10-Q
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)
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| | |
Indiana (State of Incorporation) | | 35-0257090 (IRS Employer Identification No.) |
500 Jackson Street
Box 3005
Columbus, Indiana 47202-3005
(Address of principal executive offices)
Telephone (812) 377-5000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer x | | Accelerated filer o | | Non-accelerated filer o | | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of 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
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| Condensed Consolidated Statements of Income for the three months ended April 3, 2016 and March 29, 2015 | |
| Condensed Consolidated Statements of Comprehensive Income for the three months ended April 3, 2016 and March 29, 2015 | |
| Condensed Consolidated Balance Sheets at April 3, 2016 and December 31, 2015 | |
| Condensed Consolidated Statements of Cash Flows for the three months ended April 3, 2016 and March 29, 2015 | |
| Condensed Consolidated Statements of Changes in Equity for the three months ended April 3, 2016 and March 29, 2015 | |
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PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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| | | | | | | | |
| | Three months ended |
In millions, except per share amounts | | April 3, 2016 | | March 29, 2015 |
NET SALES (a) | | $ | 4,291 |
| | $ | 4,709 |
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Cost of sales | | 3,235 |
| | 3,514 |
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GROSS MARGIN | | 1,056 |
| | 1,195 |
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OPERATING EXPENSES AND INCOME | | |
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Selling, general and administrative expenses | | 490 |
| | 517 |
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Research, development and engineering expenses | | 166 |
| | 195 |
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Equity, royalty and interest income from investees (Note 4) | | 72 |
| | 68 |
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Other operating expense, net | | (2 | ) | | (3 | ) |
OPERATING INCOME | | 470 |
| | 548 |
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Interest income | | 6 |
| | 5 |
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Interest expense (Note 8) | | 19 |
| | 14 |
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Other income, net | | 8 |
| | 9 |
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INCOME BEFORE INCOME TAXES | | 465 |
| | 548 |
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Income tax expense (Note 5) | | 132 |
| | 144 |
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CONSOLIDATED NET INCOME | | 333 |
| | 404 |
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Less: Net income attributable to noncontrolling interests | | 12 |
| | 17 |
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NET INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 321 |
| | $ | 387 |
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EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. | | |
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Basic | | $ | 1.87 |
| | $ | 2.14 |
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Diluted | | $ | 1.87 |
| | $ | 2.14 |
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WEIGHTED AVERAGE SHARES OUTSTANDING | | |
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Basic | | 171.8 |
| | 180.6 |
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Dilutive effect of stock compensation awards | | 0.2 |
| | 0.4 |
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Diluted | | 172.0 |
| | 181.0 |
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CASH DIVIDENDS DECLARED PER COMMON SHARE | | $ | 0.975 |
| | $ | 0.78 |
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____________________________________
(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.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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| | | | | | | | |
| | 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) | | |
| | |
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Foreign currency translation adjustments | | (57 | ) | | (176 | ) |
Unrealized loss on derivatives | | (21 | ) | | — |
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Change in pension and other postretirement defined benefit plans | | 9 |
| | 13 |
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Unrealized loss on marketable securities | | — |
| | (1 | ) |
Total other comprehensive loss, net of tax | | (69 | ) | | (164 | ) |
COMPREHENSIVE INCOME | | 264 |
| | 240 |
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Less: Comprehensive income attributable to noncontrolling interests | | 12 |
| | 20 |
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COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 252 |
| | $ | 220 |
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The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) |
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In millions, except par value | | April 3, 2016 | | December 31, 2015 |
ASSETS | | |
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Current assets | | |
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Cash and cash equivalents | | $ | 915 |
| | $ | 1,711 |
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Marketable securities (Note 6) | | 359 |
| | 100 |
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Total cash, cash equivalents and marketable securities | | 1,274 |
| | 1,811 |
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Accounts and notes receivable, net | | | | |
Trade and other | | 2,736 |
| | 2,640 |
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Nonconsolidated equity investees | | 185 |
| | 180 |
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Inventories (Note 7) | | 2,759 |
| | 2,707 |
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Prepaid expenses and other current assets | | 514 |
| | 609 |
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Total current assets | | 7,468 |
| | 7,947 |
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Long-term assets | | |
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Property, plant and equipment | | 7,360 |
| | 7,322 |
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Accumulated depreciation | | (3,648 | ) | | (3,577 | ) |
Property, plant and equipment, net | | 3,712 |
| | 3,745 |
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Investments and advances related to equity method investees | | 1,053 |
| | 975 |
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Goodwill | | 485 |
| | 482 |
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Other intangible assets, net | | 344 |
| | 328 |
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Pension assets | | 763 |
| | 735 |
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Other assets | | 1,002 |
| | 922 |
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Total assets | | $ | 14,827 |
| | $ | 15,134 |
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LIABILITIES | | |
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Current liabilities | | |
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Accounts payable (principally trade) | | $ | 1,809 |
| | $ | 1,706 |
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Loans payable (Note 8) | | 117 |
| | 24 |
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Commercial paper (Note 8) | | 50 |
| | — |
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Accrued compensation, benefits and retirement costs | | 302 |
