CUMMINS INC
10-Qs and 10-Ks
PROXIES
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
April 3, 2016
Commission File Number 1-4949
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
April 3, 2016
, there were
170,359,533
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 is not including the information provided on the website as part of, or incorporating such information by reference into, this Quarterly Report on Form 10-Q.
CUMMINS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
|
|
|
Page
|
|
|
|
|
|
|
Condensed Consolidated Statements of Income for the three months ended April 3, 2016 and March 29, 2015
|
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Condensed Consolidated Statements of Comprehensive Income for the three months ended April 3, 2016 and March 29, 2015
|
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|
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Condensed Consolidated Balance Sheets at April 3, 2016 and December 31, 2015
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|
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Condensed Consolidated Statements of Cash Flows for the three months ended April 3, 2016 and March 29, 2015
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Condensed Consolidated Statements of Changes in Equity for the three months ended April 3, 2016 and March 29, 2015
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2
PART I. FINANCIAL INFORMATION
ITEM 1.
Condensed Consolidated Financial Statements
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
Three months ended
|
|||||||
|
In millions, except per share amounts
|
April 3,
2016 |
March 29,
2015 |
||||||
|
NET SALES
(a)
|
$
|
4,291
|
|
$
|
4,709
|
|
||
|
Cost of sales
|
3,235
|
|
3,514
|
|
||||
|
GROSS MARGIN
|
1,056
|
|
1,195
|
|
||||
|
OPERATING EXPENSES AND INCOME
|
|
|
|
|
||||
|
Selling, general and administrative expenses
|
490
|
|
517
|
|
||||
|
Research, development and engineering expenses
|
166
|
|
195
|
|
||||
|
Equity, royalty and interest income from investees (Note 4)
|
72
|
|
68
|
|
||||
|
Other operating expense, net
|
(2
|
)
|
(3
|
)
|
||||
|
OPERATING INCOME
|
470
|
|
548
|
|
||||
|
Interest income
|
6
|
|
5
|
|
||||
|
Interest expense (Note 8)
|
19
|
|
14
|
|
||||
|
Other income, net
|
8
|
|
9
|
|
||||
|
INCOME BEFORE INCOME TAXES
|
465
|
|
548
|
|
||||
|
Income tax expense (Note 5)
|
132
|
|
144
|
|
||||
|
CONSOLIDATED NET INCOME
|
333
|
|
404
|
|
||||
|
Less: Net income attributable to noncontrolling interests
|
12
|
|
17
|
|
||||
|
NET INCOME ATTRIBUTABLE TO CUMMINS INC.
|
$
|
321
|
|
$
|
387
|
|
||
|
|
||||||||
|
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
|
|
|
|
|
||||
|
Basic
|
$
|
1.87
|
|
$
|
2.14
|
|
||
|
Diluted
|
$
|
1.87
|
|
$
|
2.14
|
|
||
|
|
||||||||
|
WEIGHTED AVERAGE SHARES OUTSTANDING
|
|
|
|
|
||||
|
Basic
|
171.8
|
|
180.6
|
|
||||
|
Dilutive effect of stock compensation awards
|
0.2
|
|
0.4
|
|
||||
|
Diluted
|
172.0
|
|
181.0
|
|
||||
|
|
||||||||
|
CASH DIVIDENDS DECLARED PER COMMON SHARE
|
$
|
0.975
|
|
$
|
0.78
|
|
||
____________________________________
(a)
Includes sales to nonconsolidated equity investees of
$242 million
and
$325 million
for the
three months ended April 3, 2016 and March 29, 2015
, respectively.
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
3
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
Three months ended
|
||||||||
|
In millions
|
April 3,
2016 |
March 29,
2015 |
||||||
|
CONSOLIDATED NET INCOME
|
$
|
333
|
|
$
|
404
|
|
||
|
Other comprehensive (loss) income, net of tax (Note 11)
|
|
|
|
|
||||
|
Foreign currency translation adjustments
|
(57
|
)
|
(176
|
)
|
||||
|
Unrealized loss on derivatives
|
(21
|
)
|
—
|
|
||||
|
Change in pension and other postretirement defined benefit plans
|
9
|
|
13
|
|
||||
|
Unrealized loss on marketable securities
|
—
|
|
(1
|
)
|
||||
|
Total other comprehensive loss, net of tax
|
(69
|
)
|
(164
|
)
|
||||
|
COMPREHENSIVE INCOME
|
264
|
|
240
|
|
||||
|
Less: Comprehensive income attributable to noncontrolling interests
|
12
|
|
20
|
|
||||
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.
|
$
|
252
|
|
$
|
220
|
|
||
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
4
|
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
||||||||
|
In millions, except par value
|
April 3,
2016 |
December 31,
2015 |
||||||
|
ASSETS
|
|
|
|
|
||||
|
Current assets
|
|
|
|
|
||||
|
Cash and cash equivalents
|
$
|
915
|
|
$
|
1,711
|
|
||
|
Marketable securities (Note 6)
|
359
|
|
100
|
|
||||
|
Total cash, cash equivalents and marketable securities
|
1,274
|
|
1,811
|
|
||||
|
Accounts and notes receivable, net
|
||||||||
|
Trade and other
|
2,736
|
|
2,640
|
|
||||
|
Nonconsolidated equity investees
|
185
|
|
180
|
|
||||
|
Inventories (Note 7)
|
2,759
|
|
2,707
|
|
||||
|
Prepaid expenses and other current assets
|
514
|
|
609
|
|
||||
|
Total current assets
|
7,468
|
|
7,947
|
|
||||
|
Long-term assets
|
|
|
|
|
||||
|
Property, plant and equipment
|
7,360
|
|
7,322
|
|
||||
|
Accumulated depreciation
|
(3,648
|
)
|
(3,577
|
)
|
||||
|
Property, plant and equipment, net
|
3,712
|
|
3,745
|
|
||||
|
Investments and advances related to equity method investees
|
1,053
|
|
975
|
|
||||
|
Goodwill
|
485
|
|
482
|
|
||||
|
Other intangible assets, net
|
344
|
|
328
|
|
||||
|
Pension assets
|
763
|
|
735
|
|
||||
|
Other assets
|
1,002
|
|
922
|
|
||||
|
Total assets
|
$
|
14,827
|
|
$
|
15,134
|
|
||
|
LIABILITIES
|
|
|
|
|
||||
|
Current liabilities
|
|
|
|
|
||||
|
Accounts payable (principally trade)
|
$
|
1,809
|
|
$
|
1,706
|
|
||
|
Loans payable (Note 8)
|
117
|
|
24
|
|
||||
|
Commercial paper (Note 8)
|
50
|
|
—
|
|
||||
|
Accrued compensation, benefits and retirement costs
|
302
|
|
409
|
|
||||
|
Current portion of accrued product warranty (Note 9)
|
350
|
|
359
|
|
||||
|
Current portion of deferred revenue
|
425
|
|
403
|
|
||||
|
Other accrued expenses
|
815
|
|
863
|
|
||||
|
Current maturities of long-term debt (Note 8)
|
49
|
|
39
|
|
||||
|
Total current liabilities
|
3,917
|
|
3,803
|
|
||||
|
Long-term liabilities
|
|
|
|
|
||||
|
Long-term debt (Note 8)
|
1,614
|
|
1,576
|
|
||||
|
Postretirement benefits other than pensions
|
339
|
|
349
|
|
||||
|
Pensions
|
298
|
|
298
|
|
||||
|
Other liabilities and deferred revenue
|
1,399
|
|
1,358
|
|
||||
|
Total liabilities
|
$
|
7,567
|
|
$
|
7,384
|
|
||
|
Commitments and contingencies (Note 10)
|
|
|
|
|
||||
|
|
|
|
|
|||||
|
EQUITY
|
||||||||
|
Cummins Inc. shareholders’ equity
|
|
|
|
|
||||
|
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued
|
$
|
2,076
|
|
$
|
2,178
|
|
||
|
Retained earnings
|
10,473
|
|
10,322
|
|
||||
|
Treasury stock, at cost, 52.0 and 47.2 shares
|
(4,203
|
)
|
(3,735
|
)
|
||||
|
Common stock held by employee benefits trust, at cost, 0.8 and 0.9 shares
|
(9
|
)
|
(11
|
)
|
||||
|
Accumulated other comprehensive loss (Note 11)
|
(1,417
|
)
|
(1,348
|
)
|
||||
|
Total Cummins Inc. shareholders’ equity
|
6,920
|
|
7,406
|
|
||||
|
Noncontrolling interests
|
340
|
|
344
|
|
||||
|
Total equity
|
$
|
7,260
|
|
$
|
7,750
|
|
||
|
Total liabilities and equity
|
$
|
14,827
|
|
$
|
15,134
|
|
||
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
5
|
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
||||||||
|
|
Three months ended
|
|||||||
|
In millions
|
April 3,
2016 |
March 29,
2015 |
||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
||||
|
Consolidated net income
|
$
|
333
|
|
$
|
404
|
|
||
|
Adjustments to reconcile consolidated net income to net cash provided by operating activities
|
|
|
|
|
||||
|
Restructuring actions and other charges, net of cash payments (Note 12)
|
(25
|
)
|
—
|
|
||||
|
Depreciation and amortization
|
128
|
|
128
|
|
||||
|
Deferred income taxes
|
(2
|
)
|
(1
|
)
|
||||
|
Equity in income of investees, net of dividends
|
(48
|
)
|
(53
|
)
|
||||
|
Pension contributions in excess of expense (Note 3)
|
(50
|
)
|
(96
|
)
|
||||
|
Other post-retirement benefits payments in excess of expense (Note 3)
|
(8
|
)
|
(8
|
)
|
||||
|
Stock-based compensation expense
|
5
|
|
5
|
|
||||
|
Translation and hedging activities
|
(14
|
)
|
7
|
|
||||
|
Changes in current assets and liabilities, net of acquisitions
|
|
|
||||||
|
Accounts and notes receivable
|
(98
|
)
|
(276
|
)
|
||||
|
Inventories
|
(54
|
)
|
(98
|
)
|
||||
|
Other current assets
|
188
|
|
20
|
|
||||
|
Accounts payable
|
103
|
|
147
|
|
||||
|
Accrued expenses
|
(283
|
)
|
(35
|
)
|
||||
|
Changes in other liabilities and deferred revenue
|
78
|
|
59
|
|
||||
|
Other, net
|
10
|
|
(30
|
)
|
||||
|
Net cash provided by operating activities
|
263
|
|
173
|
|
||||
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
||||
|
Capital expenditures
|
(71
|
)
|
(100
|
)
|
||||
|
Investments in internal use software
|
(13
|
)
|
(8
|
)
|
||||
|
Investments in and advances to equity investees
|
(25
|
)
|
10
|
|
||||
|
Acquisitions of businesses, net of cash acquired
|
(1
|
)
|
(11
|
)
|
||||
|
Investments in marketable securities—acquisitions (Note 6)
|
(291
|
)
|
(95
|
)
|
||||
|
Investments in marketable securities—liquidations (Note 6)
|
35
|
|
71
|
|
||||
|
Cash flows from derivatives not designated as hedges
|
(26
|
)
|
4
|
|
||||
|
Other, net
|
4
|
|
4
|
|
||||
|
Net cash used in investing activities
|
(388
|
)
|
(125
|
)
|
||||
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
||||
|
Proceeds from borrowings
|
105
|
|
2
|
|
||||
|
Net borrowings of commercial paper (Note 8)
|
50
|
|
—
|
|
||||
|
Payments on borrowings and capital lease obligations
|
(15
|
)
|
(18
|
)
|
||||
|
Distributions to noncontrolling interests
|
(10
|
)
|
(1
|
)
|
||||
|
Dividend payments on common stock
|
(170
|
)
|
(140
|
)
|
||||
|
Repurchases of common stock
|
(575
|
)
|
(137
|
)
|
||||
|
Other, net
|
(17
|
)
|
(2
|
)
|
||||
|
Net cash used in financing activities
|
(632
|
)
|
(296
|
)
|
||||
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
|
(39
|
)
|
(56
|
)
|
||||
|
Net decrease in cash and cash equivalents
|
(796
|
)
|
(304
|
)
|
||||
|
Cash and cash equivalents at beginning of year
|
1,711
|
|
2,301
|
|
||||
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
$
|
915
|
|
$
|
1,997
|
|
||
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
6
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
|
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, 2014
|
$
|
556
|
|
$
|
1,583
|
|
$
|
9,545
|
|
$
|
(2,844
|
)
|
$
|
(13
|
)
|
$
|
(1,078
|
)
|
$
|
7,749
|
|
$
|
344
|
|
$
|
8,093
|
|
||||||||
|
Net income
|
|
|
|
|
387
|
|
|
|
|
|
|
|
387
|
|
17
|
|
404
|
|
|||||||||||||||||
|
Other comprehensive (loss) income, net of t
ax (Note 11)
|
|
|
|
|
|
|
|
|
|
|
(167
|
)
|
(167
|
)
|
3
|
|
(164
|
)
|
|||||||||||||||||
|
Issuance of shares
|
|
|
1
|
|
|
|
|
|
|
|
|
|
1
|
|
—
|
|
1
|
|
|||||||||||||||||
|
Employee benefits trust activity
|
|
|
11
|
|
|
|
|
|
1
|
|
|
|
12
|
|
—
|
|
12
|
|
|||||||||||||||||
|
Acquisition of shares
|
|
|
|
|
|
|
(137
|
)
|
|
|
|
|
(137
|
)
|
—
|
|
(137
|
)
|
|||||||||||||||||
|
Cash dividends on common stock
|
|
|
|
|
(140
|
)
|
|
|
|
|
|
|
(140
|
)
|
—
|
|
(140
|
)
|
|||||||||||||||||
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
(1
|
)
|
(1
|
)
|
|||||||||||||||||
|
Stock based awards
|
|
|
(5
|
)
|
|
|
6
|
|
|
|
|
|
1
|
|
—
|
|
1
|
|
|||||||||||||||||
|
BALANCE AT MARCH 29, 2015
|
$
|
556
|
|
$
|
1,590
|
|
$
|
9,792
|
|
$
|
(2,975
|
)
|
$
|
(12
|
)
|
$
|
(1,245
|
)
|
$
|
7,706
|
|
$
|
363
|
|
$
|
8,069
|
|
||||||||
|
BALANCE AT DECEMBER 31, 2015
|
$
|
556
|
|
$
|
1,622
|
|
$
|
10,322
|
|
$
|
(3,735
|
)
|
$
|
(11
|
)
|
$
|
(1,348
|
)
|
$
|
7,406
|
|
$
|
344
|
|
$
|
7,750
|
|
||||||||
|
Net income
|
|
|
|
|
321
|
|
|
|
|
|
|
|
321
|
|
12
|
|
333
|
|
|||||||||||||||||
|
Other comprehensive (loss) income, net of tax (Note 11)
|
|
|
|
|
|
|
|
|
|
|
(69
|
)
|
(69
|
)
|
—
|
|
(69
|
)
|
|||||||||||||||||
|
Issuance of shares
|
|
|
2
|
|
|
|
|
|
|
|
|
|
2
|
|
—
|
|
2
|
|
|||||||||||||||||
|
Employee benefits trust activity
|
|
|
9
|
|
|
|
|
|
2
|
|
|
|
11
|
|
—
|
|
11
|
|
|||||||||||||||||
|
Acquisition of shares (Note 2)
|
|
|
(100
|
)
|
|
|
(475
|
)
|
|
|
|
|
(575
|
)
|
—
|
|
(575
|
)
|
|||||||||||||||||
|
Cash dividends on common stock
|
|
|
|
|
(170
|
)
|
|
|
|
|
|
|
(170
|
)
|
—
|
|
(170
|
)
|
|||||||||||||||||
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
(10
|
)
|
(10
|
)
|
|||||||||||||||||
|
Stock based awards
|
|
|
(6
|
)
|
|
|
7
|
|
|
|
|
|
1
|
|
—
|
|
1
|
|
|||||||||||||||||
|
Other shareholder transactions
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
(7
|
)
|
(6
|
)
|
(13
|
)
|
|||||||||||||||||
|
BALANCE AT APRIL 3, 2016
|
$
|
556
|
|
$
|
1,520
|
|
$
|
10,473
|
|
$
|
(4,203
|
)
|
$
|
(9
|
)
|
$
|
(1,417
|
)
|
$
|
6,920
|
|
$
|
340
|
|
$
|
7,260
|
|
||||||||
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
7
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, 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 over
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
first
quarters of
2016
and
2015
ended on
April 3
and
March 29,
respectively. Our fiscal year ends on December 31, regardless of the day of the week on which December 31 falls.
Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts presented and disclosed in our
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, useful lives for depreciation and amortization, estimates of future cash flows and other assumptions associated with goodwill and long-lived asset impairment tests, determination of discount rates and other assumptions for pension and other postretirement benefit costs, warranty programs, income taxes and deferred tax valuation allowances, lease classification, contingencies and restructuring costs. 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 months ended April 3, 2016
and
March 29, 2015
, were as follows:
|
|
Three months ended
|
||||
|
|
April 3,
2016 |
March 29,
2015 |
|||
|
Options excluded
|
1,687,666
|
|
339,878
|
|
|
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, 2015
. Our interim period financial results for the
three month
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.
On February 9, 2016, we entered into an accelerated share repurchase (ASR) agreement with a third party financial institution to repurchase
$500 million
of our common stock under our previously announced share repurchase plans. Pursuant to the terms of the agreement, we paid the full
$500 million
purchase price and received approximately
4.1 million
shares at a price of
$98.43
per share, representing approximately
80 percent
of the shares expected to be repurchased. The unsettled portion of the ASR meets the criteria to be accounted for as a forward contract indexed to our stock and qualifies as an equity transaction. This resulted in a
$100 million
reduction to additional paid-in capital during the quarter. The final number of shares to be
8
repurchased will be based on our volume-weighted average stock price during the term of the transaction, less a discount. The ASR is expected to be completed by the end of the second quarter of 2016.
The initial delivery of shares resulted in a reduction to our common stock outstanding used to calculate earnings per share in the first quarter of 2016.
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
|
April 3,
2016 |
March 29,
2015 |
April 3,
2016 |
March 29,
2015 |
April 3,
2016 |
March 29,
2015 |
||||||||||||||||||
|
Service cost
|
$
|
23
|
|
$
|
20
|
|
$
|
5
|
|
$
|
7
|
|
$
|
—
|
|
$
|
—
|
|
||||||
|
Interest cost
|
28
|
|
25
|
|
13
|
|
14
|
|
4
|
|
4
|
|
||||||||||||
|
Expected return on plan assets
|
(51
|
)
|
(47
|
)
|
(19
|
)
|
(23
|
)
|
—
|
|
—
|
|
||||||||||||
|
Recognized net actuarial loss
|
7
|
|
11
|
|
4
|
|
9
|
|
1
|
|
1
|
|
||||||||||||
|
Net periodic benefit cost
|
$
|
7
|
|
$
|
9
|
|
$
|
3
|
|
$
|
7
|
|
$
|
5
|
|
$
|
5
|
|
||||||
We made contributions to our defined benefit pension plans of
$60 million
and
$112 million
for the
three months ended April 3, 2016 and March 29, 2015
, respectively. We made payments for other postretirement benefits of
$13 million
for both the
three months ended April 3, 2016 and March 29, 2015
.
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 reporting periods was as follows:
|
|
Three months ended
|
|||||||
|
In millions
|
April 3,
2016 |
March 29,
2015 |
||||||
|
Distribution Entities
|
|
|
||||||
|
Komatsu Cummins Chile, Ltda.
|
$
|
10
|
|
$
|
7
|
|
||
|
North American distributors
|
5
|
|
10
|
|
||||
|
All other distributors
|
—
|
|
1
|
|
||||
|
Manufacturing Entities
|
|
|
||||||
|
Beijing Foton Cummins Engine Co., Ltd.
|
18
|
|
7
|
|
||||
|
Chongqing Cummins Engine Company, Ltd.
|
8
|
|
12
|
|
||||
|
Dongfeng Cummins Engine Company, Ltd.
|
7
|
|
14
|
|
||||
|
All other manufacturers
|
16
|
|
7
|
|
||||
|
Cummins share of net income
|
64
|
|
58
|
|
||||
|
Royalty and interest income
|
8
|
|
10
|
|
||||
|
Equity, royalty and interest income from investees
|
$
|
72
|
|
$
|
68
|
|
||
NOTE 5. INCOME TAXES
Our effective tax rate for the year is expected to approximate
28.5 percent
, excluding any one-time items that may arise. 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 and the research tax credit.
Our effective tax rate for the
three months ended April 3, 2016
, was
28.4 percent
and did not include any discrete items.
9
Our effective tax rate for the
three months ended March 29, 2015
, was
26.3 percent
. This tax rate included an
$18 million
discrete tax benefit to reflect the release of reserves for uncertain tax positions related to a favorable federal audit settlement.
The increase in the effective tax rate for the three months ended April 3, 2016, versus the comparable period in 2015 was primarily due to the favorable discrete tax benefit in 2015, partially offset by the research tax credit recognized in the first quarter of 2016 and favorable changes in the jurisdictional mix of pre-tax income.
It is reasonably possible that our existing liabilities for uncertain tax benefits may decrease in an amount ranging from
$40 million
to
$90 million
within the next 12 months for U.S. and non-U.S. audits that are in progress.
NOTE 6. MARKETABLE SECURITIES
A summary of marketable securities, all of which are classified as current, was as follows:
|
|
April 3, 2016
|
December 31, 2015
|
||||||||||||||||||||||
|
In millions
|
Cost
|
Gross unrealized
gains/(losses) |
Estimated
fair value |
Cost
|
Gross unrealized
gains/(losses) |
Estimated
fair value |
||||||||||||||||||
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Level 2
(1)
|
||||||||||||||||||||||||
|
Bank debentures
|
$
|
260
|
|
$
|
—
|
|
$
|
260
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
||||||
|
Debt mutual funds
|
71
|
|
—
|
|
71
|
|
88
|
|
—
|
|
88
|
|
||||||||||||
|
Money market funds
|
15
|
|
—
|
|
15
|
|
—
|
|
—
|
|
—
|
|
||||||||||||
|
Equity mutual funds
|
11
|
|
—
|
|
11
|
|
11
|
|
(1
|
)
|
10
|
|
||||||||||||
|
Government debt securities
|
2
|
|
—
|
|
2
|
|
2
|
|
—
|
|
2
|
|
||||||||||||
|
Total marketable securities
|
$
|
359
|
|
$
|
—
|
|
$
|
359
|
|
$
|
101
|
|
$
|
(1
|
)
|
$
|
100
|
|
||||||
____________________________________
(1)
The fair value of Level 2 securities is
estimated using actively quoted prices for similar instruments from brokers and observable inputs where available, including market transactions and third-party pricing services, or net asset values provided to investors.
We do not currently have any Level 3 securities and there were no transfers between Level 2 or 3 during the first three months of 2016 and 2015.
A description of the valuation techniques and inputs used for our Level 2 fair value measures was as follows:
|
•
|
Bank debentures
— These investments provide us with a contractual rate of return and generally range in maturity from
three months
to
one year
. 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 us with the respective financial institution, our fair value measure is the financial institutions’ month-end statement.
|
|
•
|
Debt mutual funds
— 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.
|
|
•
|
Money market funds
— These investments in short-term debt instruments have a weighted average maturity of less than
one year
. 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 us with the respective financial institution, our fair value measure is the financial institutions' month-end statement.
|
|
•
|
Equity mutual funds
— The fair value measure for these investments is the net asset value published by the issuing brokerage. Daily quoted prices are available from reputable third party pricing services and are used on a test basis to corroborate this Level 2 input measure.
|
|
•
|
Government debt securities-non-U.S.
— 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.
|
10
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
|
||||||||
|
In millions
|
April 3,
2016 |
March 29,
2015 |
||||||
|
Proceeds from sales and maturities of marketable securities
|
$
|
35
|
|
$
|
71
|
|
||
|
Gross realized gains from the sale of marketable securities
(1)
|
—
|
|
1
|
|
||||
____________________________________
(1)
Gross realized losses from the sale of available-for-sale securities were immaterial
At
April 3, 2016
, the fair value of available-for-sale investments in debt securities that utilize a Level 2 fair value measure is shown by contractual maturity below:
|
Contractual Maturity
|
(in millions)
|
|||
|
1 year or less
|
$
|
346
|
|
|
|
1 - 5 years
|
1
|
|
||
|
5 - 10 years
|
1
|
|
||
|
Total
|
$
|
348
|
|
|
NOTE 7. INVENTORIES
Inventories are stated at the lower of cost or market. Inventories included the following:
|
In millions
|
April 3,
2016 |
December 31,
2015 |
||||||
|
Finished products
|
$
|
1,833
|
|
$
|
1,796
|
|
||
|
Work-in-process and raw materials
|
1,033
|
|
1,022
|
|
||||
|
Inventories at FIFO cost
|
2,866
|
|
2,818
|
|
||||
|
Excess of FIFO over LIFO
|
(107
|
)
|
(111
|
)
|
||||
|
Total inventories
|
$
|
2,759
|
|
$
|
2,707
|
|
||
NOTE 8. DEBT
Loans Payable and Commercial Paper
Loans payable, commercial paper and the related weighted-average interest rates were as follows:
|
April 3, 2016
|
December 31, 2015
|
|||||||||||||
|
Dollars in millions
|
Amount
|
Weighted Average Interest Rate
|
Amount
|
Weighted Average Interest Rate
|
||||||||||
|
Revolving line of credit
(1)
|
$
|
100
|
|
1.02
|
%
|
$
|
—
|
|
—
|
|
||||
|
Loans payable
(2)
|
17
|
|
24
|
|
||||||||||
|
Total loans payable
|
117
|
|
24
|
|
||||||||||
|
Commercial paper
(3)
|
50
|
|
0.43
|
%
|
(4)
|
—
|
|
—
|
|
|||||
|
Total loans payable and commercial paper
|
$
|
167
|
|
$
|
24
|
|
||||||||
____________________________________
(1)
In the first quarter of 2016, we borrowed against a new international revolving line of credit, with a financial institution, which has a maximum capacity of
$100 million
. We plan to pay the outstanding balance in full in the second quarter of 2016.
(2)
Loans payable consist primarily of notes payable to various domestic and international financial institutions. It is not practical to aggregate these notes and calculate a quarterly weighted-average interest rate.
(3)
In February 2016, the Board of Directors authorized us to issue up to $1.75 billion of unsecured short-term promissory notes ("commercial paper") pursuant to a commercial paper program. The program will facilitate the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper program for general corporate purposes.
(4)
The weighted average interest rate is inclusive of all brokerage fees.
11
Long-term Debt
A summary of long-term debt was as follows:
|
In millions
|
April 3,
2016 |
December 31,
2015 |
||||||
|
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
|
|
||||
|
Other debt
|
77
|
|
55
|
|
||||
|
Unamortized discount
|
(57
|
)
|
(57
|
)
|
||||
|
Fair value adjustments due to hedge on indebtedness
|
80
|
|
63
|
|
||||
|
Capital leases
|
90
|
|
81
|
|
||||
|
Total long-term debt
|
1,663
|
|
1,615
|
|
||||
|
Less: Current maturities of long-term debt
|
49
|
|
39
|
|
||||
|
Long-term debt
|
$
|
1,614
|
|
$
|
1,576
|
|
||
Principal payments required on long-term debt during the next five years are as follows:
|
|
Required Principal Payments
|
|||||||||||||||||||
|
In millions
|
2016
|
2017
|
2018
|
2019
|
2020
|
|||||||||||||||
|
Principal payments
|
$
|
39
|
|
$
|
26
|
|
$
|
38
|
|
$
|
23
|
|
$
|
7
|
|
|||||
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
|
April 3,
2016 |
December 31,
2015 |
||||||
|
Fair value of total debt
(1)
|
$
|
2,048
|
|
$
|
1,821
|
|
||
|
Carrying value of total debt
|
1,830
|
|
1,639
|
|
||||
_________________________________________________
(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
|
April 3,
2016 |
March 29,
2015 |
||||||
|
Balance, beginning of year
|
$
|
1,404
|
|
$
|
1,283
|
|
||
|
Provision for warranties issued
|
93
|
|
109
|
|
||||
|
Deferred revenue on extended warranty contracts sold
|
55
|
|
56
|
|
||||
|
Payments
|
(102
|
)
|
(94
|
)
|
||||
|
Amortization of deferred revenue on extended warranty contracts
|
(47
|
)
|
(43
|
)
|
||||
|
Changes in estimates for pre-existing warranties
|
—
|
|
15
|
|
||||
|
Foreign currency translation
|
—
|
|
(6
|
)
|
||||
|
Balance, end of period
|
$
|
1,403
|
|
$
|
1,320
|
|
||
12
Warranty related deferred revenue, supplier recovery receivables and the long-term portion of the warranty liability on our
April 3, 2016, balance sheet
were as follows:
|
In millions
|
April 3,
2016 |
Balance Sheet Location
|
||||
|
Deferred revenue related to extended coverage programs
|
|
|
|
|||
|
Current portion
|
$
|
199
|
|
Deferred revenue
|
||
|
Long-term portion
|
527
|
|
Other liabilities and deferred revenue
|
|||
|
Total
|
$
|
726
|
|
|
||
|
Receivables related to estimated supplier recoveries
|
|
|
|
|||
|
Current portion
|
$
|
6
|
|
Trade and other receivables
|
||
|
Long-term portion
|
3
|
|
Other assets
|
|||
|
Total
|
$
|
9
|
|
|
||
|
Long-term portion of warranty liability
|
$
|
327
|
|
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.
