XNYS:CMI Cummins Inc Quarterly Report 10-Q Filing - 7/1/2012

Effective Date 7/1/2012

XNYS:CMI (Cummins Inc): Fair Value Estimate
Premium
XNYS:CMI (Cummins Inc): Consider Buying
Premium
XNYS:CMI (Cummins Inc): Consider Selling
Premium
XNYS:CMI (Cummins Inc): Fair Value Uncertainty
Premium
XNYS:CMI (Cummins Inc): Economic Moat
Premium
XNYS:CMI (Cummins Inc): Stewardship
Premium
 

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 July 1, 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 July 1, 2012, there were 190,410,156 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 six months ended July 1, 2012, and June 26, 2011

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 1, 2012, and June 26, 2011

4

 

 

 

 

Condensed Consolidated Balance Sheets at July 1, 2012, and December 31, 2011

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended July 1, 2012, and June 26, 2011

6

 

 

 

 

Condensed Consolidated Statements of Changes in Equity for the six months ended July 1, 2012, and June 26, 2011

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

ITEM 2.

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

23

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

47

 

 

 

ITEM 4.

Controls and Procedures

47

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

ITEM 1.

Legal Proceedings

48

 

 

 

ITEM 1A.

Risk Factors

48

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

 

 

 

ITEM 3.

Defaults Upon Senior Securities

49

 

 

 

ITEM 4.

Mine Safety Disclosures

49

 

 

 

ITEM 5.

Other Information

49

 

 

 

ITEM 6.

Exhibits

49

 

 

 

 

Signatures

50

 

 

 

 

Cummins Inc. Exhibit Index

51

 

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

 

Six months ended

 

In millions, except per share amounts 

 

July 1, 2012

 

June 26, 2011

 

July 1, 2012

 

June 26, 2011

 

NET SALES (a)

 

$

4,452

 

$

4,641

 

$

8,924

 

$

8,501

 

Cost of sales

 

3,242

 

3,438

 

6,516

 

6,341

 

GROSS MARGIN

 

1,210

 

1,203

 

2,408

 

2,160

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES AND INCOME

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

487

 

463

 

962

 

852

 

Research, development and engineering expenses

 

187

 

157

 

368

 

286

 

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

 

104

 

117

 

208

 

213

 

Gain on sale of businesses (Note 3)

 

6

 

68

 

6

 

68

 

Other operating income (expense), net

 

2

 

 

4

 

(6

)

OPERATING INCOME

 

648

 

768

 

1,296

 

1,297

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

7

 

10

 

15

 

16

 

Interest expense

 

8

 

13

 

16

 

23

 

Other income (expense), net

 

14

 

(3

)

16

 

(6

)

INCOME BEFORE INCOME TAXES

 

661

 

762

 

1,311

 

1,284

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

166

 

225

 

341

 

382

 

CONSOLIDATED NET INCOME

 

495

 

537

 

970

 

902

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interests

 

26

 

32

 

46

 

54

 

NET INCOME ATTRIBUTABLE TO CUMMINS INC.

 

$

469

 

$

505

 

$

924

 

$

848

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.

 

 

 

 

 

 

 

 

 

Basic

 

$

2.47

 

$

2.61

 

$

4.86

 

$

4.36

 

Diluted

 

$

2.47

 

$

2.60

 

$

4.85

 

$

4.34

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

 

 

 

 

 

 

 

 

Basic

 

189.8

 

193.8

 

190.1

 

194.6

 

Dilutive effect of stock compensation awards

 

0.3

 

0.6

 

0.4

 

0.6

 

Diluted

 

190.1

 

194.4

 

190.5

 

195.2

 

 

 

 

 

 

 

 

 

 

 

CASH DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.40

 

$

0.2625

 

$

0.80

 

$

0.525

 

 


(a)     Includes sales to nonconsolidated equity investees of $622 million and $1,291 million and $635 million and $1,234 million for the three and six months ended July 1, 2012 and June 26, 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

