)
Recognized in AOCL on
Derivative (Effective
Portion)

 

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

 

Location of Gain/(Loss)

 

Derivatives in Cash Flow Hedging
Relationships

 

March 28,
2010

 

March 29,
2009

 

March 28,
2010

 

March 29,
2009

 

Reclassified into Income
(Effective Portion)

 

Foreign currency forward contracts

 

$

(8

)

$

 

$

(1

)

$

(11

)

Net sales

 

Commodity swap contracts

 

2

 

(32

)

2

 

(8

)

Cost of sales

 

Total

 

$

(6

)

$

(32

)

$

1

 

$

(19

)

 

 

 

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Table of Contents

 

Derivatives Not Designated as Hedging Instruments

 

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.

 

 

 

 

 

Amount of Gain/(Loss) Recognized in

 

In millions

 

 

 

Income on Derivatives

 

Derivatives Not Designated as Hedging

 

Location of Gain/(Loss) Recognized

 

Three months ended

 

Instruments

 

in Income on Derivatives

 

March 28, 2010

 

March 29, 2009

 

Foreign currency forward contracts

 

Cost of sales

 

$

4

 

$

 

Foreign currency forward contracts

 

Other income (expense), net

 

(12

)

(1

)

 

Fair Value Amount and Location of Derivative Instruments

 

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

 

 

 

Derivative assets

 

 

 

Fair Value

 

 

 

 

 

March 28,

 

December 31,

 

 

 

In millions

 

2010

 

2009

 

Balance Sheet Location

 

Derivatives Designated as Hedging Instruments

 

 

 

 

 

 

 

Commodity swap contracts

 

$

11

 

$

9

 

Prepaid expenses and other current assets

 

Commodity swap contracts

 

6

 

8

 

Other assets

 

Interest rate contract

 

25

 

25

 

Other assets

 

Total Derivatives Designated as Hedging Instruments

 

42

 

42

 

 

 

 

 

 

 

 

 

 

 

Total derivative assets

 

$

42

 

$

42

 

 

 

 

 

 

Derivative liabilities

 

 

 

Fair Value

 

 

 

 

 

March 28,

 

December 31,

 

 

 

In millions

 

2010

 

2009

 

Balance Sheet Location

 

Derivatives Designated as Hedging Instruments

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

(7

)

$

1

 

Other accrued expenses

 

Total Derivatives Designated as Hedging Instruments

 

(7

)

1

 

 

 

 

 

 

 

 

 

 

 

Derivatives Not Designated as Hedging Instruments

 

 

 

 

 

 

 

Foreign currency forward contracts

 

(1

)

 

Other accrued expenses

 

Total Derivatives Not Designated as Hedging Instruments

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

Total derivative liabilities

 

$

(8

)

$

1

 

 

 

 

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NOTE 11.  COMPREHENSIVE INCOME

 

The table below represents a reconciliation of our net income to comprehensive income for the three month periods ended March 28, 2010 and March 29, 2009.

 

 

 

Three months ended

 

 

 

March 28, 2010

 

March 29, 2009

 

 

 

Attributable to

 

Attributable to
Noncontrolling

 

Total

 

Attributable to

 

Attributable to
Noncontrolling

 

Total

 

In millions

 

Cummins Inc.

 

Interests

 

Consolidated

 

Cummins Inc.

 

Interests

 

Consolidated

 

Net income

 

$

149

 

$

21

 

$

170

 

$

7

 

$

7

 

$

14

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on derivatives

 

(5

)

 

(5

)

29

 

 

29

 

Foreign currency translation adjustments

 

(49

)

4

 

(45

)

(12

)

(5

)

(17

)

Change in pensions and other postretirement defined benefit plans

 

(6

)

 

(6

)

(3

)

 

(3

)

Total other comprehensive income (loss)

 

(60

)

4

 

(56

)

14

 

(5

)

9

 

Total comprehensive income

 

$

89

 

$

25

 

$

114

 

$

21

 

$

2

 

$

23

 

 

NOTE 12.  RESTRUCTURING AND OTHER CHARGES

 

In 2009, we executed restructuring actions in response to a reduction in orders in most of our U.S. and foreign markets due to the deterioration in the global economy.  We reduced our global workforce by approximately 1,000 professional employees.  In addition, we took numerous employee actions at many of our manufacturing locations, including approximately 3,200 hourly employees, significant downsizing at numerous facilities and complete closure of several facilities and 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.

 

At March 28, 2010, of the approximately 4,200 employees affected by this plan, all terminations were substantially complete.

 

During the first quarter of 2009 we recorded a total pre-tax restructuring charge of $66 million in “Restructuring and other charges” in the Condensed Consolidated Statements of Income related to the 2009 actions.

 

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

 

 

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 our Condensed Consolidated Balance Sheets.

 

In millions

 

Severance Costs

 

Exit Activities

 

Total

 

Balance at December 31, 2009

 

$

10

 

$

1

 

$

11

 

Cash payments for 2009 actions

 

(3

)

 

(3

)

Balance at March 28, 2010

 

$

7

 

$

1

 

$

8

 

 

NOTE 13.  ACQUISITIONS

 

On January 4, 2010, we acquired the remaining 70 percent interest in Cummins Western Canada (CWC) from our former principal for consideration of approximately $71 million.  We formed a new partnership with a new distributor principal where we own 80 percent of CWC and the new distributor principal owns 20 percent.  The acquisition was effective on January 1, 2010.  The $71 million of consideration consisted of:

 

In millions

 

 

 

Borrowings under credit revolver

 

$

44

 

Capital contributed by Cummins Inc.

