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 September 30, 2012

 

Commission File Number 1-4949

 

GRAPHIC

 


 

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 September 30, 2012, there were 190,065,999 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 and nine months ended September 30, 2012, and September 25, 2011

 

3

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012, and September 25, 2011

 

4

 

 

 

 

 

Condensed Consolidated Balance Sheets at September 30, 2012, and December 31, 2011

 

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012, and September 25, 2011

 

6

 

 

 

 

 

Condensed Consolidated Statements of Changes in Equity for the nine months ended September 30, 2012, and September 25, 2011

 

7

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

ITEM 2.

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

 

24

 

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

 

50

 

 

 

 

ITEM 4.

Controls and Procedures

 

50

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

ITEM 1.

Legal Proceedings

 

50

 

 

 

 

ITEM 1A.

Risk Factors

 

51

 

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

51

 

 

 

 

ITEM 3.

Defaults Upon Senior Securities

 

51

 

 

 

 

ITEM 4.

Mine Safety Disclosures

 

51

 

 

 

 

ITEM 5.

Other Information

 

51

 

 

 

 

ITEM 6.

Exhibits

 

51

 

 

 

 

 

Signatures

 

52

 

 

 

 

 

Cummins Inc. Exhibit Index

 

53

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  Condensed Consolidated Financial Statements

 

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three months ended

 

Nine months ended

 

In millions, except per share amounts

 

September 30,
2012

 

September 25,
2011

 

September 30,
2012

 

September 25,
2011

 

NET SALES (a)

 

$

4,118

 

$

4,626

 

$

13,042

 

$

13,127

 

Cost of sales

 

3,076

 

3,438

 

9,592

 

9,779

 

GROSS MARGIN

 

1,042

 

1,188

 

3,450

 

3,348

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES AND INCOME

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

456

 

489

 

1,418

 

1,341

 

Research, development and engineering expenses

 

186

 

164

 

554

 

450

 

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

 

94

 

102

 

302

 

315

 

Gain on sale of businesses (Note 3)

 

 

 

6

 

68

 

Other operating income (expense), net

 

(1

)

2

 

3

 

(4

)

OPERATING INCOME

 

493

 

639

 

1,789

 

1,936

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

5

 

9

 

20

 

25

 

Interest expense

 

9

 

11

 

25

 

34

 

Other income (expense), net

 

(2

)

(8

)

14

 

(14

)

INCOME BEFORE INCOME TAXES

 

487

 

629

 

1,798

 

1,913

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (Note 7)

 

117

 

157

 

458

 

539

 

CONSOLIDATED NET INCOME

 

370

 

472

 

1,340

 

1,374

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interests

 

18

 

20

 

64

 

74

 

NET INCOME ATTRIBUTABLE TO CUMMINS INC.

 

$

352

 

$

452

 

$

1,276

 

$

1,300

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.

 

 

 

 

 

 

 

 

 

Basic

 

$

1.87

 

$

2.35

 

$

6.73

 

$

6.71

 

Diluted

 

$

1.86

 

$

2.35

 

$

6.72

 

$

6.69

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

 

 

 

 

 

 

 

 

Basic

 

188.6

 

192.1

 

189.6

 

193.8

 

Dilutive effect of stock compensation awards

 

0.4

 

0.6

 

0.4

 

0.6

 

Diluted

 

189.0

 

192.7

 

190.0

 

194.4

 

 

 

 

 

 

 

 

 

 

 

CASH DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.50

 

$

0.40

 

$

1.30

 

$

0.925

 

 


(a)          Includes sales to nonconsolidated equity investees of $579 million and $1,870 million and $640 million and $1,874 million for the three and nine months ended September 30, 2012 and September 25, 2011, respectively.

 

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

 

3



Table of Contents

 

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 25,

 

September 30,

 

September 25,

 

In millions

 

2012

 

2011

 

2012

 

2011

 

CONSOLIDATED NET INCOME

 

$

370

 

$

472

 

$

1,340

 

$

1,374

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

131

 

(177

)

78

 

(123

)

Unrealized gain (loss) on derivatives (Note 13)

 

13

 

(19

)

24

 

(31

)

Change in pension and other postretirement defined benefit plans

 

9

 

7

 

30

 

40

 

Unrealized gain (loss) on marketable securities (Note 6)

 

2

 

1

 

1

 

1

 

Total other comprehensive income (loss), net of tax

 

155

 

(188

)

133

 

(113

)

COMPREHENSIVE INCOME

 

525

 

284

 

1,473

 

1,261

 

Less: Comprehensive income (loss) attributable to noncontrolling interest

 

35

 

(2

)

67

 

52

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.