 

Six months ended

 

In millions

 

July 1, 2012

 

June 26, 2011

 

July 1, 2012

 

June 26, 2011

 

CONSOLIDATED NET INCOME

 

$

495

 

$

537

 

$

970

 

$

902

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(159

)

 

(53

)

54

 

Unrealized gain (loss) on derivatives

 

(8

)

(12

)

11

 

(12

)

Change in pension and other postretirement defined benefit plans

 

10

 

7

 

21

 

33

 

Unrealized gain (loss) on marketable securities

 

 

 

(1

)

 

Total other comprehensive income (loss), net of tax

 

(157

)

(5

)

(22

)

75

 

COMPREHENSIVE INCOME

 

338

 

532

 

948

 

977

 

Less: Comprehensive income attributable to noncontrolling interest

 

2

 

30

 

32

 

54

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.

 

$

336

 

$

502

 

$

916

 

$

923

 

 

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)

 

In millions, except par value 

 

July 1, 2012

 

December 31, 2011

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

1,145

 

$

1,484

 

Marketable securities (Note 6)

 

261

 

277

 

Total cash, cash equivalents and marketable securities

 

1,406

 

1,761

 

Accounts and notes receivable, net

 

 

 

 

 

Trade and other

 

2,331

 

2,252

 

Nonconsolidated equity investees

 

289

 

274

 

Inventories (Note 8)

 

2,581

 

2,141

 

Prepaid expenses and other current assets

 

639

 

663

 

Total current assets

 

7,246

 

7,091

 

Long-term assets

 

 

 

 

 

Property, plant and equipment

 

5,475

 

5,245

 

Accumulated depreciation

 

(3,051

)

(2,957

)

Property, plant and equipment, net

 

2,424

 

2,288

 

Investments and advances related to equity method investees

 

890

 

838

 

Goodwill

 

345

 

339

 

Other intangible assets, net

 

268

 

227

 

Other assets

 

996

 

885

 

Total assets

 

$

12,169

 

$

11,668

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Current liabilities

 

 

 

 

 

Loans payable

 

$

58

 

$

28

 

Accounts payable (principally trade)

 

1,634

 

1,546

 

Current maturities of long-term debt (Note 10)

 

83

 

97

 

Current portion of accrued product warranty (Note 9)

 

407

 

422

 

Accrued compensation, benefits and retirement costs

 

340

 

511

 

Deferred revenue

 

208

 

208

 

Taxes payable (including taxes on income)

 

258

 

282

 

Other accrued expenses

 

582

 

563

 

Total current liabilities

 

3,570

 

3,657

 

Long-term liabilities

 

 

 

 

 

Long-term debt (Note 10)

 

653

 

658

 

Pensions

 

118

 

205

 

Postretirement benefits other than pensions

 

425

 

432

 

Other liabilities and deferred revenue

 

966

 

885

 

Total liabilities

 

5,732

 

5,837

 

 

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

Cummins Inc. shareholders’ equity

 

 

 

 

 

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

 

2,036

 

2,001

 

Retained earnings

 

6,810

 

6,038

 

Treasury stock, at cost, 32.0 and 30.2 shares

 

(1,777

)

(1,587

)

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

 

(20

)

(22

)

Accumulated other comprehensive loss

 

 

 

 

 

Defined benefit postretirement plans

 

(703

)

(724

)

Other

 

(243

)

(214

)

Total accumulated other comprehensive loss

 

(946

)

(938

)

Total Cummins Inc. shareholders’ equity

 

6,103

 

5,492

 

Noncontrolling interests

 

334

 

339

 

Total equity

 

6,437

 

5,831

 

Total liabilities and equity

 

$

12,169

 

$

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)

 

 

 

Six months ended

 

In millions 

 

July 1, 2012

 

June 26, 2011

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Consolidated net income

 

$

970

 

$

902

 

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

 

 

 

 

 

Depreciation and amortization

 

171

 

159

 

Gain on sale of businesses (Note 3)