| | 409 |
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Current portion of accrued product warranty (Note 9) | | 350 |
| | 359 |
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Current portion of deferred revenue | | 425 |
| | 403 |
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Other accrued expenses | | 815 |
| | 863 |
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Current maturities of long-term debt (Note 8) | | 49 |
| | 39 |
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Total current liabilities | | 3,917 |
| | 3,803 |
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Long-term liabilities | | |
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Long-term debt (Note 8) | | 1,614 |
| | 1,576 |
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Postretirement benefits other than pensions | | 339 |
| | 349 |
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Pensions | | 298 |
| | 298 |
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Other liabilities and deferred revenue | | 1,399 |
| | 1,358 |
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Total liabilities | | $ | 7,567 |
| | $ | 7,384 |
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Commitments and contingencies (Note 10) | |
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EQUITY | | | | |
Cummins Inc. shareholders’ equity | | |
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Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued | | $ | 2,076 |
| | $ | 2,178 |
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Retained earnings | | 10,473 |
| | 10,322 |
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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 |
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Noncontrolling interests | | 340 |
| | 344 |
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Total equity | | $ | 7,260 |
| | $ | 7,750 |
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Total liabilities and equity | | $ | 14,827 |
| | $ | 15,134 |
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The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
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| | Three months ended |
In millions | | April 3, 2016 | | March 29, 2015 |
CASH FLOWS FROM OPERATING ACTIVITIES | | |
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Consolidated net income | | $ | 333 |
| | $ | 404 |
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Adjustments to reconcile consolidated net income to net cash provided by operating activities | | |
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Restructuring actions and other charges, net of cash payments (Note 12) | | (25 | ) | | — |
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Depreciation and amortization | | 128 |
| | 128 |
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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 |
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Translation and hedging activities | | (14 | ) | | 7 |
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Changes in current assets and liabilities, net of acquisitions | | | | |
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Accounts and notes receivable | | (98 | ) | | (276 | ) |
Inventories | | (54 | ) | | (98 | ) |
Other current assets | | 188 |
| | 20 |
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Accounts payable | | 103 |
| | 147 |
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Accrued expenses | | (283 | ) | | (35 | ) |
Changes in other liabilities and deferred revenue | | 78 |
| | 59 |
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Other, net | | 10 |
| | (30 | ) |
Net cash provided by operating activities | | 263 |
| | 173 |
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CASH FLOWS FROM INVESTING ACTIVITIES | | |
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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 |
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Other, net | | 4 |
| | 4 |
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Net cash used in investing activities | | (388 | ) | | (125 | ) |
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CASH FLOWS FROM FINANCING ACTIVITIES | | |
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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 |
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The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
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In millions | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Common Stock Held in Trust | | Accumulated Other Comprehensive Loss | | Total Cummins Inc. Shareholders’ Equity | | Noncontrolling Interests | | Total Equity |
BALANCE AT DECEMBER 31, 2014 | $ | 556 |
| | $ | 1,583 |
| | $ | 9,545 |
| | $ | (2,844 | ) | | $ | (13 | ) | | $ | (1,078 | ) | | $ | 7,749 |
| | $ | 344 |
| | $ | 8,093 |
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Net income |
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| | 387 |
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| | 387 |
| | 17 |
| | 404 |
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Other comprehensive (loss) income, net of tax (Note 11) |
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| | (167 | ) | | (167 | ) | | 3 |
| | (164 | ) |
Issuance of shares |
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| | 1 |
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|
| | 1 |
| | — |
| | 1 |
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Employee benefits trust activity |
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| | 11 |
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|
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|
| | 1 |
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| | 12 |
| | — |
| | 12 |
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Acquisition of shares |
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| | (137 | ) | |
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| |
|
| | (137 | ) | | — |
| | (137 | ) |
Cash dividends on common stock |
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| | (140 | ) | |
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| | (140 | ) | | — |
| | (140 | ) |
Distributions to noncontrolling interests |
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|
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|
| | — |
| | (1 | ) | | (1 | ) |
Stock based awards |
|
| | (5 | ) | |
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| | 6 |
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| |
|
| | 1 |
| | — |
| | 1 |
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BALANCE AT MARCH 29, 2015 | $ | 556 |
| | $ | 1,590 |
| | $ | 9,792 |
| | $ | (2,975 | ) | | $ | (12 | ) | | $ | (1,245 | ) | | $ | 7,706 |
| | $ | 363 |
| | $ | 8,069 |
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BALANCE AT DECEMBER 31, 2015 | $ | 556 |
| | $ | 1,622 |
| | $ | 10,322 |
| | $ | (3,735 | ) | | $ | (11 | ) | | $ | (1,348 | ) | | $ | 7,406 |
| | $ | 344 |
| | $ | 7,750 |
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Net income |
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| | 321 |
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| | 321 |
| | 12 |
| | 333 |
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Other comprehensive (loss) income, net of tax (Note 11) |
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| | (69 | ) | | (69 | ) | | — |
| | (69 | ) |
Issuance of shares |
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| | 2 |
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| | 2 |
| | — |
| | 2 |
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Employee benefits trust activity |