 

10

 

Capital contributed by new principal, as described below

 

8

 

Funded from first quarter operations

 

9

 

Total consideration

 

$

71

 

 

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The purchase price was approximately $97 million as presented below.  The intangible assets are primarily customer related and are being amortized over periods ranging from one to three years.  The acquisition of CWC was accounted for as a business combination, with the results of the acquired entity and the goodwill included in the Distribution operating segment as of the acquisition date.  Distribution segment results also include a $12 million gain for the three months ended March 28, 2010, as we were required to re-measure our pre-existing 30 percent ownership interest in CWC to fair value in accordance with GAAP.  Net sales for CWC were $206 million for the twelve months ended December 31, 2009, which represents less than 2 percent of Cummins Inc. consolidated sales for same period.

 

The purchase price was allocated as follows:

 

In millions

 

 

 

Accounts receivable

 

$

31

 

Inventory

 

48

 

Fixed assets

 

45

 

Intangible assets

 

11

 

Goodwill

 

2

 

Other assets

 

2

 

Current liabilities

 

(42

)

Total purchase price

 

$

97

 

Fair value of pre-existing 30 percent interest

 

(26

)

Consideration given

 

$

71

 

 

We provided a loan to our partner of approximately $8 million to fund the purchase of his 20 percent interest.  The purchase transaction resulted in $8 million of noncontrolling interest (representing our partner’s 20 percent interest) which was completely offset by the $8 million receivable from our partner, reducing the noncontrolling interest impact to zero as of the acquisition date.  The interest-bearing loan is expected to be repaid over a period of 3-5 years.  The partner also has periodic options to purchase an additional 10 to 15 percent interest in CWC up to a maximum of an additional 30 percent (total ownership not to exceed 50 percent).

 

At March 29, 2009, we had one minor acquisition with consideration of approximately $2 million.

 

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NOTE 14.  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 periods is shown below:

 

In millions 

 

Engine

 

Power
Generation

 

Components

 

Distribution(1)

 

Non-segment items(2)

 

Total

 

Three months ended March 28, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

External sales

 

$

 1,173

 

$

 378

 

$

 453

 

$

 474

 

$

 —

 

$

 2,478

 

Intersegment sales

 

250

 

139

 

177

 

2

 

(568

)

 

Total sales

 

1,423

 

517

 

630

 

476

 

(568

)

2,478

 

Depreciation and amortization(3)

 

41

 

10

 

20

 

7

 

 

78

 

Research, development and engineering expenses

 

60

 

7

 

25

 

 

 

92

 

Equity, royalty and interest income from investees

 

35

 

6

 

5

 

30

 

 

76

 

Interest income

 

2

 

1

 

 

 

 

3

 

Segment EBIT

 

133

 

34

 

57

 

72

 

(30

)

266

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 29, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

External sales

 

$

 1,205

 

$

 477

 

$

 346

 

$

 411

 

$

 —

 

$

2,439

 

Intersegment sales

 

287

 

180

 

184

 

2

 

(653

)

 

Total sales

 

1,492

 

657

 

530

 

413

 

(653

)

2,439

 

Depreciation and amortization(3)

 

41

 

11

 

18

 

5

 

 

75

 

Research, development and engineering expenses

 

58

 

8

 

19

 

 

 

85

 

Equity, royalty and interest income (loss) from investees

 

(3

)

5

 

1

 

30

 

 

33

 

Restructuring charges

 

 

 

 

 

66

 

66

 

Interest income

 

1

 

1

 

 

 

 

2

 

Segment EBIT

 

(16

)

69

 

1

 

58

 

(84

)

28

 

 


(1)     Total assets for our Distribution segment materially increased due to the acquisition of Cummins Western Canada.  See Note 13 for further information.

(2)     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 28, 2010.  For the three months ended March 29, 2009, unallocated corporate expenses included $66 million of restructuring charges and a $6 million gain related to flood damage recoveries.

(3)     Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount that is included in the Condensed Consolidated Statements of Income as “interest expense.”

 

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

 

 

 

March 28,

 

March 29,

 

In millions

 

2010

 

2009

 

Segment EBIT

 

$

266

 

$

28

 

Less:

 

 

 

 

 

Interest expense

 

9

 

7

 

Income before income taxes

 

$

257

 

$

21

 

 

20



Table of Contents

 

NOTE 15.  SUBSEQUENT EVENT

 

In April 2010, we terminated our existing facility and entered into a new 364-day agreement (subject to renewal) with a financial institution to sell a designated pool of trade receivables to Cummins Trade Receivables, LLC (CTR), a wholly-owned subsidiary.  The purchase limitation of the agreement is $250 million.  As necessary, CTR may transfer a direct interest in its receivables, without recourse, to a commercial paper conduit.  To maintain a balance in the designated pools of receivables sold, we sell new receivables to CTR as existing receivables are collected.  Receivables sold to CTR in which an interest is not transferred to the conduit are included in “Receivables, net” on our Consolidated Balance Sheets.  The maximum interest in sold receivables that can be outstanding at any point in time is limited to the lesser of $250 million or the amount of eligible receivables held by CTR.  There are no provisions in this agreement that require us to maintain a minimum investment credit rating; however, the terms of the agreement contain the same financial covenants as our revolving credit facility.  As of April 26, 2010, (the day of closing) the amount available under this program was $72 million.

 

CTR is a separate legal entity from Cummins and its assets and credit are not available to satisfy the debts and obligations of Cummins.  CTR’s assets are listed separately on its balance sheet on a stand-alone basis.  CTR’s assets will be available first and foremost to satisfy claims of its creditors.

 

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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,” “the Company,” “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 su