 

(6

)

(68

)

Deferred income taxes

 

(39

)

87

 

Equity in income of investees, net of dividends

 

(25

)

2

 

Pension contributions in excess of expense (Note 4)

 

(52

)

(47

)

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

 

(7

)

(10

)

Stock-based compensation expense

 

21

 

18

 

Excess tax benefits on stock-based awards

 

(11

)

(4

)

Translation and hedging activities

 

7

 

(6

)

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

 

 

 

 

 

Accounts and notes receivable

 

(116

)

(513

)

Inventories

 

(439

)

(290

)

Other current assets

 

(47

)

11

 

Accounts payable

 

61

 

307

 

Accrued expenses

 

(173

)

169

 

Changes in other liabilities and deferred revenue

 

103

 

58

 

Other, net

 

(21

)

(31

)

Net cash provided by operating activities

 

397

 

744

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(266

)

(215

)

Investments in internal use software

 

(40

)

(22

)

Investments in and advances to equity investees

 

(40

)

(20

)

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

 

 

111

 

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

 

(12

)

 

Investments in marketable securities—acquisitions (Note 6)

 

(276

)

(361

)

Investments in marketable securities—liquidations (Note 6)

 

280

 

343

 

Cash flows from derivatives not designated as hedges

 

1

 

6

 

Other, net

 

3

 

7

 

Net cash used in investing activities

 

(350

)

(151

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from borrowings

 

46

 

60

 

Payments on borrowings and capital lease obligations

 

(75

)

(94

)

Net borrowings under short-term credit agreements

 

3

 

11

 

Distributions to noncontrolling interests

 

(32

)

(26

)

Dividend payments on common stock

 

(152

)

(102

)

Repurchases of common stock

 

(196

)

(373

)

Excess tax benefits on stock-based awards

 

11

 

4

 

Other, net

 

9

 

7

 

Net cash used in financing activities

 

(386

)

(513

)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

 

 

8

 

Net increase (decrease) in cash and cash equivalents

 

(339

)

88

 

Cash and cash equivalents at beginning of year

 

1,484

 

1,023

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

1,145

 

$

1,111

 

 

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

 

 

 

 

 

848

 

 

 

 

 

 

 

848

 

54

 

902

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

75

 

 

 

 

 

75

 

 

75

 

Issuance of shares

 

1

 

7

 

 

 

 

 

 

 

 

 

8

 

 

8

 

Employee benefits trust activity

 

 

 

16

 

 

 

 

 

 

 

2

 

18

 

 

18

 

Acquisition of shares

 

 

 

 

 

 

 

 

 

(373

)

 

 

(373

)

 

(373

)

Cash dividends on common stock

 

 

 

 

 

(102

)

 

 

 

 

 

 

(102

)

 

(102

)

Distribution to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26

)

(26

)

Stock option exercises

 

 

 

1

 

 

 

 

 

4

 

 

 

5

 

 

5

 

Other shareholder transactions

 

 

 

9

 

 

 

 

 

 

 

 

 

9

 

5

 

14

 

BALANCE AT JUNE 26, 2011

 

$

555

 

$

1,413

 

$

5,191

 

$

(645

)

$

(1,333

)

$

(23

)

$

5,158

 

$

359

 

$

5,517

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2011

 

$

555

 

$

1,446

 

$

6,038

 

$

(938

)

$

(1,587

)

$

(22

)

$

5,492

 

$

339

 

$

5,831

 

Net income

 

 

 

 

 

924

 

 

 

 

 

 

 

924

 

46

 

970

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

(8

)

 

 

 

 

(8

)

(14

)

(22

)

Issuance of shares

 

1

 

3

 

 

 

 

 

 

 

 

 

4

 

 

4

 

Employee benefits trust activity

 

 

 

17

 

 

 

 

 

 

 

2

 

19

 

 

19

 

Acquisition of shares

 

 

 

 

 

 

 

 

 

(196

)

 

 

(196

)

 

(196

)