 

$

490

 

$

286

 

$

1,406

 

$

1,209

 

 

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

 

4



Table of Contents

 

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

September 30,

 

December 31,

 

In millions, except par value

 

2012

 

2011

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

1,033

 

$

1,484

 

Marketable securities (Note 6)

 

239

 

277

 

Total cash, cash equivalents and marketable securities

 

1,272

 

1,761

 

Accounts and notes receivable, net

 

 

 

 

 

Trade and other

 

2,266

 

2,252

 

Nonconsolidated equity investees

 

237

 

274

 

Inventories (Note 9)

 

2,570

 

2,141

 

Prepaid expenses and other current assets

 

770

 

663

 

Total current assets

 

7,115

 

7,091

 

Long-term assets

 

 

 

 

 

Property, plant and equipment

 

5,691

 

5,245

 

Accumulated depreciation

 

(3,134

)

(2,957

)

Property, plant and equipment, net

 

2,557

 

2,288

 

Investments and advances related to equity method investees

 

962

 

838

 

Goodwill (Note 10)

 

443

 

339

 

Other intangible assets, net (Note 10)

 

365

 

227

 

Other assets

 

972

 

885

 

Total assets

 

$

12,414

 

$

11,668

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Current liabilities

 

 

 

 

 

Loans payable

 

$

54

 

$

28

 

Accounts payable (principally trade)

 

1,460

 

1,546

 

Current maturities of long-term debt (Note 12)

 

77

 

97

 

Current portion of accrued product warranty (Note 11)

 

406

 

422

 

Accrued compensation, benefits and retirement costs

 

388

 

511

 

Deferred revenue

 

208

 

208

 

Taxes payable (including taxes on income)

 

172

 

282

 

Other accrued expenses

 

544

 

563

 

Total current liabilities

 

3,309

 

3,657

 

Long-term liabilities

 

 

 

 

 

Long-term debt (Note 12)

 

670

 

658

 

Postretirement benefits other than pensions

 

417

 

432

 

Other liabilities and deferred revenue

 

1,184

 

1,090

 

Total liabilities

 

5,580

 

5,837

 

 

 

 

 

 

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

Cummins Inc. shareholders’ equity

 

 

 

 

 

Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.2 shares issued

 

2,046

 

2,001

 

Retained earnings

 

7,068

 

6,038

 

Treasury stock, at cost, 32.3 and 30.2 shares

 

(1,809

)

(1,587

)

Common stock held by employee benefits trust, at cost, 1.6 and 1.8 shares

 

(19

)

(22

)

Accumulated other comprehensive loss

 

 

 

 

 

Defined benefit postretirement plans

 

(694

)

(724

)

Other

 

(114

)

(214

)

Total accumulated other comprehensive loss

 

(808

)

(938

)

Total Cummins Inc. shareholders’ equity

 

6,478

 

5,492

 

Noncontrolling interests

 

356

 

339

 

Total equity

 

6,834

 

5,831

 

Total liabilities and equity

 

$

12,414

 

$

11,668

 

 

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

 

5



Table of Contents

 

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine months ended

 

 

 

September 30,

 

September 25,

 

In millions

 

2012

 

2011

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Consolidated net income

 

$

1,340

 

$

1,374

 

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

 

 

 

 

 

Depreciation and amortization

 

262

 

243

 

Gain on sale of businesses (Note 3)

 

(6

)

(68

)

Gain on fair value adjustment for consolidated investee (Note 3)

 

(7

)

 

Deferred income taxes

 

91

 

148

 

Equity in income of investees, net of dividends

 

(51

)

7

 

Pension contributions in excess of expense (Note 4)

 

(74

)

(71

)

Other post-retirement benefits payments in excess of expense (Note 4)

 

