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 June 28, 2015
Commission File Number 1-4949
CUMMINS INC.
(Exact name of registrant as specified in its charter)
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| | |
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):
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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 June 28, 2015, there were 178,650,099 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.
CUMMINS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
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| Condensed Consolidated Statements of Income for the three and six months ended June 28, 2015 and June 29, 2014 | |
| Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 28, 2015 and June 29, 2014 | |
| Condensed Consolidated Balance Sheets at June 28, 2015 and December 31, 2014 | |
| Condensed Consolidated Statements of Cash Flows for the six months ended June 28, 2015 and June 29, 2014 | |
| Condensed Consolidated Statements of Changes in Equity for the six months ended June 28, 2015 and June 29, 2014 | |
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PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
| | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
In millions, except per share amounts | | June 28, 2015 | | June 29, 2014 | | June 28, 2015 | | June 29, 2014 |
NET SALES (a) | | $ | 5,015 |
| | $ | 4,835 |
| | $ | 9,724 |
| | $ | 9,241 |
|
Cost of sales | | 3,683 |
| | 3,630 |
| | 7,197 |
| | 6,937 |
|
GROSS MARGIN | | 1,332 |
| | 1,205 |
| | 2,527 |
| | 2,304 |
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| | | | | | | | |
OPERATING EXPENSES AND INCOME | | |
| | |
| | |
| | |
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Selling, general and administrative expenses | | 537 |
| | 513 |
| | 1,054 |
| | 998 |
|
Research, development and engineering expenses | | 166 |
| | 179 |
| | 361 |
| | 369 |
|
Equity, royalty and interest income from investees (Note 4) | | 94 |
| | 105 |
| | 162 |
| | 195 |
|
Other operating (expense) income, net | | — |
| | (6 | ) | | (3 | ) | | (7 | ) |
OPERATING INCOME | | 723 |
| | 612 |
| | 1,271 |
| | 1,125 |
|
| | | | | | | | |
Interest income | | 6 |
| | 6 |
| | 11 |
| | 11 |
|
Interest expense | | 17 |
| | 15 |
| | 31 |
| | 32 |
|
Other income (expense), net | | (8 | ) | | 39 |
| | 1 |
| | 49 |
|
INCOME BEFORE INCOME TAXES | | 704 |
| | 642 |
| | 1,252 |
| | 1,153 |
|
| | | | | | | | |
Income tax expense (Note 5) | | 208 |
| | 170 |
| | 352 |
| | 323 |
|
CONSOLIDATED NET INCOME | | 496 |
| | 472 |
| | 900 |
| | 830 |
|
| | | | | | | | |
Less: Net income attributable to noncontrolling interests | | 25 |
| | 26 |
| | 42 |
| | 46 |
|
NET INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 471 |
| | $ | 446 |
| | $ | 858 |
| | $ | 784 |
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EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. | | |
| | |
| | |
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Basic | | $ | 2.63 |
| | $ | 2.44 |
| | $ | 4.77 |
| | $ | 4.27 |
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Diluted | | $ | 2.62 |
| | $ | 2.43 |
| | $ | 4.76 |
| | $ | 4.26 |
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WEIGHTED AVERAGE SHARES OUTSTANDING | | |
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| | |
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|
Basic | | 179.2 |
| | 182.8 |
| | 179.9 |
| | 183.5 |
|
Dilutive effect of stock compensation awards | | 0.4 |
| | 0.4 |
| | 0.4 |
| | 0.4 |
|
Diluted | | 179.6 |
| | 183.2 |
| | 180.3 |
| | 183.9 |
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| | | | | | | | |
CASH DIVIDENDS DECLARED PER COMMON SHARE | | $ | 0.78 |
| | $ | 0.625 |
| | $ | 1.56 |
| | $ | 1.25 |
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____________________________________
(a) Includes sales to nonconsolidated equity investees of $357 million and $682 million and $546 million and $1,138 million for the three and six month periods ended June 28, 2015 and June 29, 2014, respectively.