Cash dividends on common stock

 

 

 

 

 

(152

)

 

 

 

 

 

 

(152

)

 

(152

)

Distribution to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(52

)

(52

)

Stock option exercises

 

 

 

 

 

 

 

 

 

6

 

 

 

6

 

 

6

 

Other shareholder transactions

 

 

 

14

 

 

 

 

 

 

 

 

 

14

 

15

 

29

 

BALANCE AT JULY 1, 2012

 

$

556

 

$

1,480

 

$

6,810

 

$

(946)

(1)

$

(1,777

)

$

(20

)

$

6,103

 

$

334

 

$

6,437

 

 


(1) Comprised of defined benefit postretirement plans of $(703) million, foreign currency translation adjustments of $(237) million, unrealized loss on derivatives of $(9) million and an unrealized gain on marketable securities of $3 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 second quarters of 2012 and 2011 ended on July 1, and June 26, respectively.  The interim periods for both 2012 and 2011 contain 13 weeks, while the six month periods contained 26 weeks and 25 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 six month periods ended July 1, 2012, and June 26, 2011, were as follows:

 

 

 

Three months ended

 

Six months ended

 

 

 

July 1, 2012

 

June 26, 2011

 

July 1, 2012

 

June 26, 2011

 

Options excluded

 

439,328

 

140,277

 

332,802

 

80,858

 

 

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 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.

 

8



Table of Contents

 

NOTE 3.  DIVESTITURES AND ACQUISITIONS

 

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 three and six months ended July 1, 2012 and June 26, 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.

 

Pending 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, closed on July 18, 2012, and will be reflected in our consolidated financial statements in the third quarter of 2012.  The purchase price was approximately $176 million and is summarized below.  There is no contingent consideration associated with this transaction.  During the first six 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 to be included in the Components operating segment in the third quarter of 2012.  The majority of the purchase price will be 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 after treatment product offerings.  This acquisition puts 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 expected to be 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

 

 

We are in the process of finalizing certain aspects of the purchase price allocation. The purchase price is expected to be 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.

 

9



Table of Contents

 

In July 2012, we acquired an additional 45 percent interest in Cummins Central Power from the former principal for consideration of approximately $17 million (subject to final adjustments), which will be reflected in our consolidated financial statements in the third quarter of 2012.  The acquisition was accounted for as a business combination, with the results of the acquired entity to be included in the Distribution operating segment in the third quarter of 2012.  We estimate that the transaction will include a $7 million gain, as we are required to re-measure our pre-existing 35 percent ownership interest in Cummins Central Power to fair value in accordance with GAAP.

 

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

 

Six months ended

 

 

 

July 1,

 

June 26,

 

July 1,

 

June 26,

 

In millions

 

2012

 

2011

 

2012

 

2011

 

Defined benefit pension and other postretirement plans

 

 

 

 

 

 

 

 

 

Voluntary pension

 

$

35

 

$

35

 

$

73

 

$

70

 

Mandatory pension

 

6

 

5

 

11

 

11

 

Defined benefit pension contributions

 

41

 

40

 

84

 

81

 

Other postretirement plans

 

8

 

9

 

17

 

18

 

Total defined benefit plans

 

$

49

 

$

49

 

$

101

 

$

99

 

 

 

 

 

 

 

 

 

 

 

Defined contribution pension plans

 

$

17

 

$

13

 

$

44

 

$

37

 

 

We made $84 million of pension contributions in the six months ended July 1, 2012, and we anticipate making an additional $46 million of contributions during the remainder of 2012. We paid $17 million of claims and premiums for other postretirement benefits in the six months ended July 1, 2012; payments for the remainder of 2012 are expected to be $34 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

 

 

 

July 1,

 

June 26,

 

July 1,

 

June 26,

 

July 1,

 

June 26,

 

In millions

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

Service cost

 

$

15

 

$

13

 

$

5

 

$

5

 

$

 

$

 

Interest cost

 

26

 

27

 

15

 

