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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 20102012
Commission File Number 1-4949
CUMMINS INC.
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
---|---|---|
Common Stock, $2.50 par value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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 ý 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 (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | 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 ý
The aggregate market value of the voting stock held by non-affiliates was approximately $14.4$18.5 billion at June 27, 2010.July 1, 2012. This value includes all shares of the registrant's common stock, except for treasury shares.
As of January 28, 2011,February 1, 2013, there were 197,847,368189,844,829 shares outstanding of $2.50 par value common stock.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement for its 20112013 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission on Schedule 14A within 120 days after the end of 2010,2012, will be incorporated by reference in Part III of this Form 10-K to the extent indicated therein upon such filing.
Website Access to Company's Reports
We maintain an inherentinternet website at www.cummins.com. Investors may obtain copies of our filings from this website free of charge as soon as reasonable practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission.
CUMMINS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART | ITEM | | | | PAGE | ITEM | | PAGE | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cautionary Statements Regarding Forward-Looking Information | 3 | Cautionary Statements Regarding Forward-Looking Information | 3 | |||||||||||||||||
I | 1 | Business | 4 | 1 | Business | 5 | ||||||||||||||
Overview | 5 | |||||||||||||||||||
Overview | 4 | Operating Segments | 5 | |||||||||||||||||
Operating Segments | 4 | Engine Segment | 5 | |||||||||||||||||
Engine Segment | 4 | Components Segment | 6 | |||||||||||||||||
Power Generation Segment | 5 | Power Generation Segment | 8 | |||||||||||||||||
Components Segment | 6 | Distribution Segment | 9 | |||||||||||||||||
Distribution Segment | 8 | Joint Ventures, Alliances and Non-Wholly-Owned Subsidiaries | 10 | |||||||||||||||||
Joint Ventures, Alliances and Non-Wholly-Owned Subsidiaries | 9 | Supply | 14 | |||||||||||||||||
Supply | 12 | Patents and Trademarks | 14 | |||||||||||||||||
Patents and Trademarks | 12 | Seasonality | 14 | |||||||||||||||||
Seasonality | 12 | Largest Customers | 14 | |||||||||||||||||
Largest Customers | 12 | Backlog | 15 | |||||||||||||||||
Backlog | 13 | Research and Development Expense | 15 | |||||||||||||||||
Research and Development Expense | 13 | Environmental Sustainability | 16 | |||||||||||||||||
Environmental Compliance | 13 | Environmental Compliance | 16 | |||||||||||||||||
Employees | 15 | Employees | 17 | |||||||||||||||||
Available Information | 15 | Available Information | 17 | |||||||||||||||||
Executive Officers of the Registrant | 16 | Executive Officers of the Registrant | 18 | |||||||||||||||||
1A | Risk Factors | 17 | 1A | Risk Factors | 20 | |||||||||||||||
1B | Unresolved Staff Comments | 23 | 1B | Unresolved Staff Comments | 27 | |||||||||||||||
2 | Properties | 23 | 2 | Properties | 27 | |||||||||||||||
3 | Legal Proceedings | 25 | 3 | Legal Proceedings | 28 | |||||||||||||||
4 | (Removed and Reserved) | 25 | 4 | Mine Safety Disclosures | 29 | |||||||||||||||
II | 5 | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 25 | 5 | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 29 | ||||||||||||||
6 | Selected Financial Data | 28 | 6 | Selected Financial Data | 31 | |||||||||||||||
7 | Management's Discussion and Analysis of Financial Condition and Results of Operations | 29 | 7 | Management's Discussion and Analysis of Financial Condition and Results of Operations | 33 | |||||||||||||||
7A | Quantitative and Qualitative Disclosures About Market Risk | 70 | 7A | Quantitative and Qualitative Disclosures About Market Risk | 76 | |||||||||||||||
8 | Financial Statements and Supplementary Data | 72 | 8 | Financial Statements and Supplementary Data | 79 | |||||||||||||||
Index to Financial Statements | 72 | Index to Financial Statements | 79 | |||||||||||||||||
9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 149 | 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 152 | |||||||||||||||
9A | Controls and Procedures | 149 | 9A | Controls and Procedures | 152 | |||||||||||||||
9B | Other Information | 149 | 9B | Other Information | 152 | |||||||||||||||
III | 10 | Directors, Executive Officers and Corporate Governance | 149 | 10 | Directors, Executive Officers and Corporate Governance | 152 | ||||||||||||||
11 | Executive Compensation | 149 | 11 | Executive Compensation | 152 | |||||||||||||||
12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 150 | 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 153 | |||||||||||||||
13 | Certain Relationships, Related Transactions and Director Independence | 150 | 13 | Certain Relationships, Related Transactions and Director Independence | 153 | |||||||||||||||
14 | Principal Accountant Fees and Services | 150 | 14 | Principal Accountant Fees and Services | 153 | |||||||||||||||
IV | 15 | Exhibits and Financial Statement Schedules | 151 | 15 | Exhibits and Financial Statement Schedules | 154 | ||||||||||||||
Signatures | 154 | Signatures | 155 | |||||||||||||||||
Cummins Inc. Exhibit Index | 156 | Cummins Inc. Exhibit Index | 157 |
Cummins Inc. and its consolidated subsidiaries are hereinafter sometimes referred to as "Cummins," "the Company," "we," "our," or "us."
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Certain parts of this annual 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. We undertake no obligation to update publicly any forward-looking statements, whether as a resultSome of new information,the future events or otherwise. Future factors that could affect the outcome of forward-looking statements include the following:
In addition, such statements could be affected by general industry and market conditions and growth rates, general domestic and international economic conditions, including the price of crude oil (diesel fuel), interest rate and currency exchange rate fluctuations, commodity pricesShareholders, 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 annual report and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future factors.events or otherwise.
Cummins Inc. 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 electric power generation systems and engine-related component products, including filtration, exhaust aftertreatment, turbochargers, fuel systems, controls andsystems, 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 more thanapproximately 600 company-owned and independent distributor locations and more than 6,000approximately 6,500 dealer locations in more than 190 countries and territories.
We have four complementary operating segments: Engine, Components, Power Generation Components and Distribution. These segments share technology, customers, strategic partners, brand recognition and our distribution network in order to gain a competitive advantagecompete more efficiently and effectively in their respective markets. In each of our operating segments, we compete worldwide with a number of other manufacturers and distributors that produce and sell similar products. Our products compete primarily on the basis of performance, fuel economy, speed of delivery, quality, customer support and price. Financial information about our operating segments, including geographic information, is incorporated by reference from Note 25,22, "OPERATING SEGMENTS," to ourConsolidated Financial Statements.
Engine segment sales and EBITearnings before interest and taxes (EBIT) as a percentage of consolidated results were:
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | |||||||
Percent of consolidated net sales(1) | 50 | % | 52 | % | 49 | % | ||||
Percent of consolidated EBIT(1) | 54 | % | 53 | % | 48 | % |
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2009 | 2008 | |||||||
Percent of consolidated net sales(1) | 49 | % | 49 | % | 50 | % | ||||
Percent of consolidated EBIT(1)(2) | 48 | % | 34 | % | 41 | % |
Our Engine segment manufactures and markets a broad range of diesel and natural gas powered engines under the Cummins brand name, as well as certain customer brand names, for the heavy- and medium-duty truck, bus, recreational vehicle (RV), light-duty automotive, agricultural, construction, mining, marine, oil and gas, rail and governmental equipment markets. We offer a wide variety of engine products including:
Our Engine segment is organized by engine displacement size and serves these end-user markets:
The principal customers of our heavy- and medium-duty truck engines include truck manufacturers such as PACCAR Inc (PACCAR), Daimler Trucks North America, Ford Motor Company, International Truck, MAN Latin America and Daimler Trucks North America.Volvo. We sell our industrial engines to manufacturers of construction, agricultural and marine equipment, including Komatsu, Hyundai, Case New Holland, Belaz, Liugong,Hyundai, Hitachi and Brunswick.JLG. The principal customers of our light-duty on-highway engines are Chrysler and manufacturers of RVs.
In the markets served by our Engine segment, we compete with independent engine manufacturers as well as OEMs who manufacture engines for their own products. Our primary competitors in North America are International Truck and Engine Corporation (Engine Division), Detroit Diesel Corporation, Caterpillar Inc. (CAT), Volvo Powertrain, Ford Motor Company and Volvo Powertrain.Hino Power. Our primary competitors in international markets vary from country to country, with local manufacturers generally predominant in each geographic market. Other engine manufacturers in international markets include Weichai Power Co. Ltd., MAN Nutzfahrzeuge AG (MAN), Fiat Power Systems, GuangxiYuchai Group, GE Jenbacher, Tognum AG, CAT, Volvo, Yanmar Co., Ltd., GuangxiYuchai Group and Deutz AG.
Components segment sales and EBIT as a percentage of consolidated results were:
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | |||||||
Percent of consolidated net sales(1) | 19 | % | 18 | % | 19 | % | ||||
Percent of consolidated EBIT(1) | 18 | % | 18 | % | 16 | % |
Our Components segment supplies products which complement our Engine segment, including filtration products, turbochargers, aftertreatment systems and fuel systems for commercial diesel applications. We manufacture filtration systems for on- and off-highway heavy-duty and mid-range equipment, and we are a supplier of filtration products for industrial and passenger car applications. In addition, we develop aftertreatment systems and turbochargers to help our customers meet increasingly stringent emission standards and fuel systems which to date have primarily supplied our Engine segment and our joint venture partner Scania.
Our Components segment is organized around the following businesses:
Customers of our Components segment generally include our Engine and Distribution segments, truck manufacturers and other OEMs, many of which are also customers of our Engine segment, such as PACCAR, Daimler, Volvo, Komatsu, Ford and other manufacturers that use our components in their product platforms.
Our Components segment competes with other manufacturers of filtration, turbochargers and fuel systems. Our primary competitors in these markets include Robert Bosch GmbH, Donaldson Company, Inc., Clarcor Inc., Mann+Hummel Group, Honeywell International, Borg-Warner, Tenneco Inc., Eberspacher Holding GmbH & Co. KG and Denso Corporation.
On July 18, 2012, we acquired the doser technology business assets from Hilite Germany GmbH (Hilite) in a $176 million cash transaction. The acquisition was accounted for as a business combination with the majority of the purchase price being allocated to goodwill and technology and customer related intangible assets. The results of the acquired entity for 2012 were included in the Components
operating segment. See Note 2, "ACQUISITIONS AND DIVESTITURES," to ourConsolidated Financial Statements for additional detail.
In the second quarter of 2011, we sold certain assets and liabilities of our exhaust business which manufactures exhaust products and select components for emission systems for a variety of applications not core to our other product offerings. This business was historically included in our Components segment. The sales price was $123 million. We recognized a gain on the sale of $68 million ($37 million after-tax), which included a goodwill allocation of $19 million. The gain was excluded from segment results as it was not considered in our evaluation of operating results for the year ended December 31, 2011.
During the fourth quarter of 2011, we sold certain assets and liabilities of our light-duty filtration business which manufactures light-duty automotive and industrial filtration solutions. The sales price was $90 million and included a note receivable from the buyer of approximately $1 million. There are no earnouts or other contingencies associated with the sales price. We recognized a gain on the sale of $53 million ($33 million after-tax), which included a goodwill allocation of $6 million. The gain was excluded from segment results as it was not considered in our evaluation of operating results for the year ended December 31, 2011.
Power Generation segment sales and EBIT as a percentage of consolidated results were:
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | |||||||
Percent of consolidated net sales(1) | 15 | % | 16 | % | 18 | % | ||||
Percent of consolidated EBIT(1) | 12 | % | 14 | % | 18 | % |
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2009 | 2008 | |||||||
Percent of consolidated net sales(1) | 18 | % | 19 | % | 20 | % | ||||
Percent of consolidated EBIT(1)(2) | 18 | % | 22 | % | 28 | % |
Our Power Generation segment designs and manufactures most of the components that make up power generation systems, including engines, controls, alternators, transfer switches and switchgear. This segment is a global provider of power generation systems, components and services for a diversified customer base, and includesincluding the following:
alternative source of generating capacity located close to its point of use, which is purchased by utilities, independent power producers and large power customers for use as prime or peaking power.
OurIn the first quarter of 2012, our Power Generation segment is organized aroundreorganized its reporting structure to include the following businesses:
This segment continuously explores emerging technologies such as fuel cells, wind and hybrid solutions and provides integrated power generation products utilizingusing technologies other than reciprocating engines. We use our own research and development capabilities as well as leveragethose of our business partnerships to develop cost-effective and environmentally sound power solutions.
Our customer base for our power generation products is highly diversified, with customer groups varying based on their power needs. India, China, the United Kingdom (U.K.), Western Europe, India,Latin America and the Middle East China and Latin America are our largest geographic markets outside of North America.
This operating segmentPower Generation competes with a variety of engine manufacturers and generator set assemblers across the world. Our primary compeitiors are CAT, Tognum (MTU) and Mitsubishi (MHI) remain our primary competitors,Kohler/SDMO (Kohler Group), but we also compete with GE Jenbacher, FG Wilson (Caterpillar(CAT group), Kohler, SDMO (Kohler group), Generac, Mitsubishi (MHI) and numerous regional generator set assemblers. Our Generatorgenerator technologies business competes globally with Emerson Electric Co., Marathon Electric and Meccalte, among others.
Components segment sales and EBIT as a percentage of consolidated results were:
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2009 | 2008 | |||||||
Percent of consolidated net sales(1) | 19 | % | 18 | % | 18 | % | ||||
Percent of consolidated EBIT(1)(2) | 16 | % | 13 | % | 13 | % |
Our Components segment supplies products which complement our Engine segment, including filtration products, turbochargers, aftertreatment systems, intake and exhaust systems and fuel systems for commercial diesel applications. We manufacture filtration and exhaust systems for on- and off-highway heavy-duty and mid-range equipment, and we are a supplier of filtration products for industrial and passenger car applications. In addition, we develop aftertreatment and exhaust systems to help our customers meet increasingly stringent emission standards and fuel systems which to date have primarily supplied our Engine segment and our partner Scania.
Our Components segment is organized around the following businesses:
Customers of our Components segment generally include our Engine and Distribution segments, truck manufacturers and other OEMs, many of which are also customers of our Engine segment, such as PACCAR, Volvo, International Truck and Engine, CNH Global N.V., Iveco and other manufacturers that use our components in their product platforms.
Our Components segment competes with other manufacturers of filtration, exhaust and fuel systems and turbochargers. Our primary competitors in these markets include Donaldson
Company, Inc., Clarcor Inc., Mann+Hummel Group, Honeywell International, Borg-Warner, Robert Bosch GmbH, Tenneco Inc., Eberspacher Holding GmbH & Co. KG and Denso Corporation.
Distribution segment sales and EBIT as a percentage of consolidated results were:
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | |||||||
Percent of consolidated net sales(1) | 16 | % | 14 | % | 14 | % | ||||
Percent of consolidated EBIT(1) | 16 | % | 15 | % | 18 | % |
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2009 | 2008 | |||||||
Percent of consolidated net sales(1) | 14 | % | 14 | % | 12 | % | ||||
Percent of consolidated EBIT(1)(2) | 18 | % | 31 | % | 18 | % |
Our Distribution segment consists of 1923 company-owned and 2218 joint venture distributors that service and distribute the full range of our products and services to end-users at approximately 380400 locations in approximately 7080 distribution territories. Our company-owned distributors are located in key markets, including North America, Australia, Europe, the Middle East, India, China, Africa, Russia, Japan, Brazil, Singapore and Japan.Central America, while our joint venture distributors are located in North America, South America, Africa, China, Thailand, Singapore and Vietnam.
The Distribution segment consists of the following businesses which service and/or distribute the full range of our products and services:
The Distribution segment is organized into fourfive primary geographic regions:
Asia Pacific and EMEAEME are composed of sevensix smaller regional distributor organizations (South Pacific, India, China, Northeast/Southeast Asia, Greater Europe, the Middle East, China, India and Africa)Northeast/Southeast Asia) which allow us to better manage these vast geographic territories.
North and Central America isare mostly comprised of a network of partially-owned distributors. Internationally, our network consists of independent, partially-owned and wholly-owned distributors. Through this network,these networks, we provide parts and service to our customers. These full-service solutions include maintenance contracts, engineering services and integrated products, where we customize our products to cater to specific needs of end-users. Our distributors also serve and develop dealers, predominantly OEM dealers, in their territories by providing new products, technical support, tools, training, parts and product information.
In addition to managing our investments ininvolvement with our wholly-owned and partially-owned distributors, our Distribution segment is responsible for managing the performance and capabilities of our independent distributors. Our Distribution segment serves a highly diverse customer base with approximately 4245 percent of their 2010 revenuesits 2012 sales being generated from the sale of new engines and power generation equipment, compared to 4447 percent in 2009, and the2011, with its remaining revenuesales generated by parts and filtration and service revenue.
Financial information about our distributors accounted for under the equity method are incorporated by reference from Note 2,3, "INVESTMENTS IN EQUITY INVESTEES," to ourConsolidated Financial Statements.
In November 2010, we purchased a majority interest in a previously independent North American distributorship. The acquisition was accounted for under the purchase method of accounting and resulted in an aggregate purchase price of $27 million. The assets of the acquired business were primarily accounts receivable, inventory, and fixed assets. The transaction generated $1 million of goodwill.
On January 4, 2010, we acquired the remaining 70 percent interest in Cummins Western Canada (CWC) from our former principal for consideration of approximately $71 million in order to increase our ownership interests in key portions of the distribution channel. We formed a new partnership with a new distributor principal where we own 80 percent of CWC and the new distributor principal owns 20 percent. The acquisition was effective on January 1, 2010, and was accounted for as a business combination. The results of the acquired entity were included in the Distribution operating segment as of the acquisition date including $2 million of goodwill. The assets of the acquired business were primarily inventory, fixed assets and accounts receivable. See Note 21, "ACQUISITIONS AND DIVESTITURES," to theConsolidated Financial Statements for additional detail.
Our distributors compete with distributors or dealers that offer similar products. In many cases, these competing distributors or dealers are owned by, or affiliated with the companies that are listed above as competitors of our Engine, Components or Power Generation or Components segments. These competitors vary by geographical location.
In July 2012, we acquired an additional 45 percent interest in Cummins Central Power from the former principal for consideration of approximately $20 million. The acquisition was accounted for as a business combination, with the results of the acquired entity included in the Distribution operating segment in the third quarter of 2012. Distribution segment results also included a $7 million gain, as we were required to re-measure our pre-existing 35 percent ownership interest in Cummins Central Power to fair value in accordance with accounting principles generally accepted in the United State of America (GAAP). See Note 2, "ACQUISITIONS AND DIVESTITURES," to ourConsolidated Financial Statements for additional detail.
JOINT VENTURES, ALLIANCES AND NON-WHOLLY-OWNED SUBSIDIARIES
We have entered into a number of joint venture agreements and alliances with business partners around the world. Our joint ventures are either distribution or manufacturing entities. We also own controlling interests in non-wholly-owned manufacturing and distribution subsidiaries. We have three approximately 80Seven entities, in
which we own more than a 50 percent owned entities thatequity interest, are consolidated in theour Distribution segment results as well as several manufacturing joint ventures in the other operating segments.
In the event of a change of control of either party to certain of these joint ventures and other strategic alliances, certain consequences may result including automatic termination and liquidation of the venture, exercise of "put" or "call" rights of ownership by the non-acquired partner, termination or transfer of technology license rights to the non-acquired partner and increases in component transfer prices to the acquired partner. We will continue to evaluate joint venture and partnership opportunities in order to penetrate new markets, develop new products and generate manufacturing and operational efficiencies.
Financial information about our investments in joint ventures and alliances is incorporated by reference from Note 2,3, "INVESTMENTS IN EQUITY INVESTEES," and Note 24, "VARIABLE INTEREST ENTITIES," to theConsolidated Financial Statements.
Our equity income from these investees was as follows:
| Years ended December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | 2012 | 2011 | 2010 | ||||||||||||||||
Distribution Entities | |||||||||||||||||||
North American distributors | $ | 147 | 42 | % | $ | 134 | 36 | % | $ | 101 | 32 | % | |||||||
Komatsu Cummins Chile, Ltda. | 26 | 8 | % | 22 | 6 | % | 16 | 5 | % | ||||||||||
All other distributors | 4 | 1 | % | 4 | 1 | % | 3 | 1 | % | ||||||||||
Manufacturing Entities | |||||||||||||||||||
Chongqing Cummins Engine Company, Ltd. | 61 | 18 | % | 68 | 18 | % | 46 | 14 | % | ||||||||||
Dongfeng Cummins Engine Company, Ltd. | 52 | 15 | % | 80 | 21 | % | 99 | 31 | % | ||||||||||
Cummins Westport, Inc. | 14 | 4 | % | 14 | 4 | % | 10 | 3 | % | ||||||||||
Shanghai Fleetguard Filter Co., Ltd. | 13 | 4 | % | 15 | 4 | % | 12 | 4 | % | ||||||||||
Tata Cummins, Ltd. | 11 | 3 | % | 14 | 4 | % | 14 | 4 | % | ||||||||||
Valvoline Cummins, Ltd. | 8 | 2 | % | 7 | 2 | % | 8 | 3 | % | ||||||||||
Beijing Foton Cummins Engine Co., Ltd. | 5 | 1 | % | (7 | ) | (2 | )% | (16 | ) | (5 | )% | ||||||||
Komatsu manufacturing alliances | (3 | ) | (1 | )% | 3 | 1 | % | 11 | 3 | % | |||||||||
All other manufacturers | 9 | 3 | % | 21 | 5 | % | 17 | 5 | % | ||||||||||
Cummins share of net income(1) | $ | 347 | 100 | % | $ | 375 | 100 | % | $ | 321 | 100 | % | |||||||
| Years ended December 31, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | 2008 | |||||||||||||||||
Distribution Entities | ||||||||||||||||||||
North American distributors | $ | 101 | 32 | % | $ | 100 | 51 | % | $ | 100 | 43 | % | ||||||||
Komatsu Cummins Chile, Ltda | 16 | 5 | % | 12 | 6 | % | 7 | 3 | % | |||||||||||
All other distributors | 3 | 1 | % | 3 | 1 | % | 5 | 2 | % | |||||||||||
Manufacturing Entities | ||||||||||||||||||||
Dongfeng Cummins Engine Company, Ltd. | 99 | 31 | % | 33 | 17 | % | 55 | 24 | % | |||||||||||
Chongqing Cummins Engine Company, Ltd. | 46 | 14 | % | 36 | 18 | % | 30 | 13 | % | |||||||||||
Tata Cummins, Ltd. | 14 | 4 | % | 5 | 3 | % | 7 | 3 | % | |||||||||||
Shanghai Fleetguard Filter Co., Ltd. | 12 | 4 | % | 7 | 4 | % | 8 | 4 | % | |||||||||||
Komatsu manufacturing alliances | 11 | 3 | % | (2 | ) | (1 | )% | 3 | 1 | % | ||||||||||
Cummins Westport, Inc. | 10 | 3 | % | 3 | 1 | % | 6 | 3 | % | |||||||||||
Valvoline Cummins, Ltd. | 8 | 3 | % | 7 | 4 | % | 2 | 1 | % | |||||||||||
Cummins MerCruiser Diesel Marine, LLC | (3 | ) | (1 | )% | (10 | ) | (5 | )% | 3 | 1 | % | |||||||||
Beijing Foton Cummins Engine Co., Ltd. | (16 | ) | (5 | )% | (5 | ) | (3 | )% | (4 | ) | (2 | )% | ||||||||
All other manufacturers | 20 | 6 | % | 7 | 4 | % | 9 | 4 | % | |||||||||||
Cummins share of net income(1) | $ | 321 | 100 | % | $ | 196 | 100 | % | $ | 231 | 100 | % | ||||||||
Our distribution agreements with independent and partially-owned distributors generally have a renewable three-year term and are restricted to specified territories. Our distributors develop and maintain a network of dealers with which we have no direct relationship. TheOur distributors are permitted to sell other, noncompetitive products only with our consent. We license all of our distributors to use our name and logo in connection with the sale and service of our products, with no right to assign or sublicense the trademarks, except to authorized dealers, without our consent. Products are sold to the distributors at standard domestic or international distributor net prices, as applicable. Net prices are wholesale prices we establish to permit our distributors an adequate margin on their sales. Subject to local laws, we can generally refuse to renew these agreements upon expiration or terminate them upon written notice for inadequate sales, change in principal ownership and certain other reasons. Distributors also have the right to terminate the agreements upon 60-day notice without cause, or
30-day notice for cause. Upon termination or failure to renew, we are required to purchase the distributor's current inventory, signage and special tools, and may, at our option purchase other assets of the distributor, but are under no obligation to do so.