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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| | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
In millions | | June 28, 2015 | | June 29, 2014 | | June 28, 2015 | | June 29, 2014 |
CONSOLIDATED NET INCOME | | $ | 496 |
| | $ | 472 |
| | $ | 900 |
| | $ | 830 |
|
Other comprehensive income, net of tax (Note 11) | | |
| | |
| | |
| | |
|
Change in pension and other postretirement defined benefit plans | | 15 |
| | 10 |
| | 28 |
| | 14 |
|
Foreign currency translation adjustments | | 145 |
| | 79 |
| | (31 | ) | | 110 |
|
Unrealized gain (loss) on marketable securities | | 1 |
| | (9 | ) | | — |
| | (11 | ) |
Unrealized gain on derivatives | | 8 |
| | 3 |
| | 8 |
| | 5 |
|
Total other comprehensive income, net of tax | | 169 |
| | 83 |
| | 5 |
| | 118 |
|
COMPREHENSIVE INCOME | | 665 |
| | 555 |
| | 905 |
| | 948 |
|
Less: Comprehensive income attributable to noncontrolling interests | | 20 |
| | 23 |
| | 40 |
| | 49 |
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 645 |
| | $ | 532 |
| | $ | 865 |
| | $ | 899 |
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) |
| | | | | | | | |
In millions, except par value | | June 28, 2015 | | December 31, 2014 |
ASSETS | | |
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Current assets | | |
| | |
|
Cash and cash equivalents | | $ | 1,760 |
| | $ | 2,301 |
|
Marketable securities (Note 6) | | 89 |
| | 93 |
|
Total cash, cash equivalents and marketable securities | | 1,849 |
| | 2,394 |
|
Accounts and notes receivable, net | | | | |
Trade and other | | 3,118 |
| | 2,744 |
|
Nonconsolidated equity investees | | 304 |
| | 202 |
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Inventories (Note 7) | | 2,986 |
| | 2,866 |
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Prepaid expenses and other current assets | | 746 |
| | 849 |
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Total current assets | | 9,003 |
| | 9,055 |
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Long-term assets | | |
| | |
|
Property, plant and equipment | | 7,151 |
| | 7,123 |
|
Accumulated depreciation | | (3,498 | ) | | (3,437 | ) |
Property, plant and equipment, net | | 3,653 |
| | 3,686 |
|
Investments and advances related to equity method investees | | 995 |
| | 981 |
|
Goodwill | | 473 |
| | 479 |
|
Other intangible assets, net | | 339 |
| | 343 |
|
Prepaid pensions | | 784 |
| | 637 |
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Other assets | | 631 |
| | 595 |
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Total assets | | $ | 15,878 |
| | $ | 15,776 |
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LIABILITIES | | |
| | |
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Current liabilities | | |
| | |
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Accounts payable (principally trade) | | $ | 1,974 |
| | $ | 1,881 |
|
Loans payable | | 70 |
| | 86 |
|
Current portion of accrued product warranty (Note 9) | | 405 |
| | 363 |
|
Accrued compensation, benefits and retirement costs | | 432 |
| | 508 |
|
Deferred revenue | | 402 |
| | 401 |
|
Other accrued expenses | | 739 |
| | 759 |
|
Current maturities of long-term debt (Note 8) | | 31 |
| | 23 |
|
Total current liabilities | | 4,053 |
| | 4,021 |
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Long-term liabilities | | |
| | |
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Long-term debt (Note 8) | | 1,576 |
| | 1,589 |
|
Postretirement benefits other than pensions | | 351 |
| | 369 |
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Pensions | | 291 |
| | 289 |
|
Other liabilities and deferred revenue | | 1,393 |
| | 1,415 |
|
Total liabilities | | $ | 7,664 |
| | $ | 7,683 |
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Commitments and contingencies (Note 10) | | | | |
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EQUITY | | | | |
Cummins Inc. shareholders’ equity | | |
| | |
|
Common stock, $2.50 par value, 500 shares authorized, 222.3 and 222.3 shares issued | | $ | 2,164 |
| | $ | 2,139 |
|
Retained earnings | | 10,123 |
| | 9,545 |
|
Treasury stock, at cost, 43.7 and 40.1 shares | | (3,350 | ) | | (2,844 | ) |
Common stock held by employee benefits trust, at cost, 1.0 and 1.1 shares | | (12 | ) | | (13 | ) |
Accumulated other comprehensive loss (Note 11) | | (1,071 | ) | | (1,078 | ) |
Total Cummins Inc. shareholders’ equity | | 7,854 |
| | 7,749 |
|
Noncontrolling interests | | 360 |
| | 344 |
|
Total equity | | $ | 8,214 |
| | $ | 8,093 |
|
Total liabilities and equity | | $ | 15,878 |
| | $ | 15,776 |
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
| | | | | | | | |
| | Six months ended |
In millions | | June 28, 2015 | | June 29, 2014 |
CASH FLOWS FROM OPERATING ACTIVITIES | | |
| | |
|
Consolidated net income | | $ | 900 |
| | $ | 830 |
|
Adjustments to reconcile consolidated net income to net cash provided by operating activities | | |
| | |
|
Depreciation and amortization | | 254 |
| | 217 |
|
Deferred income taxes | | (63 | ) | | (88 | ) |
Equity in income of investees, net of dividends | | (68 | ) | | (108 | ) |
Pension contributions in excess of expense | | (122 | ) | | (127 | ) |
Other post-retirement benefits payments in excess of expense | | (15 | ) | | (14 | ) |