Loss Contingency
Engines systems sold in the U.S. must be certified to comply with the Environmental Protection Agency (EPA) and California Air Resources Board (CARB) emission standards. EPA and CARB regulations require that in-use testing be performed on vehicles by the emission certificate holder and reported to the EPA and CARB in order to ensure ongoing compliance with these emission standards. We are the holder of this emission certificate for our engines, including engines installed in certain vehicles with one customer on which we did not also manufacture or sell the emission aftertreatment system. During 2015, a quality issue in certain of these third party aftertreatment systems caused some of our inter-related engines to fail in-use emission testing. In the fourth quarter of 2015, the vehicle manufacturer made a request that we assist in the design and bear the financial cost of a field campaign (Campaign) to address the technical issue purportedly causing some vehicles to fail the in-use testing.
While we are not responsible for the warranty issues related to a component that we did not manufacture or sell, as the emission compliance certificate holder, we are responsible for proposing a remedy to the EPA and CARB. As a result, we have proposed actions to the agencies that we believe will address the emission failures. As the certificate holder, we expect to participate in the cost of the proposed voluntary Campaign and recorded a charge for this Campaign in other operating expenses of
$60 million
(
$38 million
after tax) in 2015.
We continue to work with the vehicle manufacturer on campaign design and execution
13
plans, however the Campaign is not expected to be completed for some time. The final cost of this Campaign could differ from what we recorded in the fourth quarter of 2015 and is not expected to be known before the second half of 2016.
We currently do not expect any fines or penalties from the EPA or CARB related to this matter.
Guarantees and Commitments
From time to time we enter into guarantee arrangements, including guarantees of non-U.S. distributor financings, residual value guarantees on equipment under operating leases and other miscellaneous guarantees of joint ventures or third-party obligations. At April 3, 2016, the maximum potential loss related to these guarantees
was
$27 million
, of which
$15 million
was recorded as a liability on the balance sheet.
We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At April 3, 2016, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately
$141 million
,
of which
$70 million
relates to a contract with a components supplier that extends to 2018. Most of 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. At April 3, 2016, the total commitments under these contracts were
$39 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
$73 million
at
April 3, 2016
.
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.
14
NOTE 11. ACCUMULATED OTHER COMPREHENSIVE LOSS
Following are the changes in accumulated other comprehensive (loss) income by component
:
|
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 December 31, 2014
|
$
|
(669
|
)
|
$
|
(406
|
)
|
$
|
(1
|
)
|
$
|
(2
|
)
|
$
|
(1,078
|
)
|
|
|
|
|
|||||||||
|
Other comprehensive income before reclassifications
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
Before tax amount
|
(3
|
)
|
(204
|
)
|
1
|
|
1
|
|
(205
|
)
|
$
|
4
|
|
$
|
(201
|
)
|
||||||||||||
|
Tax benefit
|
1
|
|
23
|
|
—
|
|
—
|
|
24
|
|
—
|
|
24
|
|
||||||||||||||
|
After tax amount
|
(2
|
)
|
(181
|
)
|
1
|
|
1
|
|
(181
|
)
|
4
|
|
(177
|
)
|
||||||||||||||
|
Amounts reclassified from accumulated other comprehensive income
(1)(2)
|
15
|
|
—
|
|
(1
|
)
|
—
|
|
14
|
|
(1
|
)
|
13
|
|
||||||||||||||
|
Net current period other comprehensive (loss) income
|
13
|
|
(181
|
)
|
—
|
|
1
|
|
(167
|
)
|
$
|
3
|
|
$
|
(164
|
)
|
||||||||||||
|
Balance at March 29, 2015
|
$
|
(656
|
)
|
$
|
(587
|
)
|
$
|
(1
|
)
|
$
|
(1
|
)
|
$
|
(1,245
|
)
|
|
|
|
|
|||||||||
|
Balance at December 31, 2015
|
$
|
(654
|
)
|
$
|
(696
|
)
|
$
|
(2
|
)
|
$
|
4
|
|
$
|
(1,348
|
)
|
|
|
|
|
|||||||||
|
Other comprehensive income before reclassifications
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
Before tax amount
|
—
|
|
(58
|
)
|
—
|
|
(26
|
)
|
(84
|
)
|
$
|
—
|
|
$
|
(84
|
)
|
||||||||||||
|
Tax benefit
|
—
|
|
1
|
|
—
|
|
4
|
|
5
|
|
—
|
|
5
|
|
||||||||||||||
|
After tax amount
|
—
|
|
(57
|
)
|
—
|
|
(22
|
)
|
(79
|
)
|
—
|
|
(79
|
)
|
||||||||||||||
|
Amounts reclassified from accumulated other comprehensive income
(1)(2)
|
9
|
|
—
|
|
—
|
|
1
|
|
10
|
|
—
|
|
10
|
|
||||||||||||||
|
Net current period other comprehensive (loss) income
|
9
|
|
(57
|
)
|
—
|
|
(21
|
)
|
(69
|
)
|
$
|
—
|
|
$
|
(69
|
)
|
||||||||||||
|
Balance at April 3, 2016
|
$
|
(645
|
)
|
$
|
(753
|
)
|
$
|
(2
|
)
|
$
|
(17
|
)
|
$
|
(1,417
|
)
|
|
|
|
|
|||||||||
____________________________________
(1)
Amounts are net of tax.
(2)
See reclassifications out of accumulated other comprehensive (loss) income disclosure below for further details.
15
Following are the items reclassified out of accumulated other comprehensive (loss) income and the related tax effects:
|
In millions
|
Three months ended
|
|
||||||||
|
(Gain)/Loss Components
|
April 3,
2016 |
March 29,
2015 |
Statement of Income Location
|
|||||||
|
Change in pension and other postretirement defined benefit plans
|
|
|
|
|||||||
|
Recognized actuarial loss
|
$
|
13
|
|
$
|
22
|
|
(1)
|
|||
|
Tax effect
|
(4
|
)
|
(7
|
)
|
Income tax expense
|
|||||
|
Net change in pensions and other postretirement defined benefit plans
|
9
|
|
15
|
|
|
|||||
|
Realized gain on marketable securities
|
—
|
|
(1
|
)
|
Other income, net
|
|||||
|
Tax effect
|
—
|
|
(1
|
)
|
Income tax expense
|
|||||
|
Net realized gain on marketable securities
|
—
|
|
|
(2
|
)
|
|
||||
|
Realized loss on derivatives
|
|
|
|
|||||||
|
Foreign currency forward contracts
|
1
|
|
—
|
|
Net sales
|
|||||
|
Commodity swap contracts
|
—
|
|
—
|
|
Cost of sales
|
|||||
|
Total before taxes
|
1
|
|
|
—
|
|
|
||||
|
Tax effect
|
—
|
|
—
|
|
Income tax expense
|
|||||
|
Net realized loss on derivatives
|
1
|
|
|
—
|
|
|
||||
|
Total reclassifications for the period
|
$
|
10
|
|
|
$
|
13
|
|
|
||
____________________________________
(1)
These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 3, ''PENSION AND OTHER POSTRETIREMENT BENEFITS'').
NOTE 12. RESTRUCTURING ACTIONS AND OTHER CHARGES
We executed restructuring actions primarily in the form of professional voluntary and involuntary employee separation programs in the fourth quarter of 2015. These actions were in response to the continued deterioration in our global markets in the second half of 2015, as well as expected reductions in orders in most U.S. and global markets in 2016. We reduced our worldwide workforce by approximately
1,900
employees
, including approximately
370
employees accepting voluntary retirement packages with the remainder of the reductions being involuntary.
We incurred a charge of
$90 million
in the fourth quarter of 2015, of which
$86 million
related to severance costs for both voluntary and involuntary terminations and
$4 million
for asset impairments and other charges.
As a result of changes in estimates, we now expect approximately
$88 million
will be settled in cash.
Employee termination and severance costs were recorded based on approved plans developed by the businesses and corporate management which specified positions to be eliminated, benefits to be paid under existing severance plans or statutory requirements and the expected timetable for completion of the plan. Estimates of restructuring costs and benefits were made based on information available at the time charges were recorded. Due to the inherent uncertainty involved, actual amounts paid for such activities may differ from amounts initially recorded and we may need to revise previous estimates.
At April 3, 2016
, substantially all terminations have been completed
.
The table below summarizes the activity and balance of accrued workforce reductions, which is included in "Other accrued expenses" in our
Consolidated Balance Sheets
:
|
In millions
|
||||
|
Balance at December 31, 2015
|
$
|
60
|
|
|
|
Cash payments for 2015 actions
|
(27
|
)
|
||
|
Change in estimate
|
2
|
|
||
|
Balance at April 3, 2016
|
$
|
35
|
|
|
16
NOTE 13. OPERATING SEGMENTS
Operating segments under GAAP are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Cummins' chief operating decision-maker (CODM) is the Chief Operating Officer.
Our reportable operating segments consist of Engine, Distribution, Components and Power Generation. This reporting structure is organized according to the products and markets each segment serves
. The Engine segment produces engines and parts for sale to customers in on-highway and various industrial markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, mining, agriculture, marine, oil and gas, rail and military equipment. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers and fuel systems. The Power Generation segment is an integrated provider of power systems, which sells engines, generator sets and alternators.
As previously announced, effective April 2016, we re-organized our business to combine our Power Generation segment and our high horsepower engine business to create the new Power Systems segment. Going forward we will present results for four operating segments: Engine, Distribution, Components and Power Systems. We will begin to report results for our new reporting structure in the second quarter of 2016 and will also reflect this change for historical periods. The formation of the Power Systems segment combines two businesses that are already strongly interdependent which will allow us to streamline business and technical processes to accelerate innovation, grow market share and more efficiently manage our supply chain and manufacturing operations.
We use segment EBIT (defined as earnings before interest expense, income taxes and noncontrolling interests) as a primary basis for the CODM to evaluate the performance of each of our operating segments. Segment amounts exclude certain expenses not specifically identifiable to segments.
The accounting policies of our operating segments are the same as those applied in our
Condensed Consolidated Financial Statements
.
We prepared the financial results of our operating segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. We allocate certain common costs and expenses, primarily corporate functions, among segments differently than we would for stand-alone financial information prepared in accordance with GAAP. These include certain costs and expenses of shared services, such as information technology, human resources, legal and finance. We also do not allocate debt-related items, actuarial gains or losses, prior service costs or credits, changes in cash surrender value of corporate owned life insurance or income taxes to individual segments.
Segment EBIT may not be consistent with measures used by other companies.
17
Summarized financial information regarding our reportable operating segments for the three month periods is shown in the table below:
|
In millions
|
Engine
|
Distribution
|
|
Components
|
Power Generation
|
Non-segment
Items
(1)
|
Total
|
|||||||||||||||||
|
Three months ended April 3, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
External sales
|
$
|
1,624
|
|
$
|
1,458
|
|
|
$
|
897
|
|
$
|
312
|
|
$
|
—
|
|
$
|
4,291
|
|
|||||
|
Intersegment sales
|
710
|
|
5
|
|
|
340
|
|
238
|
|
(1,293
|
)
|
—
|
|
|||||||||||
|
Total sales
|
2,334
|
|
1,463
|
|
|
1,237
|
|
550
|
|
(1,293
|
)
|
4,291
|
|
|||||||||||
|
Depreciation and amortization
(2)
|
58
|
|
26
|
|
|
27
|
|
16
|
|
—
|
|
127
|
|
|||||||||||
|
Research, development and engineering expenses
|
97
|
|
2
|
|
|
54
|
|
13
|
|
—
|
|
166
|
|
|||||||||||
|
Equity, royalty and interest income from investees
|
41
|
|
18
|
|
|
8
|
|
5
|
|
—
|
|
72
|
|
|||||||||||
|
Interest income
|
3
|
|
1
|
|
|
1
|
|
1
|
|
—
|
|
6
|
|
|||||||||||
|
Segment EBIT
|
200
|
|
95
|
|
173
|
|
31
|
|
(15
|
)
|
484
|
|
||||||||||||
|
Three months ended March 29, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
External sales
|
$
|
1,889
|
|
$
|
1,469
|
|
$
|
931
|
|
$
|
420
|
|
$
|
—
|
|
$
|
4,709
|
|
||||||
|
Intersegment sales
|
707
|
|
7
|
|
368
|
|
260
|
|
(1,342
|
)
|
—
|
|
||||||||||||
|
Total sales
|
2,596
|
|
1,476
|
|
1,299
|
|
680
|
|
(1,342
|
)
|
4,709
|
|
||||||||||||
|
Depreciation and amortization
(2)
|
58
|
|
27
|
|
26
|
|
16
|
|
—
|
|
127
|
|
||||||||||||
|
Research, development and engineering expenses
|
114
|
|
3
|
|
61
|
|
17
|
|
—
|
|
195
|
|
||||||||||||
|
Equity, royalty and interest income from investees
|
30
|
|
20
|
|
9
|
|
9
|
|
—
|
|
68
|
|
||||||||||||
|
Interest income
|
2
|
|
1
|
|
1
|
|
1
|
|
—
|
|
5
|
|
||||||||||||
|
Segment EBIT
|
253
|
|
88
|
|
195
|
|
49
|
|
(23
|
)
|
562
|
|
||||||||||||
____________________________________
(1)
Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three months ended
April 3, 2016
and
March 29, 2015
.