See further discussion of our distribution network under the Distribution segment section above.
ManufacturingOur manufacturing joint ventures arehave generally been formed with customers and generally are intended to allow us to increase our market penetration in geographic regions, reduce capital spending, streamline our supply chain management and develop technologies. Our largest manufacturing joint ventures are based in China and are included in the list below. Our engine manufacturing joint ventures are supplied by our Components segment in the same manner as they supplyit supplies our wholly-owned Engine segment and Power Generation segment manufacturing facilities. Our Components segment joint ventures and wholly owned entities provide fuel system, filtration and turbocharger products that are used in our engines as well as some competitors' products. TheseThe results and investments in our joint ventures in which we have 50 percent or less ownership interest are not included in "Equity, royalty and interest income from investees" and "Investments and advances related to equity method investees" in ourConsolidated Financial Statements.Statements of Income andConsolidated Balance Sheets, respectively.
inboard packages, instrument and controls, service systems and replacement and service parts and assemblies, complete integration systems and other related products.
Non-Wholly-Owned Manufacturing Subsidiary
We have a controlling interest in Cummins India Ltd. (CIL), which is a publicly listed company on various stock exchanges in India. CIL produces mid-range, heavy-duty and high-horsepower engines, as well as generators for the Indian and export markets. CIL also produces compressedmarkets and natural gas spark-ignited engines licensed from anotherfor power generation, automotive and industrial applications. CIL also has distribution and power generation
Table of our joint ventures.Contents
operations. CIL's net income attributable to Cummins was $42 million, $44 million and $46 million $28 millionfor 2012, 2011 and $36 million for 2010, 2009 and 2008, respectively.
The performance of the end-to-end supply chain, extending through to our suppliers, is foundational to our ability to meet customers' expectations and support long-term growth. In order to ensure we meet the needs of our customers, we are committed to having a robust strategy for how we select and manage our suppliers.
We source our materialshave a strategic sourcing policy that guides decisions on what we make, when we establish supplier partnerships and manufactured components from leading suppliers both domestically and internationally. Wewhat we purchase. Today we machine and assemble some of thestrategic components used in our engines and power generation units, including blocks, heads, turbochargers, connecting rods, camshafts, crankshafts, filters, exhaust systems, alternators and fuel systems. We single source externally purchased material and manufactured components from leading suppliers both domestically and internationally. Many suppliers are managed though long-term agreements that assure capacity, delivery, quality and cost requirements are met over an extended period. We have a "take or pay" contract with an emission solutions business supplier requiring us to purchase approximately $73 million annually through 2018. Approximately 60 to 70 percent of the total types of parts in our product designs. We have long-term agreements with critical suppliers to assure the right capacity, delivery and quality.designs are single sourced. Although we elect to source a relatively high proportion of our total raw materials and component requirementscomponents from sole suppliers, we have an established aannual sourcing strategy process to annuallythat evaluates risk. This annual review our sourcing strategies with a focus on the reduction of risk, whichprocess has led us to begin increasing our use of dual source critical components, where possible. We are also developingsourcing to both minimize risk and increase supply chain responsiveness.
Other important elements of our sourcing strategy include:
We own or control a significant number of patents and trademarks relating to the products we manufacture. These patents and trademarks were granted and registered over a period of years. Although these patents and trademarks are generally considered beneficial to our operations, we do not believe any patent, group of patents, or trademark (other than our leading brand house trademarks) is considered significant to our business.
While individual product lines may experience modest seasonal declinesvariation in production, there is no material effect on the demand for the majority of our products on a quarterly basis with the exception that our Power Generation segment normally experiences seasonal declines in the first quarter due to general declines in construction spending during this period and our Distribution segment normally experiences seasonal declines in its first quarter business activity due to holiday periods in Asia and Australia.
We have thousands of customers around the world and have developed long-standing business relationships with many of them. PACCAR is our largest customer, accounting for approximately 13 percent of our consolidated net sales in 2012, compared to approximately 12 percent in 2011 and 7 percent in 2010. We have long-term heavy-duty engine supply agreements with PACCAR and Volvo Trucks North America. We have mid-range supply agreements with PACCAR, asfor our heavy-duty ISX 15 liter
its exclusiveand ISX 11.9 liter engines and our ISL 9 liter mid-range engine. While a significant number of our sales to PACCAR are under long-term supply agreements, these agreements provide for particular engine requirements for specific vehicle models and not a specific volume of engines. PACCAR is our only customer accounting for more than 10 percent of our net sales in 2012. The loss of this customer or a significant decline in the production level of PACCAR vehicles that use our engines would have an adverse effect on our results of operations and financial condition. We have been an engine supplier as well asto PACCAR for over 68 years. A summary of principal customers for each operating segment is included in our segment discussion.
In addition to our agreement with PACCAR, we have long-term heavy-duty engine supply agreements with Volvo Trucks North America and Navistar International Corporation and long-term mid-range supply agreements with Daimler Trucks North America, (formerly Freightliner LLC), Ford and MAN (formerly Volkswagen).MAN. We also have an agreement with Chrysler to supply engines for supplying the engine for use in Dodgeits Ram trucks. In our off-highway markets, Cummins haswe have various engine and component supply agreements ranging across our midrange and high-horsepower businesses with Komatsu Ltd., as well as various joint ventures and other license agreements in our Engine, Component and Distribution segments. Collectively, our net sales to these seven customers, including PACCAR, was approximately 2533 percent of our consolidated net sales in 2010,2012, compared to approximately 2331 percent in 20092011 and 2225 percent in 2008 and individually was2010. Excluding PACCAR, net sales to individual customers were less than eight8 percent of our consolidated net sales to any single customer in 2010,2012, compared to less than nine6 percent in 2011 and less than eight4 percent in 2009 and 2008, respectively.2010. These agreements contain standard purchase and sale agreement terms covering engine and engine parts pricing, quality and delivery commitments, as well as engineering product support obligations. The basic nature of our agreements with OEM customers is that they are long-term price and operations agreements that help assure the availability of our products to each customer through the duration of the respective agreements. Agreements with most OEMs contain bilateral termination provisions giving either party the right to terminate in the event of a material breach, change of control or insolvency or bankruptcy of the other party.
As a result of the improving economy in 2010, ourOur 2012 lead times increasedfor the majority of our businesses improved from their lower levels during the recession.2011 levels. While we have supply agreements with some truck and off-highway equipment OEMs, most of our business is transacted through open purchase orders. These open orders are historically subject to month-to-month releases and are subject to cancellation on reasonable notice without cancellation charges and therefore are not considered firm.
RESEARCH AND DEVELOPMENT EXPENSE
Our research and development program is focused on product improvements, innovations and cost reductions for our customers. We expense research and development expenditures, net of contract reimbursements, when incurred. Research and development expenses, net of contract reimbursements, were $402 million in 2010, $362 million in 2009 and $422 million in 2008. Contract reimbursements were $68 million in 2010, $92 million in 2009 and $61 million in 2008.
For 2010, 2009 and 2008, approximately $38 million, $151 million and $116 million or 9 percent, 42 percent and 27 percent respectively, were directly related to compliance with 2010 Environmental Protection Agency (EPA) emission standards. For 2010, approximately $36 million or 9 percent was directly related to compliance with 2013 EPA emission standards. In 2010,2012, we increased our research, development and engineering expenses as we continued to invest in future critical technologies and products. We will continue to make investments to improve our current technologies, to continue to meet the future emission requirements around the world and improve fuel economy.
Our research and development program is focused on product improvements, innovations and cost reductions for our customers. Research and development expenditures include salaries, contractor fees, building costs, utilities, administrative expenses and allocation of corporate costs and are expensed, net of contract reimbursements, when incurred. Research and development expenses, net of contract reimbursements, were $721 million in 2012, $621 million in 2011 and $402 million in 2010. Contract reimbursements were $86 million in 2012, $75 million in 2011 and $68 million in 2010.
For 2011 and 2010, approximately $1 million and $38 million or less than 1 percent and 9 percent, respectively, of our research and development expenditures were directly related to compliance with 2010 Environmental Protection Agency (EPA) emission standards. For 2012, 2011 and 2010,
approximately $101 million, $104 million and $36 million or 14 percent, 17 percent and 9 percent, of our research and development expenditures were directly related to compliance with 2013 EPA emission standards.
ENVIRONMENTAL COMPLIANCESUSTAINABILITY
Our Environmental Sustainability
principles attempt to positively impact the environment through the products that we make, how we use our facilities and how we impact communities where we live and work. Our newly formed Corporate Action Committee for Environmental Sustainability is developing a global plan to more fully integrate environmental stewardship across all of our businesses and functions. We continue to be a leader in sustainable business development and practices. We have investedinvest significantly in new products and technologies designed to further lower emissionreduce emissions from and increase fuelthe efficiency fromof our products. We have increased our commitmentattempt to addressing the global impact of climate change through the structured approach of our 10 climate change principles developed last year that address ways we are becoming a greater part of the solution. We have workedwork collaboratively with customers to improve their fuel economy, and reduce their carbon footprint.footprints and conserve other resources. Over the past four years, we believe that we have reduced company-wide water usage intensity by approximately 45 percent, U.S.-wide process-derived hazardous waste generation by approximately 52 percent and company-wide landfill waste by approximately 28 percent, all normalized to total work hours. We also have significantly reduced greenhouse gas (GHG) emission from our facilities through a strong energy efficiency program and we met our publically stated goal of 25 percent intensity reduction after complete 2010 goal-year
environmental data was verified. We have taken leadership positions on climate change by articulatingarticulated our positions on key public policy issues surrounding climate change.and on a wide range of environmental issues. We are actively engaged with regulatory, industry and other stakeholder groups around the world as GHG and fuel efficiency standards become more prevalent globally. For the sixtheighth consecutive year, we were named to the Dow Jones World Sustainability Index, which recognizes the top 10 percent of the world's largest 2,500 companies in economic, environmental and social leadership. We were also named the top environmentally conscious industrial company in the U.S. in Newsweek's Green Rankings. Our sustainability reportSustainability Report for 20102011/2012 as well as an addendum of more detailed environmental data is available on our website at www.cummins.com.www.cummins.com, although such report and addendum are not incorporated into this Form 10-K.
Product Environmental Compliance
Our engines are subject to extensive statutory and regulatory requirements that directly or indirectly impose standards governing emission and noise. We have substantially increased our global environmental compliance presence and expertise to better prepare for, understand and ultimately meet emerging product environmental regulations around the world. Our products comply with all current emission standards that the European Union (EU), EPA, the California Air Resources Board (CARB) and other state and international regulatory agencies have established for heavy-duty on-highway diesel and gas engines and off-highway engines. Our ability to comply with these and future emission standards is an essential element in maintaining our leadership position in regulated markets. We have made, and will continue to make, significant capital and research expenditures to comply with these standards. FailureOur failure to comply with these standards could result in adverse effects on our future financial results.
EU and EPA Engine Certifications
The current on-highway emission standards came into effect in the U.S.EU on October 1, 2008 (Euro V) and on January 1, 2010.2010 for the EPA. To meet the 2010 U.S. EPAmore stringent heavy-duty on-highway emission standards, we used an evolution of our proven 2007selective catalytic reduction (SCR) and exhaust gas recirculation (EGR) technology solutionsolutions and refined them for the EU and EPA certified engines to maintain power and torque with substantial fuel economy improvement and maintenance intervals comparable with our 2007previous compliant engines. We offer a complete lineup of on-highway engines to meet the near-zero emission standards. Mid-range and heavy-duty engines for EU and EPA 2010 require nitrogen oxide (NOx)NOx aftertreatment. NOx reduction is achieved by an integrated technology solution comprised of the XPI High Pressure Common Rail fuel system, Selective Catalytic Reduction (SCR)SCR technology, next-generation cooled exhaust gas recirculation (EGR),EGR, advanced
electronic controls, proven air handling and the Cummins Diesel Particulate Filter.Filter (DPF). The EU, EPA, and CARB have certified that our engines meet the 2010current emission requirements. Emission standards in international markets, including Europe, Japan, Mexico, Australia, Brazil, Russia, India and China are becoming more stringent. We believe that our experience in meeting U.S.the EU and EPA emission standards leaves us well positioned to take advantage of opportunities in these markets as the need for emission control capability grows.
FederalWe have received certification from the EPA that we have met both the EPA 2013 and California2014 GHG regulations require manufacturersand rules. The EPA 2013 regulations add the requirement of On-Board Diagnostics, which were introduced on the ISX15 in 2010, across the full on-highway product line in 2013 in addition to report failuresmaintaining the same near-zero emission levels of emission-related components toNOx and Particulate Matter (PM) required in 2010. On-Board Diagnostics provide enhanced service capability with standardized diagnostic trouble codes, service tool interface, in-cab warning lamp and service information availability. The new GHG and fuel-efficiency regulations will be required for all heavy-duty diesel and natural gas engines beginning in January 2014. Our GHG certification is the first engine certificate issued by the EPA and CARB whenuses the failure rate reaches a specified level. At higher failure rates, a product recall may be required. In 2010, we submitted eleven reports tosame proven base engine with the EPA relating to software corrections in the engine control moduleXPI fuel system, Variable Geometry Turbocharger (VGT™), Cummins Aftertreatment System with DPF and to the exhaust aftertreatment system. The software corrections related to the engine control moduleSCR technology and exhaust aftertreatment system necessitated the campaigns of approximately 11,400 and 6,310 engines, respectively.fully integrated electronics.
Other Environmental Statutes and Regulations
Expenditures for environmental control activities and environmental remediation projects at our facilities in the U.S. have not been a substantial portion of our annual capital outlays and are not expected to be material in 2011. Except as follows, we2013. We believe we are in compliance in all material respects with laws and regulations applicable to our plants and operations.
In the U.S., pursuant to notices received from federal and state agencies and/or defendant parties in site environmental contribution actions, we have been identified as a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended or similar state laws, at approximately 20 waste disposal sites. Based upon our experiences at similar sites we believe that our aggregate future remediation costs will not be significant. We have
established accruals that we believe are adequate for our expected future liability with respect to these sites.
In addition, we have fourseveral other sites where we are working with governmental authorities on remediation projects. The costs for these remediation projects are not expected to be material.
As of December 31, 2010,2012, we employed approximately 39,20046,000 persons worldwide. Approximately 15,50015,750 of our employees worldwide are represented by various unions under collective bargaining agreements that expire between 20112013 and 2015. For a discussion of the effects of our 2008 and 2009 restructuring actions on employment, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 22, "RESTRUCTURING AND OTHER CHARGES," to ourConsolidated Financial Statements in this Form 10-K.
We file annual, quarterly and current reports, proxy statements and other information electronically with the Securities and Exchange Commission (the "SEC"). You may read and copy any document we file with the SEC at the SEC's public reference room at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including Cummins) file electronically with the SEC. The SEC's internet site is www.sec.gov.
Our internet site is www.cummins.com. You can access our Investors and Media webpage through our internet site, by clicking on the heading "Investors and Media" followed by the "Investor
Relations" link. We make available, free of charge, on or through our Investors and Media webpage, our proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934 or the Securities Act of 1933, as amended, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.
We also have a Corporate Governance webpage. You can access our Governance Documents webpage through our internet site, www.cummins.com, by clicking on the heading "Investors and Media," followed by the "Investor Relations" link and then the topic heading of "Governance Documents" within the "Corporate Governance" heading. Code of Conduct, Committee Charters and other governance documents are included at this site. CumminsOur Code of Conduct applies to all employees, regardless of their position or the country in which they work. It also applies to the employees of any entity owned or controlled by us. We will post any amendments to the Code of Conduct and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange LLC (NYSE), on our internet site. The information on Cumminsour internet site is not incorporated by reference into this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
Following are the names and ages of theour executive officers, of Cummins Inc., their positions with us as of January 31, 2011,2013, and summaries of their backgrounds and business experience:
Name and Age | Present Cummins Inc. position and year appointed to position | Principal position during the past five years other than Cummins Inc. position currently held | |||
---|---|---|---|---|---|
Chairman of the Board of Directors and Chief Executive Officer | President and Chief Operating Officer (2008-2011), Executive Vice President and President—Power Generation (2005-2008) | ||||
Partner—Law firm of Foley & Lardner (2011-2012) Deputy Under Secretary of Commerce—Intellectual Property and Partner—Law firm of Foley & Lardner (1996-2009) | |||||
Jean S. Blackwell (58) | Executive Vice President—Corporate Responsibility (2008) | Executive Vice | |||
Pamela L. Carter | Vice President and President—Distribution Business | ||||
Steven M. Chapman | Group Vice President—China and Russia (2009) | Vice President—Emerging Markets and Businesses (2005-2009) | |||
Vice President—Human Resources (2003) |
Name and Age | Present Cummins Inc. position and year appointed to position | Principal position during the past five years other than Cummins Inc. position currently held | |||||
---|---|---|---|---|---|---|---|
Richard J. Freeland (55) | Vice President and President—Engine Business (2010) | Vice President and President—Components Group (2008-2010), Vice President and President—Worldwide Distribution Business (2005-2008) | |||||
Mark R. Gerstle | Vice | Vice President—Chief Administrative Officer (2008-2011), Vice President—Corporate Quality and Chief Risk Officer (2005-2008) | |||||
Richard E. Harris | Vice President—Chief Investment Officer (2008) | Vice President—Treasurer (2003-2008) | |||||
Marsha L. Hunt | Vice President—Corporate Controller (2003) | ||||||
Marya M. Rose | Vice President—Chief Administrative Officer (2011) | Vice President—General Counsel and Corporate Secretary | |||||
Livingston L. Satterthwaite | Vice President and President—Power Generation (2008) | Vice President—Generator Set Business (2003-2008) | |||||
Anant J. Talaulicar | Vice President and President—Components Group (2010) | , Vice President and Managing Director—India ABO | Chairman and Managing Director—Cummins India Ltd. | ||||
John C. Wall | Vice President—Chief Technical Officer (2000) | ||||||
Patrick J. Ward | Vice President—Chief Financial Officer (2008) | Vice President—Engine Business Controller | |||||
Lisa M. Yoder (49) | Vice President—Global Supply Chain & Manufacturing (2011) | Vice President—Corporate Supply Chain (2010-2011), Executive Director—Supply Chain & Operations-Power Generation (2007-2010) |
Our Chairman and Chief Executive Officer is elected annually by our Board of Directors and holds office until the first meeting of the Board of Directors following the annual meeting of the shareholders.at which his election is next considered. Other officers are appointed by the Chairman and Chief Executive Officer, are ratified by our Board of Directors and hold office for such period as the Chairman and Chief Executive Officer or the Board of Directors may prescribe.
Set forth below and elsewhere in this Annual Report on Form 10-K are some of the principal risks and uncertainties that could cause our actual business results to differ materially from any forward-looking statements contained in this Report and could individually, or combinedin combination, have a material adverse effect on our results of operations, financial position andor cash flows. These risk factors should be considered in addition to our cautionary comments concerning forward-looking statements in this Report, including statements related to markets for our products and trends in our business that involve a number of risks and uncertainties. Our separate section above, "CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION," should be considered in addition to the following statements.
The discovery of anyA sustained slowdown or significant problems with our new engine platforms in North America could materially adversely impact our results of operations, financial condition and cash flows.
The Environmental Protection Agency (EPA) and California Air Resources Board (CARB) have certified all of our 2011 on-highway and off-highway engines, which utilize selective catalytic reduction (SCR) technology to meet requisite emission levels. We introduced SCR technology into our engine platforms in 2010. The effective performance of SCR technology and the overall performance of these engine platforms impact a number of our operating segments and remain crucial to our success in North America. While the model year 2010 engine platforms have performed well in the field and the 2011 model year engines have undergone extensive testing, the discovery of any significant problems in these platforms could result in recall campaigns, increased warranty costs, reputational risk and brand risk.
Another downturn in our markets could materially and adversely affect our results of operations, financial condition andor cash flows again.flows.
Although theThe global economy continued to slow throughout 2012 as we experienced declining demand in emerging markets, including Brazil and China, and a decline in India as the result of foreign currency fluctuations. The developed economies, including the U.S. economy, experienced slowing demand as the year progressed and Brazil, recovered in 2010, the global economy remains fragile, with North America and other developed countries continuingcontinued to experience sluggish resultseconomic uncertainty driven by unresolved federal tax and certain countries inbudget issues, while Europe experiencing acontinued to struggle as the result of lingering high unemployment, concerns over European sovereign debt crisis.issues and the tightening of government budgets. If the global economy wereor some of our significant markets encounter a sustained slowdown or our emerging markets, particularly China and Brazil, don't recover to take another significant downturn,stronger growth rates; depending upon the length, duration and severity of such a downturn,slowdown, our results of operations, financial condition and cash flow would almost certainly be materially adversely affected again.affected. Specifically, our revenues would likely decrease, we may be forced to consider further restructuring actions, we may need to increase our allowance for doubtful accounts, our days sales outstanding may increase and we could experience impairments to assets of certain of our businesses.
Another downturnA slowdown in the North American and European automotive industriesinfrastructure development could adversely impactaffect our business.
A numberInfrastructure development has been a significant driver of companiesour business in recent years, especially in the global automotive industry have experienced significant financial difficultiesemerging markets of China and Brazil. In 2012, infrastructure spending in recent years. In North America,emerging markets steadily declined throughout the year. General Motors Corporation ("GM"), Ford Motor Company and Chrysler Group, LLC ("Chrysler") experienced declining markets; furthermore, GM and Chrysler previously filed for, and then exited, bankruptcy under Chapter 11 of the U.S. bankruptcy code and accepted substantial monetary infusions from the U.S. government. Automakers across Europe and Japan also experienced difficulties from a weakened economy and tightening credit
markets. Because many of our suppliers also supply automotive industry participants, the difficult automotive industry conditions also adversely affected our supply base. During the recession, lower production levels for some of our key suppliers, increasesweakness in certain raw material, commodity and energy costs and the global credit market crisis resulted in severe financial distress among many companies within the automotive supply base. A return to financial distress within the automotive industry and our shared supply base and/economic growth or the subsequent bankruptcy of one or more additional automakers mayperception that infrastructure has been overbuilt could lead to a further supplier bankruptcies, commercial disputes, supply chain interruptions, supplier requests for company sponsored capital supportdecline in infrastructure spending. Any sustained downturns in infrastructure development that result from these or a collapse of the supply chain.other circumstances could adversely affect our business.