Stock-based compensation expense | | 17 |
| | 21 |
|
Translation and hedging activities | | 27 |
| | (9 | ) |
Changes in current assets and liabilities, net of acquisitions | | | | |
|
Accounts and notes receivable | | (426 | ) | | (321 | ) |
Inventories | | (127 | ) | | (223 | ) |
Other current assets | | 18 |
| | 4 |
|
Accounts payable | | 97 |
| | 289 |
|
Accrued expenses | | (21 | ) | | 120 |
|
Changes in other liabilities and deferred revenue | | 133 |
| | 116 |
|
Other, net | | (35 | ) | | (6 | ) |
Net cash provided by operating activities | | 569 |
| | 701 |
|
| | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | |
| | |
|
Capital expenditures | | (247 | ) | | (245 | ) |
Investments in internal use software | | (22 | ) | | (26 | ) |
Investments in and advances to equity investees | | (17 | ) | | (11 | ) |
Acquisitions of businesses, net of cash acquired | | (15 | ) | | (193 | ) |
Investments in marketable securities—acquisitions (Note 6) | | (173 | ) | | (179 | ) |
Investments in marketable securities—liquidations (Note 6) | | 155 |
| | 179 |
|
Cash flows from derivatives not designated as hedges | | 5 |
| | 4 |
|
Other, net | | 14 |
| | 8 |
|
Net cash used in investing activities | | (300 | ) | | (463 | ) |
| | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | |
| | |
|
Proceeds from borrowings | | 12 |
| | 17 |
|
Payments on borrowings and capital lease obligations | | (31 | ) | | (39 | ) |
Net payments under short-term credit agreements | | (10 | ) | | (48 | ) |
Distributions to noncontrolling interests | | (14 | ) | | (32 | ) |
Dividend payments on common stock | | (280 | ) | | (229 | ) |
Repurchases of common stock | | (514 | ) | | (430 | ) |
Other, net | | 8 |
| | 5 |
|
Net cash used in financing activities | | (829 | ) | | (756 | ) |
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | | 19 |
| | 38 |
|
Net decrease in cash and cash equivalents | | (541 | ) | | (480 | ) |
Cash and cash equivalents at beginning of year | | 2,301 |
| | 2,699 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 1,760 |
| | $ | 2,219 |
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
In millions | Common Stock | | Additional paid-in Capital | | Retained Earnings | | Treasury Stock | | Common Stock Held in Trust | | Accumulated Other Comprehensive Loss | | Total Cummins Inc. Shareholders’ Equity | | Noncontrolling Interests | | Total Equity |
BALANCE AT DECEMBER 31, 2013 | $ | 556 |
| | $ | 1,543 |
| | $ | 8,406 |
| | $ | (2,195 | ) | | $ | (16 | ) | | $ | (784 | ) | | $ | 7,510 |
| | $ | 360 |
| | $ | 7,870 |
|
Net income |
|
| |
|
| | 784 |
| |
|
| |
|
| |
|
| | 784 |
| | 46 |
| | 830 |
|
Other comprehensive income (loss) |
|
| |
|
| |
|
| |
|
| |
|
| | 115 |
| | 115 |
| | 3 |
| | 118 |
|
Issuance of shares |
|
| | 4 |
| |
|
| |
|
| |
|
| |
|
| | 4 |
| | — |
| | 4 |
|
Employee benefits trust activity |
|
| | 14 |
| |
|
| |
|
| | 2 |
| |
|
| | 16 |
| | — |
| | 16 |
|
Acquisition of shares |
|
| |
|
| |
|
| | (430 | ) | |
|
| |
|
| | (430 | ) | | — |
| | (430 | ) |
Cash dividends on common stock |
|
| |
|
| | (229 | ) | |
|
| |
|
| |
|
| | (229 | ) | | — |
| | (229 | ) |
Distributions to noncontrolling interests |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | — |
| | (32 | ) | | (32 | ) |
Stock based awards |
|
| | (5 | ) | |
|
| | 21 |
| |
|
| |
|
| | 16 |
| | — |
| | 16 |
|
Other shareholder transactions |
|
| | 1 |
| |
|
| |
|
| |
|
| |
|
| | 1 |
| | (6 | ) | | (5 | ) |
BALANCE AT JUNE 29, 2014 | $ | 556 |
| | $ | 1,557 |
| | $ | 8,961 |
| | $ | (2,604 | ) | | $ | (14 | ) | | $ | (669 | ) | | $ | 7,787 |
| | $ | 371 |
| | $ | 8,158 |
|
| | | | | | | | | | | | | | | | | |
BALANCE AT DECEMBER 31, 2014 | $ | 556 |
| | $ | 1,583 |
| | $ | 9,545 |
| | $ | (2,844 | ) | | $ | (13 | ) | | $ | (1,078 | ) | | $ | 7,749 |
| | $ | 344 |
| | $ | 8,093 |
|
Net income |
|
| |
|
| | 858 |
| |
|
| |
|
| |
|
| | 858 |
| | 42 |
| | 900 |
|
Other comprehensive income (loss) |
|
| |
|
| |
|
| |
|
| |
|
| | 7 |
| | 7 |
| | (2 | ) | | 5 |
|
Issuance of shares |
|
| | 3 |
| |
|
| |
|
| |
|
| |
|
| | 3 |
| | — |
| | 3 |
|
Employee benefits trust activity |
|
| | 16 |
| |
|
| |
|
| | 1 |
| |
|
| | 17 |
| | — |
| | 17 |
|
Acquisition of shares |
|
| |
|
| |
|
| | (514 | ) | |
|
| |
|
| | (514 | ) | | — |
| | (514 | ) |
Cash dividends on common stock |
|
| |
|
| | (280 | ) | |
|
| |
|
| |
|
| | (280 | ) | | — |
| | (280 | ) |
Distributions to noncontrolling interests |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | — |
| | (25 | ) | | (25 | ) |
Stock based awards |
|
| | (4 | ) | |
|
| | 8 |
| |
|
| |
|
| | 4 |
| | — |
| | 4 |
|
Other shareholder transactions |
|
| | 10 |
| |
|
| |
|
| |
|
| |
|
| | 10 |
| | 1 |
| | 11 |
|
BALANCE AT JUNE 28, 2015 | $ | 556 |
| | $ | 1,608 |
| | $ | 10,123 |
| | $ | (3,350 | ) | | $ | (12 | ) | | $ | (1,071 | ) | | $ | 7,854 |
| | $ | 360 |
| | $ | 8,214 |
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS
Cummins Inc. (“Cummins,” “we,” “our” or “us”) was founded in 1919 as a corporation in Columbus, Indiana and as one of the first diesel engine manufacturers. We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We serve our customers through a network of approximately 600 company-owned and independent distributor locations and approximately 7,200 dealer locations in more than 190 countries and territories.