(16

)

(10

)

Stock-based compensation expense

 

29

 

28

 

Excess tax benefits on stock-based awards

 

(12

)

(4

)

Translation and hedging activities

 

16

 

(14

)

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

 

 

 

 

 

Accounts and notes receivable

 

66

 

(469

)

Inventories

 

(367

)

(367

)

Other current assets

 

(54

)

(5

)

Accounts payable

 

(145

)

317

 

Accrued expenses

 

(398

)

173

 

Changes in other liabilities and deferred revenue

 

154

 

93

 

Other, net

 

(41

)

(7

)

Net cash provided by operating activities

 

787

 

1,368

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(424

)

(377

)

Investments in internal use software

 

(62

)

(31

)

Investments in and advances to equity investees

 

(92

)

(104

)

Proceeds from sale of business, net of cash sold (Note 3)

 

10

 

111

 

Acquisition of businesses, net of cash acquired (Note 3)

 

(215

)

 

Investments in marketable securities—acquisitions (Note 6)

 

(433

)

(538

)

Investments in marketable securities—liquidations (Note 6)

 

475

 

572

 

Cash flows from derivatives not designated as hedges

 

13

 

4

 

Other, net

 

9

 

7

 

Net cash used in investing activities

 

(719

)

(356

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from borrowings

 

64

 

96

 

Payments on borrowings and capital lease obligations

 

(120

)

(174

)

Net borrowings under short-term credit agreements

 

5

 

(5

)

Distributions to noncontrolling interests

 

(50

)

(50

)

Dividend payments on common stock

 

(246

)

(178

)

Repurchases of common stock

 

(231

)

(546

)

Excess tax benefits on stock-based awards

 

12

 

4

 

Other, net

 

16

 

13

 

Net cash used in financing activities

 

(550

)

(840

)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

 

31

 

(30

)

Net increase (decrease) in cash and cash equivalents

 

(451

)

142

 

Cash and cash equivalents at beginning of year

 

1,484

 

1,023

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

1,033

 

$

1,165

 

 

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

 

6



Table of Contents

 

CUMMINS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Common

 

Total

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

Stock

 

Cummins Inc.

 

 

 

 

 

 

 

Common

 

paid-in

 

Retained

 

Comprehensive

 

Treasury

 

Held in

 

Shareholders’

 

Noncontrolling

 

Total

 

In millions

 

Stock

 

Capital

 

Earnings

 

Loss

 

Stock

 

Trust

 

Equity

 

Interests

 

Equity

 

BALANCE AT DECEMBER 31, 2010

 

$

554

 

$

1,380

 

$

4,445

 

$

(720

)

$

(964

)

$

(25

)

$

4,670

 

$

326

 

$

4,996

 

Net income

 

 

 

 

 

1,300

 

 

 

 

 

 

 

1,300

 

74

 

1,374

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

(91

)

 

 

 

 

(91

)

(22

)

(113

)

Issuance of shares

 

1

 

12

 

 

 

 

 

 

 

 

 

13

 

 

13

 

Employee benefits trust activity

 

 

 

21

 

 

 

 

 

 

 

3

 

24

 

 

24

 

Acquisition of shares

 

 

 

 

 

 

 

 

 

(546

)

 

 

(546

)

 

(546

)

Cash dividends on common stock

 

 

 

 

 

(178

)

 

 

 

 

 

 

(178

)

 

(178

)

Distribution to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(52

)

(52

)

Stock option exercises

 

 

 

 

 

 

 

 

 

5

 

 

 

5

 

 

5

 

Other shareholder transactions

 

 

 

14

 

 

 

 

 

 

 

 

 

14

 

7

 

21

 

BALANCE AT SEPTEMBER 25, 2011

 

$

555

 

$

1,427

 

$

5,567

 

$

(811

)

$

(1,505

)

$

(22

)

$

5,211

 

$

333

 

$

5,544

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2011

 

$

555

 

$

1,446

 

$

6,038

 

$

(938

)

$

(1,587

)

$

(22

)

$

5,492

 

$

339

 

$

5,831

 

Net income

 

 

 

 

 

1,276

 

 

 

 

 

 

 

1,276

 

64

 

1,340

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

130

 