We rely on income from investees that we do not directly control.
Our net income includes significant equity, royalty and interest income from investees that we do not directly control. For 2010, we recognized $351 million of equity, royalty and interest income from investees, compared to $214 million in 2009. The majority of our equity, royalty and interest income from investees comes from our 12 unconsolidated North American distributors, and from two of our joint ventures in China, Dongfeng Cummins Engine Company, Ltd. ("DCEC") and Chongqing Cummins Engine Company, Ltd. ("CCEC"). Our equity ownership interests in our unconsolidated North American distributors generally range from 30 percent to 50 percent. We have 50 percent equity ownership interests in DCEC and CCEC. As a result, although a significant percentage of our net income is derived from these unconsolidated entities, we do not unilaterally control their management or operations, which puts a substantial portion of our net income at risk from the actions or inactions of these other entities. A significant reductionUnpredictability in the leveladoption, implementation and enforcement of contributionincreasingly stringent emission standards by these entities to our net income would likely have a material adverse effect on our results of operations.
Government regulationmultiple jurisdictions around the world could adversely affect our business.
Our engines are subject to extensive statutory and regulatory requirements governing emission and noise, including standards imposed by the EPA, the European Union, state regulatory agencies such(such as the CARBCARB) and other regulatory agencies around the world. We have made, and will be required to continue to make, significant capital and research expenditures to comply with these regulatoryemission standards. Developing engines to meet numerous changing government regulatory requirements, with different implementation timelines and emission requirements, makes developing engines efficiently for multiple markets complicated and could result in substantial additional costs that may be difficult to recover in certain markets. In some cases, we may be required to develop new products to comply with new regulations, particularly those relating to air emission. For example, we were required to develop new engines to comply with stringent emission standards in the U.S. by January 1, 2010, including the reduction of NOx emission to near zero levels, among other requirements. While we were able to meet this andhave met previous deadlines, our ability to comply with other existing and future regulatory standards will be essential for us to maintain our position in the engine markets we serve. Further, theThe successful development and introduction of new and enhanced products in order to comply with new regulatory requirements are subject to other risks, such
as delays in product development, cost over-runs and unanticipated technical and manufacturing difficulties.
In addition to these risks, the nature and timing of government implementation and enforcement of increasingly stringent emission standards around the world is unpredictable and subject to change, or delays which could result in the products we developed or modified to comply with these standards becoming unnecessary or becoming necessary later than expected and in some cases negating our competitive advantage. This in turn can delay, diminish or eliminate the expected return on capital and research expenditures that we have invested in such products and may adversely affect our perceived competitive advantage in being an early, advanced developer of compliant engines.
We derive significant income from investees that we do not directly control.
Our net income includes significant equity, royalty and interest income from investees that we do not directly control. For 2012, we recognized $384 million of equity, royalty and interest income from investees, compared to $416 million in 2011. The majority of our equity, royalty and interest income from investees is from our 11 unconsolidated North American distributors and from two of our joint ventures in China, Dongfeng Cummins Engine Company, Ltd. (DCEC) and Chongqing Cummins Engine Company, Ltd. (CCEC). Our equity ownership interests in our unconsolidated North American distributors generally range from 30 percent to 50 percent. We have 50 percent equity ownership interests in DCEC and CCEC. As a result, although a significant percentage of our net income is derived from these unconsolidated entities, we do not unilaterally control their management or their operations, which puts a substantial portion of our net income at risk from the actions or inactions of these other entities. A significant reduction in the level of contribution by these entities to our net income would likely have a material adverse effect on our results of operations.
Our truck manufacturers and OEMoriginal equipment manufacturers (OEMs) customers may not continue to outsource their engine supply needs.
Several of our engine customers, including PACCAR, Inc., Volvo AB, Navistar International Corporation and Chrysler, are truck manufacturers or OEMs that manufacture engines for some of their own products. Despite their own engine manufacturing abilities, these customers have historically chosen to outsource certain types of engine production to us due to the quality of our engine products, our emission capability,capabilities, our systems integration, their customers' preferences, their desire for cost reductions, their desire for eliminating production risks and their desire to maintain company focus. However, there can be no assurance that these customers will continue to outsource, or outsource as much of, their engine production in the
future. Increased levels of OEM vertical integration could result from a number of factors, such as shifts in our customers' business strategies, acquisition by a customer of another engine manufacturer, the inability of third-party suppliers to meet product specifications and the emergence of low-cost production opportunities in foreign countries. Any significant reduction in the level of engine production outsourcing from our truck manufacturer or OEM customers could have a material adverse effect on our results of operations.
Our products are exposed to variabilityA downturn in material and commodity costs.the North American truck industry or other factors negatively affecting any of our truck OEM customers could materially adversely impact our results of operations.
Our businesses establish pricesWe make significant sales of engines and components to a few large truck OEMs in North America. If the North American truck market suffers a significant downturn, or if one of our large truck OEM customers experienced financial distress or bankruptcy, such circumstance would likely lead to significant reductions in our revenues and earnings, commercial disputes, receivable collection issues, and other negative consequences that could have a material adverse impact on our results of operations.
The discovery of any significant problems with our customersnew engine platforms in accordance with contractual time frames; however, the timing of market price increases may prevent us from passing these additional costs on to our customers through timely pricing actions. Additionally, higher material and commodity costs around the world may offset our efforts to reduce our cost structure. While we customarily enter into financial transactions to address some of these risks (i.e. copper, platinum and palladium), there can be no assurance that commodity price fluctuations will notNorth America could materially adversely affectimpact our results of operations, financial condition and cash flows. In addition, whileflow.
The EPA and CARB have certified all of our 2012/2013 on-highway and off-highway engines, which utilize SCR technology to meet requisite emission levels. We introduced SCR technology into our engine platforms in 2010. The effective performance of SCR technology and the useoverall performance of commodity price hedging instruments may provide us with protection from adverse fluctuationsthese engine platforms impact a number of our operating segments and remain crucial to our success in commodity prices, by utilizingNorth America. While these instruments we potentially forego2010 engine platforms have performed well in the benefits that might result from favorable fluctuationsfield, the discovery of any significant problems in price. As a result, higher material and commodity costs, as well as hedging these commodity costs during periods of decreasing prices,platforms could result in declining margins.recall campaigns, increased warranty costs, reputational risk and brand risk, and could materially adversely impact our results of operations, financial condition and cash flow.
We are subject to currency exchange rate and other related risks.
We conduct operations in many areas of the world involving transactions denominated in a variety of currencies. We are subject to currency exchange rate risk to the extent that our costs are denominated in currencies other than those in which we earn revenues. In addition, since our financial statements are denominated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on our results of operations. While we customarily enter into financial transactions that attempt to address these risks and many of our supply agreements with customers include currency exchange rate adjustment provisions, there can be no assurance that currency exchange rate fluctuations will not adversely affect our results of operations, financial condition and cash flows.operations. In addition, while the use of currency hedging instruments may provide us with some protection from adverse fluctuations in currency exchange rates, by utilizing these instruments we potentially forego the benefits that might result from favorable fluctuations in currency exchange rates.
We also face risks arising from the imposition of exchange controls and currency devaluations. Exchange controls may limit our ability to convert foreign currencies into U.S. dollars or to remit dividends and other payments by our foreign subsidiaries or businesses located in or conducted within a country imposing controls. Currency devaluations result in a diminished value of funds denominated in the currency of the country instituting the devaluation.
We are vulnerable to supply shortages from single-sourced suppliers.
During 2010,2012, we single sourced approximately 60 to 70 percent of the total types of parts in our product designs. Any delay in our suppliers' deliveries may adversely affect our operations at multiple manufacturing locations, forcing us to seek alternative supply sources to avoid serious disruptions. Delays may be caused by factors affecting our suppliers, including capacity constraints, labor disputes, economic downturns, availability of credit, the impaired financial condition of a particular supplier, suppliers' allocations to other purchasers, weather emergencies, natural disasters or acts of war or terrorism. Any extended delay in receiving critical supplies could impair our ability to deliver products to our customers.customers and our results of operations.
Our products are exposed to variability in material and commodity costs.
Our businesses establish prices with our customers in accordance with contractual time frames; however, the timing of material and commodity market price increases may prevent us from passing these additional costs on to our customers through timely pricing actions. Additionally, higher material and commodity costs around the world may offset our efforts to reduce our cost structure. While we customarily enter into financial transactions and contractual pricing adjustment provisions with our customers that attempt to address some of these risks (notably with respect to copper, platinum and palladium), there can be no assurance that commodity price fluctuations will not adversely affect our results of operations. In addition, while the use of commodity price hedging instruments may provide
us with some protection from adverse fluctuations in commodity prices, by utilizing these instruments we potentially forego the benefits that might result from favorable fluctuations in price. As a result, higher material and commodity costs, as well as hedging these commodity costs during periods of decreasing prices, could result in declining margins.
Our products are subject to recall for performance or safety-related issues.
Our products may be subject to recall for performance or safety-related issues. Product recalls subject us to harm to our reputation, loss of current and future customers, reduced revenue and product recall costs. Product recall costs are incurred when we decide, either voluntarily or involuntarily, to recall a product through a formal campaign to solicit the return of specific products due to a known or suspected performance issue. Any significant product recalls could have a material adverse effect on our results of operations, financial condition and cash flows.
We face significant competition in the markets we serve.
The markets in which we operate are highly competitive. We compete worldwide with a number of other manufacturers and distributors that produce and sell similar products. We primarily compete in the market with diesel engines and related diesel products; however, new technologies continue to be developed for gasoline, natural gas and other technologies and we will continue to face new competition from these expanding technologies. Our products primarily compete on the basis of price, performance, fuel economy, speed of delivery, quality and customer support. We also face competitors in some emerging markets who have established local practices and long standing relationships with participants in these markets. There can be no assurance that our products will be able to compete successfully with the products of other companies and in other markets. For a more complete discussion of the competitive environment in which each of our segments operates, see "Operating Segments" in "Item 1 Business."
Increasing global competition among our customers may affect our existing customer relationships and restrict our ability to benefit from some of our customers' growth.
As our customers in emerging markets continue to grow in size and scope, they are increasingly seeking to export their products to other countries. This has meant greater demand for our advanced engine technologies to help these customers meet the more stringent emissions requirements of developed markets, as well as greater demand for access to our distribution systems for purposes of equipment servicing. As these emerging market customers enter into and begin to compete in more developed markets, they may increasingly begin to compete with our existing customers in these markets. Our further aid to emerging market customers could adversely affect our relationships with developed market customers and, as a result, we may be pressured to restrict sale or support of some of our products in the areas of increased competition. In addition, to the extent the competition does not correspond to overall growth in demand, we may see little or no benefit from this type of expansion by our emerging market customers.
We are exposed to political, economic and other risks that arise from operating a multinational business.
Approximately 6453 percent of our net sales for 20102012 and 59 percent in 2011 were attributable to customers outside the U.S., compared to 52 percent in 2009. Accordingly, our business is subject to the political, economic and other risks that are inherent in operating in numerous countries. These risks include:
As we continue to operate our business globally, our success will depend, in part, on our ability to anticipate and effectively manage these and other related risks. There can be no assurance that the consequences of these and other factors relating to our multinational operations will not have a material adverse effect upon us.
Significant declinesUnanticipated changes in future financial and stock market conditionsour effective tax rate, the adoption of new tax legislation or exposure to additional income tax liabilities could diminishadversely affect our pension plan asset performance and adversely impact our results of operations, financial condition and cash flows.profitability.
We sponsor both fundedare subject to income taxes in the U.S. and unfunded domesticnumerous international jurisdictions. Our income tax provision and cash tax liability in the future could be adversely affected by changes in the distribution of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes to our assertions regarding permanent re-investment of our foreign defined benefit pension and other retirement plans. Our pension expenseearnings, changes in tax laws and the required contributionsdiscovery of new information in the course of our tax return preparation process. The carrying value of deferred tax assets, which are predominantly in the U.S., is dependent on our ability to generate future taxable income in the U.S. We are also subject to ongoing tax audits. These audits can involve complex issues, which may require an extended period of time to resolve and can be highly judgmental. Tax authorities may disagree with certain tax reporting positions taken by us and, as a result, assess additional taxes against us. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our pension planstax provision. The amounts ultimately paid upon resolution of these or subsequent tax audits could be materially different from the amounts previously included in our income tax provision and, therefore, could have a material impact on our tax provision.
We are directly affectedexposed to risks arising from the price and availability of energy.
The level of demand for our products and services is influenced in multiple ways by the valueprice and availability of plan assets,energy. High energy costs generally drive greater demand for better fuel economy in almost all countries in which we operate. Some of our engine products have been developed with a primary purpose of offering fuel economy improvements, and if energy costs decrease or increase less than expected, demand for these products may likewise decrease. The relative unavailability of electricity in some emerging market countries also influences demand for our electricity generating products, such as our diesel generators. If these countries add energy capacity by expanding their power grids at a rate equal to or faster than the projectedgrowth in demand for energy, the demand for our generating products could also decrease or increase less than would otherwise be the case.
Our global operations are subject to laws and actual ratesregulations that impose significant compliance costs and create reputational and legal risk.
Due to the international scope of return on plan assetsour operations, we are subject to a complex system of commercial and trade regulations around the actuarial assumptions we use to measure our defined benefit pension plan obligations, includingworld. Recent years have seen an increase in the discount rate at which future projecteddevelopment and accumulated pension obligationsenforcement of laws regarding trade compliance and anti-corruption such as the U.S. Foreign Corrupt Practices Act and similar laws from other countries. Our numerous foreign subsidiaries, affiliates and joint venture partners are discounted to agoverned by laws, rules and business practices that
present value. We could experience increased pension expense due to a combination of factors, including the decreased investment performance of pension plan assets, decreases in the discount rate and changes in our assumptions relating to the expected return on plan assets.
Significant declines in future financial and stock market conditions could cause material losses in our pension plan assets, which could result in increased pension expense in future years and adverse changes to our financial condition. Depending upon the severity of market declines and government regulatory changes, we may be legally obligated to make pension payments in the U.S. and perhaps other countries, and these contributions could be material.
We face reputational and legal risk from operation outside the U.S. and affiliations with joint venture partners
Several of our foreign subsidiaries, affiliates and joint venture partners are located outside the U.S. with laws, rules and business practices that differ from those of the U.S. The activities of these entities may not comply with U.S. laws or customsbusiness practices or our Code of Business ConductConduct. Violations of these laws may result in severe criminal or civil sanctions, could disrupt our business, and actions by these entities may cause us legalresult in an adverse effect on our reputation, business and results of operations or reputational risk if they violate applicablefinancial condition. We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing laws rulesmight be administered or business practices.interpreted.
We face the challenge of increasingaccurately aligning our capacity and ramping upwith our production at the appropriate pace as we exit the downturn.demand.
Prior to the recession, we experiencedWe can experience capacity constraints and longer lead times for certain products.products in times of growing demand while we can also experience idle capacity as economies slow or demand for certain products decline. Accurately forecasting our expected volumes and appropriately adjusting our capacity as we exit the downturn have been, and will continue to be, important factors in determining our results of operations. We cannot guarantee that we will be able to increase manufacturing capacity to a level that meets demand for our products, which could prevent us from meeting increased customer demand and could harm our business. However, if we overestimate our demand and overbuild our capacity, we may have significantly underutilized assets and we may experience reduced margins. If we do not accurately align our manufacturing capabilities with demand it could have a material adverse effect on our results of operations.
Our business is exposed to risks of product liability claims.
We face an inherent business risk of exposure to product liability claims in the event that our products' failure to perform to specification results or is alleged to result in property damage, bodily injury and/or death. We may experience material product liability losses in the future. While we maintain insurance coverage with respect to certain product liability claims, we may not be able to obtain such insurance on acceptable terms in the future, if at all, and any such insurance may not provide adequate coverage against product liability claims. In addition, product liability claims can be expensive to defend and can divert the attention of management and other personnel for significant periods of time, regardless of the ultimate outcome. An unsuccessful defense of a significant product liability claim could have a material adverse effect upon us. In addition, even if we are successful in defending against a claim relating to our products, claims of this nature could cause our customers to lose confidence in our products and us.
We may need to write off significant investments in our new North American light-duty diesel engine platformsplatform if customer commitments further deteriorate.
We began development of a new North American light-duty diesel engine platform in July 2006 to be used in a variety of on- and off-highway applications. Since that time, and as of December 31, 2010,2012, we have capitalized investments of approximately $218$233 million. Market uncertainty due to the global recession resulted in some customers delaying or cancelling their vehicle programs, while others remain active. If customer expectations or volume projections further deteriorate from our current expected levels and we do not
identify new customers, we may need to recognize an impairment charge and write the assets down to net realizable value.
Our operations are subject to extensiveincreasingly stringent environmental laws and regulations.
Our plants and operations are subject to increasingly stringent environmental laws and regulations in all of the countries in which we operate, including laws and regulations governing air emission, discharges to water and the generation, handling, storage, transportation, treatment and disposal of waste materials. While we believe that we are in compliance in all material respects with these environmental laws and regulations, there can be no assurance that we will not be adversely impacted by costs, liabilities or claims with respect to existing or subsequently acquired operations, under either
present laws and regulations or those that may be adopted or imposed in the future. We are also subject to laws requiring the cleanup of contaminated property. If a release of hazardous substances occurs at or from any of our current or former properties or at a landfill or another location where we have disposed of hazardous materials, we may be held liable for the contamination and the amount of such liability could be material.
Unanticipated changesSignificant declines in future financial and stock market conditions could diminish our effective tax rate, the adoptionpension plan asset performance and adversely impact our results of new tax legislation or exposure to additional income tax liabilities could adversely affect our profitability.operations, financial condition and cash flow.
We sponsor both funded and unfunded domestic and foreign defined benefit pension and other retirement plans. Our pension expense and the required contributions to our pension plans are subjectdirectly affected by the value of plan assets, the projected and actual rates of return on plan assets and the actuarial assumptions we use to income taxesmeasure our defined benefit pension plan obligations, including the discount rate at which future projected and accumulated pension obligations are discounted to a present value. We could experience increased pension expense due to a combination of factors, including the decreased investment performance of pension plan assets, decreases in the discount rate and changes in our assumptions relating to the expected return on plan assets.
Significant declines in future financial and stock market conditions could cause material losses in our pension plan assets, which could result in increased pension expense in future years and adversely impact our results of operations, financial condition and cash flow. Depending upon the severity of market declines and government regulatory changes, we may be legally obligated to make pension payments in the U.S. and numerous international jurisdictions. Our income tax provisionperhaps other countries and cash tax liability in the futurethese contributions could be adversely affected by changes in the distribution of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and the discovery of new information in the course of our tax return preparation process. The carrying value of deferred tax assets, which are predominantly in the U.S., is dependent on our ability to generate future taxable income in the U.S. We are also subject to ongoing tax audits. These audits can involve complex issues, which may require an extended period of time to resolve and can be highly judgmental. Tax authorities may disagree with certain tax reporting positions taken by us and, as a result, assess additional taxes against us. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. The amounts ultimately paid upon resolution of these or subsequent tax audits could be materially different from the amounts previously included in our income tax provision and, therefore, could have a material impact on our tax provision.material.
We may be adversely impacted by work stoppages and other labor matters.
As of December 31, 2010,2012, we employed approximately 39,20046,000 persons worldwide. Approximately 15,50015,750 of our employees worldwide are represented by various unions under collective bargaining agreements that expire between 20112013 and 2015. While we have no reason to believe that we will be materially impacted by work stoppages andor other labor matters, there can be no assurance that future issues with our labor unions will be resolved favorably or that we will not encounter future strikes, work stoppages, or other types of conflicts with labor unions or our employees. Any of these consequences may have an adverse effect on us or may limit our flexibility in dealing with our workforce. In addition, many of our customers and suppliers have unionized work forces. Work stoppages or slow-downs experienced by our customers or suppliers could result in slow-downs or closures that would have a material adverse effect on our operations.
Tableresults of Contentsoperations, financial condition and cash flow.
Our financial statements are subject to changes in accounting standards that could adversely impact our profitability or financial position.
Our financial statements are subject to the application of accounting principles generally accepted in the United States of America (GAAP), which are periodically revised and/or expanded. Accordingly, from time to time we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the Financial Accounting Standards Board. Recently, accounting standard setters issued new guidance which further interprets or seeks to revise accounting pronouncements related to revenue recognition and lease accounting as well as to issue new standards expanding disclosures. The impact of accounting pronouncements that have been issued but not yet implemented is disclosed in our annual and quarterly reports on Form 10-K and Form 10-Q. An assessment of proposed standards is not provided, as such proposals are subject to change through the exposure process and, therefore, their effects on our financial statements cannot be meaningfully assessed. It is possible that future accounting standards we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material adverse effect on the reported results of operations and financial position.
ITEM 1B. Unresolved Staff Comments
None.
Our principal manufacturing facilities include our plants used by the following segments in the following locations:
Segment | U.S. Facilities | Facilities Outside the U.S. | ||
---|---|---|---|---|
Engine | Indiana: Columbus, Seymour | |||
Brazil: Sao Paulo | ||||
India: Pune | ||||
Mexico: San Luis Potosi | ||||
New York: Lakewood | ||||
North Carolina: Whitakers | Cumbernauld | |||
Components | Indiana: Columbus | Australia: Kilsyth | ||
Iowa: Lake Mills | Brazil: Sao Paulo | |||
South Carolina: Charleston | China: Beijing, Shanghai, Wuxi, Wuhan | |||
Tennessee: Cookeville | France: Quimper | |||
Wisconsin: Mineral Point, Neillsville | Germany: Marktheidenfeld | |||
Radurapur | ||||
Mexico: Ciudad Juarez, San Luis Potosi | ||||
South Africa: Pretoria, Johannesburg | ||||
South Korea: Suwon | ||||
Turkey: Ismir | ||||
U.K.: Darlington, Huddersfield | ||||
Power Generation | Indiana: Elkhart | Brazil: Sao Paulo | ||
Minnesota: Fridley | China: Wuxi, Wuhan | |||
Germany: Ingolstadt | ||||
India: Pirangut, | ||||
Mexico: San Luis Potosi | ||||
Romania: Craiova | ||||
U.K.: Margate, Manston, Stamford |
|
|
| ||
In addition, engines and engine components are manufactured by joint ventures or independent licensees at manufacturing plants in the U.K.U.S., China, India, Japan, Pakistan, South Korea, TurkeyMexico and Indonesia.Sweden.