NOTE 2. BASIS OF PRESENTATION
The unaudited Condensed Consolidated Financial Statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows. All such adjustments are of a normal recurring nature. The Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations. Certain reclassifications have been made to prior period amounts to conform to the presentation of the current period condensed financial statements.
Our reporting period usually ends on the Sunday closest to the last day of the quarterly calendar period. The second quarters of 2015 and 2014 ended on June 28 and June 29, 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 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.
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 six month periods ended June 28, 2015 and June 29, 2014, were as follows:
|
| | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 28, 2015 | | June 29, 2014 | | June 28, 2015 | | June 29, 2014 |
Options excluded | 490,085 |
| | 104,262 |
| | 414,982 |
| | 52,846 |
|
These interim condensed financial statements should be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2014. Our interim period financial results for the three and six 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.
NOTE 3. PENSION AND OTHER POSTRETIREMENT BENEFITS
The components of net periodic pension and other postretirement benefit costs under our plans were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension | | | | |
| | U.S. Plans | | U.K. Plans | | Other Postretirement Benefits |
| | Three months ended |
In millions | | June 28, 2015 | | June 29, 2014 | | June 28, 2015 | | June 29, 2014 | | June 28, 2015 | | June 29, 2014 |
Service cost | | $ | 20 |
| | $ | 17 |
| | $ | 6 |
| | $ | 6 |
| | $ | — |
| | $ | — |
|
Interest cost | | 26 |
| | 27 |
| | 14 |
| | 17 |
| | 4 |
| | 5 |
|
Expected return on plan assets | | (48 | ) | | (44 | ) | | (22 | ) | | (21 | ) | | — |
| | — |
|
Recognized net actuarial loss | | 12 |
| | 7 |
| | 8 |
| | 6 |
| | 1 |
| | — |
|
Net periodic benefit cost | | $ | 10 |
| | $ | 7 |
| | $ | 6 |
| | $ | 8 |
| | $ | 5 |
| | $ | 5 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension | | | | |
| | U.S. Plans | | U.K. Plans | | Other Postretirement Benefits |
| | Six months ended |
In millions | | June 28, 2015 | | June 29, 2014 | | June 28, 2015 | | June 29, 2014 | | June 28, 2015 | | June 29, 2014 |
Service cost | | $ | 40 |
| | $ | 34 |
| | $ | 13 |
| | $ | 12 |
| | $ | — |
| | $ | — |
|
Interest cost | | 51 |
| | 53 |
| | 28 |
| | 33 |
| | 8 |
| | 9 |
|
Expected return on plan assets | | (95 | ) | | (88 | ) | | (45 | ) | | (43 | ) | | — |
| | — |
|
Recognized net actuarial loss | | 23 |
| | 15 |
| | 17 |
| | 13 |
| | 2 |
| | — |
|
Net periodic benefit cost | | $ | 19 |
| | $ | 14 |
| | $ | 13 |
| | $ | 15 |
| | $ | 10 |
| | $ | 9 |
|
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 | | Six months ended |
In millions | | June 28, 2015 | | June 29, 2014 | | June 28, 2015 | | June 29, 2014 |
Distribution Entities | | | | | | | | |
North American distributors | | $ | 8 |
| | $ | 30 |
| | $ | 18 |
| | $ | 62 |
|
Komatsu Cummins Chile, Ltda. | | 8 |
| | 8 |
| | 15 |
| | 14 |
|
All other distributors | | — |
| | 1 |
| | 1 |
| | 2 |
|
Manufacturing Entities | | | | | | |
| | |
|
Beijing Foton Cummins Engine Co., Ltd | | 22 |
| | 1 |
| | 29 |
| | 1 |
|
Dongfeng Cummins Engine Company, Ltd. | | 15 |
| | 22 |
| | 29 |
| | 36 |
|
Chongqing Cummins Engine Company, Ltd. | | 11 |
| | 15 |
| | 23 |
| | 26 |
|
All other manufacturers | | 21 |
| | 19 |
| | 28 |
| | 34 |
|
Cummins share of net income | | 85 |
| | 96 |
| | 143 |
| | 175 |
|
Royalty and interest income | | 9 |
| | 9 |
| | 19 |
| | 20 |
|
Equity, royalty and interest income from investees | | $ | 94 |
| | $ | 105 |
| | $ | 162 |
| | $ | 195 |
|
NOTE 5. INCOME TAXES
Our effective tax rate for the year is expected to approximate 29.5 percent, excluding any one-time items that may arise. The expected tax rate does not include the benefits of the research tax credit, which expired December 31, 2014 and has not yet been renewed by Congress. If the research credit is reinstated during 2015, we anticipate the 2015 effective tax rate will be reduced to 28.5 percent. Our tax rate is generally less than the 35 percent U.S. statutory income tax rate primarily due to lower tax rates on foreign income.