(2)
Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs included in the
Condensed Consolidated Statements of Income
as "Interest expense."
The amortization of debt discount and deferred costs were $1 million and $1 million for the three months ended April 3, 2016 and March 29, 2015, respectively.
A reconciliation of our segment information to the corresponding amounts in the
Condensed Consolidated Statements of Income
is shown in the table below:
|
|
Three months ended
|
|||||||
|
In millions
|
April 3,
2016 |
March 29,
2015 |
||||||
|
Total segment EBIT
|
$
|
484
|
|
$
|
562
|
|
||
|
Less: Interest expense
|
19
|
|
14
|
|
||||
|
Income before income taxes
|
$
|
465
|
|
$
|
548
|
|
||
NOTE 14. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2016, the Financial Accounting Standards Board (FASB) amended its standards related to the accounting for stock compensation. This amendment addresses several aspects of the accounting for share-based payment transactions that could change for us including, but not limited to, recognition of excess tax benefits or deficiencies in the income statement each period and classification of the excess tax benefits or deficiencies as operating activities in the cash flow statement. The new standard is effective for annual periods beginning after December 15, 2016, with early adoption permitted. We are in the process of evaluating the impact the amendment will have on our
Consolidated Financial Statements.
In February 2016, the FASB amended its standards related to the accounting for leases. Under the new standard, lessees will now be required to recognize all leases on the balance sheet as both a right-of-use-asset and a liability. The standard will continue to have two types of leases for income statement recognition purposes: operating leases and finance leases. Operating leases will result in the recognition of a single lease expense on a straight-line basis over the lease term similar to the treatment for operating leases under today's standards. Finance leases will result in an accelerated expense similar to the accounting for capital leases under today's standards. The determination of a lease classification as operating or finance will be done in a
18
manner very similar to today's standard. The new standard also contains amended guidance regarding the identification of embedded leases in service contracts and the identification of lease and non-lease components in an arrangement. The new standard is effective for us on January 1, 2019, with early adoption permitted. We are still evaluating the impact the standard could have on our
Consolidated Financial Statements
; however, while we have not yet quantified the amount, we do expect the standard will have a material impact on our
Consolidated Balance Sheets
due to the recognition of additional assets and liabilities for operating leases.
In January 2016, the FASB amended its standards related to the accounting of certain financial instruments. This amendment addresses certain aspects of recognition, measurement, presentation and disclosure. The new rules will become effective for annual and interim periods beginning after December 15, 2017. Early adoption is not permitted. We are in the process of evaluating the impact the amendment will have on our
Consolidated Financial Statements
.
In May 2014, the FASB amended its standards related to revenue recognition. This amendment replaces all existing revenue recognition guidance and provides a single, comprehensive revenue recognition model for all contracts with customers. The standard contains principles that we will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that we will recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that we expect to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendment also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. The standard allows either full or modified retrospective adoption effective for annual and interim periods beginning January 1, 2018. We are in the process of evaluating the impact the amendment will have on our
Consolidated Financial Statements.
While a final decision has not been made, we are currently planning to adopt the standard using the modified retrospective approach.
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cummins Inc. and its consolidated subsidiaries are hereinafter sometimes referred to as “Cummins,” “we,” “our” or “us.”
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Certain parts of this quarterly report contain forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include those that are based on current expectations, estimates and projections about the industries in which we operate and management’s beliefs and assumptions. Forward-looking statements are generally accompanied by words such as "anticipates," "expects," "forecasts," "intends," "plans," "believes," "seeks," "estimates," "could," "should" or words of similar meaning. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which we refer to as "future factors," which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some future factors that could cause our results to differ materially from the results discussed in such forward-looking statements are discussed below and shareholders, potential investors and other readers are urged to consider these future factors carefully in evaluating forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. Future factors that could affect the outcome of forward-looking statements include the following:
|
•
|
a sustained slowdown or significant downturn in our markets;
|
|
•
|
a downturn in the North American truck industry;
|
|
•
|
a major customer experiencing financial distress;
|
|
•
|
changes in the engine outsourcing practices of significant customers;
|
|
•
|
any significant problems in our new engine platforms;
|
|
•
|
a further slowdown in infrastructure development;
|
|
•
|
unpredictability in the adoption, implementation and enforcement of emission standards around the world;
|
|
•
|
foreign currency exchange rate changes;
|
19
|
•
|
the actions of, and income from, joint ventures and other investees that we do not directly control;
|
|
•
|
the integration of our previously partially-owned United States and Canadian distributors;
|
|
•
|
our plan to grow through strategic acquisitions and related uncertainties of entering into such transactions;
|
|
•
|
challenges or unexpected costs in completing restructuring and cost reduction initiatives;
|
|
•
|
supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers;
|
|
•
|
variability in material and commodity costs;
|
|
•
|
product recalls;
|
|
•
|
the development of new technologies;
|
|
•
|
competitor pricing activity;
|
|
•
|
increasing competition, including increased global competition among our customers in emerging markets;
|
|
•
|
exposure to potential security breaches or other disruptions to our information technology systems and data security;
|
|
•
|
political, economic and other risks from operations in numerous countries;
|
|
•
|
changes in taxation;
|
|
•
|
global legal and ethical compliance costs and risks;
|
|
•
|
aligning our capacity and production with our demand;
|
|
•
|
product liability claims;
|
|
•
|
increasingly stringent environmental laws and regulations;
|
|
•
|
the price and availability of energy;
|
|
•
|
the performance of our pension plan assets;
|
|
•
|
labor relations;
|
|
•
|
changes in actuarial and accounting standards;
|
|
•
|
our sales mix of products;
|
|
•
|
protection and validity of our patent and other intellectual property rights;
|
|
•
|
technological implementation and cost/financial risks in our increasing use of large, multi-year contracts;
|
|
•
|
the cyclical nature of some of our markets;
|
|
•
|
the outcome of pending and future litigation and governmental proceedings;
|
|
•
|
continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support our future business; and
|
|
•
|
other risk factors described in our Form 10-K, Part I, Item 1A under the caption “Risk Factors.”
|
Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this quarterly report and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
20
ORGANIZATION OF INFORMATION
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) was prepared to provide the reader with a view and perspective of our business through the eyes of management and should be read in conjunction with our Management's Discussion and Analysis of Financial Condition and Results of Operations section of our
2015
Form 10-K. Our MD&A is presented in the following sections:
•
Executive Summary and Financial Highlights
•
Outlook
•
Results of Operations
|
•
|
Comprehensive Income
|
•
Operating Segment Results
•
Liquidity and Capital Resources
•
Application of Critical Accounting Estimates
•
Recently Issued Accounting Pronouncements
21
EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS
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 have long-standing relationships with many of the leading manufacturers in the markets we serve, including PACCAR Inc, Daimler Trucks North America, Navistar International Corporation, Fiat Chrysler Automobiles (Fiat Chrysler), Volvo AB, Komatsu and MAN Nutzfahrzeuge AG.
We serve our customers through a network of approximately
600
company-owned and independent distributor locations and over
7,200
dealer locations in more than
190
countries and territories.
Our reportable operating segments consist of Engine, Distribution, Components and Power Generation. This reporting structure is organized according to the products and markets each segment serves
. The Engine segment produces engines and parts for sale to customers in on-highway and various industrial markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, mining, agriculture, marine, oil and gas, rail and military equipment. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers and fuel systems. The Power Generation segment is an integrated provider of power systems, which sells engines, generator sets and alternators.
Our financial performance depends, in large part, on varying conditions in the markets we serve, particularly the on-highway, construction and general industrial markets. Demand in these markets tends to fluctuate in response to overall economic conditions. Our sales may also be impacted by OEM inventory levels, production schedules and stoppages. Economic downturns in markets we serve generally result in reduced sales of our products and can result in price reductions in certain products and/or markets. As a worldwide business, our operations are also affected by currency, political, economic and regulatory matters, including adoption and enforcement of environmental and emission standards, in the countries we serve. As part of our growth strategy, we invest in businesses in certain countries that carry high levels of these risks such as China, Brazil, India, Mexico, Russia and countries in the Middle East and Africa. At the same time, our geographic diversity and broad product and service offerings have helped limit the impact from a drop in demand in any one industry or customer or the economy of any single country on our consolidated results.
Worldwide revenues
decreased
9 percent
in the three months ended
April 3, 2016,
as compared to the same period in
2015
, primarily due to lower demand in most global on-highway markets, unfavorable foreign currency fluctuations, decreased demand in most global Power generation markets and lower demand in most global industrial markets, partially offset by sales increases related to the consolidation of partially-owned North American distributors since December 31, 2014. Revenue in the U.S. and Canada
declined
by
10 percent
primarily due to decreased demand in the North American on-highway markets and lower demand in the industrial oil and gas markets, partially offset by increased Distribution segment sales related to the consolidation of North American distributors.
Continued global economic weakness in the
first
quarter of 2016 negatively impacted our international revenues (excludes the U.S. and Canada), which
declined
by
8 percent
, with sales down in most of our markets, especially in South America, the U.K. and China. The decline in international sales was primarily due to unfavorable foreign currency impacts of
3 percent
(primarily in the
Brazilian real, European euro, Canadian dollar, Indian rupee, Chinese renminbi and Australian dollar
), lower demand in the on-highway markets in Brazil and Mexico and decreased demand in international industrial markets led by declines in mining and commercial marine markets.
The following table contains sales and earnings before interest expense, income tax expense and noncontrolling interests (EBIT) results by operating segment for the
three months ended April 3, 2016 and March 29, 2015
.
Refer to the section titled “Operating Segment Results” for a more detailed discussion of net sales and EBIT by operating segment, including the reconciliation of segment EBIT to income before income taxes.
22
|
|
Three months ended
|
|||||||||||||||||||||||||||
|
Operating Segments
|
April 3, 2016
|
March 29, 2015
|
Percent change
|
|||||||||||||||||||||||||
|
|
Percent
|
|
|
Percent
|
|
2016 vs. 2015
|
||||||||||||||||||||||
|
In millions
|
Sales
|
of Total
|
EBIT
|
Sales
|
of Total
|
EBIT
|
Sales
|
EBIT
|
||||||||||||||||||||
|
Engine
|
$
|
2,334
|
|
54
|
%
|
$
|
200
|
|
$
|
2,596
|
|
55
|
%
|
$
|
253
|
|
(10
|
)%
|
(21
|
)%
|
||||||||
|
Distribution
|
1,463
|
|
34
|
%
|
95
|
|
1,476
|
|
31
|
%
|
88
|
|
(1
|
)%
|
8
|
%
|
||||||||||||
|
Components
|
1,237
|
|
29
|
%
|
173
|
|
1,299
|
|
28
|
%
|
195
|
|
(5
|
)%
|
(11
|
)%
|
||||||||||||
|
Power Generation
|
550
|
|
13
|
%
|
31
|
|
680
|
|
14
|
%
|
49
|
|
(19
|
)%
|
(37
|
)%
|
||||||||||||
|
Intersegment eliminations
|
(1,293
|
)
|
(30
|
)%
|
—
|
|
(1,342
|
)
|
(28
|
)%
|
—
|
|
(4
|
)%
|
—
|
|
||||||||||||
|
Non-segment
|
—
|
|
—
|
|
(15
|
)
|
—
|
|
—
|
|
(23
|
)
|
—
|
|
(35
|
)%
|
||||||||||||
|
Total
|
$
|
4,291
|
|
100
|
%
|
$
|
484
|
|
$
|
4,709
|
|
100
|
%
|
$
|
562
|
|
(9
|
)%
|
(14
|
)%
|
||||||||
Net income attributable to Cummins was
$321 million
, or
$1.87 per diluted share
, on sales of
$4.3 billion
for the three months ended
April 3, 2016
, versus the comparable prior year period net income attributable to Cummins of
$387 million
, or
$2.14
per diluted share, on sales of
$4.7 billion
. The
decrease
in net income and earnings per diluted share was driven by
lower gross margin, unfavorable foreign currency fluctuations and a higher effective tax rate, partially offset by lower research, development and engineering expenses and decreased selling, general and administrative expenses
. The
decrease
in gross margin was primarily due to
lower volumes, unfavorable mix and unfavorable foreign currency fluctuations (primarily in the Brazilian real, Canadian dollar and Australian dollar), partially offset by lower material and commodity costs, improved Distribution segment sales related to the consolidation of partially-owned North American distributors since December 31, 2014 and savings from restructuring actions taken in the fourth quarter of 2015
.
Basic and diluted earnings per share for the three months ended April 3, 2016, benefited $0.03 from fewer weighted average shares outstanding due to purchases under the stock repurchase programs.
We generated
$263 million
of operating cash flows for the
three months ended
, compared to
$173 million
for the same period in
2015
. Refer to the section titled “Cash Flows” in the “Liquidity and Capital Resources” section for a discussion of items impacting cash flows.
During the first three months of
2016
, we repurchased
$274 million
of common stock under the 2014 Board of Directors Authorized Plan, completing this program.
In November 2015, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon the completion of the 2014 repurchase plan.
We repurchased
$201 million
under the new authorization during the first three months of 2016 and paid an additional
$100 million
under an accelerated share repurchase agreement for shares that we will receive in the second quarter of 2016. See Note
2
, "
BASIS OF PRESENTATION
" to the
Notes to Condensed Consolidated Financial Statements
for additional information.
In February 2016, the Board of Directors authorized us to issue up to $1.75 billion of unsecured short-term promissory notes ("commercial paper") pursuant to a commercial paper program. The program will facilitate the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper program for general corporate purposes.
Our debt to capital ratio (total capital defined as debt plus equity) at
April 3, 2016
, was
20.1 percent
, compared to
17.5 percent
at
December 31, 2015
. The increase was due to the repurchases of common stock and higher total debt. At
April 3, 2016
, we had
$1.3 billion
in cash and marketable securities on hand and access to our credit facilities, if necessary, to meet currently anticipated investment and funding needs. As of the date of filing this Quarterly Report on Form 10-Q, our credit ratings were as follows:
|
Long-Term
|
Short-Term
|
|||||
|
Credit Rating Agency
|
|
Senior Debt Rating
|
Debt Rating
|
Outlook
|
||
|
Standard & Poor’s Rating Services
|
|
A+
|
A1
|
Stable
|
||
|
Fitch Ratings
|
|
A
|
F1
|
Stable
|
||
|
Moody’s Investors Service, Inc.
|
|
A2
|
P1
|
Stable
|
||
23
Our global pension plans, including our unfunded and non-qualified plans, were 111 percent funded at December 31, 2015. Our U.S. qualified plan, which represents approximately 57 percent of the worldwide pension obligation, was 119 percent funded and our U.K. plan was 123 percent funded.