 

 

 

 

130

 

3

 

133

 

Issuance of shares

 

1

 

5

 

 

 

 

 

 

 

 

 

6

 

 

6

 

Employee benefits trust activity

 

 

 

22

 

 

 

 

 

 

 

3

 

25

 

 

25

 

Acquisition of shares

 

 

 

 

 

 

 

 

 

(231

)

 

 

(231

)

 

(231

)

Cash dividends on common stock

 

 

 

 

 

(246

)

 

 

 

 

 

 

(246

)

 

(246

)

Distribution to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(71

)

(71

)

Stock option exercises

 

 

 

 

 

 

 

 

 

9

 

 

 

9

 

 

9

 

Other shareholder transactions

 

 

 

17

 

 

 

 

 

 

 

 

 

17

 

21

 

38

 

BALANCE AT SEPTEMBER 30, 2012

 

$

556

 

$

1,490

 

$

7,068

 

$

(808

)(1)

$

(1,809

)

$

(19

)

$

6,478

 

$

356

 

$

6,834

 

 


(1)Comprised of defined benefit postretirement plans of $(694) million, foreign currency translation adjustments of $(122) million, unrealized gain on derivatives of $4 million and an unrealized gain on marketable securities of $4 million.

 

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

 

7



Table of Contents

 

CUMMINS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1NATURE OF OPERATIONS

 

Cummins Inc. (“Cummins,” “we,” “our” or “us”) is a leading global power provider that designs, manufactures, distributes and services diesel and natural gas engines, engine-related component products, including emission solutions, filtration, fuel systems and air handling systems, and power generation products, including electric power generation systems and related products.  We were founded in 1919 as one of the first manufacturers of diesel engines and are headquartered in the United States (U.S.) 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 600 company-owned and independent distributor locations and approximately 6,500 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 usually ends on the Sunday closest to the last day of the quarterly calendar period.  The third quarters of 2012 and 2011 ended on September 30, and September 25, respectively.  The interim periods for both 2012 and 2011 contain 13 weeks, while the nine month periods contained 39 weeks and 38 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, 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 SEC.

 

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 and nine month periods ended September 30, 2012, and September 25, 2011, were as follows:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,
2012

 

September 25,
2011

 

September 30,
2012

 

September 25,
2011

 

Options excluded

 

599,637

 

285,937

 

412,318

 

142,750

 

 

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, 2011.  Our interim period financial results for the three and nine 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.  ACQUISITIONS AND DIVESTITURES

 

Acquisitions

 

In April 2012, we reached an agreement to acquire the doser technology and business assets from Hilite Germany GmbH (Hilite) in a cash transaction.  Dosers are products that enable compliance with emission standards in certain aftertreatment systems and complement our current product offerings.  The transaction was approved by German regulators in June and closed on July 18, 2012.  The purchase price was $176 million and is summarized below.  There was no contingent consideration associated with this transaction.  During the first nine months of 2012 we expensed approximately $4 million of acquisition related costs.

 

The acquisition of Hilite was accounted for as a business combination, with the results of the acquired entity and the goodwill included in the Components operating segment in the third quarter of 2012.  The majority of the purchase price was allocated to technology and customer related intangible assets and goodwill, most of which is expected to be fully deductible for tax purposes.  We expect the Hilite acquisition to strengthen our aftertreatment product offerings.  This acquisition enhances our technical capabilities and keeps us in a strong position to meet the needs of current customers and grow into new markets, especially as an increasing number of regions around the world adopt tougher emission standards.

 

Intangible assets by asset class, including weighted average amortization life, are as follows:

 

Dollars in millions

 

Purchase price
allocation

 

Weighted average
amortization life
in years

 

Technology

 

$

52

 

10.6

 

Customer

 

23

 

4.5

 

License arrangements

 

8

 

6.0

 

Total intangible assets

 

$

83

 

8.5

 

 

The purchase price was allocated as follows:

 

In millions

 

 

 

Inventory

 

$

5

 

Fixed assets

 

5

 

Intangible assets

 

83

 

Goodwill

 

91

 

Liabilities

 

(8

)

Total purchase price

 

$

176

 

 

Net sales for Hilite were $77 million for the 12 months ended December 31, 2011.