The principal distribution facilities used by our Distribution segment are located in the following locations:
U.S. Facilities | Facilities Outside the U.S. | |
---|---|---|
| Australia: Scoresby | |
| Belgium: Mechelen | |
| Canada: Surrey, Edmonton | |
Nebraska: Omaha | China: Beijing, Shanghai | |
New York: Bronx | Germany: Gross Gerau | |
Pennsylvania: Bristol, Harrisburg | India: Pune | |
Japan: Tokyo | ||
Korea: Chonan | ||
Russia: Moscow | ||
Singapore: Singapore SG | ||
South Africa: Johannesburg | ||
U.K.: Wellingborough | ||
United Arab Emirates: Dubai |
Headquarters and Other Offices
Our Corporate Headquarters are located in Columbus, Indiana. Additional marketing and operational headquarters are in the following locations:
U.S. Facilities | Facilities Outside the U.S. | |
---|---|---|
Indiana: Columbus, Indianapolis | China: Beijing, Shanghai | |
Tennessee: Franklin, Nashville | India: Pune | |
Washington DC | U.K.: Staines, Stockton |
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 4. (Removed and Reserved)Mine Safety Disclosures
Not Applicable.
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Our common stock par value $2.50 per share, is listed on the NYSE under the symbol "CMI." For information about the quoted market prices of our common stock, information regarding dividend payments and the number of common stock shareholders, see "Selected Quarterly Financial Data" in this report. For other matters related to our common stock and shareholders' equity, see Note 14, "CUMMINS INC. SHAREHOLDERS'15, "SHAREHOLDERS' EQUITY," to theConsolidated Financial Statements.
(b) Use of proceeds—not applicable.
(c) 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) | |||||||||
October 1 - November 4, 2012 | 284,881 | $ | 87.84 | 284,568 | 131,733 | ||||||||
November 5 - December 2, 2012 | 2,653 | 99.54 | — | 131,514 | |||||||||
December 3 - December 31, 2012 | 14,372 | 106.00 | — | 118,254 | |||||||||
Total | 301,906 | 88.80 | 284,568 | ||||||||||
| 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) | |||||||||
September 27, - October 31, 2010 | 3,391 | $ | 91.18 | — | 145,336 | ||||||||
November 1 - November 28, 2010 | 19,691 | 95.33 | — | 129,784 | |||||||||
November 29 - December 31, 2010 | 14,957 | 106.05 | — | 117,989 | |||||||||
Total | 38,039 | $ | 99.18 | — | |||||||||
In December 2007,2011 we completed our prior authorization, purchasing the remaining $111 million (1.1 million shares) authorized under this plan. In February 2011, the Board of Directors authorized us to acquirethe acquisition of an additional $500 million$1 billion of our common stock beginning in 2008. This2011, and we acquired $518 million, or 5.3 million shares, under the new authorization does not have an expiration date. Wein 2011. In 2012 we acquired $128$256 million, in 2008, $20or 2.6 million in 2009 and $241 million in 2010,shares, of our common stock leaving $111$226 million available for purchase under this authorization at December 31, 2010.2012. In February 2011,December 2012, the Board of Directors approved a new share repurchase program and authorized the acquisition of up toan additional $1 billion of Cumminsour common stock upon the completion of the $500 million2011 repurchase program.
During the fourth quarter of 2010,2012, we repurchased 38,03917,338 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 initial 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 and after shares are sold 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.
The following Performance Graph and related information shall not be deemed "soliciting material" or to be "filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any of our future filingfilings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
The following graph compares the cumulative total shareholder return on our common stock for the last five years with the cumulative total return on the S&P 500 Index and an index of peer companies selected by us. In 2010, we re-evaluated our peer group that management benchmarks against and have chosen to include companies that participate in similar end-markets and have similar businesses. Our revised peer group includes BorgWarner Inc, Caterpillar, Inc., Daimler AG, Danaher Corporation, Deere & Company, Donaldson Company Inc., Eaton Corporation, Emerson Electric Co., W.W. Grainger Inc., Honeywell International, Illinois Tool Works Inc., Ingersoll-Rand Company Ltd., Navistar International Corporation, Paccar Inc.,PACCAR Inc, Parker-Hannifin Corporation, Textron Inc. and Volvo AB. Each of the measures of cumulative total return assumes reinvestment of dividends. The comparisons in this table are required by the SEC and are not intended to forecast or be indicative of possible future performance of our stock.
COMPARISON OF 5-YEAR5 YEAR CUMULATIVE TOTAL RETURN
AMONG CUMMINS INC., S&P 500
INDEX AND CUSTOM PEER GROUP
ASSUMES $100 INVESTED ON JAN 01, 2006DEC. 31, 2007
ASSUMES DIVIDENDDIVIDENDS REINVESTED
FISCAL YEAR ENDING DECDEC. 31, 2010
2012
ITEM 6. Selected Financial Data
The selected financial information presented below for each of the last five years ended December 31, 2010,beginning with 2012, was derived from ourConsolidated Financial Statements. This information should be read in conjunction with ourConsolidated Financial Statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
In millions, except per share amounts | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
For the years ended December 31, | ||||||||||||||||
Net sales | $ | 17,334 | $ | 18,048 | $ | 13,226 | $ | 10,800 | $ | 14,342 | ||||||
U.S. percentage of sales | 47 | % | 41 | % | 36 | % | 48 | % | 41 | % | ||||||
Non-U.S. percentage of sales | 53 | % | 59 | % | 64 | % | 52 | % | 59 | % | ||||||
Gross margin | 4,508 | 4,589 | 3,168 | 2,169 | 2,940 | |||||||||||
Research, development and engineering expenses | 728 | 629 | 414 | 362 | 422 | |||||||||||
Equity, royalty and interest income from investees | 384 | 416 | 351 | 214 | 253 | |||||||||||
Interest expense | 32 | 44 | 40 | 35 | 42 | |||||||||||
Consolidated net income(1) | 1,738 | 1,946 | 1,140 | 484 | 818 | |||||||||||
Net income attributable to Cummins Inc.(1)(2) | 1,645 | 1,848 | 1,040 | 428 | 755 | |||||||||||
Net earnings per share attributable to Cummins Inc. | ||||||||||||||||
Basic | $ | 8.69 | $ | 9.58 | $ | 5.29 | $ | 2.17 | $ | 3.87 | ||||||
Diluted | 8.67 | 9.55 | 5.28 | 2.16 | 3.84 | |||||||||||
Cash dividends declared per share | 1.80 | 1.325 | 0.875 | 0.70 | 0.60 | |||||||||||
Cash flows from operations | $ | 1,532 | $ | 2,073 | $ | 1,006 | $ | 1,137 | $ | 987 | ||||||
Capital expenditures | 690 | 622 | 364 | 310 | 543 | |||||||||||
At December 31, | ||||||||||||||||
Cash and cash equivalents | $ | 1,369 | $ | 1,484 | $ | 1,023 | $ | 930 | $ | 426 | ||||||
Total assets | 12,548 | 11,668 | 10,402 | 8,816 | 8,519 | |||||||||||
Long-term debt | 698 | 658 | 709 | 637 | 629 | |||||||||||
Total equity(3) | 6,974 | 5,831 | 4,996 | 4,020 | 3,480 |
In millions, except per share amounts | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
For the years ended December 31, | |||||||||||||||||
Net sales | $ | 13,226 | $ | 10,800 | $ | 14,342 | $ | 13,048 | $ | 11,362 | |||||||
U.S. percentage of sales | 36 | % | 48 | % | 41 | % | 46 | % | 50 | % | |||||||
Non-U.S. percentage of sales | 64 | % | 52 | % | 59 | % | 54 | % | 50 | % | |||||||
Gross margin | 3,168 | 2,169 | 2,940 | 2,556 | 2,465 | ||||||||||||
Research, development and engineering expenses | 414 | 362 | 422 | 329 | 321 | ||||||||||||
Equity, royalty and interest income from investees | 351 | 214 | 253 | 205 | 140 | ||||||||||||
Interest expense | 40 | 35 | 42 | 58 | 96 | ||||||||||||
Consolidated net income(1) | 1,140 | 484 | 818 | 788 | 759 | ||||||||||||
Net income attributable to Cummins Inc.(1)(2) | 1,040 | 428 | 755 | 739 | 715 | ||||||||||||
Net earnings per share attributable to Cummins Inc.(3) | |||||||||||||||||
Basic | $ | 5.29 | $ | 2.17 | $ | 3.87 | $ | 3.72 | $ | 3.76 | |||||||
Diluted | 5.28 | 2.16 | 3.84 | 3.70 | 3.55 | ||||||||||||
Cash dividends declared per share | 0.875 | 0.70 | 0.60 | 0.43 | 0.33 | ||||||||||||
Cash flows from operations | $ | 1,006 | $ | 1,137 | $ | 987 | $ | 810 | $ | 840 | |||||||
Capital expenditures | 364 | 310 | 543 | 353 | 249 | ||||||||||||
At December 31, | |||||||||||||||||
Cash and cash equivalents | $ | 1,023 | $ | 930 | $ | 426 | $ | 577 | $ | 840 | |||||||
Total assets | 10,402 | 8,816 | 8,519 | 8,195 | 7,465 | ||||||||||||
Long-term debt | 709 | 637 | 629 | 555 | 647 | ||||||||||||
Total equity(4) | 4,996 | 4,020 | 3,480 | 3,702 | 3,056 |
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 ourConsolidated Financial Statements and the accompanying notes to those financial statements. Our MD&A is presented in the following sections:
EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS
We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines electric power generation systems and engine-related component products, including filtration, exhaust aftertreatment, turbochargers, fuel systems, controls andsystems, 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., Chrysler Group, LLC,Inc, Daimler Trucks North America, MAN Nutzfahrzeuge AG,Chrysler Group, LLC, Volvo AB, Komatsu, Navistar International Corporation, Aggreko plc, Ford Motor Company Komatsu, Volvo AB and Case New Holland.MAN Nutzfahrzeuge AG. We serve our customers through a network of more thanapproximately 600 company-owned and independent distributor locations and approximately 6,0006,500 dealer locations in more than 190 countries and territories.
Our reportable operating segments consist of the following: Engine, Components, Power Generation Components and Distribution. This reporting structure is organized according to the products and markets each segment serves and allows management to focus its efforts on providing enhanced service to a wide range of customers. The Engine segment produces engines and parts for sale to customers in on-highway and various industrial markets. TheOur 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.military equipment. The Components segment sells filtration products, aftertreatment, turbochargers and fuel systems. The Power Generation segment is an integrated provider of power systems which sells engines, generator sets and alternators. The Components segment sells filtration products, exhaust aftertreatment systems, turbochargers and fuel systems. 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.
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 and is particularly sensitive to changes in interest rate levels and our customers' access to credit.conditions. Our sales may also be impacted by OEM inventory levels and production schedules and stoppages. Economic downturns in markets we serve
generally result in reductions in sales and pricing of our products. 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.
In 2010, emergingThe global economy continued to slow throughout 2012, although the impacts were partially offset by strong demand across several end markets recovered with stronger demand in China, Indiathe U.S. and Brazil, while we started to see modest but uneven signsCanada (North America) in the first half of recovery in developed markets. As we expected, after the strong demandyear; however these markets weakened in the second half of 2009,the year, particularly the heavy-duty truck market. Economies in advanceemerging markets, including China and Brazil experienced challenges throughout the year in most markets, especially the off-highway construction market in China and the medium-duty truck market in Brazil. Demand in India remained strong for power generation equipment; however, improved volumes were more than offset by unfavorable currency impacts. International (excludes the U.S. and Canada) off-highway construction markets have continued to deteriorate with engine shipments down 53 percent, including a 72 percent decline in China. The on-highway medium-duty truck market in Brazil declined as the result of the 2010 United States (U.S.)2011 pre-buy ahead of the new 2012 emission change,requirements and one of our customers replacing our B6.7 engine with a proprietary engine in 2012 contributing to international medium-duty truck shipments being down 19 percent. North American demand for heavy-duty on-highway products in North America decreased approximately 61increased 3 percent in 2010 versus 2009. In addition,while medium-duty truck shipments in North America decreased 34increased 15 percent in 2010 versus 2009. Excluding2012 compared to 2011; although demand in both of these markets declined in the second half of 2012. North American light-duty on-highway markets, overall order trendsdemand also improved and were consistent with our expectationsan increase in shipments to Chrysler of organic revenue37 percent in 2012 compared to 2011.
Slow growth in 2010. In recognitionthe U.S. economy and uncertainty driven by unresolved federal tax and budget issues caused businesses to hold back on capital expenditures in 2012, thus impacting demand for truck and power generation equipment. The governments of China and India have controlled inflation through tight monetary policies in the form of rising interest rates and tightening access to credit, although both countries began easing these policies in response to reduced inflationary concerns in 2012. Brazil also began easing their monetary policies in the second half of 2012. Easing monetary policies could enhance our end markets; however, there likely will be a delay between when these policies are implemented and when our end markets respond. The European economy remains uncertain with continued volatility in the Euro countries. Although we do not have any significant direct exposure to European sovereign debt, we generated approximately 8 percent of our net sales from Euro zone countries in 2012. As a result of a number of markets unexpectedly slowing in mid-2012, continued weak economic data in a number of regions and increasing levels of uncertainty regarding the direction of the global economic challenges,economy, we launched significant restructuringimplemented a number of cost reduction initiatives in late 2008 and 2009 that were designedthe second half of 2012. In October 2012, we announced strategic actions necessary to respond to the current environment by cutting costs while maintaining investments in key growth programs. Actions include a number of measures to reduce structuralcosts including planned work week reductions, shutdowns at some manufacturing facilities and overhead costs across all ofsome targeted workforce reductions. We reduced our businesses, improve operational performance, strengthen our position in emerging markets and prepare to capitalize on the eventual recovery in North America and Europe. These initiatives helped to mitigate the adverse volume impacts that certain markets experienced and they better position us for when a more robust economic recovery extends beyond the emerging markets. Despite the slow recoveryworkforce by 1,300 people in the U.S. marketsfourth quarter and Europe, we were able to operate much more efficiently and, as a result, recorded the most profitable results in our history in 2010.incurred total restructuring charges of $52 million ($35 million after-tax), or $0.18 per diluted share.
The following table contains sales and earnings before interest and taxes (EBIT)EBIT results by operating segment for the years ended December 31, 20102012 and 2009.2011. Refer to the section titled "Operating Segment Results" later in MD&A for a more detailed discussion of net sales and EBIT by operating segment including the reconciliation of segment EBIT to income before taxes.
| 2012 | 2011 | Percent change 2012 vs. 2011 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Percent of Total | | | Percent of Total | | |||||||||||||||||||
In millions | Sales | EBIT | Sales | EBIT | Sales | EBIT | |||||||||||||||||||
Engine | $ | 10,733 | 62 | % | $ | 1,248 | $ | 11,307 | 63 | % | $ | 1,384 | (5 | )% | (10 | )% | |||||||||
Components | 4,012 | 23 | % | 426 | 4,063 | 23 | % | 470 | (1 | )% | (9 | )% | |||||||||||||
Power Generation | 3,268 | 19 | % | 285 | 3,498 | 19 | % | 373 | (7 | )% | (24 | )% | |||||||||||||
Distribution | 3,277 | 19 | % | 369 | 3,044 | 17 | % | 386 | 8 | % | (4 | )% | |||||||||||||
Intersegment eliminations | (3,956 | ) | (23 | )% | — | (3,864 | ) | (22 | )% | — | 2 | % | — | ||||||||||||
Non-segment | — | — | (25 | ) | — | — | 102 | — | NM | ||||||||||||||||
Total | $ | 17,334 | 100 | % | $ | 2,303 | $ | 18,048 | 100 | % | $ | 2,715 | (4 | )% | (15 | )% | |||||||||
| 2010 | 2009 | Percent change 2010 vs. 2009 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Percent of Total | | | Percent of Total | | |||||||||||||||||||
In millions | Sales | EBIT | Sales | EBIT | Sales | EBIT | |||||||||||||||||||
Engine | $ | 7,888 | 60 | % | $ | 809 | $ | 6,405 | 59 | % | $ | 252 | 23 | % | NM | ||||||||||
Power Generation | 2,919 | 22 | % | 299 | 2,417 | 22 | % | 167 | 21 | % | 79 | % | |||||||||||||
Components | 3,046 | 23 | % | 278 | 2,355 | 22 | % | 95 | 29 | % | NM | ||||||||||||||
Distribution | 2,324 | 18 | % | 297 | 1,784 | 17 | % | 235 | 30 | % | 26 | % | |||||||||||||
Intersegment eliminations | (2,951 | ) | (23 | )% | — | (2,161 | ) | (20 | )% | — | 37 | % | — | ||||||||||||
Non-segment | — | — | (26 | ) | — | — | (74 | ) | — | (65 | )% | ||||||||||||||
Total | $ | 13,226 | 100 | % | $ | 1,657 | $ | 10,800 | 100 | % | $ | 675 | 22 | % | NM | ||||||||||
"NM"—not meaningful information.
Net income attributable to Cummins Inc. for 20102012 was $1,040$1,645 million, or $5.28$8.67 per diluted share, on sales of $13.2$17.3 billion, compared to 20092011 net income attributable to Cummins Inc. of $428$1,848 million, or $2.16$9.55 per diluted share, on sales of $10.8$18.0 billion. We recorded restructuringThe decrease in income and other charges of $99 million ($65 million after - -tax, or $0.33earnings per diluted share) in 2009. For a detailed discussion of restructuring see Note 22, "RESTRUCTURING AND OTHER CHARGES," to ourConsolidated Financial Statements. The increase in incomeshare was driven by higher volumes in emerging markets, price improvements, increasedoperating expenses, lower gross margins and lower equity, royalty and interest income decreased warranty expenses and restructuring charges incurred in 2009 that were not repeated in 2010. These werefrom investees, partially offset by higher incomea lower effective tax expense, selling, generalrate of 23.5 percent versus 27.1 percent in 2011. In addition, the significant gains we recorded in 2011 for the disposition of certain assets and administrative expensesliabilities of our exhaust business and research, developmentlight-duty filtration business and engineering expensesflood damage recoveries did not repeat in 2010 as compared2012. Diluted earnings per share for 2012 benefited $0.06 from lower shares primarily due to 2009.the stock repurchase program.
In 2010,July 2012, we recordedcompleted the acquisition of Hilite Germany GmbH (Hilite) in a pre-tax recoverycash transaction for $176 million. We also acquired an additional 45 percent interest in Cummins Central Power for consideration of $32 million ($21 million after -tax, or $0.11 per diluted share) related to the overpayment of revenue based taxes on imported products in Brazil from 2004-2008. The tax recovery was recorded in cost of sales in our non segment business results as it was not considered by management in its evaluation of operating results for the year.approximately $20 million.
We generated $1,006 million$1.5 billion of operating cash flows for the twelve months ended December 31, 2010,in 2012, compared to $1,137 million for the twelve months ended December 31, 2009.$2.1 billion in 2011. Refer to the section titled "Operating Activities" later in the MD&A"Liquidity and Capital Resources" section for a discussion of items impacting cash flows.
In December 2007, ourFebruary 2011, the Board of Directors approved a share repurchase program and authorized the acquisition of up to $500 million$1 billion of our common stock. In February 2009, we temporarily suspended our stock repurchase program to conserve cash through the U.S. recession. We resumed stock repurchases under our Board authorization in the fourth quarter of 2009 and we have repurchased $241$256 million of common stock during 2010.in 2012. In February 2011,December 2012, the Board of Directors authorized the acquisition of up to $1 billion of Cumminsour common stock.stock upon completion of the 2011 repurchase program.
In July 2010, our2012, the Board of Directors authorized a dividend increase of 5025 percent from $0.40 to $0.2625$0.50 per share on a quarterly basis effective in the third quarter. Our debt to capital ratio (total capital(capital is defined as debt plus equity) at December 31, 2010,2012, was 14.410.0 percent, compared to 14.911.8 percent at December 31, 2009. We currently have a Baa2 credit rating with a stable outlook from Moody's Investors Services, a BBB+2011. As of the date of filing of this Annual Report on Form 10-K, we had an 'A' credit rating with a stable outlook from Standard and& Poor's and a BBB+Rating Services, an 'A' credit rating and a stable outlook from Fitch Ratings and a 'Baa1' credit rating with a positive outlook from Fitch.Moody's Investors Service, Inc. In addition to the $1.362our $1.6 billion in cash and marketable securities on hand, we have sufficient access to our revolver and accounts receivable programcredit facilities, if necessary, to meet currently anticipated growthinvestment and funding needs.
On November 9, 2012, we entered into a five-year revolving credit agreement with a syndicate of lenders. The credit agreement provides us with a $1.75 billion senior unsecured revolving credit facility, the proceeds of which are to be used by us for working capital or other general corporate purposes.
Our global pension plans, including our unfunded non-qualified plans, were 9698 percent funded at year-end 2010. The2012. Our U.S. qualified plan, which isrepresents approximately 6260 percent of theour worldwide pension obligation, was 99106 percent funded and the international plans were 107our United Kingdom (U.K.) plan was 104 percent funded. Asset returns in 20102012 for the U.S. qualified plan were 15.214 percent while the year-end 20102012 discount rate was 5.40%,3.95 percent, down 0.200.85 percentage points from the 20092011 discount rate of 5.60%.4.80 percent. We expect to contribute $130$170 million of cash to our global pension plans in 2011.2013. We do not have a required minimum pension contribution obligation for our U.S. plans in 2010.2013. We expect pension and other postretirement benefit expense in 20112013 to decreaseincrease by approximately $5$35 million pre-tax, or $0.02$0.14 per diluted share, when compared to 2010.2012. Refer to application of critical accounting estimates within MD&A and Note 11,12, "PENSION AND OTHER POST RETIREMENT BENEFITS," to theConsolidated Financial Statements, for additional information concerning our pension and other post-retirement benefit plans.
In 2010, economiesThe global economy continued to slow throughout 2012, although the impacts were partially offset by strong demand across several end markets in North America in the first half of the year; however these markets weakened in the second half of the year, particularly the heavy-duty truck market. Economies in emerging markets, including China India and Brazil recoveredexperienced challenges throughout the year in most markets, especially the off-highway construction market in China and we started to see signs of economic recoverythe medium-duty truck market in developed markets.Brazil. Demand in India remained strong for power generation equipment; however, improved volumes were more than offset by unfavorable currency impacts.