We expect to contribute
$146 million
to our global pension plans in
2016
. In addition, we expect our
2016
net periodic pension cost to approximate
$42 million
. See Note
3
, "
PENSION AND OTHER POSTRETIREMENT BENEFITS
" to the
Notes to Condensed Consolidated Financial Statements
for additional information.
We expect our effective tax rate for the full year of
2016
to approximate
28.5 percent
, excluding any one-time tax items.
24
OUTLOOK
Near-Term
Our outlook reflects the following trends for the remainder of
2016
:
|
•
|
We expect demand in the North American medium-duty truck market to remain strong.
|
|
•
|
We expect demand for pick-up trucks in North America to remain strong.
|
|
•
|
We expect demand in India to improve in most end-markets as its economy continues to improve.
|
|
•
|
We expect to realize annualized savings from the 2015 restructuring actions of approximately $160 million.
|
Our outlook reflects the following challenges to our business that may reduce our revenue and earnings potential for the remainder of
2016
:
|
•
|
We may close or restructure additional manufacturing facilities as we evaluate the appropriate size and structure of our manufacturing capacity, which could result in additional charges.
|
|
•
|
We expect industry production of heavy-duty trucks in North America to decline.
|
|
•
|
We expect power generation markets to remain weak.
|
|
•
|
We believe weak economic conditions in Brazil will continue to negatively impact demand across our businesses.
|
|
•
|
Foreign currency volatility could continue to put pressure on our revenues and earnings.
|
|
•
|
We expect market demand to remain weak in the oil and gas markets as the result of low crude oil prices.
|
|
•
|
Demand for equipment in global mining markets is expected to remain weak.
|
25
RESULTS OF OPERATIONS
|
|
Three months ended
|
Favorable/
|
|||||||||||||
|
April 3,
2016 |
March 29,
2015 |
(Unfavorable)
|
|||||||||||||
|
In millions (except per share amounts)
|
Amount
|
Percent
|
|||||||||||||
|
NET SALES
|
$
|
4,291
|
|
$
|
4,709
|
|
$
|
(418
|
)
|
(9
|
)%
|
||||
|
Cost of sales
|
3,235
|
|
3,514
|
|
279
|
|
8
|
%
|
|||||||
|
GROSS MARGIN
|
1,056
|
|
1,195
|
|
(139
|
)
|
(12
|
)%
|
|||||||
|
OPERATING EXPENSES AND INCOME
|
|
|
|
|
|
|
|
|
|||||||
|
Selling, general and administrative expenses
|
490
|
|
517
|
|
27
|
|
5
|
%
|
|||||||
|
Research, development and engineering expenses
|
166
|
|
195
|
|
29
|
|
15
|
%
|
|||||||
|
Equity, royalty and interest income from investees
|
72
|
|
68
|
|
4
|
|
6
|
%
|
|||||||
|
Other operating expense, net
|
(2
|
)
|
(3
|
)
|
1
|
|
33
|
%
|
|||||||
|
OPERATING INCOME
|
470
|
|
548
|
|
(78
|
)
|
(14
|
)%
|
|||||||
|
Interest income
|
6
|
|
5
|
|
1
|
|
20
|
%
|
|||||||
|
Interest expense
|
19
|
|
14
|
|
(5
|
)
|
(36
|
)%
|
|||||||
|
Other income, net
|
8
|
|
9
|
|
(1
|
)
|
(11
|
)%
|
|||||||
|
INCOME BEFORE INCOME TAXES
|
465
|
|
548
|
|
(83
|
)
|
(15
|
)%
|
|||||||
|
Income tax expense
|
132
|
|
144
|
|
12
|
|
8
|
%
|
|||||||
|
CONSOLIDATED NET INCOME
|
333
|
|
404
|
|
(71
|
)
|
(18
|
)%
|
|||||||
|
Less: Net income attributable to noncontrolling interests
|
12
|
|
17
|
|
5
|
|
29
|
%
|
|||||||
|
NET INCOME ATTRIBUTABLE TO CUMMINS INC.
|
$
|
321
|
|
$
|
387
|
|
$
|
(66
|
)
|
(17
|
)%
|
||||
|
Diluted Earnings Per Common Share Attributable to Cummins Inc.
|
$
|
1.87
|
|
$
|
2.14
|
|
$
|
(0.27
|
)
|
(13
|
)%
|
||||
|
|
Three months ended
|
Favorable/
(Unfavorable)
|
|||||||
|
|
April 3,
2016 |
March 29,
2015 |
|||||||
|
Percent of sales
|
Percentage Points
|
||||||||
|
Gross margin
|
24.6
|
%
|
25.4
|
%
|
(0.8
|
)
|
|||
|
Selling, general and administrative expenses
|
11.4
|
%
|
11.0
|
%
|
(0.4
|
)
|
|||
|
Research, development and engineering expenses
|
3.9
|
%
|
4.1
|
%
|
0.2
|
|
|||
Net Sales
Net sales for the three months ended
April 3, 2016
,
decreased
by
$418 million
versus the comparable period in
2015
. The primary drivers by segment were as follows:
|
•
|
Engine segment sales
decrease
d
10 percent
primarily due to lower demand in North American on-highway markets and lower demand in most industrial markets, partially offset by increased sales in the light-duty automotive business.
|
|
•
|
Power Generation segment sales
decrease
d
19 percent
primarily due to lower demand in both lines of business and decreased sales in most regions with the largest declines in China, Other Asia, Western Europe and Brazil.
|
|
•
|
Foreign currency fluctuations unfavorably impacted sales by approximately
3 percent
(primarily in the Brazilian real, European euro, Canadian dollar, Indian rupee, Chinese renminbi and Australian dollar).
|
|
•
|
Components segment sales
decrease
d
5 percent
primarily due to lower demand in turbo technologies and fuel systems businesses and unfavorable foreign currency fluctuations.
|
|
•
|
Distribution segment sales
decrease
d
1 percent
, primarily due to a decline in North American engine and power generation sales and unfavorable foreign currency fluctuations, partially offset by higher sales related to the consolidation of partially-owned North American distributors since December 31, 2014.
|
Sales to international markets, based on location of customers, for the three months ended April 3, 2016 and the comparable period in 2015 were both 39 percent of net sales
. A more detailed discussion of sales by segment is presented in the “OPERATING SEGMENT RESULTS” section.
26
Gross Margin
Gross margin
decrease
d
$139 million
for the three months ended
April 3, 2016
, versus the comparable period in
2015
and
decreased
0.8 point
s as a percentage of sales. The
decrease
in gross margin was primarily due to
lower volumes, unfavorable mix and unfavorable foreign currency fluctuations (primarily in the Brazilian real, Canadian dollar and Australian dollar), partially offset by lower material and commodity costs, improved Distribution segment sales related to the consolidation of partially-owned North American distributors since December 31, 2014 and savings from restructuring actions taken in the fourth quarter of 2015
.
The provision for base warranties issued, excluding campaigns, as a percent of sales for the three months ended April 3, 2016 and the comparable period in 2015 were both 2.0 percent.
A more detailed discussion of margin by segment is presented in the “OPERATING SEGMENT RESULTS” section.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
decreased
$27 million
for the three months ended
April 3, 2016
, versus the comparable period in
2015
, primarily due to lower compensation expenses of $16 million as a result of restructuring actions in 2015 and lower consulting expenses of $12 million. Overall, selling, general and administrative expenses, as a percentage of sales,
increased
to
11.4 percent
in the
three months ended April 3, 2016
, from
11.0 percent
in the comparable period in
2015
(largely due to the acquisition of North American distributors since December 31, 2014). Compensation and related expenses include salaries, fringe benefits and variable compensation.
Research, Development and Engineering Expenses
Research, development and engineering expenses
decreased
$29 million
for the three months ended
April 3, 2016
, versus the comparable period in
2015
, primarily due to higher expense recovery of $9 million, lower consulting expenses of $1 million and lower compensation expenses of $1 million as a result of restructuring actions in 2015. Compensation and related expenses include salaries, fringe benefits and variable compensation. Overall, research, development and engineering expenses, as a percentage of sales,
decreased
to
3.9 percent
in the
three months ended April 3, 2016
, from
4.1 percent
in the comparable period in
2015
.
Research activities continue to focus on development of new products to meet future emission standards around the world and improvements in fuel economy performance.
Equity, Royalty and Interest Income From Investees
Equity, royalty and interest income from investees
increase
d
$4 million
for the
three months ended April 3, 2016
, versus the comparable period in
2015
, primarily due to higher earnings at Beijing Foton Cummins Engine Co., Ltd. ($11 million) and Komatsu Cummins Chile, Ltda. ($3 million). These increases were partially offset by lower equity earnings at Dongfeng Cummins Engine Company, Ltd. ($7 million), North American distributors ($5 million) and Chongqing Cummins Engine Company, Ltd. ($4 million).
Other Operating Expense, Net
Other operating expense, net
was as follows:
|
|
Three months ended
|
|||||||
|
In millions
|
April 3,
2016 |
March 29,
2015 |
||||||
|
Loss on write off of assets
|
$
|
(5
|
)
|
$
|
(1
|
)
|
||
|
Amortization of intangible assets
|
(3
|
)
|
(6
|
)
|
||||
|
Royalty income, net
|
7
|
|
5
|
|
||||
|
Other, net
|
(1
|
)
|
(1
|
)
|
||||
|
Total other operating expense, net
|
$
|
(2
|
)
|
$
|
(3
|
)
|
||
Interest Income
Interest income for the three months ended April 3, 2016, remained relatively flat versus the comparable periods in 2015.
Interest Expense
Interest expense for the three months ended April 3, 2016, increased $5 million versus the comparable periods in 2015, primarily due to
an increase in total weighted average debt outstanding.
27
Other Income, Net
Other income, net
was as follows:
|
|
Three months ended
|
|||||||
|
In millions
|
April 3,
2016 |
March 29,
2015 |
||||||
|
Change in cash surrender value of corporate owned life insurance
|
$
|
8
|
|
$
|
10
|
|
||
|
Dividend income
|
1
|
|
1
|
|
||||
|
Gain on marketable securities, net
|
—
|
|
1
|
|
||||
|
Bank charges
|
(3
|
)
|
(2
|
)
|
||||
|
Foreign currency loss, net
|
(3
|
)
|
(2
|
)
|
||||
|
Other, net
|
5
|
|
1
|
|
||||
|
Total other income, net
|
$
|
8
|
|
$
|
9
|
|
||
Income Tax Expense
Our effective tax rate for the year is expected to approximate
28.5 percent
, excluding any one-time items that may arise. 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 and the research tax credit.
Our effective tax rate for the
three months ended April 3, 2016
, was
28.4 percent
and did not include any discrete items.
Our effective tax rate for the
three months ended March 29, 2015
, was
26.3 percent
. This tax rate included an
$18 million
discrete tax benefit to reflect the release of reserves for uncertain tax positions related to a favorable federal audit settlement.
The increase in the effective tax rate for the three months ended April 3, 2016, versus the comparable period in 2015 was primarily due to the favorable discrete tax benefit in 2015, partially offset by the research tax credit recognized in the first quarter of 2016 and favorable changes in the jurisdictional mix of pre-tax income.
It is reasonably possible that our existing liabilities for uncertain tax benefits may decrease in an amount ranging from
$40 million
to
$90 million
within the next 12 months for U.S. and non-U.S. audits that are in progress.
Noncontrolling Interests
Noncontrolling interests eliminate the income or loss attributable to non-Cummins ownership interests in our consolidated entities. Noncontrolling interests in income of consolidated subsidiaries for the
three months ended April 3, 2016
,
decrease
d
$5 million
primarily due to lower earnings at Cummins India Ltd.
Net Income Attributable to Cummins Inc. and Diluted Earnings Per Share Attributable to Cummins Inc.
Net income and diluted earnings per share attributable to Cummins Inc. for the
three months ended April 3, 2016
,
decrease
d
$66 million
and $0.27 per share, respectively versus the comparable period in
2015
, primarily due to
lower gross margin, unfavorable foreign currency fluctuations and a higher effective tax rate, partially offset by lower research, development and engineering expenses and decreased selling, general and administrative expenses
.
Basic and diluted earnings per share for the three months ended April 3, 2016, benefited $0.03 from fewer weighted average shares outstanding due to purchases under the stock repurchase programs.
28
COMPREHENSIVE INCOME
Foreign Currency Translation Adjustment
The foreign currency translation adjustment was a net loss of
$57 million
and
$176 million
for the three months ended April 3,
2016
and March 29,
2015
, respectively, and was driven by the following:
|
Three months ended
|
||||||||||||
|
April 3, 2016
|
March 29, 2015
|
|||||||||||
|
In millions
|
Translation adjustment
|
Primary currency driver vs. U.S. dollar
|
Translation adjustment
|
Primary currency driver vs. U.S. dollar
|
||||||||
|
Wholly owned subsidiaries
|
$
|
(62
|
)
|
British pound offset by Brazilian real
|
$
|
(181
|
)
|
British pound, Brazilian real
|
||||
|
Equity method investments
|
5
|
|
Mexican peso
(1)
, Chinese renminbi
|
—
|
|
Indian rupee offset by Russian rouble, Chinese renminbi
|
||||||
|
Consolidated subsidiaries with a non-controlling interest
|
—
|
|
Indian rupee offset by Chinese renminbi
|
5
|
|
Indian rupee
|
||||||
|
Total
|
$
|
(57
|
)
|
$
|
(176
|
)
|
||||||
____________________________________
(1)
The Mexican peso adjustment related to a reclassification out of other comprehensive income at the time of the sale of an equity investment in the first quarter of 2016.
29
OPERATING SEGMENT RESULTS
Our reportable operating segments consist of Engine, Distribution, Components and Power Generation. This reporting structure is organized according to the products and markets each segment serves
. We use segment EBIT as the primary basis for the chief operating decision-maker to evaluate the performance of each of our operating segments.