The effective tax rate for the three and six month periods ended June 28, 2015, was 29.5 percent and 28.1 percent, respectively. The tax rate for the six month period ended June 28, 2015, included an $18 million discrete tax benefit to reflect the release of reserves for uncertain tax positions related to a favorable federal audit settlement.
Our effective tax rate for the three and six month periods ended June 29, 2014, was 26.5 percent and 28 percent, respectively. The tax rate for the three months ended June 29, 2014, included a $2 million discrete tax benefit for the release of reserves for uncertain tax positions related to multiple state audit settlements. Additionally, the tax rate for the six month period included a $12 million discrete tax expense attributable primarily to state deferred tax adjustments, as well as a $6 million discrete net tax benefit resulting from a $70 million dividend paid from China earnings generated prior to 2012.
The increase in the effective tax rate for the three months ended June 28, 2015, versus the comparable period in 2014 was primarily due to unfavorable changes in the jurisdictional mix of pre-tax income.
NOTE 6. MARKETABLE SECURITIES
A summary of marketable securities, all of which are classified as current, was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 28, 2015 | | December 31, 2014 |
In millions | | Cost | | Gross unrealized gains/(losses) | | Estimated fair value | | Cost | | Gross unrealized gains/(losses) | | Estimated fair value |
Available-for-sale | | |
| | |
| | |
| | |
| | |
| | |
|
Level 2(1) | | | | | | | | | | | | |
Debt mutual funds | | $ | 64 |
| | $ | — |
| | $ | 64 |
| | $ | 75 |
| | $ | 1 |
| | $ | 76 |
|
Equity mutual funds | | 9 |
| | — |
| | 9 |
| | 9 |
| | — |
| | 9 |
|
Bank debentures | | 13 |
| | — |
| | 13 |
| | 6 |
| | — |
| | 6 |
|
Government debt securities | | 3 |
| | — |
| | 3 |
| | 2 |
| | — |
| | 2 |
|
Total marketable securities | | $ | 89 |
| | $ | — |
| | $ | 89 |
| | $ | 92 |
| | $ | 1 |
| | $ | 93 |
|
____________________________________
(1) The fair value of Level 2 securities is estimated primarily using actively quoted prices for similar instruments from brokers and observable inputs, including market transactions and third-party pricing services. We do not currently have any Level 3 securities, and there were no transfers between Level 2 or 3 during the first half of 2015 and 2014.