We currently expect the following positive trends in 2011:2013:
We currently expect the following challenges to our business that will put pressure onmay reduce our earnings potential in 2011:2013:
We seebelieve that, over the longer term, there will be economic improvements in most of our current markets and we are confident that our opportunities for long-term profitable growth will continue in the future.future as the result of the following four macroeconomic trends that will benefit our businesses:
| | | | Favorable/(Unfavorable) | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Years ended December 31, | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||||||||||||
In millions (except per share amounts) | 2012 | 2011 | 2010 | Amount | Percent | Amount | Percent | |||||||||||||||
NET SALES | $ | 17,334 | $ | 18,048 | $ | 13,226 | $ | (714 | ) | (4 | )% | $ | 4,822 | 36 | % | |||||||
Cost of sales | 12,826 | 13,459 | 10,058 | 633 | 5 | % | (3,401 | ) | (34 | )% | ||||||||||||
GROSS MARGIN | 4,508 | 4,589 | 3,168 | (81 | ) | (2 | )% | 1,421 | 45 | % | ||||||||||||
OPERATING EXPENSES AND INCOME | ||||||||||||||||||||||
Selling, general and administrative expenses | 1,900 | 1,837 | 1,487 | (63 | ) | (3 | )% | (350 | ) | (24 | )% | |||||||||||
Research, development and engineering expenses | 728 | 629 | 414 | (99 | ) | (16 | )% | (215 | ) | (52 | )% | |||||||||||
Equity, royalty and interest income from investees | 384 | 416 | 351 | (32 | ) | (8 | )% | 65 | 19 | % | ||||||||||||
Gain on sale of businesses | 6 | 121 | — | (115 | ) | (95 | )% | 121 | 100 | % | ||||||||||||
Other operating income (expense), net | (16 | ) | 21 | (16 | ) | (37 | ) | NM | 37 | NM | ||||||||||||
OPERATING INCOME | 2,254 | 2,681 | 1,602 | (427 | ) | 16 | % | 1,079 | 67 | % | ||||||||||||
Interest income | 25 | 34 | 21 | (9 | ) | (26 | )% | 13 | 62 | % | ||||||||||||
Interest expense | 32 | 44 | 40 | 12 | 27 | % | (4 | ) | (10 | )% | ||||||||||||
Other income (expense), net | 24 | — | 34 | 24 | 100 | % | (34 | ) | (100 | )% | ||||||||||||
INCOME BEFORE INCOME TAXES | 2,271 | 2,671 | 1,617 | (400 | ) | 15 | % | 1,054 | 65 | % | ||||||||||||
Income tax expense | 533 | 725 | 477 | 192 | 26 | % | (248 | ) | (52 | )% | ||||||||||||
CONSOLIDATED NET INCOME | 1,738 | 1,946 | 1,140 | (208 | ) | 11 | % | 806 | 71 | % | ||||||||||||
Less: Net income attributable to noncontrolling interests | 93 | 98 | 100 | 5 | 5 | % | 2 | 2 | % | |||||||||||||
NET INCOME ATTRIBUTABLE TO CUMMINS INC. | $ | 1,645 | $ | 1,848 | $ | 1,040 | $ | (203 | ) | (11 | )% | $ | 808 | 78 | % | |||||||
Diluted earnings per common share attributable to Cummins Inc. | $ | 8.67 | $ | 9.55 | $ | 5.28 | $ | (0.88 | ) | (9 | )% | $ | 4.27 | 81 | % | |||||||
| | | | Favorable/(Unfavorable) Percentage Points | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Percent of sales | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||||
Gross margin | 26.0 | % | 25.4 | % | 24.0 | % | 0.6 | 1.4 | ||||||||
Selling, general and administrative expenses | 11.0 | % | 10.2 | % | 11.2 | % | (0.8 | ) | 1.0 | |||||||
Research, development and engineering expenses | 4.2 | % | 3.5 | % | 3.1 | % | (0.7 | ) | (0.4 | ) |
Net Sales
Net sales decreased versus 2011 and was primarily driven by the following:
The decreases above were partially offset as Distribution segment sales, excluding acquisitions, increased by 2 percent due to higher demand for parts and filtration products especially in North and Central America, increased power generation growth in East Asia, increased demand in the South Pacific and higher service demand from South Pacific mining customers, which were partially offset by lower engine product sales due to a slowdown in the North American oil and gas markets.
A more detailed discussion of sales by segment is presented in the "OPERATING SEGMENT RESULTS" section.
Sales to international markets were 49 percent of total net sales in 2012, compared with 56 percent of total net sales in 2011.
Gross Margin
Gross margin decreased by $81 million and as a percentage of sales increased by 0.6 percentage points. The increase in gross margin as a percentage of sales was primarily due to lower material costs, improved price realization, lower warranty costs and favorable product mix, which were partially offset by lower volumes, unfavorable foreign currency fluctuations and restructuring charges of $29 million.
The provision for warranties issued as a percentage of sales was 2.1 percent in both 2012 and 2011. 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 increased primarily due to higher consulting of $45 million, restructuring and other charges of $20 million and an increase of $19 million in compensation and related expenses, which were partially offset by reduced discretionary spending in the
second half of the year. Higher compensation expense was primarily due to increased headcount to support our strategic growth initiatives launched prior to a number of markets unexpectedly slowing in mid-2012. Compensation and related expenses include salaries, fringe benefits and variable compensation. Variable compensation related to 2012 performance decreased $87 million over variable compensation related to 2011 performance. In the third quarter of 2012, we implemented a number of cost reduction initiatives to align our cost structure with the slowdown in demand at several of our key markets in the second half of the year. Overall, selling, general and administrative expenses, as a percentage of sales, increased to 11.0 percent in 2012 from 10.2 percent in 2011.
Research, Development and Engineering Expenses
Research, development and engineering expenses increased primarily due to an increase of $54 million in compensation and related expenses and increased consulting of $32 million. Higher compensation expense was primarily due to increased headcount to support our strategic growth initiatives. Compensation and related expenses include salaries, fringe benefits and variable compensation. Variable compensation related to 2012 performance decreased $25 million over variable compensation related to 2011 performance. Research, development and engineering expenses in 2012 also included restructuring and other charges of $3 million. Overall, research, development and engineering expenses, as a percentage of sales, increased to 4.2 percent in 2012 from 3.5 percent in 2011. 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 decreased primarily due to the following:
In millions | 2012 vs. 2011 Increase/(Decrease) | |||
---|---|---|---|---|
Dongfeng Cummins Engine Company, Ltd. (DCEC) | $ | (28 | ) | |
Chongqing Cummins Engine Company, Ltd. (CCEC) | (7 | ) | ||
Beijing Foton Cummins Engine Co., Ltd. (BFCEC) | 12 | |||
North American distributors | 13 | |||
All other | (18 | ) | ||
Cummins share of net income | (28 | ) | ||
Royalty and interest income | (4 | ) | ||
Equity, royalty and interest income from investees | $ | (32 | ) | |
The decreases above were primarily due to lower sales in China at DCEC and CCEC, which were partially offset by growth in North American distributors and higher sales at BFCEC.
Gain on Sale of Businesses
In the second quarter of 2011, we sold certain assets and liabilities of our exhaust business which manufactures exhaust products and select components for emission systems for a variety of applications not core to our other product offerings. This business was historically included in our Components segment. The sales price was $123 million. We recognized a gain on the sale of $68 million ($37 million after-tax), which included a goodwill allocation of $19 million. The gain was excluded from segment results as it was not considered in our evaluation of operating results for the year ended December 31, 2011.
Sales for this business were $62 million and $171 million in 2011 (through closing) and 2010, respectively. Income before income taxes for this business were approximately $9 million and $22 million in 2011 (through closing) and 2010, respectively.
During the fourth quarter of 2011, we sold certain assets and liabilities of our light-duty filtration business which manufactures light-duty automotive and industrial filtration solutions. The sales price was $90 million and included a note receivable from the buyer of approximately $1 million. There are no earnouts or other contingencies associated with the sales price. We recognized a gain on the sale of $53 million ($33 million after-tax), which included a goodwill allocation of $6 million. The gain was excluded from segment results as it was not considered in our evaluation of operating results for the year ended December 31, 2011.
Sales for this business were $64 million and $74 million in 2011 (through closing) and 2010, respectively. Income before income taxes for this business were approximately $13 million and $9 million in 2011 (through closing) and 2010, respectively.
In the second quarter of 2012, we recorded an additional $6 million gain ($4 million after-tax) related to final purchase price adjustments for our 2011 divestitures. The gain was excluded from segment results as it was not considered in our evaluation of operating results for the year ended December 31, 2012.
Other Operating Income (Expense), Net
Other operating income (expense), net was as follows:
| Years ended December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2012 | 2011 | |||||
Royalty income | $ | 18 | $ | 12 | |||
Flood damage gain | — | 38 | |||||
Loss on sale of fixed assets | (2 | ) | (10 | ) | |||
Royalty expense | (3 | ) | (3 | ) | |||
Amortization of intangible assets | (8 | ) | (5 | ) | |||
Legal matters | (20 | ) | (5 | ) | |||
Other, net | (1 | ) | (6 | ) | |||
Total other operating income (expense), net | $ | (16 | ) | $ | 21 | ||
Interest Income
Interest income decreased primarily due to lower average investment balances in 2012 compared to 2011.
Interest Expense
Interest expense decreased primarily due to lower capitalized interest in 2011 and the termination of a capital lease in September 2011.
RESULTS OF OPERATIONSOther Income (Expense), Net
Other income (expense), net was as follows:
| Years ended December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2012 | 2011 | |||||
Gain on sale of equity investment | $ | 13 | $ | — | |||
Dividend income | 7 | 7 | |||||
Gain on fair value adjustment for consolidated investee(1) | 7 | — | |||||
Change in cash surrender value of corporate owned life insurance | 5 | 12 | |||||
Gain on marketable securities, net | 3 | — | |||||
Foreign currency losses, net | (14 | ) | (14 | ) | |||
Bank charges | (15 | ) | (16 | ) | |||
Other, net | 18 | 11 | |||||
Total other income (expense), net | $ | 24 | $ | — | |||
| | | | Favorable/(Unfavorable) | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Years ended December 31, | 2010 vs. 2009 | 2009 vs. 2008 | ||||||||||||||||||||
In millions (except per share amounts) | 2010 | 2009 | 2008 | Amount | Percent | Amount | Percent | ||||||||||||||||
Net sales | $ | 13,226 | $ | 10,800 | $ | 14,342 | $ | 2,426 | 22 | % | $ | (3,542 | ) | (25 | )% | ||||||||
Cost of sales | 10,058 | 8,631 | 11,402 | (1,427 | ) | (17 | )% | 2,771 | 24 | % | |||||||||||||
Gross margin | 3,168 | 2,169 | 2,940 | 999 | 46 | % | (771 | ) | (26 | )% | |||||||||||||
Operating expenses and income | |||||||||||||||||||||||
Selling, general and administrative expenses | 1,487 | 1,239 | 1,450 | (248 | ) | (20 | )% | 211 | 15 | % | |||||||||||||
Research, development and engineering expenses | 414 | 362 | 422 | (52 | ) | (14 | )% | 60 | 14 | % | |||||||||||||
Equity, royalty and interest income from investees | 351 | 214 | 253 | 137 | 64 | % | (39 | ) | (15 | )% | |||||||||||||
Restructuring and other charges | — | 99 | 37 | 99 | 100 | % | (62 | ) | NM | ||||||||||||||
Other operating (expense) income, net | (16 | ) | (1 | ) | (12 | ) | (15 | ) | NM | 11 | 92 | % | |||||||||||
�� | |||||||||||||||||||||||
Operating income | 1,602 | 682 | 1,272 | 920 | NM | (590 | ) | (46 | )% | ||||||||||||||
Interest income | 21 | 8 | 18 | 13 | NM | (10 | ) | (56 | )% | ||||||||||||||
Interest expense | 40 | 35 | 42 | (5 | ) | (14 | )% | 7 | 17 | % | |||||||||||||
Other income (expense), net | 34 | (15 | ) | (70 | ) | 49 | NM | 55 | 79 | % | |||||||||||||
Income before income taxes | 1,617 | 640 | 1,178 | 977 | NM | (538 | ) | (46 | )% | ||||||||||||||
Income tax expense | 477 | 156 | 360 | (321 | ) | NM | 204 | 57 | % | ||||||||||||||
Consolidated net income | 1,140 | 484 | 818 | 656 | NM | (334 | ) | (41 | )% | ||||||||||||||
Less: Net income attributable to noncontrolling interests | 100 | 56 | 63 | (44 | ) | (79 | )% | 7 | 11 | % | |||||||||||||
Net income attributable to Cummins Inc. | $ | 1,040 | $ | 428 | $ | 755 | $ | 612 | NM | $ | (327 | ) | (43 | )% | |||||||||
Diluted earnings per common share attributable to Cummins Inc. | $ | 5.28 | $ | 2.16 | $ | 3.84 | $ | 3.12 | NM | $ | (1.68 | ) | (44 | )% | |||||||||
| | | | Favorable/(Unfavorable) Percentage Points | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Percent of sales | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||
Gross margin | 24.0 | % | 20.1 | % | 20.5 | % | 3.9 | (0.4 | ) | |||||||
Selling, general and administrative expenses | 11.2 | % | 11.5 | % | 10.1 | % | 0.3 | (1.4 | ) | |||||||
Research, development and engineering expenses | 3.1 | % | 3.4 | % | 2.9 | % | 0.3 | (0.5 | ) |
Income Tax Expense
Our income tax rates are generally less than the 35 percent U.S. statutory income tax rate primarily because of lower taxes on foreign earnings and research tax credits. Our effective tax rate for 2012 was 23.5 percent compared to 27.1 percent for 2011. Our 2012 income tax provision includes a one-time $134 million tax benefit resulting from transactions entered into and tax return elections made with respect to our U.K. operations. Our 2011 income tax provision includes a tax benefit of $48 million related to prior year refund claims filed for additional research tax credits, as well as additional foreign income and related foreign tax credits, net of related tax reserves. Our effective tax rate for 2011 also includes a tax benefit of $19 million related to the release of deferred U.S. tax liabilities on certain foreign earnings, as a result of restructuring our foreign operations. Also included in 2011 is a tax benefit of $16 million resulting from the reduction of our unrecognized tax benefits primarily due to settlements with taxing authorities. The 2011 income tax provision also includes other tax items totaling to a $2 million net tax charge, primarily relating to the enactment of state law changes in Indiana and changes in the U.K. as well as adjustments to our income tax accounts based on our 2010 tax return filings.
On January 2, 2013, the American Taxpayer Relief Act of 2012 was enacted. This legislation retroactively extended the U.S. federal research credit for two years, from January 1, 2012, through December 31, 2013. We expect our 2013 effective tax rate, which will include an estimated 1 percent benefit for the 2013 research credit, to be 26 percent excluding any one-time items that may arise. Additionally, we anticipate that our first quarter 2013 results will include a one-time tax benefit of approximately $28 million representing the net benefit attributable to the 2012 research credit. Earnings of our China operations generated after December 31, 2011, are considered to be permanently reinvested and additional U.S. deferred tax is no longer being provided on these earnings generated after 2011. We have $702 million of retained earnings and related cumulative translation adjustments in our China operations generated prior to December 31, 2011 and have provided a U.S. deferred tax liability of $158 million relating to these earnings and related translation adjustments. We anticipate that these earnings will be distributed to the U.S. within the next five years.
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 decreased primarily due to a decline of $5 million at Wuxi Cummins Turbo Technologies Co. Ltd., $3 million at Cummins Western Canada LP. and $3 million at Power Systems India. The decreases were partially offset by an increase of $6 million at Cummins Power Solutions Ltd. and $2 million at Cummins Central Power LLC.
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. decreased primarily due to lower volumes, particularly in the international construction and medium-duty truck markets, higher research, development and engineering expenses, higher selling, general and administrative expenses and lower equity, royalty and interest income from investees. These decreases were partially offset by improved gross margin as a percentage of sales and a lower effective tax rate of 23.5 percent versus 27.1 percent in 2011. In addition, the significant gains we recorded in 2011 for the disposition of certain asset and liabilities of our exhaust business and light-duty filtration business and flood damage recoveries from the insurance settlement regarding a June 2008 flood in Southern Indiana did not repeat in 2012. Diluted earnings per share for 2012 also benefited $0.06 from lower shares primarily due to the stock repurchase program.
Net Sales
Sales increased in all segments primarily due to increased demand from themost markets including recovery of emerging markets and improvement in developedthe North American on-highway markets. The primary drivers for the increase in sales were:
A more detailed discussion of sales by segment is presented in the "OPERATING SEGMENT RESULTS" section.
Sales to international markets were 6456 percent of total net sales in 2010,2011, compared with 5260 percent of total net sales in 2009 and 59 percent of total net sales in 2008.2010.
Gross Margin
Significant drivers of the change in gross margin were as follows:
In millions | 2010 vs. 2009 Increase/(Decrease) | |||
---|---|---|---|---|
Volume/mix | $ | 469 | ||
Warranty expense | 145 | |||
Price | 136 | |||
Material costs | 109 | |||
Acquisitions | 63 | |||
Currency | 62 | |||
Brazil tax recovery | 32 | |||
Other | (17 | ) | ||
Total | $ | 999 | ||
Gross margin increased by $999$1,421 million and as a percentage of sales increased by 3.91.4 percentage points. The significant improvement was led by increases in volume, improved price realization, higher volumes, decreases in warranty expense, increased pricingproduct content on certain products and favorable currency impacts, partially offset by higher material costs.costs, higher commodity costs and higher base warranty costs due to increased volumes and increasing
mix of EPA 2010 products. Gross margin in 2010 also benefited from a one-time $32 million tax recovery in Brazil. See Note 14, "COMMITMENTS AND CONTINGENCIES," in ourConsolidated Financial Statements for more information.
The warranty provision on salesfor warranties issued in 2010 as a percentage of sales in 2011 was 3.02.1 percent compared to 3.33.0 percent in 2009. The decrease2010. Accrual rates for engines sold this year were generally lower than the rates charged in prior years as a percentage of sales was primarily due to engine mix.our warranty costs for EPA 2010 products have been lower than expected. A more detailed discussion of margin by segment is presented in the "OPERATING SEGMENT RESULTS" section.
In the third quarter of 2010, it was determined that we overpaid a Brazilian revenue based tax on imported products during the period 2004-2008. Our results include a pre-tax recovery of $32 million in cost of sales ($21 million after-tax) related to tax credits arising from an overpayment. This recovery has been excluded from segment results as it was not considered by management in its evaluation of operating results for the year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased primarily due to higher volumes in support of the business and an increase of $151$174 million in compensation and related expenses.expenses including increased headcount to support our strategic growth initiatives, merit increases and increased discretionary spending. Compensation and related expenses include salaries, fringe benefits and variable compensation. Variable compensation related to 20102011 performance increased $93$42 million over variable compensation related to 20092010 performance. Salaries and fringe benefits increased due to severance actions taken throughout 2009 that were partially offset by increased employment in 2010. Overall, selling, general and administrative expenses, as a percentage of sales, decreased slightly tofrom 11.2 percent in 2010 from 11.5to 10.2 percent in 2009.
Table of Contents2011.
Research, Development and Engineering Expenses
Research, development and engineering expenses increased primarily due to an increase of $35$79 million in compensation and related expenses, an increase in the number of engineering programs with increased costs of $79 million and a decrease of $24 million in reimbursements.increased discretionary spending. Compensation and related expenses include salaries, fringe benefits and variable compensation. Variable compensation related to 20102011 performance increased $20$8 million over variable compensation related to 20092010 performance. Overall, research, development and engineering expenses, as a percentage of sales, decreased slightlyincreased to 3.5 percent in 2011 from 3.1 percent in 2010 from 3.4 percent in 2009.2010. 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 increased primarily due to the following:
In millions | 2010 vs. 2009 Increase/(Decrease) | 2011 vs. 2010 Increase/(Decrease) | ||||||
---|---|---|---|---|---|---|---|---|
Dongfeng Cummins Engine Company, Ltd. (DCEC) | $ | 66 | ||||||
Komatsu manufacturing alliances | 13 | |||||||
North American distributors | $ | 33 | ||||||
Chongqing Cummins Engine Company, Ltd. | 22 | |||||||
Beijing Foton Cummins Engine Co., Ltd. | 9 | |||||||
Dongfeng Cummins Engine Company, Ltd. | (19 | ) | ||||||
All other | 9 | |||||||
Cummins share of net income | 54 | |||||||
Royalty and interest income | 12 | 11 | ||||||
Equity, royalty and interest income from investees | $ | 65 | ||||||
These overall increases were primarily due to higher demand as a result ofthe economic recovery in emerging markets.North America, particularly in the oil and gas markets, and strong demand for power generation and mining products in China with CCEC, which was partially offset by lower sales at DCEC due to weaker demand in the on-highway truck market.
Gain on Sale of Businesses
In the second quarter of 2011, we sold certain assets and liabilities of our exhaust business which manufactures exhaust products and select components for emission systems for a variety of applications not core to our other product offerings. This business was historically included in our Components segment. The sales price was $123 million. We recognized a gain on the sale of $68 million ($37 million after-tax), which included a goodwill allocation of $19 million. The gain was excluded from segment results as it was not considered in our evaluation of operating results for the year ended December 31, 2011.
Sales for this business were $62 million, $171 million and $126 million in 2011 (through closing), 2010 and 2009, respectively. Income before income taxes for this business were approximately $9 million, $22 million and $11 million in 2011 (through closing), 2010 and 2009, respectively.
During the fourth quarter of 2011, we sold certain assets and liabilities of our light-duty filtration business which manufactures light-duty automotive and industrial filtration solutions. The sales price was $90 million and included a note receivable from the buyer of approximately $1 million. There are no earnouts or other contingencies associated with the sales price. We recognized a gain on the sale of $53 million ($33 million after-tax), which included a goodwill allocation of $6 million. The gain was excluded from segment results as it was not considered in our evaluation of operating results for the year ended December 31, 2011.
Sales for this business were $64 million, $74 million and $54 million in 2011 (through closing), 2010 and 2009, respectively. Income before income taxes for this business were approximately $13 million, $9 million and $2 million in 2011 (through closing), 2010 and 2009, respectively.
We have entered into supply and other agreements with the operations that represent ongoing involvement and as such, the results of these operations have not been presented as discontinued operations.
Other Operating Income (Expense) Income,, Net
Other operating income (expense) income, net was as follows:
| Years ended December 31, | Years ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | 2011 | 2010 | ||||||||||
Flood damage gain (loss) | $ | 38 | $ | (2 | ) | |||||||||
Royalty income | 12 | 10 | ||||||||||||
Royalty expense | (3 | ) | (3 | ) | ||||||||||
Amortization of intangible assets | $ | (15 | ) | $ | (7 | ) | (5 | ) | (15 | ) | ||||
Legal matters | (5 | ) | — | |||||||||||
Loss on sale of fixed assets | (4 | ) | (8 | ) | (10 | ) | (4 | ) | ||||||
Royalty expense | (3 | ) | (7 | ) | ||||||||||
Flood damage (loss) gain(1) | (2 | ) | 12 | |||||||||||
Royalty income | 10 | 8 | ||||||||||||
Other, net | (2 | ) | 1 | (6 | ) | (2 | ) | |||||||
Total other operating (expense) income, net | $ | (16 | ) | $ | (1 | ) | ||||||||
Total other operating income (expense), net | $ | 21 | $ | (16 | ) | |||||||||
In 2009, theJune 2008, four of our sites in Southern Indiana, including our Technical Center, experienced extensive flood damage. In October 2011, we received $40 million from our insurance carriers to settle all outstanding 2008 flood claims. As a result, we recognized a gain represents flood insurance proceeds received which more than offsetof approximately $38 million ($24 million after-tax), net of any remaining flood related expenses, recognized in 2009 and 2008.
Interest Income
Interest income increased primarily due to higher investmentaverage cash balances in 2010 comparedaddition to 2009.higher average interest rates.
Interest Expense
Interest expense increased primarily due to lower capitalized interest in 2011 and higher borrowings in 2010 compared to 2009.
Table of Contentsaverage debt, partially offset by lower interest rates.