As previously announced, effective April 2016, we re-organized our business to combine our Power Generation segment and our high horsepower engine business to create the new Power Systems segment. Going forward we will present results for four operating segments: Engine, Distribution, Components and Power Systems. We will begin to report results for our new reporting structure in the second quarter of 2016 and will also reflect this change for historical periods. The formation of the Power Systems segment combines two businesses that are already strongly interdependent which will allow us to streamline business and technical processes to accelerate innovation, grow market share and more efficiently manage our supply chain and manufacturing operations.
Following is a discussion of results for each of our operating segments.
Engine Segment Results
Financial data for the Engine segment was as follows:
|
|
Three months ended
|
Favorable/
|
|||||||||||||
|
|
April 3,
|
March 29,
|
(Unfavorable)
|
||||||||||||
|
In millions
|
2016
|
2015
|
Amount
|
Percent
|
|||||||||||
|
External sales
(1)
|
$
|
1,624
|
|
$
|
1,889
|
|
$
|
(265
|
)
|
(14
|
)%
|
||||
|
Intersegment sales
(1)
|
710
|
|
707
|
|
3
|
|
—
|
%
|
|||||||
|
Total sales
|
2,334
|
|
2,596
|
|
(262
|
)
|
(10
|
)%
|
|||||||
|
Depreciation and amortization
|
58
|
|
58
|
|
—
|
|
—
|
%
|
|||||||
|
Research, development and engineering expenses
|
97
|
|
114
|
|
17
|
|
15
|
%
|
|||||||
|
Equity, royalty and interest income from investees
|
41
|
|
30
|
|
11
|
|
37
|
%
|
|||||||
|
Interest income
|
3
|
|
2
|
|
1
|
|
50
|
%
|
|||||||
|
Segment EBIT
|
200
|
|
253
|
|
(53
|
)
|
(21
|
)%
|
|||||||
|
|
|
|
|
|
Percentage Points
|
||||||||||
|
Segment EBIT as a percentage of total sales
|
8.6
|
%
|
9.7
|
%
|
|
|
(1.1
|
)
|
|||||||
____________________________________
(1 )
Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.
Engine segment net sales by market were as follows:
|
|
Three months ended
|
Favorable/
|
|||||||||||||
|
|
April 3,
|
March 29,
|
(Unfavorable)
|
||||||||||||
|
In millions
|
2016
|
2015
|
Amount
|
Percent
|
|||||||||||
|
Heavy-duty truck
|
$
|
631
|
|
$
|
757
|
|
$
|
(126
|
)
|
(17
|
)%
|
||||
|
Medium-duty truck and bus
|
549
|
|
608
|
|
(59
|
)
|
(10
|
)%
|
|||||||
|
Light-duty automotive
|
433
|
|
381
|
|
52
|
|
14
|
%
|
|||||||
|
Total on-highway
|
1,613
|
|
1,746
|
|
(133
|
)
|
(8
|
)%
|
|||||||
|
Industrial
|
539
|
|
616
|
|
(77
|
)
|
(13
|
)%
|
|||||||
|
Stationary power
|
182
|
|
234
|
|
(52
|
)
|
(22
|
)%
|
|||||||
|
Total sales
|
$
|
2,334
|
|
$
|
2,596
|
|
$
|
(262
|
)
|
(10
|
)%
|
||||
30
Unit shipments by segment classification (including unit shipments to Power Generation) were as follows:
|
|
Three months ended
|
Favorable/
|
||||||||||
|
|
April 3,
|
March 29,
|
(Unfavorable)
|
|||||||||
|
|
2016
|
2015
|
Amount
|
Percent
|
||||||||
|
Mid-range
|
117,100
|
|
112,400
|
|
4,700
|
|
4
|
%
|
||||
|
Heavy-duty
|
19,700
|
|
28,700
|
|
(9,000
|
)
|
(31
|
)%
|
||||
|
High-horsepower
|
2,800
|
|
3,500
|
|
(700
|
)
|
(20
|
)%
|
||||
|
Total unit shipments
|
139,600
|
|
144,600
|
|
(5,000
|
)
|
(3
|
)%
|
||||
Sales
Engine segment sales for the
three months ended April 3, 2016
,
decrease
d
$262 million
versus the comparable period in
2015
. The following were the primary drivers by market:
|
•
|
Heavy-duty truck engine sales
decrease
d
$126 million
primarily due to lower demand in North American heavy-duty truck markets with decreased engine shipments of 33 percent.
|
|
•
|
Industrial engine sales
decrease
d
$77 million
primarily due to lower demand in North American oil and gas markets with decreased engine shipments of 81 percent, lower international demand in mining markets with decreased engine shipments of 30 percent, primarily in Europe, and lower international demand in marine markets with decreased engine shipments of 14 percent.
|
|
•
|
Medium-duty truck and bus sales
decrease
d
$59 million
primarily due to lower demand in global medium-duty truck markets with decreased engine shipments of 16 percent, primarily in North America and Brazil.
|
|
•
|
Foreign currency fluctuations unfavorably impacted sales results (primarily in Brazilian real, Chinese renminbi and Indian rupee).
|
The decreases above were partially offset by an
increase
in light-duty automotive sales of
$52 million
primarily due to new sales to Nissan for the truck platform they launched in the second half of 2015.
Total on-highway-related sales for the
three months ended April 3, 2016
, were
69 percent
of total engine segment sales, compared to
67 percent
for the comparable period in
2015
.
Segment EBIT
Engine segment EBIT for the
three months ended April 3, 2016
,
decrease
d
$53 million
versus the comparable period in
2015
primarily due to lower gross margin, partially offset by lower selling, general and administrative expenses, lower research, development and engineering expenses, higher equity, royalty and interest income from investees and favorable foreign currency fluctuations (primarily in the British pound and Mexican peso).
Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
|
Three months ended
|
||||||||||
|
April 3, 2016 vs. March 29, 2015
|
||||||||||
|
Favorable/(Unfavorable) Change
|
||||||||||
|
In millions
|
Amount
|
Percent
|
Percentage point
change as a percent of total sales |
|||||||
|
Gross margin
|
$
|
(106
|
)
|
(19
|
)%
|
(2.1
|
)
|
|||
|
Selling, general and administrative expenses
|
26
|
|
13
|
%
|
0.2
|
|
||||
|
Research, development and engineering expenses
|
17
|
|
15
|
%
|
0.2
|
|
||||
|
Equity, royalty and interest income from investees
|
11
|
|
37
|
%
|
0.6
|
|
||||
The
decrease
in gross margin for the
three months ended April 3, 2016
, versus the comparable period in
2015
, was primarily due to unfavorable mix and lower volumes, partially offset by lower material and commodity costs and favorable product coverage. The
decrease
in selling, general and administrative expenses was primarily due to lower compensation expenses as the result of restructuring actions taken in December 2015 and lower consulting expenses. The
decrease
in research, development and engineering expenses was primarily due to higher expense recovery. The
increase
in equity, royalty and interest income from investees was primarily due to increased earnings at Beijing Foton Cummins Engine Co., Ltd., partially offset by decreased earnings at Dongfeng Cummins Engine Company, Ltd. and Cummins Westport, Inc.
31
Distribution Segment Results
Financial data for the Distribution segment was as follows:
|
|
Three months ended
|
Favorable/
|
|||||||||||||
|
|
April 3,
|
March 29,
|
(Unfavorable)
|
||||||||||||
|
In millions
|
2016
|
2015
|
Amount
|
Percent
|
|||||||||||
|
External sales
|
$
|
1,458
|
|
$
|
1,469
|
|
$
|
(11
|
)
|
(1
|
)%
|
||||
|
Intersegment sales
|
5
|
|
7
|
|
(2
|
)
|
(29
|
)%
|
|||||||
|
Total sales
|
1,463
|
|
1,476
|
|
(13
|
)
|
(1
|
)%
|
|||||||
|
Depreciation and amortization
|
26
|
|
27
|
|
1
|
|
4
|
%
|
|||||||
|
Research, development and engineering expenses
|
2
|
|
3
|
|
1
|
|
33
|
%
|
|||||||
|
Equity, royalty and interest income from investees
|
18
|
|
20
|
|
(2
|
)
|
(10
|
)%
|
|||||||
|
Interest income
|
1
|
|
1
|
|
—
|
|
—
|
%
|
|||||||
|
Segment EBIT
|
95
|
|
88
|
|
7
|
|
8
|
%
|
|||||||
|
|
|
|
Percentage Points
|
||||||||||||
|
Segment EBIT as a percentage of total sales
|
6.5
|
%
|
6.0
|
%
|
|
|
0.5
|
|
|||||||
Sales for our Distribution segment by region were as follows:
|
|
Three months ended
|
Favorable/
|
|||||||||||||
|
|
April 3,
|
March 29,
|
(Unfavorable)
|
||||||||||||
|
In millions
|
2016
|
2015
|
Amount
|
Percent
|
|||||||||||
|
North & Central America
|
$
|
955
|
|
$
|
979
|
|
$
|
(24
|
)
|
(2
|
)%
|
||||
|
Europe, CIS and China
|
186
|
|
156
|
|
30
|
|
19
|
%
|
|||||||
|
Asia Pacific
|
169
|
|
177
|
|
(8
|
)
|
(5
|
)%
|
|||||||
|
Africa
|
48
|
|
50
|
|
(2
|
)
|
(4
|
)%
|
|||||||
|
Middle East
|
41
|
|
44
|
|
(3
|
)
|
(7
|
)%
|
|||||||
|
India
|
41
|
|
37
|
|
4
|
|
11
|
%
|
|||||||
|
South America
|
23
|
|
33
|
|
(10
|
)
|
(30
|
)%
|
|||||||
|
Total sales
|
$
|
1,463
|
|
$
|
1,476
|
|
$
|
(13
|
)
|
(1
|
)%
|
||||
Sales for our Distribution segment by product were as follows:
|
|
Three months ended
|
Favorable/
|
|||||||||||||
|
|
April 3,
|
March 29,
|
(Unfavorable)
|
||||||||||||
|
In millions
|
2016
|
2015
|
Amount
|
Percent
|
|||||||||||
|
Parts and filtration
|
$
|
647
|
|
$
|
573
|
|
$
|
74
|
|
13
|
%
|
||||
|
Service
|
299
|
|
284
|
|
15
|
|
5
|
%
|
|||||||
|
Power generation
|
275
|
|
298
|
|
(23
|
)
|
(8
|
)%
|
|||||||
|
Engines
|
242
|
|
321
|
|
(79
|
)
|
(25
|
)%
|
|||||||
|
Total sales
|
$
|
1,463
|
|
$
|
1,476
|
|
$
|
(13
|
)
|
(1
|
)%
|
||||
Sales
Distribution segment sales for the
three months ended April 3, 2016
,
decrease
d
$13 million
versus the comparable period in
2015
, primarily due to a decline in organic sales of $135 million in North American engine and power generation markets and unfavorable foreign currency fluctuations (primarily in the Canadian dollar, Australian dollar and South African rand), partially offset by $109 million of segment sales related to the consolidation of partially-owned North American distributors since December 31, 2014 and organic sales growth in China, Africa, Europe and CIS.
Segment EBIT
Distribution segment EBIT for the
three months ended April 3, 2016
,
increase
d
$7 million
versus the comparable period in
2015
, primarily due to higher gross margin, partially offset by unfavorable foreign currency fluctuations (primarily in the
32
Canadian dollar, Australian dollar and South African rand) and higher selling, general and administrative expenses. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
|
Three months ended
|
||||||||||
|
April 3, 2016 vs. March 29, 2015
|
||||||||||
|
Favorable/(Unfavorable) Change
|
||||||||||
|
In millions
|
Amount
|
Percent
|
Percentage point
change as a percent of total sales |
|||||||
|
Gross margin
|
$
|
14
|
|
6
|
%
|
1.1
|
|
|||
|
Selling, general and administrative expenses
|
(13
|
)
|
(8
|
)%
|
(1.0
|
)
|
||||
|
Equity, royalty and interest income from investees
|
(2
|
)
|
(10
|
)%
|
(0.2
|
)
|
||||
|
Other operating income, net
|
7
|
|
NM
|
|
0.5
|
|
||||
|
"NM" - not meaningful information
|
||||||||||
The
increase
in gross margin for the
three months ended April 3, 2016
, versus the comparable period in
2015
, was primarily due to the acquisition of partially owned North American distributors since December 31, 2014, favorable mix and improved pricing, partially offset by unfavorable foreign currency fluctuations (primarily in the Canadian dollar, Australian dollar and South African rand). The
increase
in selling, general and administrative expenses was primarily due to higher compensation expenses due to the acquisition of North American distributors. Acquisitions resulted in lower amortization of intangible assets of $6 million for the
three months ended April 3, 2016
, versus the comparable period in 2015, driving the favorable change in other income, net.
Components Segment Results
Financial data for the Components segment was as follows:
|
|
Three months ended
|
Favorable/
|
|||||||||||||
|
|
April 3,
|
March 29,
|
(Unfavorable)
|
||||||||||||
|
In millions
|
2016
|
2015
|
Amount
|
Percent
|
|||||||||||
|
External sales
(1)
|
$
|
897
|
|
$
|
931
|
|
$
|
(34
|
)
|
(4
|
)%
|
||||
|
Intersegment sales
(1)
|
340
|
|
368
|
|
(28
|
)
|
(8
|
)%
|
|||||||
|
Total sales
|
1,237
|
|
1,299
|
|
(62
|
)
|
(5
|
)%
|
|||||||
|
Depreciation and amortization
|
27
|
|
26
|
|
(1
|
)
|
(4
|
)%
|
|||||||
|
Research, development and engineering expenses
|
54
|
|
61
|
|
7
|
|
11
|
%
|
|||||||
|
Equity, royalty and interest income from investees
|
8
|
|
9
|
|
(1
|
)
|
(11
|
)%
|
|||||||
|
Interest income
|
1
|
|
1
|
|
—
|
|
—
|
%
|
|||||||
|
Segment EBIT
|
173
|
|
195
|
|
(22
|
)
|
(11
|
)%
|
|||||||
|
|
|
|
Percentage Points
|
||||||||||||
|
Segment EBIT as a percentage of total sales
|
14.0
|
%
|
15.0
|
%
|
|
|
(1.0
|
)
|
|||||||
____________________________________
(1)
Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.