The proceeds from sales and maturities of marketable securities and gross realized gains and losses from the sale of available-for-sale securities were as follows:
|
| | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
In millions | | June 28, 2015 | | June 29, 2014 | | June 28, 2015 | | June 29, 2014 |
Proceeds from sales and maturities of marketable securities | | $ | 84 |
| | $ | 71 |
| | $ | 155 |
| | $ | 179 |
|
Gross realized gains from the sale of available-for-sale securities | | — |
| | 12 |
| | 1 |
| | 13 |
|
At June 28, 2015, the fair value of available-for-sale investments in debt securities that utilize a Level 2 fair value measure by contractual maturity was as follows:
|
| | | | |
Maturity date | | Fair value (in millions) |
1 year or less | | $ | 66 |
|
1 - 5 years | | 11 |
|
5 - 10 years | | 3 |
|
Total | | $ | 80 |
|
NOTE 7. INVENTORIES
Inventories are stated at the lower of cost or market. Inventories included the following:
|
| | | | | | | | |
In millions | | June 28, 2015 | | December 31, 2014 |
Finished products | | $ | 1,888 |
| | $ | 1,859 |
|
Work-in-process and raw materials | | 1,216 |
| | 1,129 |
|
Inventories at FIFO cost | | 3,104 |
| | 2,988 |
|
Excess of FIFO over LIFO | | (118 | ) | | (122 | ) |
Total inventories | | $ | 2,986 |
| | $ | 2,866 |
|
NOTE 8. DEBT
A summary of long-term debt was as follows:
|
| | | | | | | | |
In millions | | June 28, 2015 | | December 31, 2014 |
Long-term debt | | |
| | |
|
Senior notes, 3.65%, due 2023 | | $ | 500 |
| | $ | 500 |
|
Debentures, 6.75%, due 2027 | | 58 |
| | 58 |
|
Debentures, 7.125%, due 2028 | | 250 |
| | 250 |
|
Senior notes, 4.875%, due 2043 | | 500 |
| | 500 |
|
Debentures, 5.65%, due 2098 (effective interest rate 7.48%) | | 165 |
| | 165 |
|
Credit facilities related to consolidated joint ventures | | 3 |
| | 3 |
|
Other debt | | 47 |
| | 31 |
|
Unamortized discount | | (47 | ) | | (47 | ) |
Fair value adjustments due to hedge on indebtedness | | 53 |
| | 65 |
|
Capital leases | | 78 |
| | 87 |
|
Total long-term debt | | 1,607 |
| | 1,612 |
|
Less: Current maturities of long-term debt | | (31 | ) | | (23 | ) |
Long-term debt | | $ | 1,576 |
| | $ | 1,589 |
|
Principal payments required on long-term debt during the next five years are as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | Required Principal Payments |
In millions | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
Principal payments | | $ | 16 |
| | $ | 39 |
| | $ | 15 |
| | $ | 16 |
| | $ | 11 |
|
Fair Value of Debt
Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our risk premium, the fair value and carrying value of total debt, including current maturities, was as follows:
|
| | | | | | | | |
In millions | | June 28, 2015 | | December 31, 2014 |
Fair value of total debt(1) | | $ | 1,884 |
| | $ | 1,993 |
|
Carrying value of total debt | | 1,677 |
| | 1,698 |
|
_________________________________________________
(1) The fair value of debt is derived from Level 2 inputs.
NOTE 9. PRODUCT WARRANTY LIABILITY
A tabular reconciliation of the product warranty liability, including the deferred revenue related to our extended warranty coverage and accrued recall programs was as follows:
|
| | | | | | | | |
In millions | | June 28, 2015 | | June 29, 2014 |
Balance, beginning of year | | $ | 1,283 |
| | $ | 1,129 |
|
Provision for warranties issued | | 233 |
| | 206 |
|
Deferred revenue on extended warranty contracts sold | | 131 |
| | 118 |
|
Payments | | (191 | ) | | (211 | ) |
Amortization of deferred revenue on extended warranty contracts | | (88 | ) | | (71 | ) |
Changes in estimates for pre-existing warranties | | 19 |
| | 12 |
|
Foreign currency translation | | (3 | ) | | 2 |
|
Balance, end of period | | $ | 1,384 |
| | $ | 1,185 |
|
Warranty related deferred revenue, supplier recovery receivables and the long-term portion of the warranty liability on our June 28, 2015, balance sheet were as follows:
|
| | | | | | |
In millions | | June 28, 2015 | | Balance Sheet Location |
Deferred revenue related to extended coverage programs | | |
| | |
Current portion | | $ | 177 |
| | Deferred revenue |
Long-term portion | | 472 |
| | Other liabilities and deferred revenue |
Total | | $ | 649 |
| | |
| | | | |
Receivables related to estimated supplier recoveries | | |
| | |
Current portion | | $ | 6 |
| | Trade and other receivables |
Long-term portion | | 4 |
| | Other assets |
Total | | $ | 10 |
| | |
| | | | |
Long-term portion of warranty liability | | $ | 330 |
| | Other liabilities and deferred revenue |
NOTE 10. COMMITMENTS AND CONTINGENCIES
We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We also have been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are material individually or in the aggregate. While we believe we have also established adequate accruals for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition or cash flows.
We conduct significant business operations in Brazil that are subject to the Brazilian federal, state and local labor, social security, tax and customs laws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding the application of these laws to particular circumstances.
U.S. Distributor Commitments
Our distribution agreements with partially-owned distributors generally have a renewable three-year term and are restricted to specified territories. Our distributors develop and maintain a network of dealers with which we have no direct relationship. Our distributors are permitted to sell other, noncompetitive products only with our consent. We license all of our distributors to use our name and logo in connection with the sale and service of our products, with no right to assign or sublicense the trademarks, except to authorized dealers, without our consent. Products are sold to the distributors at standard domestic or international distributor net prices, as applicable. Net prices are wholesale prices we establish to permit our distributors an adequate margin on their sales. Subject to local laws, we can generally refuse to renew these agreements upon expiration or terminate them upon written notice for inadequate sales, change in principal ownership and certain other reasons. Distributors also have the right to terminate the agreements upon 60-day notice without cause, or 30-day notice for cause. Upon termination or failure to renew, we are required to purchase the distributor’s current inventory, signage and special tools and may, at our option purchase other assets of the distributor, but are under no obligation to do so.