Other Income (Expense), Net
Other income (expense) was as follows:
| Years ended December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | |||||
Change in cash surrender value of corporate owned life insurance(1) | $ | 12 | $ | (4 | ) | ||
Gain on acquisition of Cummins Western Canada (CWC) | 12 | — | |||||
Dividend income | 7 | 5 | |||||
Life insurance proceeds | 7 | — | |||||
Foreign currency losses, net(2) | (1 | ) | (20 | ) | |||
Bank charges | (15 | ) | (14 | ) | |||
Other, net | 12 | 18 | |||||
Total other income (expense), net | $ | 34 | $ | (15 | ) | ||
| Years ended December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2011 | 2010 | |||||
Change in cash surrender value of corporate owned life insurance | $ | 12 | $ | 12 | |||
Dividend income | 7 | 7 | |||||
Gain on fair value adjustment for Cummins Western Canada | — | 12 | |||||
Life insurance proceeds | — | 7 | |||||
Foreign currency losses, net | (14 | ) | (1 | ) | |||
Bank charges | (16 | ) | (15 | ) | |||
Other, net | 11 | 12 | |||||
Total other income (expense), net | $ | — | $ | 34 | |||
Income Tax Expense
Our income tax rates are generally less than the 35 percent U.S. statutory income tax rate primarily because of lower taxes on foreign earnings and research tax credits. Our effective tax rate for 20102011 was 29.527.1 percent compared to 24.429.5 percent for 2009.2010. Our 2011 income tax provision includes a tax benefit of $48 million related to prior year refund claims filed for additional research tax credits, as well as additional foreign income and related foreign tax credits, net of related tax reserves. Our effective tax rate for 2011 also includes a tax benefit of $19 million related to the release of deferred U.S. tax liabilities on certain foreign earnings, as a result of restructuring our foreign operations. Also included in 2011 is a tax benefit of $16 million resulting from the reduction of our unrecognized tax benefits primarily due to settlements with taxing authorities. The 2011 income tax provision also includes other tax items totaling to a $2 million net tax charge, primarily relating to the enactment of state law changes in Indiana and changes in the U.K. as well as adjustments to our income tax accounts based on our 2010 tax return filings. Our 2010 income tax provision also includes a $17 million (1.1 percent) reduction in the fourth quarter related to the legislative reinstatement of the U.S. research tax credit. During 2010, we also releasedcredit as well as a $3 million (0.2 percent)tax benefit related to the release of deferred U.S. tax liabilities on foreign earnings now considered to be permanently reinvested outside of the U.S. Our 2009 income tax provision also includes a $29 million (4.5 percent) reduction in the fourth quarter related to adjustments to deferred tax accounts. In 2009, we released $19 million of deferred tax liabilities on foreign earnings now considered to be permanently reinvested outside of the U.S. and recorded a deferred tax asset of $10 million related to prior period matters.
We expect our 2011 effective tax rate to be 30 percent excluding any discrete items that may arise.
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 increaseddecreased primarily due to higher incomea decline of $18$9 million at Wuxi Cummins Turbo Technologies Co. Ltd. and $4 million at Cummins India Ltd., a publicly traded company on various exchanges in IndiaIndia. These decreases were partially offset by an increase of $6 million at Cummins Western Canada LP, $4 million at Cummins Power Systems LLC and a $15$1 million increase in income from Wuxiat Cummins Turbo Technologies Co. Ltd., reflecting the economic recovery in emerging markets.Northeast LLC.
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. increased primarily due to higher volumes in emergingmost markets and certain developed countries,geographic regions, including the recovery of the North American on-highway truck markets, significantly improved gross margins, the gain on disposition of certain assets and liabilities of our exhaust business and our light-duty filtration business, a lower effective tax rate, increased equity income and restructuring charges incurredthe gain related to flood damage recoveries from the insurance settlement regarding a June 2008 flood in 2009 that were not repeated in 2010.Southern Indiana. These favorable drivers were partially offset by higher income tax expense, selling, general and administrative expenses and research, development and engineering expenses.expenses in 2011 as compared to 2010. Diluted earnings per share for 2011 also benefited $0.06$0.17 from lower shares primarily due to the stock repurchase program.
Net Sales
Sales decreased in all segments primarily due to lower demand as a result of the global economic downturn. The primary drivers were:
A more detailed discussion of sales by segment is presented in the "OPERATING SEGMENT RESULTS" section.
Gross Margin
Significant drivers of the change in gross margin were as follows:
In millions | 2009 vs. 2008 Increase (Decrease) | |||
---|---|---|---|---|
Volume/mix | $ | (1,228 | ) | |
Price | 252 | |||
Production costs | 132 | |||
Warranty expense | 46 | |||
Material costs | 13 | |||
Currency | 8 | |||
Other | 6 | |||
Total | $ | (771 | ) | |
Gross margin decreased by $771 million, and as a percentage of sales decreased by 0.4 percentage points. The decrease was led by lower volumes which were partially offset by increased engine purchases ahead of the January 1, 2010, emission standards change, improved pricing and decreased production costs. The overall decrease in volumes was due to lower sales resulting from the global economic downturn. Our warranty provision on sales in 2009 was 3.3 percent compared to 2.9 percent in 2008. Our 2008 warranty expense included $117 million recorded in the fourth quarter associated with increases in the estimated warranty liability primarily for certain mid-range engine products launched in 2007. The accrual rates in 2009 for these related engine products were higher than those recorded in 2008 before this change in estimate. As such, our warranty as a percentage of sales for
these engine families is higher on products sold in 2009 than it was in 2008. Overall, our relative product mix also impacted the rate as a percentage of sales when comparing these two periods.
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 primarily due to a decrease of $74 million in discretionary spending, in order to conserve cash, and a decrease of $71 million in compensation and related expenses. Compensation and related expenses include salaries, fringe benefits and variable compensation. Salaries and fringe benefits decreased due to severance actions taken throughout 2009. Overall, selling, general and administrative expenses as a percentage of sales increased to 11.5 percent in 2009 from 10.1 percent in 2008, primarily due to the 25 percent decrease in net sales.
Research, Development and Engineering Expenses
Research, development and engineering expenses decreased primarily due to a lower number of engineering projects to conserve cash while focusing on the development of critical technologies, new products and increased reimbursements from third parties for engineering projects. Overall, research, development and engineering expenses as a percentage of sales increased to 3.4 percent in 2009 from 2.9 percent in 2008, primarily due to the 25 percent decrease in net sales.
Equity, Royalty and Interest Income from Investees
Equity, royalty and interest income from investees decreased primarily due to the following changes in equity income:
In millions | 2009 vs. 2008 Increase/(Decrease) | |||
---|---|---|---|---|
Dongfeng Cummins Engine Company, Ltd. (DCEC) | $ | (22 | ) | |
Cummins MerCruiser Diesel, LLC (MerCruiser) | (13 | ) |
These decreases were primarily due to lower demand as a result of the global economic conditions. The effects of the global economic downturn were partially offset by modest increases in some markets.
Other Operating (Expense) Income, Net
Other operating (expense) income was as follows:
| Years ended December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2009 | 2008 | |||||
Flood damage gain (loss)(1) | $ | 12 | $ | (5 | ) | ||
Royalty income | 8 | 12 | |||||
Royalty expense | (7 | ) | (10 | ) | |||
Amortization of other intangibles | (7 | ) | (13 | ) | |||
(Loss) gain on sale of fixed assets | (8 | ) | 5 | ||||
Other, net | 1 | (1 | ) | ||||
Total other operating (expense) income, net | $ | (1 | ) | $ | (12 | ) | |
Interest Income
Interest income decreased primarily due to lower interest rates in 2009 compared to 2008.
Interest Expense
Interest expense decreased primarily due to declining short-term interest rates.
Other (Expense) Income, Net
Other (expense) income was as follows:
| Years ended December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2009 | 2008 | |||||
Foreign currency loss(1) | $ | (20 | ) | $ | (46 | ) | |
Bank charges | (14 | ) | (12 | ) | |||
Change in cash surrender value of corporate owned life insurance(2) | (4 | ) | (36 | ) | |||
Dividend income | 5 | 6 | |||||
Other, net | 18 | 18 | |||||
Total other (expense) income, net | $ | (15 | ) | $ | (70 | ) | |
Income Tax Expense
Our income tax rates are generally less than the 35 percent U.S. statutory income tax rate primarily because of lower taxes on foreign earnings and research tax credits. Our effective tax rate for
2009 was 24.4 percent compared to 30.6 percent for 2008. The decrease is due to tax on foreign earnings, which are subject to lower tax rates, and an increase in research tax credits. Our 2009 income tax provision also includes a $29 million (4.5 percent) reduction in the fourth quarter related to adjustments to deferred tax accounts. In 2009, we released $19 million (3.0 percent) of deferred tax liabilities on foreign earnings, now considered to be permanently reinvested outside the U.S. and recorded a deferred tax asset of $10 million (1.5 percent) related to prior period matters.
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 decreased primarily due to lower income of $8 million at Cummins India Limited, a publicly traded company at various exchanges in India, as a result of the decline in demand due to the global economic downturn. There were no other individual fluctuations in the subsidiaries that were significant.
Net Income Attributable to Cummins Inc. and Diluted Earnings Per Share Attributable to Cummins Inc.
Net income attributable to Cummins Inc. and diluted earnings per share attributable to Cummins Inc. decreased primarily due to significantly lower volumes, restructuring and other charges and decreased equity income partially offset by a lower effective tax rate.
RESTRUCTURING AND OTHER CHARGES
2009 Restructuring Actions
In 2009, we executed restructuring actions in response to a reduction in orders in most of our U.S. and foreign markets due to the deterioration in the global economy. We reduced our global workforce by approximately 1,000 professional employees. In addition, we took numerous employee actions at many of our manufacturing locations, including approximately 3,200 hourly employees, significant downsizing at numerous facilities and complete closure of several facilities and branch distributor locations. 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, union contracts or statutory requirements and the expected timetable for completion of the plan. Estimates of restructuring costs 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.
In response to closures and downsizing noted above, we incurred $2 million of restructuring expenses for lease terminations and $5 million of restructuring expenses for asset impairments. During 2009, we recorded a total pre-tax restructuring charge of $85 million, comprising $90 million of charges related to 2009 actions net of the $3 million favorable change in estimate related to 2008 actions and the $2 million favorable change in estimate related to earlier 2009 actions, in "Restructuring and other charges" in theConsolidated Statements of Income.
These restructuring actions included:
In millions | Year ended December 31, 2009 | |||
---|---|---|---|---|
Workforce reductions | $ | 81 | ||
Exit activities | 7 | |||
Other | 2 | |||
Changes in estimate | (5 | ) | ||
Total restructuring charges | 85 | |||
Curtailment loss | 14 | |||
Total restructuring and other charges | $ | 99 | ||
In addition, as a result of the restructuring actions described above, we also recorded a $14 million curtailment loss in our pension and other postretirement plans. See Note 11, "PENSION AND OTHER POSTRETIREMENT BENEFITS," to theConsolidated Financial Statements for additional detail.
At December 31, 2010, of the approximately 4,200 employees affected by this plan, substantially all terminations were complete.
We do not include restructuring charges in our operating segment results. The pre-tax impact of allocating restructuring charges to the segment results would have been as follows:
In millions | Year ended December 31, 2009 | |||
---|---|---|---|---|
Engine | $ | 47 | ||
Power Generation | 12 | |||
Components | 35 | |||
Distribution | 5 | |||
Total restructuring and other charges | $ | 99 | ||
The following table summarizes the balance of accrued restructuring charges by expense type and the changes in the accrued amounts for the applicable periods. The restructuring related accruals were recorded in "Other accrued expenses" in ourConsolidated Balance Sheets.
In millions | Severance Costs | Exit Activities | Other | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2009 Restructuring charges | $ | 81 | $ | 7 | $ | 2 | $ | 90 | |||||
Cash payments for 2009 actions | (70 | ) | (1 | ) | — | (71 | ) | ||||||
Non cash items | — | (5 | ) | (2 | ) | (7 | ) | ||||||
Changes in estimates | (2 | ) | — | — | (2 | ) | |||||||
Translation | 1 | — | — | 1 | |||||||||
Balance at December 31, 2009 | $ | 10 | $ | 1 | $ | — | $ | 11 | |||||
Cash payments for 2009 actions | (7 | ) | — | — | (7 | ) | |||||||
Changes in estimates | (3 | ) | (1 | ) | — | (4 | ) | ||||||
Balance at December 31, 2010 | $ | — | $ | — | $ | — | $ | — | |||||
2008 Restructuring Actions
We have executed restructuring actions primarily in the form of voluntary and involuntary separation programs in the fourth quarter of 2008.2012. These actions were in response to the continued deterioration in our U.S. businesses and most key markets around the world in the second half of 2008,2012, as well as a
reduction in orders in most U.S. and global markets for 2009.2013. We reduced our worldwide professional workforce by approximately 650 employees, or 4.53 percent. We offered a voluntary retirement package to certain active professional employees in the U.S. based on a clearly defined set of criteria. We also took voluntary and involuntary actions which included approximately 800reduced our hourly employees, the majority of which received severance benefits. The compensation packages contained salary and continuation of benefits, including health care, life insurance and outplacement services. The voluntary retirement package was acceptedworkforce by approximately 150650 employees. The remaining professional reductions of 500 employees were involuntary. The expenses recorded during the year ended December 31, 2008, included severance costs related to both voluntary and involuntary terminations. During 2008,2012, we incurred a pre-tax charge related to the professional and hourly restructuring initiativesworkforce reductions of approximately $37$49 million.
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 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.
We incurred a $1 million charge for lease terminations and a $2 million charge for asset impairments and other non-cash charges. During 2012, we recorded restructuring and other charges of $52 million ($35 million after-tax). These restructuring actions included:
In millions | Year ended December 31, 2012 | |||
---|---|---|---|---|
Workforce reductions | $ | 49 | ||
Exit activities | 1 | |||
Other | 2 | |||
Restructuring and other charges | $ | 52 | ||
If the 2012 restructuring actions are successfully implemented, we expect the annualized savings from the professional actions to be approximately $39 million. Our charge related to the professional actions was approximately $32 million. Approximately 32 percent of the savings from the restructuring actions will be realized in cost of sales, 53 percent in selling, general and administrative expenses and 15 percent in research, development and engineering expenses. We expect the accrual to be paid in cash which will be funded with cash generated from operations.
At December 31, 2008,2012, of the approximately 1,4501,300 employees to be affected by this plan, 1,2501,130 had been terminated. All terminations
Restructuring and other charges were substantially complete as of December 31, 2009.
We do not include restructuring chargesincluded in theeach segment results. The pre-tax impact of allocating restructuring charges for the year ended December 31, 2008, would have beenin our operating results as follows:
In millions | Year ended December 31, 2008 | Year ended December 31, 2012 | ||||||
---|---|---|---|---|---|---|---|---|
Engine | $ | 17 | $ | 20 | ||||
Distribution | 14 | |||||||
Power Generation | 3 | 12 | ||||||
Components | 15 | 6 | ||||||
Distribution | 2 | |||||||
Total restructuring charges | $ | 37 | ||||||
Restructuring and other charges | $ | 52 | ||||||
The following table below summarizes the activity and balance of accrued restructuring expenses for 2008 actions,charges, which wereis included in the balance of "Other accrued expenses" in ourConsolidated Balance Sheets as offor the year ended December 31, 20092012.
In millions | Charges | Payments | Accrued Balance at December 31, 2012 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Restructuring charges(1) | $ | 50 | $ | 25 | $ | 25 |
The table below summarizes where the restructuring and other charges are located in ourConsolidated Statements of Income for the year ended December 31, 2012.
In millions | Severance Costs | |||
---|---|---|---|---|
2008 | ||||
Restructuring charges | $ | 37 | ||
Cash payments for 2008 actions | (3 | ) | ||
Balance at December 31, 2008 | 34 | |||
2009 | ||||
Cash payments for 2008 actions | (31 | ) | ||
Change in estimate | (3 | ) | ||
Balance at December 31, 2009 | $ | — | ||
In millions | Year ended December 31, 2012 | |||
---|---|---|---|---|
Cost of sales | $ | 29 | ||
Selling, general and administrative expenses | 20 | |||
Research, development and engineering expenses | 3 | |||
Restructuring and other charges | $ | 52 | ||
OPERATING SEGMENT RESULTS
Our reportable operating segments consist of the following: Engine, Components, Power Generation Components, and Distribution. This reporting structure is organized according to the products and markets each segment serves and allows management to focus its efforts on providing enhanced service to a wide range of customers. The Engine segment produces engines and parts for sale to customers in on-highway and various industrial markets. TheOur engines are used in trucks of all sizes, buses and RVs,recreational vehicles, as well as in various industrial applications, including construction, mining, agriculture, marine, oil and gas, rail and military.military equipment. The Components segment sells filtration products, aftertreatment, turbochargers and fuel systems. The Power Generation segment is an integrated provider of power systems which sells engines, generator sets and alternators. The Components segment includes sales of filtration products, exhaust and aftertreatment systems, turbochargers and fuel systems. 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.OEMs throughout the world.
We use segment EBIT (defined as earnings before interest expense, taxes and noncontrolling interests) as a primary basis for the chief operating decision-maker 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 ourConsolidated 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 have allocated certain common costs and expenses, primarily corporate functions, among segments differently than we would for stand-alone financial information prepared in accordance with accounting principles generally accepted in the United States of America (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, restructuring and other charges, flood damage gains or losses, divestiture gains or losses or income taxes to individual segments. In 2010,2012, non-segment items alsoincluded a $20 million reserve ($12 million after-tax) related to legal matters and a $6 million gain related to adjustments from our 2011 divestitures, while 2011 included the gain on disposition of certain assets and liabilities of our exhaust business and our light-duty filtration business and 2010 included a Brazil revenue tax recovery that wasrecovery. These gains were not allocated to the businesses as it wasthey were not considered by management in itsour evaluation of operating results for the year. Segment EBIT may not be consistent with measures used by other companies.
Following is a discussion of operating results for each of our business segments.
Financial data for the Engine segment was as follows:
| | | | | Favorable/ (Unfavorable) | | | | Favorable/(Unfavorable) | ||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Years ended December 31, | 2010 vs. 2009 | 2009 vs. 2008 | Years ended December 31, | 2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||||||||||||||||||||||||||
In millions | In millions | 2010 | 2009 | 2008 | Amount | Percent | Amount | Percent | 2012 | 2011 | 2010 | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||
External sales | External sales | $ | 6,594 | $ | 5,582 | $ | 7,432 | $ | 1,012 | 18 | % | $ | (1,850 | ) | (25 | )% | $ | 9,101 | $ | 9,649 | $ | 6,594 | $ | (548 | ) | (6 | )% | $ | 3,055 | 46 | % | ||||||||||||||
Intersegment sales | Intersegment sales | 1,294 | 823 | 1,378 | 471 | 57 | % | (555 | ) | (40 | )% | 1,632 | 1,658 | 1,294 | (26 | ) | (2 | )% | 364 | 28 | % | ||||||||||||||||||||||||
Total sales | 7,888 | 6,405 | 8,810 | 1,483 | 23 | % | (2,405 | ) | (27 | )% | |||||||||||||||||||||||||||||||||||
Total sales | 10,733 | 11,307 | 7,888 | (574 | ) | (5 | )% | 3,419 | 43 | % | |||||||||||||||||||||||||||||||||||
Depreciation and amortization | Depreciation and amortization | 171 | 185 | 180 | 14 | 8 | % | (5 | ) | (3 | )% | 192 | 181 | 171 | (11 | ) | (6 | )% | (10 | ) | (6 | )% | |||||||||||||||||||||||
Research, development and engineering expenses | Research, development and engineering expenses | 263 | 241 | 286 | (22 | ) | (9 | )% | 45 | 16 | % | 433 | 397 | 263 | (36 | ) | (9 | )% | (134 | ) | (51 | )% | |||||||||||||||||||||||
Equity, royalty and interest income from investees | Equity, royalty and interest income from investees | 161 | 54 | 99 | 107 | NM | (45 | ) | (45 | )% | 127 | 166 | 161 | (39 | ) | (23 | )% | 5 | 3 | % | |||||||||||||||||||||||||
Interest income | Interest income | 12 | 3 | 10 | 9 | NM | (7 | ) | (70 | )% | 11 | 18 | 12 | (7 | ) | (39 | )% | 6 | 50 | % | |||||||||||||||||||||||||
Segment EBIT | Segment EBIT | 809 | 252 | 535 | 557 | NM | (283 | ) | (53 | )% | 1,248 | 1,384 | 809 | (136 | ) | (10 | )% | 575 | 71 | % |
| | | | Percentage Points | Percentage Points | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Segment EBIT as a percentage of total sales | 10.3 | % | 3.9 | % | 6.1 | % | 6.4 | (2.2) |
| | | | Percentage Points | Percentage Points | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Segment EBIT as a percentage of total sales | 11.6 | % | 12.2 | % | 10.3 | % | (0.6) | 1.9 |
Engine segment sales by market were as follows:
| | | | Favorable/ (Unfavorable) | | | | Favorable/(Unfavorable) | ||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Years ended December 31, | 2010 vs. 2009 | 2009 vs. 2008 | Years ended December 31, | 2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||||||||||||||||||||||||||
In millions | 2010 | 2009 | 2008 | Amount | Percent | Amount | Percent | 2012 | 2011 | 2010 | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||
Heavy-duty truck | $ | 1,503 | $ | 1,996 | $ | 2,308 | $ | (493 | ) | (25 | )% | $ | (312 | ) | (14 | )% | $ | 2,964 | $ | 2,791 | $ | 1,503 | $ | 173 | 6 | % | $ | 1,288 | 86 | % | ||||||||||||||
Medium-duty truck and bus | 1,435 | 1,232 | 1,550 | 203 | 16 | % | (318 | ) | (21 | )% | 2,091 | 2,320 | 1,435 | (229 | ) | (10 | )% | 885 | 62 | % | ||||||||||||||||||||||||
Light-duty automotive and RV | 1,022 | 688 | 804 | 334 | 49 | % | (116 | ) | (14 | )% | 1,279 | 1,176 | 1,022 | 103 | 9 | % | 154 | 15 | % | |||||||||||||||||||||||||
Total on-highway | 3,960 | 3,916 | 4,662 | 44 | 1 | % | (746 | ) | (16 | )% | 6,334 | 6,287 | 3,960 | 47 | 1 | % | 2,327 | 59 | % | |||||||||||||||||||||||||
Industrial | 2,889 | 1,821 | 3,029 | 1,068 | 59 | % | (1,208 | ) | (40 | )% | 3,233 | 3,850 | 2,889 | (617 | ) | (16 | )% | 961 | 33 | % | ||||||||||||||||||||||||
Stationary power | 1,039 | 668 | 1,119 | 371 | 56 | % | (451 | ) | (40 | )% | 1,166 | 1,170 | 1,039 | (4 | ) | — | 131 | 13 | % | |||||||||||||||||||||||||
Total sales | $ | 7,888 | $ | 6,405 | $ | 8,810 | $ | 1,483 | 23 | % | $ | (2,405 | ) | (27 | )% | $ | 10,733 | $ | 11,307 | $ | 7,888 | $ | (574 | ) | (5 | )% | $ | 3,419 | 43 | % | ||||||||||||||
Unit shipments by engine classification (including unit shipments to Power Generation) were as follows:
| | | | Favorable/ (Unfavorable) | | | | Favorable/(Unfavorable) | ||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Years ended December 31, | 2010 vs. 2009 | 2009 vs. 2008 | Years ended December 31, | 2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | Amount | Percent | Amount | Percent | 2012 | 2011 | 2010 | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||
Midrange | 368,900 | 269,200 | 418,300 | 99,700 | 37 | % | (149,100 | ) | (36 | )% | ||||||||||||||||||||||||||||||||||
Mid-range | 440,500 | 509,400 | 368,900 | (68,900 | ) | (14 | )% | 140,500 | 38 | % | ||||||||||||||||||||||||||||||||||
Heavy-duty | 61,200 | 85,900 | 108,300 | (24,700 | ) | (29 | )% | (22,400 | ) | (21 | )% | 119,100 | 116,300 | 61,200 | 2,800 | 2 | % | 55,100 | 90 | % | ||||||||||||||||||||||||
High-horsepower | 18,500 | 13,400 | 20,600 | 5,100 | 38 | % | (7,200 | ) | (35 | )% | 19,800 | 21,600 | 18,500 | (1,800 | ) | (8 | )% | 3,100 | 17 | % | ||||||||||||||||||||||||
Total unit shipments | 448,600 | 368,500 | 547,200 | 80,100 | 22 | % | (178,700 | ) | (33 | )% | 579,400 | 647,300 | 448,600 | (67,900 | ) | (10 | )% | 198,700 | 44 | % | ||||||||||||||||||||||||
2012 vs. 2011
Sales
Engine segment sales decreased versus 2011 due to lower demand in the industrial and medium-duty truck and bus businesses, partially offset by growth in the heavy-duty truck and light-duty automotive and RV businesses. The following are the primary drivers by market:
The decreases above were partially offset by the following:
Total on-highway-related sales for 2012 were 59 percent of total engine segment sales, compared to 56 percent in 2011.
