Annual report pursuant to Section 13 and 15(d)

SHAREHOLDERS' EQUITY

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SHAREHOLDERS' EQUITY
 12 Months Ended
Dec. 31, 2011
SHAREHOLDERS' EQUITY  
SHAREHOLDERS' EQUITY

NOTE 15. SHAREHOLDERS' EQUITY

Preferred and Preference Stock

        We are authorized to issue one million shares each of zero par value preferred and preference stock with preferred shares being senior to preference shares. We can determine the number of shares of each series, and the rights, preferences and limitations of each series. At December 31, 2011, there was no preferred or preference stock outstanding.

Common Stock

        Changes in shares of common stock, treasury stock and common stock held in trust for employee benefit plans are as follows:

In millions
   Common
Stock 		  Treasury
Stock 		  Common Stock
Held in Trust 		 

Balance at December 31, 2008

     221.7     20.4     5.1  

Shares acquired

     —     0.4     —  

Shares issued

     0.9     (0.1 )   —  

Employee benefits trust activity

     —     —     (2.1 )

Other shareholder transactions

     (0.6 )   —     —  
               

Balance at December 31, 2009

     222.0     20.7     3.0  
               

Shares acquired

     —     3.5     —  

Shares issued

     0.2     (0.2 )   —  

Employee benefits trust activity

     —     —     (0.9 )

Other shareholder transactions

     (0.4 )   —     —  
               

Balance at December 31, 2010

     221.8     24.0     2.1  
               

Shares acquired

     —     6.4     —  

Shares issued

     0.4     (0.2 )   —  

Employee benefits trust activity

     —     —     (0.3 )
               

Balance at December 31, 2011

     222.2     30.2     1.8  
               

Treasury Stock

        Shares of common stock repurchased by us are recorded at cost as treasury stock and result in a reduction of shareholders' equity in our Consolidated Balance Sheets. Treasury shares may be reissued as part of our stock-based compensation programs. When shares are reissued, we use the weighted-average cost method for determining cost. The gains between the cost of the shares and the issuance price are added to additional paid-in-capital. The losses are deducted from additional paid-in capital to the extent of the gains. Thereafter, the losses are deducted from retained earnings. Treasury stock activity for the three-year period ended December 31, 2011, consisting of shares issued and repurchased is presented in our Consolidated Statements of Changes in Equity.

        In December 2007, the Board of Directors authorized the acquisition of up to $500 million of our common stock, which was completed in February 2011.

        Repurchases under this plan by year were as follows:

In millions (except per share amounts)
   Shares
Purchased 		  Average Cost
Per Share 		  Total Cost of
Repurchases 		  Remaining
Authorized
Capacity 		 

2008

     2.3   $ 55.49   $ 128   $ 372  

2009

     0.4     46.52     20     352  

2010

     3.5     68.57     241     111  

2011

     1.1     104.47     111     —  
                       

Total

     7.3         $ 500        
                       

        In February 2011, the Board of Directors approved a new share repurchase program and authorized the acquisition of up to $1 billion of our common stock upon completion of the $500 million program. In 2011, we made the following quarterly purchases under the repurchase programs as indicated:

In millions (except per share amounts)
For each quarter ended
  2011
Shares
Purchased 		  Average Cost
Per Share 		  Total Cost of
Repurchases 		  Remaining
Authorized
Capacity 		 

December 2007, $500 million repurchase program

                          

March 27

     1.1   $ 104.47   $ 111   $ —  

February 2011, $1 billion repurchase program

                          

March 27

     0.8   $ 99.14     79   $ 921  

June 26

     1.6     110.49     183     738  

September 25

     1.9     89.55     173     565  

December 31

     1.0     88.17     83     482  
                     

Subtotal

     5.3   $ 97.26   $ 518   $ 482  
                     

Total

     6.4   $ 98.46   $ 629   $ 482  
                     

Quarterly Dividends

        In July 2011, the Board of Directors approved a 52 percent increase to our quarterly cash dividend on our common stock from $0.2625 per share to $0.40 per share. In July 2010, our Board of Directors approved a 50 percent increase in our quarterly cash dividend on our common stock from $0.175 per share to $0.2625 per share. Cash dividends per share paid to common shareholders for the last three years were as follows:

 
   Quarterly Dividends  
 
   2011   2010   2009  

First quarter

   $ 0.2625   $ 0.175   $ 0.175  

Second quarter

     0.2625     0.175     0.175  

Third quarter

     0.40     0.2625     0.175  

Fourth quarter

     0.40     0.2625     0.175  
               

Total

   $ 1.325   $ 0.875   $ 0.70  
               

        Total dividends paid to common shareholders in 2011, 2010 and 2009 were $255 million, $172 million and $141 million, respectively. Declaration and payment of dividends in the future depends upon our income and liquidity position, among other factors, and is subject to declaration by our Board of Directors, who meet quarterly to consider our dividend payment. We expect to fund dividend payments with cash from operations.

Employee Benefits Trust

        In 1997, we established the Employee Benefits Trust (EBT) funded with common stock for use in meeting our future obligations under employee benefit and compensation plans. The primary sources of cash for the EBT are dividends received on unallocated shares of our common stock held by the EBT. The EBT may be used to fund matching contributions to employee accounts in the 401(k) Retirement Savings Plan (RSP) made in proportion to employee contributions under the terms of the RSP. In addition, we may direct the trustee to sell shares of the EBT on the open market to fund other non-qualified employee benefit plans. Matching contributions charged to income for the years ended December 31, 2011, 2010 and 2009 were $28 million, $21 million and $13 million, respectively. EBT shares sold on the open market and proceeds from those sales for the years ended December 31, 2011 and 2010 were as follows:

In millions
   2011   2010   2009  

EBT shares sold on open market

     —     0.7     1.5  

Proceeds from sale

   $ —   $ 58   $ 72  

Employee Stock Ownership Plan

        Our ESOP Trust was established in 1989 for certain domestic salaried and non-bargained employees participating in our RSP. The ESOP had a note payable to us which was funded through future employer contributions to the ESOP Trust. In 2010, the debt was repaid and the ESOP became an unleveraged plan. There was no activity related to the ESOP Trust for the year ended December 31, 2011.

        During the plan years of 2010 and 2009, our total annual cash contributions and cash contributions from the EBT were $2 million and $10 million, respectively. These contributions were equal to the required principal and interest payments due under the ESOP notes. Dividends received on allocated ESOP shares were used to purchase shares of our common stock from the EBT. Those shares were allocated to the participant accounts. Compensation expense was recorded as shares were allocated to plan participants each year and reduced by the common stock dividends received by the ESOP Trust. Annual compensation expense for the plan years of 2010 and 2009 were $1 million and $4 million, respectively. Unearned compensation was included in Cummins Inc. shareholders' equity and represented compensation expense which was recorded as the remaining shares were allocated to participants. All shares issued to the ESOP Trust were considered outstanding for purposes of computing earnings per share.