Other Guarantees and Commitments
In addition to the matters discussed above, from time to time we enter into other guarantee arrangements, including guarantees of non-U.S. distributor financings, residual value guarantees on equipment under operating leases and other miscellaneous guarantees of third-party obligations. As of June 28, 2015, the maximum potential loss related to these other guarantees was $5 million.
We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. The penalty amounts are less than our purchase commitments and essentially allow the supplier to recover their tooling costs in most instances. As of June 28, 2015, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $67 million, of which $31 million relates to a contract with an engine parts supplier that extends to 2016. These arrangements enable us to secure critical components. We do not currently anticipate paying any penalties under these contracts.
During 2014, we began entering into physical forward contracts with suppliers of platinum and palladium to purchase minimum volumes of the commodities at contractually stated prices for various periods, not to exceed two years. As of June 28, 2015, the total commitments under these contracts were $67 million. These arrangements enable us to fix the prices of these commodities, which otherwise are subject to market volatility.
We have guarantees with certain customers that require us to satisfactorily honor contractual or regulatory obligations, or compensate for monetary losses related to nonperformance. These performance bonds and other performance-related guarantees were $69 million at June 28, 2015 and $76 million at December 31, 2014.
Indemnifications
Periodically, we enter into various contractual arrangements where we agree to indemnify a third-party against certain types of losses. Common types of indemnities include:
| |
• | product liability and license, patent or trademark indemnifications; |
| |
• | asset sale agreements where we agree to indemnify the purchaser against future environmental exposures related to the asset sold; and |
| |
• | any contractual agreement where we agree to indemnify the counter-party for losses suffered as a result of a misrepresentation in the contract. |
We regularly evaluate the probability of having to incur costs associated with these indemnities and accrue for expected losses that are probable. Because the indemnifications are not related to specified known liabilities and due to their uncertain nature, we are unable to estimate the maximum amount of the potential loss associated with these indemnifications.
NOTE 11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Following are the changes in accumulated other comprehensive income (loss) by component for the three and six months ended:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended |
In millions | | Change in pensions and other postretirement defined benefit plans | | Foreign currency translation adjustment | | Unrealized gain (loss) on marketable securities | | Unrealized gain (loss) on derivatives | | Total attributable to Cummins Inc. | | Noncontrolling interests | | Total |
Balance at March 30, 2014 | | $ | (607 | ) | | $ | (155 | ) | | $ | 6 |
| | $ | 1 |
| | $ | (755 | ) | | |
| | |
|
Other comprehensive income before reclassifications | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Before tax amount | | — |
| | 83 |
| | — |
| | 7 |
| | 90 |
| | $ | — |
| | $ | 90 |
|
Tax (expense) benefit | | — |
| | (4 | ) | | — |
| | (2 | ) | | (6 | ) | | — |
| | (6 | ) |
After tax amount | | — |
| | 79 |
| | — |
| | 5 |
| | 84 |
| | — |
| | 84 |
|
Amounts reclassified from accumulated other comprehensive income(1)(2) | | 10 |
| | — |
| | (6 | ) | | (2 | ) | | 2 |
| | (3 | ) | | (1 | ) |
Net current period other comprehensive income (loss) | | 10 |
| | 79 |
| | (6 | ) | | 3 |
| | 86 |
| | $ | (3 | ) | | $ | 83 |
|
Balance at June 29, 2014 | | $ | (597 | ) | | $ | (76 | ) | | $ | — |
| | $ | 4 |
| | $ | (669 | ) | | |
| | |
|
| | | | | | | | | | | | | | |
Balance at March 29, 2015 | | $ | (656 | ) | | $ | (587 | ) | | $ | (1 | ) | | $ | (1 | ) | | $ | (1,245 | ) | | |
| | |
|
Other comprehensive income before reclassifications | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Before tax amount | | — |
| | 153 |
| | — |
| | 9 |
| | 162 |
| | $ | (6 | ) | | $ | 156 |
|
Tax (expense) benefit | | — |
| | (1 | ) | | — |
| | (2 | ) | | (3 | ) | | — |
| | (3 | ) |
After tax amount | | — |
| | 152 |
| | — |
| | 7 |
| | 159 |
| | (6 | ) | | 153 |
|
Amounts reclassified from accumulated other comprehensive income(1)(2) | | 15 |
| | — |
| | — |
| | — |
| | 15 |
| | 1 |
| | 16 |
|
Net current period other comprehensive income (loss) | | 15 |
| | 152 |
| | — |
| | 7 |
| | 174 |
| | $ | (5 | ) | | $ | 169 |
|
Balance at June 28, 2015 | | $ | (641 | ) | | $ | (435 | ) | | $ | (1 | ) | | $ | 6 |
| | $ | (1,071 | ) | | |
| | |
|
____________________________________
(1) Amounts are net of tax.