Segment EBIT
Engine segment EBIT decreased versus 2011, primarily due to lower gross margin, lower equity, royalty and interest income from investees, higher research, development and engineering expenses and higher selling, general and administrative expenses. Engine segment EBIT for 2012 included restructuring and other charges of $20 million in the fourth quarter. Changes in Engine segment EBIT and EBIT as a percentage of sales were as follows:
| Year ended December 31, 2012 vs. 2011 Favorable/(Unfavorable) Change | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In millions | Amount | Percent | Percentage point change as a percent of sales | |||||||
Gross margin | $ | (82 | ) | (3 | )% | 0.3 | ||||
Selling, general and administrative expenses | (8 | ) | (1 | )% | (0.4 | ) | ||||
Research, development and engineering expenses | (36 | ) | (9 | )% | (0.5 | ) | ||||
Equity, royalty and interest income from investees | (39 | ) | (23 | )% | (0.3 | ) |
The decrease in gross margin versus 2011 was primarily due to lower volumes and restructuring and other charges, which was partially offset by improved price realization, lower material costs, favorable product mix and improved product coverage. The increase in selling, general and administrative expenses was primarily due to increased headcount to support our strategic growth initiatives launched prior to a number of markets unexpectedly slowing in mid-2012, partially offset by decreased variable compensation expense. The increase in research, development and engineering expenses was primarily due to new product development spending and increased headcount to support our strategic growth initiatives. The decrease in equity, royalty and interest income from investees was primarily due to weaker demand for on-highway products at DCEC.
20102011 vs. 20092010
Sales
Engine segment sales increased in all businesses versus 2009, due to2010, as demand improved sales in most markets especially the industrial, stationary power, light-duty automotive and medium-duty truck markets, which were partially offset by decreasesincluding a significant rebound in the North American heavy-duty truck market.on-highway markets, improvements in international construction markets, increased demand in global mining markets and significant increases in oil and gas markets. The following are the primary drivers by market.market:
These increases were partially offset by a decline in heavy-duty truck engine sales. Consistent with prior emission standards changes, North American (includes the U.S and Canada and excludes Mexico) unit sales declined 61 percent due to higher engine purchases by OEMs in late 2009, aheadTable of the Environmental Protection Agency's (EPA)'s 2010 emission standards change, as part of the OEM's transition plan.Contents
Total on-highway-related sales for 20102011 were 5056 percent of total engine segment sales, compared to 6150 percent in 2009.2010.
Segment EBIT
Engine segment EBIT increased significantly versus 2009,2010, primarily due to higher gross margin, and equity, royalty and interest income from investees which were partially offset by increased selling, general and administrative expenses and research, development and engineering expenses. Changes in Engine segment EBIT and EBIT as a percentage of sales were as follows:
| Year ended December 31, 2010 vs. 2009 Favorable/(Unfavorable) Change | Year ended December 31, 2011 vs. 2010 Favorable/(Unfavorable) Change | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Amount | Percent | Percentage point change as a percent of sales | Amount | Percent | Percentage point change as a percent of sales | ||||||||||||||
Gross margin | $ | 539 | 53 | % | 3.8 | $ | 864 | 55 | % | 1.7 | ||||||||||
Equity, royalty and interest income from investees | 107 | NM | 1.2 | |||||||||||||||||
Selling, general and administrative expenses | (88 | ) | (16 | )% | 0.5 | (142 | ) | (22 | )% | 1.2 | ||||||||||
Research, development and engineering expenses | (22 | ) | (9 | )% | 0.5 | (134 | ) | (51 | )% | (0.2 | ) | |||||||||
Equity, royalty and interest income from investees | 5 | 3 | % | (0.5 | ) |
The increase in gross margin versus 2009,2010 was primarily due to higher volumes, improved price realization decreased warranty expense and cost structure improvements from actions taken in late 2008 and early 2009,favorable mix, partially offset by an unfavorable mix. Equity,higher commodity costs and higher base warranty costs due to increased volumes and increasing mix of EPA 2010 products. Although our warranty costs increased, our warranty cost as a percentage of sales decreased as actual accrual rates for engines sold this year were generally lower than rates charged in prior years as our warranty costs for EPA 2010 engines have been lower than expected. The increases in selling, general and administrative expenses and research, development and engineering expenses were primarily due to new product development spending and increased headcount to support our strategic growth initiatives. The increase in equity, royalty and interest income from investees increasedwas primarily due to strong demand for power generation and mining products in most unconsolidated joint ventures. The increaseChina with CCEC and strong export sales to Russia and Brazil in the midrange on-highway market with Beijing Foton Cummins Engine Co., Ltd., which was ledpartially offset by higherlower sales at DCEC due to weaker demand in emerging markets, especially at DCECthe on-highway heavy-duty and Komatsu-Cummins Engine Company (KCEC). The increasemedium-duty truck market in China.
Financial data for the Components segment was as follows:
| | | | Favorable/(Unfavorable) | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Years ended December 31, | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||||||||||||
In millions | 2012 | 2011 | 2010 | Amount | Percent | Amount | Percent | |||||||||||||||
External sales | $ | 2,809 | $ | 2,886 | $ | 2,171 | $ | (77 | ) | (3 | )% | $ | 715 | 33 | % | |||||||
Intersegment sales | 1,203 | 1,177 | 875 | 26 | 2 | % | 302 | 35 | % | |||||||||||||
Total sales | 4,012 | 4,063 | 3,046 | (51 | ) | (1 | )% | 1,017 | 33 | % | ||||||||||||
Depreciation and amortization | 82 | 73 | 79 | (9 | ) | (12 | )% | 6 | 8 | % | ||||||||||||
Research, development and engineering expenses | 213 | 175 | 114 | (38 | ) | (22 | )% | (61 | ) | (54 | )% | |||||||||||
Equity, royalty and interest income from investees | 29 | 31 | 23 | (2 | ) | (6 | )% | 8 | 35 | % | ||||||||||||
Interest income | 3 | 5 | 2 | (2 | ) | (40 | )% | 3 | NM | |||||||||||||
Segment EBIT | 426 | 470 | 278 | (44 | ) | (9 | )% | 192 | 69 | % |
| | | | Percentage Points | Percentage Points | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Segment EBIT as a percentage of total sales | 10.6 | % | 11.6 | % | 9.1 | % | (1.0) | 2.5 |
Acquisition
In April 2012, we reached an agreement to acquire the doser technology and business assets from Hilite in selling, generala cash transaction. Dosers are products that enable compliance with emission standards in certain aftertreatment systems and administrative expensescomplement our current product offerings. The transaction was primarily dueapproved by German regulators in June and closed on July 18, 2012. The purchase price was $176 million. There was no contingent consideration associated with this transaction. During 2012 we expensed approximately $4 million of acquisition related costs. See Note 2, "ACQUISITIONS AND DIVESTITURES," to higher variable compensation which resulted fromtheConsolidated Financial Statements for more details.
Sales for our Components segment by business were as follows:
| | | | Favorable/(Unfavorable) | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Years ended December 31, | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||||||||||||
In millions | 2012 | 2011 | 2010 | Amount | Percent | Amount | Percent | |||||||||||||||
Emission solutions excluding acquisition | $ | 1,369 | $ | 1,262 | $ | 750 | $ | 107 | 8 | % | $ | 512 | 68 | % | ||||||||
Acquisition | 46 | — | — | 46 | 100 | % | — | — | ||||||||||||||
Total emission solutions | 1,415 | 1,262 | 750 | 153 | 12 | % | 512 | 68 | % | |||||||||||||
Turbo technologies | 1,106 | 1,223 | 948 | (117 | ) | (10 | )% | 275 | 29 | % | ||||||||||||
Filtration | 1,048 | 1,113 | 1,011 | (65 | ) | (6 | )% | 102 | 10 | % | ||||||||||||
Fuel systems | 443 | 465 | 337 | (22 | ) | (5 | )% | 128 | 38 | % | ||||||||||||
Total sales | $ | 4,012 | $ | 4,063 | $ | 3,046 | $ | (51 | ) | (1 | )% | $ | 1,017 | 33 | % | |||||||
Excluding Acquisition
Selected financial information for our Components segment excluding the segment's strong performance.impact of the acquisition was as follows:
| | | | Favorable/(Unfavorable) | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Years ended December 31, | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||||||||||||
In millions | 2012 | 2011 | 2010 | Amount | Percent | Amount | Percent | |||||||||||||||
Excluding acquisition | ||||||||||||||||||||||
Sales | $ | 3,966 | $ | 4,063 | $ | 3,046 | $ | (97 | ) | (2 | )% | $ | 1,017 | 33 | % | |||||||
Segment EBIT | 434 | 470 | 278 | (36 | ) | (8 | )% | 192 | 69 | % |
| | | | Percentage Points | Percentage Points | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Segment EBIT as a percentage of total sales | 10.9 | % | 11.6 | % | 9.1 | % | (0.7) | 2.5 |
20092012 vs. 20082011
Sales
EngineComponents segment sales, experienced deterioration across all major markets,excluding the acquisition, decreased versus 2008,2011. The following are the primary drivers:
The decreases above were partially offset by the emission solutions business as sales increased primarily due to higher demand in the North American on-highway market in the first half of the year and new sales in the Brazilian on-highway market as the result of new emission requirements effective January 1, 2010, emission standards change and improving market share.
Total on-highway-relatedunfavorable foreign currency fluctuations. Disposition related sales were 61 percent of total Engine segment sales, compared to 53 percent$55 million in 2008.2011.
Segment EBIT
EngineComponents segment EBIT decreased versus 2008,2011, primarily due to lower gross margin and equity, royalty and interest income from investees which were partially offset by decreased selling, general and administrative expenses and decreasedhigher research, development and engineering expenses. Components segment EBIT for 2012 included restructuring and other charges of $6 million in the fourth quarter. Changes in EngineComponents segment EBIT and EBIT as a percentage of sales were as follows:
| Year ended December 31, 2009 vs. 2008 Favorable/(Unfavorable) Change | Year ended December 31, 2012 vs. 2011 Favorable/(Unfavorable) Change | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Amount | Percent | Percentage point change as a percent of sales | Amount | Percent | Percentage point change as a percent of sales | ||||||||||||||
Including acquisition | ||||||||||||||||||||
Gross margin | $ | (330 | ) | (24 | )% | 0.6 | % | $ | (3 | ) | — | 0.2 | ||||||||
Selling, general and administrative expenses | 57 | 9 | % | (1.7 | )% | (4 | ) | (1 | )% | (0.2 | ) | |||||||||
Research, development and engineering expenses | 45 | 16 | % | (0.6 | )% | (38 | ) | (22 | )% | (1.0 | ) | |||||||||
Equity, royalty and interest income from investees | (45 | ) | (45 | )% | NM | (2 | ) | (6 | )% | (0.1 | ) | |||||||||
Excluding acquisition | ||||||||||||||||||||
Gross margin | (3 | ) | — | 0.4 | ||||||||||||||||
Selling, general and administrative expenses | (1 | ) | — | (0.2 | ) | |||||||||||||||
Research, development and engineering expenses | (35 | ) | (20 | )% | (1.0 | ) |
Segment EBIT Excluding Acquisition
The decrease in gross margin versus 2011 was primarily due to lower engine volumesprice realization, unfavorable foreign currency fluctuations, the disposition of certain assets and liabilities of our exhaust business and our light-duty filtration business in most markets as a result of the global economic downturn, which was2011 and restructuring and other charges, partially offset by increased saleshigher volumes, particularly in the U.S. in the fourth quarter of 2009 ahead of the January 1, 2010, emission standards change, price improvementssolutions business, lower material costs and by cost reduction activities at our manufacturing plants. Equity, royalty and interest income from investees decreased due to significantly lower demand at DCEC, KCEC and Cummins MerCruiser
Diesel Marine LLC.improved product coverage. The decreaseincrease in selling, general and administrative expenses was primarily due to increased headcount to support our strategic growth initiatives launched prior to a number of markets unexpectedly slowing in mid-2012, partially offset by decreased variable compensation expense and lower discretionary spending in the second half of 2012. The increase in research, development and engineering expenses was primarily due to lower discretionarynew product development spending higher recoveryand increased headcount to support our strategic growth initiatives.
2011 vs. 2010
Sales
Components segment sales increased in all businesses versus 2010. The following are the primary regional drivers by business:
Segment EBIT
Components segment EBIT increased versus 2010, primarily due to the improved gross margin which was partially offset by increased research, development and engineering expenses and higher selling, general and administrative expenses. Changes in Components segment EBIT and EBIT as a percentage of sales were as follows:
| Year ended December 31, 2011 vs. 2010 Favorable/(Unfavorable) Change | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In millions | Amount | Percent | Percentage point change as a percent of sales | |||||||
Gross margin | $ | 295 | 51 | % | 2.5 | |||||
Selling, general and administrative expenses | (44 | ) | (19 | )% | 0.8 | |||||
Research, development and engineering expenses | (61 | ) | (54 | )% | (0.6 | ) | ||||
Equity, royalty and interest income from investees | 8 | 35 | % | — |
The increase in gross margin was primarily due to higher volumes for all businesses and increased product content on 2010 North American truck engines. The increases in research, development and engineering expenses and selling, general and administrative expenses were primarily due to new product development spending and increased headcount to support our strategic growth initiatives. The increase in equity, royalty and interest income from investees was driven by improved joint venture income from both the filtration business in China and India and the fuel systems business.
In 2011, we sold certain assets and liabilities of our exhaust business and light-duty filtration business and recognized $68 million and $53 million, respectively, in pre-tax gain on the sales. The gains have been excluded from Components results as they were not considered in our evaluation of Components operating results for the year ended 2011. See Note 2, "ACQUISITIONS AND DIVESTITURES," to theConsolidated Financial Statements.
Power Generation Segment Results
Financial data for the Power Generation segment was as follows:
| | | | | Favorable/ (Unfavorable) | | | | Favorable/(Unfavorable) | ||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Years ended December 31, | 2010 vs. 2009 | 2009 vs. 2008 | Years ended December 31, | 2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||||||||||||||||||||||||||
In millions | In millions | 2010 | 2009 | 2008 | Amount | Percent | Amount | Percent | 2012 | 2011 | 2010 | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||
External sales | External sales | $ | 2,150 | $ | 1,879 | $ | 2,601 | $ | 271 | 14 | % | $ | (722 | ) | (28 | )% | $ | 2,163 | $ | 2,492 | $ | 2,150 | $ | (329 | ) | (13 | )% | $ | 342 | 16 | % | ||||||||||||||
Intersegment sales | Intersegment sales | 769 | 538 | 899 | 231 | 43 | % | (361 | ) | (40 | )% | 1,105 | 1,006 | 769 | 99 | 10 | % | 237 | 31 | % | |||||||||||||||||||||||||
Total sales | 2,919 | 2,417 | 3,500 | 502 | 21 | % | (1,083 | ) | (31 | )% | |||||||||||||||||||||||||||||||||||
Total sales | 3,268 | 3,498 | 2,919 | (230 | ) | (7 | )% | 579 | 20 | % | |||||||||||||||||||||||||||||||||||
Depreciation and amortization | Depreciation and amortization | 41 | 49 | 41 | 8 | 16 | % | (8 | ) | (20 | )% | 47 | 42 | 41 | (5 | ) | (12 | )% | (1 | ) | (2 | )% | |||||||||||||||||||||||
Research, development and engineering expenses | Research, development and engineering expenses | 36 | 33 | 41 | (3 | ) | (9 | )% | 8 | 20 | % | 76 | 54 | 36 | (22 | ) | (41 | )% | (18 | ) | (50 | )% | |||||||||||||||||||||||
Equity, royalty and interest income from investees | Equity, royalty and interest income from investees | 35 | 22 | 23 | 13 | 59 | % | (1 | ) | (4 | )% | 40 | 47 | 35 | (7 | ) | (15 | )% | 12 | 34 | % | ||||||||||||||||||||||||
Interest income | Interest income | 5 | 3 | 3 | 2 | 67 | % | — | — | 9 | 8 | 5 | 1 | 13 | % | 3 | 60 | % | |||||||||||||||||||||||||||
Segment EBIT | Segment EBIT | 299 | 167 | 376 | 132 | 79 | % | (209 | ) | (56 | )% | 285 | 373 | 299 | (88 | ) | (24 | )% | 74 | 25 | % |
| | | | Percentage Points | Percentage Points | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Segment EBIT as a percentage of total sales | 10.2 | % | 6.9 | % | 10.7 | % | 3.3 | (3.8) |
| | | | Percentage Points | Percentage Points | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Segment EBIT as a percentage of total sales | 8.7 | % | 10.7 | % | 10.2 | % | (2.0) | 0.5 |
In the first quarter of 2012, our Power Generation segment reorganized its reporting structure to include the following businesses:
Sales for our Power Generation segment by business (including 2011 and 2010 reorganized balances) were as follows:
| | | | Favorable/ (Unfavorable) | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Years ended December 31, | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||||||
In millions | 2010 | 2009 | 2008 | Amount | Percent | Amount | Percent | |||||||||||||||
Commercial products | $ | 1,831 | $ | 1,456 | $ | 2,116 | $ | 375 | 26 | % | $ | (660 | ) | (31 | )% | |||||||
Generator technologies | 549 | 512 | 686 | 37 | 7 | % | (174 | ) | (25 | )% | ||||||||||||
Commercial projects | 222 | 177 | 328 | 45 | 25 | % | (151 | ) | (46 | )% | ||||||||||||
Consumer | 186 | 140 | 238 | 46 | 33 | % | (98 | ) | (41 | )% | ||||||||||||
Power electronics | 131 | 132 | 132 | (1 | ) | (1 | )% | — | — | |||||||||||||
Total sales | $ | 2,919 | $ | 2,417 | $ | 3,500 | $ | 502 | 21 | % | $ | (1,083 | ) | (31 | )% | |||||||
| | | | Favorable/(Unfavorable) | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Years ended December 31, | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||||||||||||
In millions | 2012 | 2011 | 2010 | Amount | Percent | Amount | Percent | |||||||||||||||
Power products | $ | 1,654 | $ | 1,636 | $ | 1,465 | $ | 18 | 1 | % | $ | 171 | 12 | % | ||||||||
Power systems | 757 | 815 | 616 | (58 | ) | (7 | )% | 199 | 32 | % | ||||||||||||
Generator technologies | 566 | 673 | 550 | (107 | ) | (16 | )% | 123 | 22 | % | ||||||||||||
Power solutions | 291 | 374 | 288 | (83 | ) | (22 | )% | 86 | 30 | % | ||||||||||||
Total sales | $ | 3,268 | $ | 3,498 | $ | 2,919 | $ | (230 | ) | (7 | )% | $ | 579 | 20 | % | |||||||
20102012 vs. 20092011
Sales
Power Generation segment sales improved in most businesses,decreased versus 2009,2011, primarily due to increased demand.lower demand in the generator technologies, power solutions and power systems businesses. The following are the primary drivers by business.business:
The decreases above were partially offset by power products as sales increased primarily due to signs of recoveryhigher volumes in the North American RV market.
Segment EBIT
Power Generation segment EBIT increaseddecreased versus 2009,2011, primarily due to lower gross margin, higher gross marginsresearch, development and engineering expenses, lower equity, royalty and interest income from investees which were partially offset by increasedand higher selling, general and administrative expenses. Power Generation segment EBIT for 2012 included restructuring and other charges of $12 million in the fourth quarter. Changes in Power Generation segment EBIT and EBIT as a percentage of sales were as follows:
| Year ended December 31, 2010 vs. 2009 Favorable/(Unfavorable) Change | Year ended December 31, 2012 vs. 2011 Favorable/(Unfavorable) Change | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Amount | Percent | Percentage point change as a percent of sales | Amount | Percent | Percentage point change as a percent of sales | ||||||||||||||
Gross margin | $ | 151 | 38 | % | 2.4 | $ | (60 | ) | (9 | )% | (0.4 | ) | ||||||||
Selling, general and administrative expenses | (31 | ) | (14 | )% | 0.5 | (6 | ) | (2 | )% | (0.8 | ) | |||||||||
Research, development and engineering expenses | (22 | ) | (41 | )% | (0.8 | ) | ||||||||||||||
Equity, royalty and interest income from investees | 13 | 59 | % | 0.3 | (7 | ) | (15 | )% | (0.1 | ) | ||||||||||
Research, development and engineering expenses | (3 | ) | (9 | )% | 0.2 |
The increasedecrease in gross margin versus 2011 was due to lower volumes, unfavorable foreign currency fluctuations, higher volumes,material costs, increased product coverage and restructuring and other charges,
which were partially offset by increased warranty expenses and increased variable compensation.improved price realization. The increase in selling, general and administrative expenses was primarily due to higher variable compensation expense which resulted fromincreased headcount to support our strategic growth initiatives, partially offset by lower discretionary spending in the strong improvement over 2009.second half of 2012 to align with slowing demand in key markets. The increase in research, development and engineering expenses was primarily due to increased headcount to support our strategic growth initiatives and new product development spending. Equity, royalty and interest income from investees increaseddecreased primarily due to higher demand, especiallylower profitability at Cummins Olayan Energy and CCEC.
20092011 vs. 20082010
Sales
Power Generation segment sales decreasedincreased in mostall businesses, versus 2008, as2010, primarily due to increased demand in the result of the global economic downturn.power systems, power products and generator technologies businesses. The following are the primary drivers by business.business:
Segment EBIT
Power Generation segment EBIT decreasedincreased versus 2010, primarily due to a lowerhigher gross margin, which wasmargins, partially offset by decreases inhigher selling, general and administrative expenses and research, development
and engineering expenses. Changes in Power Generation segment EBIT and EBIT as a percentage of sales were as follows:
| Year ended December 31, 2009 vs. 2008 Favorable/(Unfavorable) Change | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In millions | Amount | Percent | Percentage point change as a percent of sales | |||||||
Gross margin | $ | (258 | ) | (39 | )% | (2.3 | )% | |||
Selling, general and administrative expenses | 57 | 21 | % | (1.2 | )% | |||||
Research, development and engineering expenses | 8 | 20 | % | (0.2 | )% | |||||
Equity, royalty and interest income from investees | (1 | ) | (4 | )% | NM |
The decrease in gross margin was primarily due to lower volumes, unfavorable sales mix and increased material and commodity costs which were partially offset by improved pricing and favorable foreign currency translation. The decrease in selling, general and administrative expenses and research, development and engineering expenses was primarily due to favorable foreign currency translation, lower variable compensation costs, implementation of severance programs and decreased discretionary spending.