Sales for our Components segment by business were as follows:
|
|
Three months ended
|
Favorable/
|
|||||||||||||
|
|
April 3,
|
March 29,
|
(Unfavorable)
|
||||||||||||
|
In millions
|
2016
|
2015
|
Amount
|
Percent
|
|||||||||||
|
Emission solutions
|
$
|
607
|
|
$
|
613
|
|
$
|
(6
|
)
|
(1
|
)%
|
||||
|
Turbo technologies
|
265
|
|
301
|
|
(36
|
)
|
(12
|
)%
|
|||||||
|
Filtration
|
252
|
|
255
|
|
(3
|
)
|
(1
|
)%
|
|||||||
|
Fuel systems
|
113
|
|
130
|
|
(17
|
)
|
(13
|
)%
|
|||||||
|
Total sales
|
$
|
1,237
|
|
$
|
1,299
|
|
$
|
(62
|
)
|
(5
|
)%
|
||||
33
Sales
Components segment sales for the
three months ended April 3, 2016
,
decrease
d
$62 million
across all lines of business versus the comparable period in
2015
. The following were the primary drivers by business:
|
•
|
Turbo technologies sales
decrease
d
$36 million
primarily due to lower demand in North American on-highway markets and unfavorable foreign currency fluctuations (primarily in the British pound, Brazilian real and Chinese renminbi).
|
|
•
|
Fuel systems sales
decrease
d
$17 million
primarily due to lower demand in the North American on-highway markets, partially offset by higher demand in China.
|
Segment EBIT
Components segment EBIT for the
three months ended April 3, 2016
,
decrease
d
$22 million
versus the comparable period in
2015
, primarily due to lower gross margin and unfavorable foreign currency fluctuations (primarily in the Brazilian real),
partially offset by lower research, development and engineering expenses. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
|
Three months ended
|
||||||||||
|
April 3, 2016 vs. March 29, 2015
|
||||||||||
|
Favorable/(Unfavorable) Change
|
||||||||||
|
In millions
|
Amount
|
Percent
|
Percentage point
change as a percent of total sales |
|||||||
|
Gross margin
|
$
|
(28
|
)
|
(9
|
)%
|
(1.1
|
)
|
|||
|
Selling, general and administrative expenses
|
3
|
|
4
|
%
|
(0.1
|
)
|
||||
|
Research, development and engineering expenses
|
7
|
|
11
|
%
|
0.3
|
|
||||
|
Equity, royalty and interest income from investees
|
(1
|
)
|
(11
|
)%
|
(0.1
|
)
|
||||
The
decrease
in gross margin for the
three months ended April 3, 2016
, versus the comparable period in
2015
, was primarily due to unfavorable mix, unfavorable pricing and unfavorable foreign currency fluctuations (primarily in the Brazilian real), partially offset by lower material costs. The
decrease
in selling, general and administrative expenses was primarily due to lower consulting expenses and lower compensation expenses as the result of restructuring actions taken in December 2015. The
decrease
in research, development and engineering expenses was primarily due to higher expense recovery, lower consulting expenses and lower compensation expenses as the result of restructuring actions taken in December 2015.
Power Generation Segment Results
Financial data for the Power Generation segment was as follows:
|
|
Three months ended
|
Favorable/
|
|||||||||||||
|
|
April 3,
|
March 29,
|
(Unfavorable)
|
||||||||||||
|
In millions
|
2016
|
2015
|
Amount
|
Percent
|
|||||||||||
|
External sales
(1)
|
$
|
312
|
|
$
|
420
|
|
$
|
(108
|
)
|
(26
|
)%
|
||||
|
Intersegment sales
(1)
|
238
|
|
260
|
|
(22
|
)
|
(8
|
)%
|
|||||||
|
Total sales
|
550
|
|
680
|
|
(130
|
)
|
(19
|
)%
|
|||||||
|
Depreciation and amortization
|
16
|
|
16
|
|
—
|
|
—
|
%
|
|||||||
|
Research, development and engineering expenses
|
13
|
|
17
|
|
4
|
|
24
|
%
|
|||||||
|
Equity, royalty and interest income from investees
|
5
|
|
9
|
|
(4
|
)
|
(44
|
)%
|
|||||||
|
Interest income
|
1
|
|
1
|
|
—
|
|
—
|
%
|
|||||||
|
Segment EBIT
|
31
|
|
49
|
|
(18
|
)
|
(37
|
)%
|
|||||||
|
|
|
|
Percentage Points
|
||||||||||||
|
Segment EBIT as a percentage of total sales
|
5.6
|
%
|
7.2
|
%
|
|
|
(1.6
|
)
|
|||||||
____________________________________
(1)
Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.
34
In the first quarter of 2016, our Power Generation segment reorganized its reporting structure to include the following product lines:
|
•
|
Power generation -
We manufacture generators for commercial and consumer applications ranging from 2 kilowatts to 3.5 megawatts, as well as paralleling systems and transfer switches for applications such as data centers, health care facilities and waste water treatment plants. We also provide turnkey solutions for distributed generation and energy management applications using natural gas or biogas as a fuel. The business also serves global rental accounts for diesel and gas generator sets.
|
|
•
|
Generator technologies -
We design, manufacture, sell and service A/C generator/alternator products internally as well as to other generator set assemblers. Our products are sold under the Stamford, AVK and Markon brands and range in output from 3 kilovolt-amperes (kVA) to 12,000 kVA.
|
Sales for our Power Generation segment by business (including 2015 reorganized balances) were as follows:
|
|
Three months ended
|
Favorable/
|
|||||||||||||
|
|
April 3,
|
March 29,
|
(Unfavorable)
|
||||||||||||
|
In millions
|
2016
|
2015
|
Amount
|
Percent
|
|||||||||||
|
Power generation
|
$
|
477
|
|
$
|
582
|
|
$
|
(105
|
)
|
(18
|
)%
|
||||
|
Generator technologies
|
73
|
|
98
|
|
(25
|
)
|
(26
|
)%
|
|||||||
|
Total sales
|
$
|
550
|
|
$
|
680
|
|
$
|
(130
|
)
|
(19
|
)%
|
||||
Sales
Power Generation segment sales for the
three months ended April 3, 2016
,
decrease
d
$130 million
versus the comparable period in
2015
. The following were the primary drivers by business:
|
•
|
Power generation sales
decrease
d in most regions with the largest declines in demand primarily in China, Other Asia, Latin America, Mexico and Western Europe.
|
|
•
|
Generator technologies sales
decrease
d in most regions with the highest declines in demand primarily in China and Western Europe.
|
|
•
|
Foreign currency fluctuations unfavorably impacted sales results (primarily in the Brazilian real, Indian rupee and European euro).
|
Segment EBIT
Power Generation segment EBIT for the
three months ended April 3, 2016
,
decrease
d
$18 million
versus the comparable period in
2015
, primarily due to lower gross margin, partially offset by lower selling, general and administrative expenses. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
|
Three months ended
|
||||||||||
|
April 3, 2016 vs. March 29, 2015
|
||||||||||
|
Favorable/(Unfavorable) Change
|
||||||||||
|
In millions
|
Amount
|
Percent
|
Percentage point
change as a percent of total sales |
|||||||
|
Gross margin
|
$
|
(29
|
)
|
(23
|
)%
|
(0.8
|
)
|
|||
|
Selling, general and administrative expenses
|
11
|
|
15
|
%
|
(0.6
|
)
|
||||
|
Research, development and engineering expenses
|
4
|
|
24
|
%
|
0.1
|
|
||||
|
Equity, royalty and interest income from investees
|
(4
|
)
|
(44
|
)%
|
(0.4
|
)
|
||||
The
decrease
in gross margin for the
three months ended April 3, 2016
, versus the comparable period in
2015
, was primarily due to lower volumes, partially offset by savings from restructuring actions taken in December 2015 and lower material and commodity costs. The
decrease
in selling, general and administrative expenses was primarily due to lower compensation expenses as the result of restructuring actions taken in December 2015 and lower consulting expenses. The
decrease
in research, development and engineering expenses was primarily due to lower compensation expenses as the result of restructuring actions taken in December 2015.
35
Reconciliation of Segment EBIT to Income Before Income Taxes
The table below reconciles the segment information to the corresponding amounts in the
Condensed Consolidated Statements of Income:
|
|
Three months ended
|
|||||||
|
In millions
|
April 3,
2016 |
March 29,
2015 |
||||||
|
Total EBIT
|
$
|
499
|
|
$
|
585
|
|
||
|
Non-segment EBIT
(1)
|
(15
|
)
|
(23
|
)
|
||||
|
Total segment EBIT
|
484
|
|
562
|
|
||||
|
Less: Interest expense
|
19
|
|
14
|
|
||||
|
Income before income taxes
|
$
|
465
|
|
$
|
548
|
|
||
____________________________________
(1)
Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three months ended April 3, 2016 and March 29, 2015.
36
LIQUIDITY AND CAPITAL RESOURCES
Key Working Capital and Balance Sheet Data
We fund our working capital with cash from operations and short-term borrowings when necessary. Various assets and liabilities, including short-term debt, can fluctuate significantly from month to month depending on short-term liquidity needs. As a result, working capital is a prime focus of management attention.
Working capital and balance sheet measures are provided in the following table:
|
Dollars in millions
|
April 3,
2016 |
December 31,
2015 |
||||||
|
Working capital
(1)
|
$
|
3,551
|
|
$
|
4,144
|
|
||
|
Current ratio
|
1.91
|
|
2.09
|
|
||||
|
Accounts and notes receivable, net
|
$
|
2,921
|
|
$
|
2,820
|
|
||
|
Days’ sales in receivables
|
61
|
|
55
|
|
||||
|
Inventories
|
$
|
2,759
|
|
$
|
2,707
|
|
||
|
Inventory turnover
|
4.6
|
|
4.9
|
|
||||
|
Accounts payable (principally trade)
|
$
|
1,809
|
|
$
|
1,706
|
|
||
|
Days' payable outstanding
|
50
|
|
48
|
|
||||
|
Total debt
|
$
|
1,830
|
|
$
|
1,639
|
|
||
|
Total debt as a percent of total capital
(2)
|
20.1
|
%
|
17.5
|
%
|
||||
____________________________________
(1)
Working capital includes cash and cash equivalents.
(2)
Total capital is defined as total debt plus equity.
Cash Flows
Cash and cash equivalents were impacted as follows:
|
|
Three months ended
|
|
||||||||||
|
In millions
|
April 3,
2016 |
March 29,
2015 |
Change
|
|||||||||
|
Net cash provided by operating activities
|
$
|
263
|
|
$
|
173
|
|
$
|
90
|
|
|||
|
Net cash used in investing activities
|
(388
|
)
|
(125
|
)
|
(263
|
)
|
||||||
|
Net cash used in financing activities
|
(632
|
)
|
(296
|
)
|
(336
|
)
|
||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
(39
|
)
|
(56
|
)
|
17
|
|
||||||
|
Net decrease in cash and cash equivalents
|
$
|
(796
|
)
|
$
|
(304
|
)
|
$
|
(492
|
)
|
|||
Net cash
provided by
operating activities
increase
d
$90 million
for the
three months ended April 3, 2016
, versus the comparable period in
2015
, primarily due to favorable working capital fluctuations and lower pension contributions in excess of expense, partially offset by lower consolidated net income. During the first
three
months of
2016
, the
lower
working capital requirements resulted in a cash
outflow
of
$144 million
compared to a cash
outflow
of
$242 million
in the comparable period in
2015
.
Net cash
used in
investing activities
increase
d
$263 million
for the
three months ended April 3, 2016
, versus the comparable period in
2015
, primarily due to higher net investments in marketable securities of $232 million.
Net cash
used in
financing activities
increase
d
$336 million
for the
three months ended April 3, 2016
, versus the comparable period in
2015
, primarily due to higher common stock repurchases of $438 million, partially offset by increased proceeds from borrowings of $103 million and new net borrowings of commercial paper of $50 million.
Sources of Liquidity
We generate significant ongoing cash flow, which has been used, in part, to fund working capital, common stock repurchases, capital expenditures, dividends on our common stock, acquisitions, projected pension obligations, debt service and restructuring actions and other charges. Cash provided by operations is our principal source of liquidity with
$263 million
provided in the
three months ended April 3, 2016
.
37
At
April 3, 2016
, our other sources of liquidity included:
|
April 3, 2016
|
||||||||||||||
|
In millions
|
Total Combined
|
U.S
|
International
|
Primary location of international balances
|
||||||||||
|
Cash and cash equivalents
|
$
|
915
|
|
$
|
242
|
|
$
|
673
|
|
U.K., China, Singapore
|
||||
|
Marketable securities
(1)
|
359
|
|
33
|
|
326
|
|
China, India
|
|||||||
|
Total
|
$
|
1,274
|
|
$
|
275
|
|
$
|
999
|
|
|||||
|
Available credit capacity
|
|
|||||||||||||
|
Revolving credit facility
(2)
|
$
|
1,750
|
|
|||||||||||
|
International and other uncommitted domestic credit facilities
(3)
|
151
|
|
||||||||||||
____________________________________
(1)
The majority of marketable securities could be liquidated into cash within a few days.
(2)
The revolving credit facility is maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At April 3, 2016, we had $50 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facility to $1.70 billion.
(3)
The available capacity is net of letters of credit.
Cash, Cash Equivalents and Marketable Securities
A significant portion of our cash flows is generated outside the U.S.
The geographic location of our cash and marketable securities aligns well with our ongoing investments. We manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. As a result, we do not anticipate any local liquidity restrictions to preclude us from funding our operating needs with local resources.
If we distribute our foreign cash balances to the U.S. or to other foreign subsidiaries, we could be required to accrue and pay U.S. taxes. For example, we would be required to accrue and pay additional U.S. taxes if we repatriated cash from certain foreign subsidiaries whose earnings we have asserted are permanently reinvested outside of the U.S. Foreign earnings for which we assert permanent reinvestment outside the U.S. consist primarily of earnings of our China and U.K. domiciled subsidiaries. At present, we do not foresee a need to repatriate any earnings from these subsidiaries for which we have asserted permanent reinvestment. However, to help fund cash needs of the U.S. or other international subsidiaries as they arise, we repatriate available cash from certain foreign subsidiaries whose earnings are not permanently reinvested when it is cost effective to do so. Earnings generated after 2011 from our China operations are considered permanently reinvested, while earnings generated prior to 2012, for which U.S. deferred tax liabilities have been recorded, are expected to be repatriated in future years.
Debt Facilities and Other Sources of Liquidity
In February 2016, the Board of Directors authorized us to issue up to $1.75 billion of unsecured short-term promissory notes ("commercial paper") pursuant to a commercial paper program. The program will facilitate the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper program for general corporate purposes.