(2) See reclassifications out of accumulated other comprehensive income (loss) disclosure below for further details.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended |
In millions | | Change in pensions and other postretirement defined benefit plans | | Foreign currency translation adjustment | | Unrealized gain (loss) on marketable securities | | Unrealized gain (loss) on derivatives | | Total attributable to Cummins Inc. | | Noncontrolling interests | | Total |
Balance at December 31, 2013 | | $ | (611 | ) | | $ | (179 | ) | | $ | 7 |
| | $ | (1 | ) | | $ | (784 | ) | | |
| | |
|
Other comprehensive income before reclassifications | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Before tax amount | | (7 | ) | | 107 |
| | (1 | ) | | 10 |
| | 109 |
| | $ | 7 |
| | $ | 116 |
|
Tax (expense) benefit | | 1 |
| | (4 | ) | | — |
| | (3 | ) | | (6 | ) | | — |
| | (6 | ) |
After tax amount | | (6 | ) | | 103 |
| | (1 | ) | | 7 |
| | 103 |
| | 7 |
| | 110 |
|
Amounts reclassified from accumulated other comprehensive income(1)(2) | | 20 |
| | — |
| | (6 | ) | | (2 | ) | | 12 |
| | (4 | ) | | 8 |
|
Net current period other comprehensive income (loss) | | 14 |
| | 103 |
| | (7 | ) | | 5 |
| | 115 |
| | $ | 3 |
| | $ | 118 |
|
Balance at June 29, 2014 | | $ | (597 | ) | | $ | (76 | ) | | $ | — |
| | $ | 4 |
| | $ | (669 | ) | | |
| | |
|
| | | | | | | | | | | | | | |
Balance at December 31, 2014 | | $ | (669 | ) | | $ | (406 | ) | | $ | (1 | ) | | $ | (2 | ) | | $ | (1,078 | ) | | |
| | |
|
Other comprehensive income before reclassifications | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Before tax amount | | (3 | ) | | (51 | ) | | 1 |
| | 10 |
| | (43 | ) | | $ | (2 | ) | | $ | (45 | ) |
Tax (expense) benefit | | 1 |
| | 22 |
| | — |
| | (2 | ) | | 21 |
| | — |
| | 21 |
|
After tax amount | | (2 | ) | | (29 | ) | | 1 |
| | 8 |
| | (22 | ) | | (2 | ) | | (24 | ) |
Amounts reclassified from accumulated other comprehensive income(1)(2) | | 30 |
| | — |
| | (1 | ) | | — |
| | 29 |
| | — |
| | 29 |
|
Net current period other comprehensive income (loss) | | 28 |
| | (29 | ) | | — |
| | 8 |
| | 7 |
| | $ | (2 | ) | | $ | 5 |
|
Balance at June 28, 2015 | | $ | (641 | ) | | $ | (435 | ) | | $ | (1 | ) | | $ | 6 |
| | $ | (1,071 | ) | | |
| | |
|
____________________________________
(1) Amounts are net of tax.
(2) See reclassifications out of accumulated other comprehensive income (loss) disclosure below for further details.
Following are the items reclassified out of accumulated other comprehensive income (loss) and the related tax effects:
|
| | | | | | | | | | | | | | | | | | |
In millions | | Three months ended | | Six months ended | | |
(Gain)/Loss Components | | June 28, 2015 | | June 29, 2014 | | June 28, 2015 | | June 29, 2014 | | Statement of Income Location |
| | | | | | | | | | |
Change in pension and other postretirement defined benefit plans | | |
| | | | |
| | | | |
Recognized actuarial loss | | $ | 21 |
| | $ | 14 |
| | $ | 43 |
| | $ | 29 |
| | (1) |
Tax effect | | (6 | ) | | (4 | ) | | (13 | ) | | (9 | ) | | Income tax expense |
Net change in pensions and other postretirement defined benefit plans | | $ | 15 |
| | $ | 10 |
| | $ | 30 |
| | $ | 20 |
| | |
| | | | | | | | | | |
Realized (gain) loss on marketable securities | | $ | — |
| | $ | (12 | ) | | $ | (1 | ) | | $ | (13 | ) | | Other income (expense), net |
Tax effect | | 1 |
| | 3 |
| | — |
| | 3 |
| | Income tax expense |
Net realized (gain) loss on marketable securities | | $ | 1 |
|
| $ | (9 | ) | | $ | (1 | ) |
| $ | (10 | ) | | |
| | | | | | | | | | |
Realized (gain) loss on derivatives | | |
| | | | |
| | | | |
Foreign currency forward contracts | | $ | — |
| | $ | (3 | ) | | $ | — |
| | $ | (5 | ) | | Net sales |
Commodity swap contracts | | — |
| | 1 |
| | — |
| | 3 |
| | Cost of sales |
Total before taxes | | — |
|
| (2 | ) | | — |
|
| (2 | ) | | |
Tax effect | | — |
| | — |
| | — |
| | — |
| |