Annual report pursuant to Section 13 and 15(d)

ACQUISITIONS

v3.8.0.1
ACQUISITIONS
12 Months Ended
Dec. 31, 2017
Business Combinations [Abstract]  
Acquisitions Acquisitions for the years ended December 31, 2017, 2016 and 2015 were as follows:
Entity Acquired (Dollars in millions)
 
Date of Acquisition
 
Additional Percent Interest Acquired
 
Payments to Former Owners
 
Acquisition Related Debt Retirements
 
Total Purchase Consideration
 
Type of Acquisition(1)
 
Gain Recognized(1)
 
Goodwill Acquired
 
Intangibles Recognized(2)
 
Net Sales Previous Fiscal Year Ended
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brammo Inc.
 
11/01/17
 
100%
 
$
62

 
$

 
$
68

(3) 
COMB
 
$

 
$
47


$
23

 
$
4

 
Eaton Cummins Automated Transmission Technologies
 
07/31/17
 
50%
 
600

(4) 

 
600

 
COMB
 

 
544

 
596

 

(4) 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wuxi Cummins Turbo Technologies Co. Ltd
 
12/05/16
 
45%
 
$
86

 
$

 
$
86

 
EQUITY
 
$

 
$

 
$

 
$

 
Cummins Pacific LLC
 
10/04/16
 
50%
 
32

 
67

 
99

 
COMB
 
15

 
4

 
8

 
391

(5 
) 
Cummins Northeast LLC
 
01/01/16
 
35%
 
12

 

 
12

 
EQUITY
 

 

 

 

 
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cummins Crosspoint LLC
 
08/03/15
 
50%
 
$
29

 
$
36

 
$
65

 
COMB
 
$
10

 
$
7

 
$
2

 
$
258

(5 
) 
Cummins Atlantic LLC
 
08/03/15
 
51%
 
21

 
28

 
49

 
COMB
 
8

 
5

 
6

 
245

(5 
) 
Cummins Central Power LLC
 
06/29/15
 
20.01%
 
8

 

 
8

 
EQUITY
 

 

 

 

 
____________________________________________________
(1) 
All results from acquired entities (excluding Brammo Inc.) were included in segment results subsequent to the acquisition date. Previously consolidated entities were accounted for as equity transactions (EQUITY). Newly consolidated entities were accounted for as business combinations (COMB) with gains recognized based on the requirement to remeasure our pre-existing ownership to fair value in accordance with GAAP and are included in the Consolidated Statements of Income as "Other income, net. The Brammo Inc. acquisition had not yet been assigned to a reportable segment at December 31, 2017.
(2)  
Intangible assets acquired in business combinations were mostly customer and technology related, the majority of which will be amortized over a period of`up to 25 years from the date of the acquisition.
(3)  
The "Total Purchase Consideration" represents the total amount that will or is estimated to be paid to complete the acquisition. A portion of the Brammo Inc. acquisition payment has not yet been made and will be paid in future periods in accordance with the purchase contract. The Brammo Inc. acquisition contains an earnout based on future results of the acquired business and could result in a maximum contingent consideration payment of $100 million (fair value of $5 million) to the former owners.
(4) This transaction created a newly formed joint venture that we consolidated. See additional information below.
(5)
Sales amounts are not fully incremental to our consolidated sales as the amount would be reduced by the elimination of sales to the previously unconsolidated entity.Eaton Cummins Automated Transmission Technologies
 
In April 2017, we entered into an agreement to form a joint venture with Eaton Corporation PLC (Eaton), which closed on July 31, 2017 (the acquisition date). We purchased a 50 percent interest in the new venture named Eaton Cummins Automated Transmission Technologies (ECJV) for $600 million in cash. In addition, each partner contributed $20 million for working capital. The joint venture will design, assemble, sell and support medium-duty and heavy-duty automated transmissions for the commercial vehicle market, including new product launches. The new generation products (Procision and Endurant) were launched in 2016 and 2017, respectively, and are owned by the joint venture. Eaton will continue to manufacture and sell the old generation products to the joint venture which will be marked up and sold to end customers. Eaton will also sell certain transmission components to the joint venture at prices approximating market rates. In addition, Eaton will provide certain manufacturing and administrative services to the joint venture, including but not limited to manufacturing labor in Mexico, information technology services, accounting services and purchasing services, at prices approximating market rates. Pro forma financial information was not provided as historical activity related to the products contributed to the joint venture was not material.
We consolidated the results of the joint venture in our Components segment as we have a majority voting interest in the venture by virtue of a tie-breaking vote on the joint venture's board of directors. The joint venture had an enterprise value at inception of $1.2 billion. Due to the structure of the joint venture and equal sharing of economic benefits, we did not apply a discount for lack of control to the noncontrolling interests. The final purchase price allocation was as follows:
In millions
 
Inventory
$
3

Fixed assets
58

Intangible assets
 
      Customer relationships
424

      Technology
172

Goodwill
544

Liabilities
(1
)
      Total business valuation
1,200

Less: Noncontrolling interest
600

Total purchase consideration
$
600



Customer relationship assets represent the value of the long-term strategic relationship the business has with its significant customers, which we are amortizing over 25 years. The assets were valued using an income approach, specifically the "multi-period excess earnings" method, which identifies an estimated stream of revenues and expenses for a particular group of assets from which deductions of portions of the projected economic benefits, attributable to assets other than the subject asset (contributory assets), are deducted in order to isolate the prospective earnings of the subject asset. This value is considered a level 3 measurement under the GAAP fair value hierarchy. Key assumptions used in the valuation of customer relationships include: (1) a rate of return of 10 percent and (2) an attrition rate of 3 percent. Technology assets primarily represent the associated patents and know how related to the Endurant and Procision next generation automated transmissions, which we are amortizing over 15 years. These assets were valued using the "relief-from-royalty" method, which is a combination of both the income approach and market approach that values a subject asset based on an estimate of the "relief" from the royalty expense that would be incurred if the subject asset were licensed from a third party. Key assumptions impacting this value include: (1) a market royalty rate of 5 percent, (2) a rate of return of 10 percent and (3) an economic depreciation rate of 7.5 percent. This value is considered a level 3 measurement under the GAAP fair value hierarchy. Annual amortization of the intangible assets for the next 5 years is expected to approximate $28 million.
Goodwill was determined based on the residual difference between the fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities. Approximately $31 million of the goodwill is deductible for tax purposes. Among the factors contributing to a purchase price resulting in the recognition of goodwill is the ability to integrate and optimize the engine and transmission development to deliver the world’s best power train, to realize synergies in service and aftermarket growth and to utilize our strength in international markets where automated transmission adoption rates are very low.
Included in our 2017 results were revenues of $164 million and a net loss of $11 million related to this joint venture.