 

In July 2012, we acquired an additional 45 percent interest in Cummins Central Power from the former principal for consideration of approximately $20 million.  The acquisition was accounted for as a business combination, with the results of the acquired entity included in the Distribution operating segment in the third quarter of 2012.  Distribution segment results also included a $7 million gain, as we were required to re-measure our pre-existing 35 percent ownership interest in Cummins Central Power to fair value in accordance with GAAP.  Net sales for Cummins Central Power were $209 million for the 12 months ended December 31, 2011.

 

Divestitures

 

In the second quarter of 2011, we sold certain assets and liabilities of our exhaust business which manufactures exhaust products and select components for emission systems for a variety of applications not core to our other product offerings.  This business was historically included in our Components segment.  The sales price was $123 million.  We recognized a gain of $68 million ($37 million after-tax), which included a goodwill allocation of $19 million.  In the second quarter of 2012, we recorded an additional $6 million gain ($4 million after-tax) related to final purchase price adjustments for our 2011 divestitures.  The gains have been excluded from segment results as they were not considered in our evaluation of operating results for the nine months ended September 30, 2012 and September 25, 2011.

 

Sales for this business were $62 million, $171 million and $126 million in 2011 (through closing), 2010 and 2009, respectively.  Operating results for this business were approximately $9 million, $22 million and $11 million in 2011 (through closing), 2010 and 2009, respectively.

 

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NOTE 4. PENSION AND OTHER POSTRETIREMENT BENEFITS

 

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

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 25,

 

September 30,

 

September 25,

 

In millions

 

2012

 

2011

 

2012

 

2011

 

Defined benefit pension and other postretirement plans

 

 

 

 

 

 

 

 

 

Voluntary pension

 

$

34

 

$

36

 

$

107

 

$

106

 

Mandatory pension

 

4

 

5

 

15

 

16

 

Defined benefit pension contributions

 

38

 

41

 

122

 

122

 

Other postretirement plans

 

14

 

4

 

31

 

22

 

Total defined benefit plans

 

$

52

 

$

45

 

$

153

 

$

144

 

 

 

 

 

 

 

 

 

 

 

Defined contribution pension plans

 

$

15

 

$

20

 

$

59

 

$

57

 

 

We made $122 million of pension contributions in the nine months ended September 30, 2012, and we anticipate making an additional $8 million of contributions during the remainder of 2012. We paid $31 million of claims and premiums for other postretirement benefits in the nine months ended September 30, 2012; payments for the remainder of 2012 are expected to be $20 million. The $130 million of contributions for the full year include voluntary contributions of approximately $109 million.  These contributions and payments may be made from trusts or company funds either to increase pension assets or to make direct benefit payments to plan participants.

 

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

 

 

 

Pension

 

 

 

 

 

 

 

U.S. Plans

 

Non-U.S. Plans

 

Other Postretirement Benefits

 

 

 

Three months ended

 

 

 

September 30,

 

September 25,

 

September 30,

 

September 25,

 

September 30,

 

September 25,

 

In millions

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

Service cost

 

$

15

 

$

13

 

$

5

 

$

5

 

$

 

$

 

Interest cost

 

25

 

27

 

15

 

15

 

6

 

6

 

Expected return on plan assets

 

(40

)

(38

)

(20

)

(19

)

 

 

Amortization of prior service (credit) cost

 

 

 

 

1

 

(1

)

(2

)

Recognized net actuarial loss

 

12

 

10

 

4

 

3

 

 

 

Net periodic benefit cost

 

$

12

 

$

12

 

$

4

 

$

5

 

$

5

 

$

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension

 

 

 

 

 

 

 

U.S. Plans

 

Non-U.S. Plans

 

Other Postretirement Benefits

 

 

 

Nine months ended

 

 

 

September 30,

 

September 25,

 

September 30,

 

September 25,

 

September 30,

 

September 25,

 

In millions

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

Service cost

 

$

44

 

$

39

 

$

16

 

$

15

 

$

 

$

 

Interest cost

 

77

 

81

 

44

 

45

 

16

 

18

 

Expected return on plan assets

 

(118

)

(114

)

(61

)

(56

)

 

 