15

 

5

 

6

 

Expected return on plan assets

 

(39

)

(38

)

(21

)

(19

)

 

 

Amortization of prior service (credit) cost

 

 

 

 

1

 

(1

)

(2

)

Recognized net actuarial loss

 

11

 

10

 

4

 

3

 

1

 

 

Net periodic benefit cost

 

$

13

 

$

12

 

$

3

 

$

5

 

$

5

 

$

4

 

 

 

 

Pension

 

 

 

 

 

 

 

U.S. Plans

 

Non-U.S. Plans

 

Other Postretirement Benefits

 

 

 

Six months ended

 

 

 

July 1,

 

June 26,

 

July 1,

 

June 26,

 

July 1,

 

June 26,

 

In millions

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

Service cost

 

$

29

 

$

26

 

$

11

 

$

10

 

$

 

$

 

Interest cost

 

52

 

54

 

29

 

30

 

10

 

12

 

Expected return on plan assets

 

(78

)

(76

)

(41

)

(37

)

 

 

Amortization of prior service (credit) cost

 

 

 

 

1

 

(2

)

(4

)

Recognized net actuarial loss

 

23

 

20

 

7

 

6

 

2

 

 

Net periodic benefit cost

 

$

26

 

$

24

 

$

6

 

$

10

 

$

10

 

$

8

 

 

10



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

 

Six months ended

 

 

 

July 1,

 

June 26,

 

July 1,

 

June 26,

 

In millions

 

2012

 

2011

 

2012

 

2011

 

Distribution Entities

 

 

 

 

 

 

 

 

 

North American distributors

 

$

38

 

$

35

 

$

78

 

$

65

 

Komatsu Cummins Chile, Ltda.

 

6

 

6

 

11

 

10

 

All other distributors

 

2

 

1

 

3

 

2

 

Manufacturing Entities

 

 

 

 

 

 

 

 

 

Chongqing Cummins Engine Company, Ltd.

 

17

 

19

 

35

 

31

 

Dongfeng Cummins Engine Company, Ltd.

 

17

 

26

 

33

 

49

 

Cummins Westport, Inc.

 

4

 

3

 

9

 

4

 

Shanghai Fleetguard Filter Co., Ltd.

 

4

 

4

 

7

 

8

 

Tata Cummins, Ltd.

 

3

 

3

 

7

 

7

 

Beijing Foton Cummins Engine Co., Ltd.

 

2

 

(1

)

 

(3

)

Valvoline Cummins, Ltd.

 

2

 

2

 

4

 

4

 

Komatsu manufacturing alliances

 

1

 

(1

)

 

1

 

All other manufacturers

 

(1

)

6

 

 

12

 

Cummins share of net income

 

$

95

 

$

103

 

$

187

 

$

190

 

Royalty and interest income

 

9

 

14

 

21

 

23

 

Equity, royalty and interest income from investees

 

$

104

 

$

117

 

$

208

 

$

213

 

 

NOTE 6.  MARKETABLE SECURITIES

 

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

 

 

 

July 1, 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

 

$

146

 

$

2

 

$

148

 

$

115

 

$

2

 

$

117

 

Bank debentures

 

53

 

 

53

 

82

 

 

82

 

Certificates of deposit

 

48

 

 

48

 

66

 

 

66

 

Government debt securities-non-U.S.

 

3

 

 

3

 

3

 

 

3

 

Corporate debt securities

 

2

 

 

2

 

2

 

 

2

 

Equity securities and other

 

 

7

 

7

 

 

7

 

7

 

Total marketable securities

 

$

252

 

$

9

 

$

261

 

$

268

 

$

9

 

$

277

 

 

At July 1, 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

 

$

32

 

1-5 years

 

25

 

5-10 years

 

1

 

Total

 

$

58

 

 

NOTE 7.  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 six months of 2012.