We have a
$1.75 billion
revolving credit facility, the proceeds of which can be used for general corporate purposes. This facility expires on November 13, 2020. The revolving credit facility is maintained primarily to provide backup liquidity for our commercial paper borrowings, letters of credit and general corporate purposes. The total combined borrowing capacity under the revolving credit facility and commercial paper program should not exceed $1.75 billion.
As a well-known seasoned issuer, we filed an automatic shelf registration for an undetermined amount of debt and equity securities with the Securities and Exchange Commission on February 16, 2016. Under this shelf registration we may offer, from time to time, debt securities, common stock, preferred and preference stock, depositary shares, warrants, stock purchase contracts and stock purchase units.
38
Uses of Cash
Share Repurchases
In November 2015, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon the completion of the 2014 repurchase plan.
In the first three months of
2016
, we made the following purchases under the respective stock repurchase programs:
|
In millions (except per share amounts)
For each quarter ended |
Shares
Purchased |
Average Cost
Per Share |
Total Cost of
Repurchases |
Cash Paid for Shares Not Received
|
Remaining
Authorized Capacity (1) |
||||||||||||||
|
July 2014, $1 billion repurchase program
|
|
|
|
|
|
|
|
|
|||||||||||
|
April 3
|
2.9
|
|
$
|
95.40
|
|
$
|
274
|
|
$
|
—
|
|
||||||||
|
November 2015, $1 billion repurchase program
|
|
|
|
|
|
|
|
|
|||||||||||
|
April 3
|
2.0
|
|
$
|
98.43
|
|
$
|
201
|
|
$
|
100
|
|
$
|
699
|
|
|||||
|
Total
|
4.9
|
|
$
|
96.66
|
|
$
|
475
|
|
$
|
100
|
|
||||||||
____________________________________
(1)
The remaining authorized capacities under the 2014 and 2015 Plans were calculated based on the cost to purchase the shares but exclude commission expenses in accordance with the authorized Plans.
On February 9, 2016, we entered into an accelerated share repurchase (ASR) agreement with a third party financial institution to repurchase
$500 million
of our common stock under our previously announced share repurchase plans. Pursuant to the terms of the agreement, we paid the full
$500 million
purchase price and received approximately
4.1 million
shares at a price of
$98.43
per share, representing approximately
80 percent
of the shares expected to be repurchased. The unsettled portion of the ASR meets the criteria to be accounted for as a forward contract indexed to our stock and qualifies as an equity transaction. This resulted in a
$100 million
reduction to additional paid-in capital during the quarter. The final number of shares to be repurchased will be based on our volume-weighted average stock price during the term of the transaction, less a discount. The ASR is expected to be completed by the end of the second quarter of 2016.
We may continue to repurchase outstanding shares from time to time
during 2016
to offset the dilutive impact of employee stock based compensation plans and to enhance shareholder value.
Dividends
In July 2015, our Board of Directors authorized an increase to our quarterly dividend of 25 percent from $0.78 per share to $0.975 per share.
We paid dividends of
$170 million
during the
three months ended April 3, 2016
.
Capital Expenditures
Capital expenditures and spending on internal use software for the
three months ended
April 3, 2016
, were
$84 million
compared to
$108 million
in the comparable period in
2015
.
Despite the challenging international economies, we continue to invest in new product lines and targeted capacity expansions. We plan to spend between $600 million and $650 million in 2016 as we continue with product launches and facility improvements. Approximately 50 percent of our capital expenditures are expected to be invested outside of the U.S. in 2016.
Pensions
The funded status of our pension plans is dependent upon a variety of variables and assumptions including return on invested assets, market interest rates and levels of voluntary contributions to the plans.
In the first
three
months of
2016
,
the investment return on our U.S. pension trust was 4.7 percent while our U.K. pension trust return was 4.0 percent.
Approximately 78 percent of our pension plan assets are held in highly liquid investments such as fixed income and equity securities. The remaining 22 percent of our plan assets are held in less liquid, but market valued investments, including real estate, private equity and insurance contracts.
39
We sponsor funded and unfunded domestic and foreign defined benefit pension plans. Contributions to these plans were as follows:
|
|
Three months ended
|
|||||||
|
In millions
|
April 3,
2016 |
March 29,
2015 |
||||||
|
Defined benefit pension plans
|
|
|
|
|
||||
|
Voluntary contribution
|
$
|
48
|
|
$
|
36
|
|
||
|
Mandatory contribution
|
12
|
|
76
|
|
||||
|
Defined benefit pension contributions
|
$
|
60
|
|
$
|
112
|
|
||
|
Defined contribution pension plans
|
$
|
21
|
|
$
|
25
|
|
||
We anticipate making additional defined benefit pension contributions during the remainder of
2016
of
$86 million
. The estimated
$146 million
of pension contributions for the full year include voluntary contributions of approximately
$102 million
. These contributions may be made from trusts or company funds either to increase pension assets or to make direct benefit payments to plan participants. We expect our
2016
net periodic pension cost to approximate
$42 million
.
Current Maturities of Short and Long-Term Debt
We had
$50 million
of commercial paper outstanding at
April 3, 2016,
that matures in less than one year. The maturity schedule of our existing long-term debt does not require significant cash outflows in the intermediate term. Required annual principal payments range from
$7 million
to
$39 million
over the next five years (including the remainder of 2016).
Restructuring Actions
We executed restructuring actions primarily in the form of professional voluntary and involuntary employee separation programs in the fourth quarter of 2015. We reduced our worldwide workforce by approximately
1,900
employees. We incurred a fourth quarter charge of
$90 million
(
$61 million
after tax) for these headcount reductions, of which
$86 million
was expected to be settled in cash. As a result of changes in estimates, we now expect the amount to be
$88 million
. The majority of these payments will be made by the end of September 2016.
At April 3, 2016
, substantially all terminations have been completed
.
Credit Ratings
Our ratings and outlook from each of the credit rating agencies as of the date of filing are shown in the table below.
|
Long-Term
|
Short-Term
|
|||||
|
Credit Rating Agency
(1)
|
|
Senior Debt Rating
|
Debt Rating
|
Outlook
|
||
|
Standard & Poor’s Rating Services
|
|
A+
|
A1
|
Stable
|
||
|
Fitch Ratings
|
|
A
|
F1
|
Stable
|
||
|
Moody’s Investors Service, Inc.
|
|
A2
|
P1
|
Stable
|
||
____________________________________
(1)
Credit ratings are not recommendations to buy, are subject to change and each rating should be evaluated independently of any other rating. In addition, we undertake no obligation to update disclosures concerning our credit ratings, whether as a result of new information, future events or otherwise.
Management's Assessment of Liquidity
Our financial condition and liquidity remain strong. Our solid balance sheet and credit ratings enable ready access to credit and the capital markets. We assess our liquidity in terms of our ability to generate adequate cash to fund our operating, investing and financing activities. We believe our liquidity provides us with the financial flexibility needed to fund working capital, common stock repurchases, capital expenditures, dividend payments, acquisition of the remaining North American distributor, projected pension obligations, debt service obligations and severance payments. We continue to generate cash from operations in the U.S. and maintain access to our revolving credit facility.
40
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
A summary of our significant accounting policies is included in Note 1, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” of the
Notes to the Consolidated Financial Statements
of our
2015
Form 10-K which discusses accounting policies that we have selected from acceptable alternatives.
Our
Condensed Consolidated Financial Statements
are prepared in accordance with generally accepted accounting principles that often require management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts presented and disclosed in the financial statements. Management reviews these estimates and assumptions based on historical experience, changes in business conditions and other relevant factors they believe to be reasonable under the circumstances. In any given reporting period, our actual results may differ from the estimates and assumptions used in preparing our
Condensed Consolidated Financial Statements.
Critical accounting estimates are defined as follows: the estimate requires management to make assumptions about matters that were highly uncertain at the time the estimate was made; different estimates reasonably could have been used; or if changes in the estimate are reasonably likely to occur from period to period and the change would have a material impact on our financial condition or results of operations. Our senior management has discussed the development and selection of our accounting policies, related accounting estimates and the disclosures set forth below with the Audit Committee of our Board of Directors. Our critical accounting estimates disclosed in the Form 10-K address the estimation of liabilities for warranty programs, accounting for income taxes and pension benefits.
A discussion of our critical accounting estimates may be found in the “Management’s Discussion and Analysis” section of our
2015
Form 10-K under the caption “APPLICATION OF CRITICAL ACCOUNTING ESTIMATES.” Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in different policies or estimates being reported in the first
three
months of
2016
.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 14, "RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS," in the
Notes to Condensed Consolidated Financial Statements
for additional information.
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
A discussion of quantitative and qualitative disclosures about market risk may be found in Item 7A of our
2015
Form 10-K. There have been no material changes in this information since the filing of our
2015
Form 10-K.
ITEM 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended
April 3, 2016
, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
41
PART II. OTHER INFORMATION
ITEM 1.
Legal Proceedings
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.
ITEM 1A.
Risk Factors
In addition to other information set forth in this report, you should consider other risk factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended
December 31, 2015
, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K or the "CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION" in this Quarterly report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently judge to be immaterial also may materially adversely affect our business, financial condition or operating results.
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
The following information is provided pursuant to Item 703 of Regulation S-K:
|
|
Issuer Purchases of Equity Securities
|
||||||||||||
|
Period
|
(a) Total
Number of
Shares
Purchased
(1)
|
(b) Average
Price Paid per Share |
(c) Total Number of
Shares Purchased as Part of Publicly Announced Plans or Programs |
(d) Maximum
Number of Shares
that May Yet Be
Purchased Under the
Plans or Programs
(2)
|
|||||||||
|
January 1 - February 7
|
850,978
|
|
$
|
88.20
|
|
850,378
|
|
120,020
|
|
||||
|
February 8 - March 6
|
4,065,102
|
|
98.43
|
|
4,063,802
|
|
124,204
|
|
|||||
|
March 7 - April 3
|
1,075
|
|
109.96
|
|
—
|
|
124,113
|
|
|||||
|
Total
|
4,917,155
|
|
96.66
|
|
4,914,180
|
|
|
|
|||||
____________________________________
(1)
Shares purchased represent shares under our Key Employee Stock Investment Plan established in 1969 (there is no maximum repurchase limitation in this plan) and our Board of Directors authorized share repurchase programs.
(2)
These values reflect the sum of shares held in loan status under our Key Employee Stock Investment Plan. The repurchase programs authorized by the Board of Directors do not limit the number of shares that may be purchased and were excluded from this column. The dollar value remaining available for future purchases under such programs as of April 3, 2016, was $699 million.
In November 2015, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon the completion of the 2014 repurchase plan.
On February 9, 2016, we entered into an accelerated share repurchase (ASR) agreement with a third party financial institution to repurchase
$500 million
of our common stock under our previously announced share repurchase plans. Pursuant to the terms of the agreement, we paid the full
$500 million
purchase price and received approximately
4.1 million
shares at a price of
$98.43
per share, representing approximately
80 percent
of the shares expected to be repurchased. The unsettled portion of the ASR meets the criteria to be accounted for as a forward contract
42
indexed to our stock and qualifies as an equity transaction. This resulted in a
$100 million
reduction to additional paid-in capital during the quarter. The final number of shares to be repurchased will be based on our volume-weighted average stock price during the term of the transaction, less a discount. The ASR is expected to be completed by the end of the second quarter of 2016.
The initial
4.1 million
shares delivered from the ASR are included in purchases in the table above.
We repurchased a total of
$274 million
and
$201 million
of stock under the 2014 and 2015 authorized stock repurchase plans, respectively, during the three months ended
April 3, 2016
, including the ASR shares discussed above.
During the three months ended
April 3, 2016
, we repurchased
2,975
shares from employees in connection with the Key Employee Stock Investment Plan which allows certain employees, other than officers, to purchase shares of common stock on an installment basis up to an established credit limit. Loans are issued for five-year terms at a fixed interest rate established at the date of purchase and may be refinanced after its initial five-year period for an additional five-year period. Participants must hold shares for a minimum of six months from date of purchase. If the shares are sold before the loan is paid off, the employee must wait six months before another share purchase may be made. We hold participants’ shares as security for the loans and would, in effect repurchase shares if the participant defaulted in repayment of the loan. There is no maximum amount of shares that we may purchase under this plan.
ITEM 3.
Defaults Upon Senior Securities
Not applicable.
ITEM 4.
Mine Safety Disclosures
Not applicable.
ITEM 5.
Other Information
Not applicable.
ITEM 6.
Exhibits
See Exhibit Index at the end of this Quarterly Report on Form 10-Q.
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
Cummins Inc.
|
|
||||
|
Date:
|
May 3, 2016
|
|
|||
|
|
|
||||
|
By:
|
/s/ PATRICK J. WARD
|
|
By:
|
/s/ MARSHA L. HUNT
|
|
|
|
Patrick J. Ward
|
|
|
Marsha L. Hunt
|
|
|
|
Vice President and Chief Financial Officer
|
|
|
Vice President-Corporate Controller
|
|
|
|
(Principal Financial Officer)
|
|
|
(Principal Accounting Officer)
|
|
44
CUMMINS INC.
EXHIBIT INDEX
|
Exhibit No.
|
|
Description of Exhibit
|
|
12
|
|
Calculation of Ratio of Earnings to Fixed Charges.
|
|
31(a)
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31(b)
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
101.INS
|
|
XBRL Instance Document.
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document.
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document.
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document.
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document.
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document.
|
45
TABLE OF CONTENTS
Part I. Financial InformationprintItem 1. Condensed Consolidated Financial StatementsprintNote 1. Nature Of OperationsprintNote 2. Basis Of PresentationprintNote 3. Pension and Other Postretirement BenefitsprintNote 4. Equity, Royalty and Interest Income From InvesteesprintNote 5. Income TaxesprintNote 6. Marketable SecuritiesprintNote 7. InventoriesprintNote 8. DebtprintNote 9. Product Warranty LiabilityprintNote 10. Commitments and ContingenciesprintNote 11. Accumulated Other Comprehensive LossprintNote 12. Restructuring Actions and Other ChargesprintNote 13. Operating SegmentsprintNote 14. Recently Issued Accounting PronouncementsprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II. Other InformationprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 3. Defaults Upon Senior SecuritiesprintItem 4. Mine Safety DisclosuresprintItem 5. Other InformationprintItem 6. Exhibitsprint