Amortization of prior service (credit) cost

 

 

 

 

2

 

(3

)

(6

)

Recognized net actuarial loss

 

35

 

30

 

11

 

9

 

2

 

 

Net periodic benefit cost

 

$

38

 

$

36

 

$

10

 

$

15

 

$

15

 

$

12

 

 

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Table of Contents

 

NOTE 5.  EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES

 

Equity, royalty and interest income from investees included in our Condensed Consolidated Statements of Income for the interim reporting periods was as follows:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 25,

 

September 30,

 

September 25,

 

In millions

 

2012

 

2011

 

2012

 

2011

 

Distribution Entities

 

 

 

 

 

 

 

 

 

North American distributors

 

$

37

 

$

35

 

$

115

 

$

100

 

Komatsu Cummins Chile, Ltda.

 

9

 

6

 

20

 

16

 

All other distributors

 

 

1

 

3

 

3

 

Manufacturing Entities

 

 

 

 

 

 

 

 

 

Chongqing Cummins Engine Company, Ltd.

 

14

 

20

 

49

 

51

 

Dongfeng Cummins Engine Company, Ltd.

 

9

 

15

 

42

 

64

 

Shanghai Fleetguard Filter Co., Ltd.

 

3

 

4

 

10

 

12

 

Beijing Foton Cummins Engine Co., Ltd.

 

3

 

(2

)

3

 

(5

)

Cummins Westport, Inc.

 

2

 

4

 

11

 

8

 

Valvoline Cummins, Ltd.

 

2

 

2

 

6

 

6

 

Tata Cummins, Ltd.

 

 

2

 

7

 

9

 

Komatsu manufacturing alliances

 

(1

)

 

(1

)

1

 

All other manufacturers

 

7

 

7

 

7

 

19

 

Cummins share of net income

 

 

85

 

 

94

 

 

272

 

 

284

 

Royalty and interest income

 

9

 

8

 

30

 

31

 

Equity, royalty and interest income from investees

 

$

94

 

$

102

 

$

302

 

$

315

 

 

NOTE 6.  MARKETABLE SECURITIES

 

A summary of marketable securities, all of which are classified as current, was as follows:

 

 

 

September 30, 2012

 

December 31, 2011

 

In millions

 

Cost

 

Gross unrealized
gains/(losses)

 

Estimated
fair value

 

Cost

 

Gross unrealized
gains/(losses)

 

Estimated
fair value

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt mutual funds

 

$

140

 

$

3

 

$

143

 

$

115

 

$

2

 

$

117

 

Bank debentures

 

50

 

 

50

 

82

 

 

82

 

Certificates of deposit

 

32

 

 

32

 

66

 

 

66

 

Government debt securities-non-U.S.

 

3

 

 

3

 

3

 

 

3

 

Corporate debt securities

 

2

 

 

2

 

2

 

 

2

 

Equity securities and other

 

 

9

 

9

 

 

7

 

7

 

Total marketable securities

 

$

227

 

$

12

 

$

239

 

$

268

 

$

9

 

$

277

 

 

At September 30, 2012, the fair value of available-for-sale investments in debt securities by contractual maturity was as follows:

 

Maturity date

 

Fair value

 

In millions

 

 

 

1 year or less

 

$

29

 

1-5 years

 

25

 

5-10 years

 

1

 

Total

 

$

55

 

 

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NOTE 7.  INCOME TAXES

 

Our effective tax rate for the year is expected to approximate 26.5 percent, absent any discrete period activity.  Our tax rate is generally less than the 35 percent U.S. income tax rate primarily due to lower tax rates on foreign income.  The tax rates for the three and nine month periods ended September 30, 2012, were 24.1 percent and 25.5 percent, respectively.  These tax rates include a $16 million tax benefit for third quarter discrete tax adjustments, $6 million of which related to a dividend distribution of accumulated foreign income earned in prior years.  These discrete tax adjustments also included a discrete tax benefit of $13 million for prior year tax return true-up adjustments and a discrete tax charge of $3 million related to the third quarter enactment of U.K. tax law changes.