 

11



Table of Contents

 

The following table summarizes our financial instruments recorded at fair value in our Condensed Consolidated Balance Sheets at July 1, 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

 

$

80

 

$

68

 

$

 

$

148

 

Bank debentures

 

 

53

 

 

53

 

Certificates of deposit

 

 

48

 

 

48

 

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

 

 

87

 

 

87

 

Total assets

 

$

87

 

$

261

 

$

 

$

348

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

 

 

 

 

 

 

 

 

Commodity swap contracts

 

 

12

 

 

12

 

Foreign currency forward contracts

 

 

2

 

 

2

 

Total liabilities

 

$

 

$

14

 

$

 

$

14

 

 

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

 

 

12



Table of Contents

 

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.

 

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

 

Fair Value of Other Financial Instruments

 

Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our risk premium, the fair value and carrying value of total debt, including current maturities, at July 1, 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).

 

 

 

July 1,

 

December 31,

 

In millions

 

2012

 

2011

 

Fair value of total debt

 

$

951

 

$

901

 

Carrying value of total debt

 

794

 

783

 

 

NOTE 8.  INVENTORIES

 

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

 

 

 

July 1,

 

December 31,

 

In millions

 

2012

 

2011

 

Finished products

 

$

1,502

 

$

1,220

 

Work-in-process and raw materials

 

1,190

 

1,019

 

Inventories at FIFO cost

 

2,692

 

2,239

 

Excess of FIFO over LIFO

 

(111

)

(98

)

Total inventories

 

$

2,581

 

$

2,141

 

 

13



Table of Contents

 

NOTE 9.  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:

 

 

 

Six months ended

 

 

 

July 1,

 

June 26,

 

In millions 

 

2012

 

2011

 

Balance, beginning of year

 

$

1,014

 

$

980

 

Provision for warranties issued

 

227

 

219

 

Deferred revenue on extended warranty contracts sold

 

98

 

50

 

Payments

 

(196

)

(188

)

Amortization of deferred revenue on extended warranty contracts

 

(51

)

(46

)

Changes in estimates for pre-existing warranties

 

(27

)

7

 

Foreign currency translation

 

(3

)

3

 

Balance, end of period

 

$

1,062

 

$

1,025

 

 

Warranty related deferred revenue, supplier recovery receivables and the long-term portion of the warranty liability on our July 1, 2012, balance sheet were as follows:

 

In millions

 

July 1, 2012

 

Balance Sheet Location

 

Deferred revenue related to extended coverage programs

 

 

 

 

 

Current portion

 

$

102

 

Deferred revenue

 

Long-term portion

 

258

 

Other liabilities and deferred revenue

 

Total

 

$

360

 

 

 

 

 

 

 

 

 

Receivables related to estimated supplier recoveries

 

 

 

 

 

Current portion

 

$

7

 

Trade and other receivables

 

Long-term portion

 

6

 

Other assets

 

Total

 

$

13

 

 

 

 

 

 

 

 

 

Long-term portion of warranty liability

 

$

295

 

Other liabilities and deferred revenue

 

 

14



Table of Contents

 

NOTE 10.  DEBT

 

A summary of long-term debt was as follows:

 

 

 

July 1,

 

December 31,

 

In millions 

 

2012

 

2011

 

Long-term debt

 

 

 

 

 

Export financing loan, 4.5%, due 2012

 

$

7

 

$

31

 

Export financing loan, 4.5%, due 2013

 

44

 

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

 

95

 

90

 

 

 

619

 

638

 

Unamortized discount

 

(35

)

(36

)

Fair value adjustments due to hedge on indebtedness

 

87

 

82

 

Capital leases

 

65

 

71

 

Total long-term debt

 

736

 

755

 

Less: Current maturities of long-term debt

 

(83

)

(97

)

Long-term debt

 

$

653

 

$

658

 

 

Principal payments required on long-term debt during the next five years are the following:

 

 

 

Required Principal Payments

 

In millions

 

2012

 

2013

 

2014

 

2015

 

2016

 

Payment

 

$

71

 

$

50

 

$

31

 

$

16

 

$