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| | 9 |
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| | 2 |
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| | 11 |
| | — |
| | 11 |
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Acquisition of shares (Note 2) |
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| | (100 | ) | |
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| | (475 | ) | |
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| | (575 | ) | | — |
| | (575 | ) |
Cash dividends on common stock |
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| | (170 | ) | |
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| | (170 | ) | | — |
| | (170 | ) |
Distributions to noncontrolling interests |
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| | — |
| | (10 | ) | | (10 | ) |
Stock based awards |
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| | (6 | ) | |
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| | 7 |
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| | 1 |
| | — |
| | 1 |
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Other shareholder transactions |
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| | (7 | ) | |
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| | (7 | ) | | (6 | ) | | (13 | ) |
BALANCE AT APRIL 3, 2016 | $ | 556 |
| | $ | 1,520 |
| | $ | 10,473 |
| | $ | (4,203 | ) | | $ | (9 | ) | | $ | (1,417 | ) | | $ | 6,920 |
| | $ | 340 |
| | $ | 7,260 |
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The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS
Cummins Inc. (“Cummins,” “we,” “our” or “us”) was founded in 1919 as a corporation in Columbus, Indiana, 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:
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| Three months ended |
| April 3, 2016 | | March 29, 2015 |
Options excluded | 1,687,666 |
| | 339,878 |
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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
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:
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| | 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:
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| | | | | | | | |
| | 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.
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. |
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.
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 |
|
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
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.
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.
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 |
|
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.
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 |
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Less: Interest expense | | 19 |
| | 14 |
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Income before income taxes | | $ | 465 |
| | $ | 548 |
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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
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:
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• | a sustained slowdown or significant downturn in our markets; |
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• | a downturn in the North American truck industry; |
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• | a major customer experiencing financial distress; |
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• | changes in the engine outsourcing practices of significant customers; |
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• | any significant problems in our new engine platforms; |
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• | a further slowdown in infrastructure development; |
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• | unpredictability in the adoption, implementation and enforcement of emission standards around the world; |
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• | foreign currency exchange rate changes; |
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• | the actions of, and income from, joint ventures and other investees that we do not directly control; |
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• | the integration of our previously partially-owned United States and Canadian distributors; |
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• | our plan to grow through strategic acquisitions and related uncertainties of entering into such transactions; |
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• | challenges or unexpected costs in completing restructuring and cost reduction initiatives; |
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• | supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers; |
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• | variability in material and commodity costs; |
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• | the development of new technologies; |
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• | competitor pricing activity; |
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• | increasing competition, including increased global competition among our customers in emerging markets; |
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• | exposure to potential security breaches or other disruptions to our information technology systems and data security; |
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• | political, economic and other risks from operations in numerous countries; |
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• | global legal and ethical compliance costs and risks; |
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• | aligning our capacity and production with our demand; |
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• | product liability claims; |
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• | increasingly stringent environmental laws and regulations; |
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• | the price and availability of energy; |
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• | the performance of our pension plan assets; |
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• | changes in actuarial and accounting standards; |
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• | our sales mix of products; |
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• | protection and validity of our patent and other intellectual property rights; |
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• | technological implementation and cost/financial risks in our increasing use of large, multi-year contracts; |
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• | the cyclical nature of some of our markets; |
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• | the outcome of pending and future litigation and governmental proceedings; |
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• | 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 |
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• | 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.
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
•Operating Segment Results
•Liquidity and Capital Resources
•Application of Critical Accounting Estimates
•Recently Issued Accounting Pronouncements
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.
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| | 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 | )% | | — |
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Non-segment | | — |
| | — |
| | (15 | ) | | — |
| | — |
| | (23 | ) | | — |
| | (35 | )% |
Total | | $ | |