 

The tax rates for the three and nine month periods ended September 25, 2011, were 25.0 percent and 28.2 percent, respectively, and included a net discrete income tax benefit of $29 million (net of additional reserves for uncertain tax positions of $39 million) related to prior year refund claims filed for additional research tax credits, additional foreign income and foreign tax credits, as well as other adjustments.  This benefit also included discrete income tax charges of $2 million for prior year tax return true-up adjustments and $3 million related to the third quarter enactment of U.K. tax law changes in the three and nine month periods ended September 25, 2011.   Additionally, the tax rate for the nine month period included a second quarter discrete income tax charge of $4 million related to the enactment of state tax law changes in Indiana.  The decrease in the 2012 effective tax rates versus the comparable periods in 2011 is due primarily to our assertion that income earned after 2011 by our China operations is permanently reinvested, as well as certain tax planning strategies implemented in our U.K. subsidiaries.

 

NOTE 8.  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 nine months of 2012.

 

The following table summarizes our financial instruments recorded at fair value in our Condensed Consolidated Balance Sheets at September 30, 2012:

 

 

 

Fair Value Measurements Using

 

 

 

Quoted prices in
active markets for
identical assets

 

Significant other
observable inputs

 

Significant
unobservable inputs

 

 

 

In millions

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

Debt mutual funds

 

$

78

 

$

65

 

$

 

$

143

 

Bank debentures

 

 

50

 

 

50

 

Certificates of deposit

 

 

32

 

 

32

 

Government debt securities-non-U.S.

 

 

3

 

 

3

 

Corporate debt securities

 

 

2

 

 

2

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale equity securities

 

 

 

 

 

 

 

 

 

Financial services industry

 

9

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

88

 

 

88

 

Commodity swap contracts

 

 

6

 

 

6

 

Foreign currency forward contracts

 

 

5

 

 

5

 

Commodity call option contracts

 

 

1

 

 

1

 

Total assets

 

$

87

 

$

252

 

$

 

$

339

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

 

1

 

 

1

 

Total liabilities

 

$

 

$

1

 

$

 

$

1

 

 

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Table of Contents

 

The following table summarizes our financial instruments recorded at fair value in our Condensed Consolidated Balance Sheets at December 31, 2011:

 

 

 

Fair Value Measurements Using

 

 

 

Quoted prices in
active markets for
identical assets

 

Significant other
observable inputs

 

Significant
unobservable inputs

 

 

 

In millions

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

Debt mutual funds

 

$

53

 

$

64

 

$

 

$

117

 

Bank debentures

 

 

82

 

 

82

 

Certificates of deposit

 

 

66

 

 

66

 

Government debt securities-non-U.S.

 

 

3

 

 

3

 

Corporate debt securities

 

 

2

 

 

2

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale equity securities

 

 

 

 

 

 

 

 

 

Financial services industry

 

7

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

82

 

 

82

 

Total assets

 

$

60

 

$

299

 

$

 

$

359

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

 

 

 

 

 

 

 

 

Commodity swap contracts

 

 

22

 

 

22

 

Foreign currency forward contracts

 

 

8

 

 

8

 

Total liabilities

 

$

 

$

30

 

$

 

$

30

 

 

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.

 

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 three years.  The counter-parties 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.

 

Commodity call and put option contracts — 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.

 

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.

 

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Table of Contents

 

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 September 30, 2012 and December 31, 2011, are set forth in the table below.  The carrying values of all other receivables and liabilities approximated fair values (derived from level 2 inputs).

 

 

 

September 30,

 

December 31,

 

In millions

 

2012

 

2011

 

Fair value of total debt

 

$

957

 

$

901

 

Carrying value of total debt

 

801

 

783

 

 

NOTE 9.  INVENTORIES

 

Inventories are stated at the lower of cost or market.  Inventories included the following:

 

 

 

September 30,

 

December 31,

 

In millions

 

2012

 

2011

 

Finished products

 

$

1,390

 

$

1,220

 

Work-in-process and raw materials

 

1,292

 

1,019

 

Inventories at FIFO cost

 

2,682

 

2,239

 

Excess of FIFO over LIFO

 

(112

)

(98

)

Total inventories

 

$

2,570

 

$

2,141

 

 

NOTE 10.  GOODWILL AND OTHER INTANGIBLE ASSETS

 

A summary of the carrying amount of goodwill was as follows:

 

 

 

 

 

 

 

Power

 

 

 

 

 

In millions

 

Components

 

Distribution

 

Generation

 

Engine

 

Total

 

Goodwill at December 31, 2010

 

$

338

 

$

11

 

$

12

 

$

6

 

$

367

 

Divestitures

 

(25

)

 

 

 

(25

)

Translation and other

 

(2

)

(1

)

 

 

(3

)

Goodwill at December 31, 2011

 

 

311

 

 

10

 

 

12

 

 

6

 

 

339

 

Acquisitions

 

91

 

9

 

 

 

100

 

Translation and other

 

4

 

 

 

 

4

 

Goodwill at September 30, 2012

 

$

406

 

$

19

 

$

12

 

$

6

 

$

443

 

 

Intangible assets that have finite useful lives are amortized over their estimated useful lives.  The following table summarizes our other intangible assets with finite lives that are subject to amortization:

 

 

 

September 30,

 

December 31,

 

In millions

 

2012

 

2011

 

Software

 

$

500

 

$

409

 

Less: Accumulated amortization

 

(231

)

(191

)

Net software

 

269

 

218

 

Trademarks, patents and other

 

138

 

44

 

Less: Accumulated amortization

 

(42

)

(35

)

Net trademarks, patents and other

 

96

 

9

 

Total

 

$

365

 

$

227

 

 

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Table of Contents

 

Amortization expense for software and other intangibles totaled $16 million and $44 million and $14 million and $43 million for the three and nine months ended September 30, 2012 and September 25, 2011, respectively.  Internal and external software costs (excluding those related to research, re-engineering and training), trademarks and patents are amortized generally over a 3 to 12-year period. The following table represents the projected amortization expense of our intangible assets, assuming no further acquisitions or dispositions.

 

 

 

For the years ended

 

In millions

 

2013

 

2014

 

2015

 

2016

 

2017

 

Projected amortization expense

 

$

80

 

$

69

 

$

66

 

$

60

 

$

33

 

 

NOTE 11.  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, or when they become probable and estimable, which is reflected in the provision for warranties issued line.  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 and accrued recall programs:

 

 

 

Nine months ended

 

 

 

September 30,

 

September 25,

 

In millions

 

2012

 

2011

 

Balance, beginning of year

 

$

1,014

 

$

980

 

Provision for warranties issued

 

320

 

329

 

Deferred revenue on extended warranty contracts sold

 

154

 

82

 

Payments

 

(294

)

(292

)

Amortization of deferred revenue on extended warranty contracts

 

(77

)

(71

)

Changes in estimates for pre-existing warranties

 

(36

)

(4

)

Foreign currency translation

 

2

 

(6

)

Balance, end of period

 

$

1,083

 

$

1,018

 

 

Warranty related deferred revenue, supplier recovery receivables and the long-term portion of the warranty liability on our September 30, 2012, balance sheet were as follows:

 

 

 

September 30,

 

 

In millions

 

2012

 

Balance Sheet Location

Deferred revenue related to extended coverage programs

 

 

 

 

Current portion

 

$

106

 

Deferred revenue

Long-term portion

 

284

 

Other liabilities and deferred revenue

Total

 

$

390

 

 

 

 

 

 

 

Receivables related to estimated supplier recoveries

 

 

 

 

Current portion

 

$

6

 

Trade and other receivables

Long-term portion

 

6

 

Other assets

Total

 

$

12

 

 

 

 

 

 

 

Long-term portion of warranty liability

 

$

287

 

Other liabilities and deferred revenue

 

15



Table of Contents

 

NOTE 12.  DEBT

 

A summary of long-term debt was as follows:

 

 

 

September 30,

 

December 31,

 

In millions

 

2012

 

2011

 

Long-term debt

 

 

 

 

 

Export financing loan, 4.5%, due 2012

 

$

 

$

31

 

Export financing loan, 4.5%, due 2013

 

34

 

44

 

Debentures, 6.75%, due 2027

 

58

 

58

 

Debentures, 7.125%, due 2028

 

250

 

250

 

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

 

165

 

165

 

Other

 

119

 

90

 

 

 

626