Components Segment Results
Financial data for the Components segment was as follows:
| | | | Favorable/ (Unfavorable) | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Years ended December 31, | 2010 vs. 2009 | 2009 vs. 2008 | ||||||||||||||||||||
In millions | 2010 | 2009 | 2008 | Amount | Percent | Amount | Percent | ||||||||||||||||
External sales | $ | 2,171 | $ | 1,562 | $ | 2,154 | $ | 609 | 39 | % | $ | (592 | ) | (27 | )% | ||||||||
Intersegment sales | 875 | 793 | 998 | 82 | 10 | % | (205 | ) | (21 | )% | |||||||||||||
Total sales | 3,046 | 2,355 | 3,152 | 691 | 29 | % | (797 | ) | (25 | )% | |||||||||||||
Depreciation and amortization | 79 | 73 | 65 | (6 | ) | (8 | )% | (8 | ) | (12 | )% | ||||||||||||
Research, development and engineering expenses | 114 | 88 | 95 | (26 | ) | (30 | )% | 7 | 7 | % | |||||||||||||
Equity, royalty and interest income from investees | 23 | 13 | 14 | 10 | 77 | % | (1 | ) | (7 | )% | |||||||||||||
Interest income | 2 | 1 | 3 | 1 | 100 | % | (2 | ) | (67 | )% | |||||||||||||
Segment EBIT | 278 | 95 | 169 | 183 | NM | (74 | ) | (44 | )% |
| | | | Percentage Points | Percentage Points | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Segment EBIT as a percentage of total sales | 9.1 | % | 4.0 | % | 5.4 | % | 5.1 | (1.4) |
Sales for our Components segment by business were as follows:
| | | | Favorable/ (Unfavorable) | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Years ended December 31, | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||||||
In millions | 2010 | 2009(1) | 2008 | Amount | Percent | Amount | Percent | |||||||||||||||
Filtration | $ | 1,011 | $ | 851 | $ | 1,194 | $ | 160 | 19 | % | $ | (343 | ) | (29 | )% | |||||||
Turbo technologies | 948 | 704 | 979 | 244 | 35 | % | (275 | ) | (28 | )% | ||||||||||||
Emission solutions | 750 | 495 | 553 | 255 | 52 | % | (58 | ) | (10 | )% | ||||||||||||
Fuel systems | 337 | 305 | 426 | 32 | 10 | % | (121 | ) | (28 | )% | ||||||||||||
Total sales | $ | 3,046 | $ | 2,355 | $ | 3,152 | $ | 691 | 29 | % | $ | (797 | ) | (25 | )% | |||||||
2010 vs. 2009
Sales
Components segment sales increased in all businesses versus 2009. The following are the primary regional drivers by business.
Segment EBIT
Components segment EBIT almost tripled versus 2009, primarily due to the improved gross margin which was partially offset by increased selling, general and administrative expenses and research,
development and engineering expenses. Changes in Components segment EBIT and EBIT as a percentage of sales were as follows:
| Year ended December 31, 2010 vs. 2009 Favorable/(Unfavorable) Change | Year ended December 31, 2011 vs. 2010 Favorable/(Unfavorable) Change | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Amount | Percent | Percentage point change as a percent of sales | Amount | Percent | Percentage point change as a percent of sales | ||||||||||||||
Gross margin | $ | 233 | 67 | % | 4.3 | $ | 135 | 25 | % | 0.7 | ||||||||||
Selling, general and administrative expenses | (44 | ) | (24 | )% | 0.3 | (56 | ) | (22 | )% | (0.2 | ) | |||||||||
Research, development and engineering expenses | (26 | ) | (30 | )% | — | (18 | ) | (50 | )% | (0.3 | ) | |||||||||
Equity, royalty and interest income from investees | 10 | 77 | % | 0.2 | 12 | 34 | % | 0.1 |
The increase in gross margin was due to higher volumes for all businesses, increased aftertreatment content on 2010 North American truck engines and efficiencies gained from restructuring actionsimproved price realization, which was partially offset by higherincreased commodity costs and warranty expenses.material costs. The increaseincreases in selling, general and administrative expenses and research, development and engineering expenses were primarily due to increased variable compensation which resultedheadcount to support our strategic growth initiatives. Equity, royalty and interest income from the segment's strong performance; other people costs and new product development program spending.
2009 vs. 2008
Sales
Components segment sales decreased in all businesses versus 2008,investees increased at CCEC primarily as thea result of the global economic downturn. The following are the primary drivers by business.
Components segment EBIT decreased versus 2008, primarily due to a lower gross margin which was partially offset by decreased selling, general and administrative expenses and research, development and engineering expenses. Changes in Components segment EBIT and EBIT as a percentage of sales were as follows:
| Year ended December 31, 2009 vs. 2008 Favorable/(Unfavorable) Change | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In millions | Amount | Percent | Percentage point change as a percent of sales | |||||||
Gross margin | $ | (138 | ) | (28 | )% | (0.6 | )% | |||
Selling, general and administrative expenses | 43 | 19 | % | (0.6 | )% | |||||
Research, development and engineering expenses | 7 | 7 | % | (0.7 | )% |
The decrease in gross margin was due to lower volumes for most markets, partially offset by implementation of severance programs. The decrease in selling, general and administrative expenses and research, development and engineering expenses was primarily due to implementation of severance programs, closing certain facilities, decreased discretionary spending and decreased research and development spending.
Distribution Segment Results
Financial data for the Distribution segment was as follows:
| | | | | Favorable/ (Unfavorable) | | | | Favorable/(Unfavorable) | ||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Years ended December 31, | 2010 vs. 2009 | 2009 vs. 2008 | Years ended December 31, | 2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||||||||||||||||||||||||||
In millions | In millions | 2010 | 2009 | 2008 | Amount | Percent | Amount | Percent | 2012 | 2011 | 2010 | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||
External sales | External sales | $ | 2,311 | $ | 1,777 | $ | 2,155 | $ | 534 | 30 | % | $ | (378 | ) | (18 | )% | $ | 3,261 | $ | 3,021 | $ | 2,311 | $ | 240 | 8 | % | $ | 710 | 31 | % | |||||||||||||||
Intersegment sales | Intersegment sales | 13 | 7 | 9 | 6 | 86 | % | (2 | ) | (22 | )% | 16 | 23 | 13 | (7 | ) | (30 | )% | 10 | 77 | % | ||||||||||||||||||||||||
Total sales | 2,324 | 1,784 | 2,164 | 540 | 30 | % | (380 | ) | (18 | )% | |||||||||||||||||||||||||||||||||||
Total sales | 3,277 | 3,044 | 2,324 | 233 | 8 | % | 720 | 31 | % | ||||||||||||||||||||||||||||||||||||
Depreciation and amortization | Depreciation and amortization | 25 | 17 | 25 | (8 | ) | (47 | )% | 8 | 32 | % | 34 | 25 | 25 | (9 | ) | (36 | )% | — | — | |||||||||||||||||||||||||
Research, development and engineering expenses | 6 | 3 | 1 | (3 | ) | (100 | )% | (2 | ) | NM | |||||||||||||||||||||||||||||||||||
Equity, royalty and interest income from investees | Equity, royalty and interest income from investees | 132 | 125 | 117 | 7 | 6 | % | 8 | 7 | % | 188 | 172 | 132 | 16 | 9 | % | 40 | 30 | % | ||||||||||||||||||||||||||
Interest income | Interest income | 2 | 1 | 2 | 1 | 100 | % | (1 | ) | (50 | )% | 2 | 3 | 2 | (1 | ) | (33 | )% | 1 | 50 | % | ||||||||||||||||||||||||
Segment EBIT | 297 | 235 | 242 | 62 | 26 | % | (7 | ) | (3 | )% | |||||||||||||||||||||||||||||||||||
Segment EBIT(1) | 369 | 386 | 297 | (17 | ) | (4 | )% | 89 | 30 | % |
| | | | Percentage Points | Percentage Points | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Segment EBIT as a percentage of total sales | 11.3 | % | 12.7 | % | 12.8 | % | (1.4) | (0.1) |
| | | | Percentage Points | Percentage Points | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Segment EBIT as a percentage of total sales | 12.8 | % | 13.2 | % | 11.2 | % | (0.4) | 2.0 |
Sales for our Distribution segment by region were as follows:
| | | | Favorable/ (Unfavorable) | | | | Favorable/(Unfavorable) | ||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Years ended December 31, | 2010 vs. 2009 | 2009 vs. 2008 | Years ended December 31, | 2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||||||||||||||||||||||||||
In millions | 2010 | 2009 | 2008 | Amount | Percent | Amount | Percent | 2012 | 2011 | 2010 | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||
Asia Pacific | $ | 904 | $ | 755 | $ | 812 | $ | 149 | 20 | % | $ | (57 | ) | (7 | )% | $ | 1,314 | $ | 1,170 | $ | 904 | $ | 144 | 12 | % | $ | 266 | 29 | % | |||||||||||||||
Europe, Middle East and Africa | 794 | 692 | 1,022 | 102 | 15 | % | (330 | ) | (32 | )% | ||||||||||||||||||||||||||||||||||
North & Central America | 539 | 278 | 260 | 261 | 94 | % | 18 | 7 | % | |||||||||||||||||||||||||||||||||||
North and Central America | 901 | 797 | 539 | 104 | 13 | % | 258 | 48 | % | |||||||||||||||||||||||||||||||||||
Europe and Middle East | 770 | 808 | 683 | (38 | ) | (5 | )% | 125 | 18 | % | ||||||||||||||||||||||||||||||||||
Africa | 154 | 151 | 111 | 3 | 2 | % | 40 | 36 | % | |||||||||||||||||||||||||||||||||||
South America | 87 | 59 | 70 | 28 | 47 | % | (11 | ) | (16 | )% | 138 | 118 | 87 | 20 | 17 | % | 31 | 36 | % | |||||||||||||||||||||||||
Total sales | $ | 2,324 | $ | 1,784 | $ | 2,164 | $ | 540 | 30 | % | $ | (380 | ) | (18 | )% | $ | 3,277 | $ | 3,044 | $ | 2,324 | $ | 233 | 8 | % | $ | 720 | 31 | % | |||||||||||||||
Sales for our Distribution segment by product were as follows:
| | | | Favorable/(Unfavorable) | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Years ended December 31, | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||||||||||||
In millions | 2012 | 2011 | 2010 | Amount | Percent | Amount | Percent | |||||||||||||||
Parts and filtration | $ | 1,235 | $ | 1,085 | $ | 882 | $ | 150 | 14 | % | $ | 203 | 23 | % | ||||||||
Power generation | 807 | 722 | 516 | 85 | 12 | % | 206 | 40 | % | |||||||||||||
Engines | 665 | 703 | 466 | (38 | ) | (5 | )% | 237 | 51 | % | ||||||||||||
Service | 570 | 534 | 460 | 36 | 7 | % | 74 | 16 | % | |||||||||||||
Total sales | $ | 3,277 | $ | 3,044 | $ | 2,324 | $ | 233 | 8 | % | $ | 720 | 31 | % | ||||||||
2010 vs. 2009Acquisitions
The acquisitions represent the purchase of the majority interest in Cummins Central Power, an equity investee, in the third quarter of 2012, as explained in Note 2, "ACQUISITIONS AND DIVESTITURES," to theConsolidated Financial Statements, we well as several immaterial acquisitions.
Excluding Acquisitions
Selected financial information for our Distribution segment excluding the impact of acquisitions was as follows:
| Years ended December 31, | Favorable/ (Unfavorable) | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | Amount | Percent | ||||||||||
Excluding acquisitions(1) | ||||||||||||||
Sales | $ | 2,038 | $ | 1,784 | $ | 254 | 14 | % | ||||||
EBIT | 267 | (2) | 235 | 32 | 14 | % |
| | | | Favorable/(Unfavorable) | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Years ended December 31, | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||||||||||||
In millions | 2012 | 2011 | 2010 | Amount | Percent | Amount | Percent | |||||||||||||||
Parts and filtration | $ | 1,174 | $ | 1,085 | $ | 882 | $ | 89 | 8 | % | $ | 203 | 23 | % | ||||||||
Power generation | 779 | 722 | 516 | 57 | 8 | % | 206 | 40 | % | |||||||||||||
Engines | 613 | 703 | 466 | (90 | ) | (13 | )% | 237 | 51 | % | ||||||||||||
Service | 552 | 534 | 460 | 18 | 3 | % | 74 | 16 | % | |||||||||||||
Sales excluding acquisitions | 3,118 | 3,044 | 2,324 | 74 | 2 | % | 720 | 31 | % | |||||||||||||
Acquisitions | 159 | — | — | 159 | 100 | % | — | — | ||||||||||||||
Total sales | $ | 3,277 | $ | 3,044 | $ | 2,324 | $ | 233 | 8 | % | $ | 720 | 31 | % | ||||||||
Segment EBIT excluding acquisitions(1) | 362 | 386 | 297 | (24 | ) | (6 | )% | 89 | 30 | % |
| | | | Percentage Points | Percentage Points | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Segment EBIT as a percentage of total sales excluding acquisitions | 11.6 | % | 12.7 | % | 12.8 | % | (1.1) | (0.1) |
2012 vs. 2011
Sales
Distribution segment sales, excluding the acquisitions, increased versus 2009,2011 due to increasedhigher demand in the parts and filtration, power generation and service revenues,businesses, partially offset by lower demand in the engine business. The following were the primary drivers by line of business:
The increases above were partially offset by the following:
Segment EBIT
Distribution segment EBIT increaseddecreased versus 2009,2011, primarily due to increased gross margin and a one-time gain from an acquisition that occurred in the first quarter, partially offset by increasedhigher selling, general and administrative expenses.expenses and higher research, development and engineering expenses, which were partially offset by higher equity, royalty and interest income from investees and higher gross margin. Distribution segment EBIT for 2012 included restructuring and other charges of $14 million in the fourth quarter. Changes in Distribution segment EBIT and EBIT as a percentage of sales were as follows:
| Year ended December 31, 2010 vs. 2009 Favorable/(Unfavorable) Change | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Amount | Percent | Percentage point change as a percent of sales | ||||||||
Including acquisitions | |||||||||||
Gross margin | $ | 129 | 34 | % | 0.5 | ||||||
Selling, general and administrative expenses | (85 | ) | (31 | )% | — | ||||||
Other (expense) income | 12 | (1) | NM | 0.4 | |||||||
Excluding acquisitions | |||||||||||
Gross margin | 66 | 17 | % | 0.5 | |||||||
Selling, general and administrative expenses | (59 | ) | (21 | )% | (0.9 | ) |
| Year ended December 31, 2012 vs. 2011 Favorable/(Unfavorable) Change | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In millions | Amount | Percent | Percentage point change as a percent of sales | |||||||
Including acquisitions | ||||||||||
Gross margin | $ | 11 | 2 | % | (1.2 | ) | ||||
Selling, general and administrative expenses | (46 | ) | (10 | )% | (0.3 | ) | ||||
Research, development and engineering expenses | (3 | ) | (100 | )% | (0.1 | ) | ||||
Equity, royalty and interest income from investees | 16 | 9 | % | — | ||||||
Excluding acquisitions | ||||||||||
Gross margin | (18 | ) | (3 | )% | (1.1 | ) | ||||
Selling, general and administrative expenses | (23 | ) | (5 | )% | (0.4 | ) |
Segment EBIT Excluding Acquisitions
The primarydecrease in gross margin versus 2011 was primarily due to unfavorable foreign currency impacts, unfavorable variations in geographic mix and restructuring and other charges, which were partially offset by higher volumes in most products. The increase in other income represents the purchase of the majority interest in an equity investee in the first quarter of 2010, which resulted in a gain of $12 million asselling, general and administrative expenses was primarily due to increased headcount to support our strategic growth initiatives launched
explainedprior to a number of markets unexpectedly slowing in Note 21, "ACQUISITIONS AND DIVESTITURES," tomid-2012, partially offset by decreased variable compensation expense and lower discretionary spending in theConsolidated Financial Statements.
Excluding acquisitions, the second half of 2012. The increase in gross margin versus 2009, was primarily due to higher volumesresearch, development and favorable foreign currency impacts. Excluding effects from acquisitions, the increase in selling, general and administrativeengineering expenses was mainly due to higher salariesincreased headcount to support our strategic growth initiatives. The increase in equity, royalty and unfavorable foreign currency impacts.interest income from investees was primarily due to increased income from North American distributors.
20092011 vs. 20082010
Excluding Acquisition
Selected financial information for our Distribution segment excluding the impact of the acquisition was as follows:
| Years ended December 31, | Favorable/ (Unfavorable) | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | 2009 | 2008 | Amount | Percent | ||||||||||
Excluding acquisition(1) | ||||||||||||||
Sales | $ | 1,746 | $ | 2,164 | $ | (418 | ) | (19 | )% | |||||
EBIT | 224 | 242 | (18 | ) | (7 | )% |
Sales
Distribution segment sales excludingincreased for all product lines versus 2010. The following were the acquisition, decreased versus 2008,primary drivers by line of business:
Segment EBIT
Distribution segment EBIT decreasedincreased versus 2010, primarily due to lowerimproved gross margin partially offset by decreased selling, general and administrative expenses and higher equity, royalty and interest income from investees.investees, which was partially offset by increased selling, general and administrative expenses. Segment EBIT was also unfavorably impacted by the absence of a one-time gain of $12 million from the acquisition of Cummins Western Canada in 2010. Changes in Distribution segment EBIT and EBIT as a percentage of sales were as follows:
| Year ended December 31, 2009 vs. 2008 Favorable/(Unfavorable) Change | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Amount | Percent | Percentage point change as a percent of sales | ||||||||
Including acquisition | |||||||||||
Gross margin | $ | (86 | ) | (18 | )% | (0.2 | ) | ||||
Selling, general and administrative expenses | 54 | 16 | % | (0.3 | ) | ||||||
Excluding acquisition(1) | |||||||||||
Gross margin | (94 | ) | (20 | )% | (0.2 | ) | |||||
Selling, general and administrative expenses | 56 | 17 | % | (0.5 | ) |
| Year ended December 31, 2011 vs. 2010 Favorable/(Unfavorable) Change | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In millions | Amount | Percent | Percentage point change as a percent of sales | |||||||
Gross margin | $ | 161 | 31 | % | 0.1 | |||||
Selling, general and administrative expenses | (108 | ) | (30 | )% | 0.1 | |||||
Equity, royalty and interest income from investees | 40 | 30 | % | — |
The increase in gross margin versus 2010 was primarily due to higher volumes in most products, favorable foreign currency impacts and the acquisition of onea previously independent distributor in 2009.2010. The 2008 data does not exclude acquisitions which occurredincrease in 2008.selling, general and administrative expenses was mainly due to higher headcount to support our strategic growth initiatives and unfavorable foreign currency impacts. The increase in equity, royalty and interest income from investees was primarily due to higher income from North American distributors, especially in the oil and gas markets, and increased parts sales.
The decrease in gross margin was primarily due to lower sales volumes as a result of the global economic downturn and unfavorable foreign currency translation. Selling, general and administrative expenses decreased primarily due to favorable foreign currency translation, lower sales volumes and decreased discretionary spending.
Reconciliation of Segment EBIT to Income Before Income Taxes
The table below reconciles the segment information to the corresponding amounts in theConsolidated Statements of Income.
| | Years ended December 31, | Years ended December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | In millions | 2010 | 2009 | 2008 | 2012 | 2011 | 2010 | ||||||||||||||
Total segment EBIT | Total segment EBIT | $ | 1,683 | $ | 749 | $ | 1,322 | $ | 2,328 | $ | 2,613 | $ | 1,683 | ||||||||
Non-segment EBIT(1) | Non-segment EBIT(1) | (26 | ) | (74 | ) | (102 | ) | (25 | ) | 102 | (26 | ) | |||||||||
Total EBIT | Total EBIT | $ | 1,657 | $ | 675 | $ | 1,220 | 2,303 | 2,715 | 1,657 | |||||||||||
Less: | |||||||||||||||||||||
Interest expense | 40 | 35 | 42 | ||||||||||||||||||
Less: Interest expense | 32 | 44 | 40 | ||||||||||||||||||
Income before income taxes | Income before income taxes | $ | 1,617 | $ | 640 | $ | 1,178 | $ | 2,271 | $ | 2,671 | $ | 1,617 | ||||||||
LIQUIDITY AND CAPITAL RESOURCES
Management's Assessment of Liquidity
Our financial condition and liquidity remain strong. Our solid balance sheet and credit ratings enable us to have ready access to credit as we terminated our three year credit facility a year early and entered into a new four year credit facility during 2010.credit.
We assess our liquidity in terms of our ability to generate adequate cash to fund our operating, investing and financing activities. We generate significant ongoing cash flow, which has been used, in part, to fund capital expenditures, pay dividends on our common stock, fund repurchases of common stock and make acquisitions. Cash provided by operations is our principal source of liquidity. As of December 31, 2010,2012, other sources of liquidity include:included:
We believe our liquidity provides us with the financial flexibility needed to fund working capital, capital expenditures, projected pension obligations, dividend payments, common stock repurchases, acquisitions, restructuring actions and debt service obligations.
On July 16, 2010, we entered into aOur new four year revolving credit agreement, with a syndicatecompleted in the fourth quarter of lenders which2012, provides us with a $1.24$1.75 billion unsecured revolving credit facility, the proceeds of which are to be used for theour general corporate purposes of Cummins.purposes. See Note 9,10, "DEBT" to theourConsolidated Financial Statements for further information. The credit agreement includes twoone financial covenants:covenant: a leverage ratio and an interest coverage ratio. At December 31, 2010, we were in compliance with both financial covenants.
The required leverage ratio, which measures the sum of total debt plus securitization financing to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) for the four fiscal quarters shouldmay not exceed 3.03.25 to 1.1.0. At December 31, 2010,2012, our leverage using this measureratio was 0.460.30 to 1. The required interest coverage ratio, which1.0.
A significant portion of our cash flows is consolidated EBITDA minus capital expenditures to consolidated interest expense, in each case forgenerated outside the four consecutive fiscal quarters, should not be less than 1.50 to 1. AtU.S. As of December 31, 2010,2012, the total of cash, cash equivalents and marketable securities held by foreign subsidiaries was $1.3 billion, the vast majority of which was located in the U.K., China, India, Singapore and Brazil. The geographic location of our interest coverage ratio using this measure was 36.68cash and marketable securities aligns well with our business growth strategy. 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 1.preclude us from funding our targeted expansion or 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 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. Our 2012 and subsequent earnings 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.
We continuously monitor our pension assets and believe that we have limited exposure to the European debt crisis. No sovereign debt instruments of crisis countries are held in the trusts, while any equities are held are with large well-diversified multinational firms or are de minimusminimis amounts in large index funds. In addition, we have rebalanced our asset portfolio's in the U.S. and U.K. with equities representing a smaller segment of the total portfolios. Our pension plans have not experienced any significant impact on liquidity or counterparty exposure due to the volatility in the credit markets.
A significant portion of our cash flows is generated outside the U.S. More than half of our cash and cash equivalents and most of our marketable securities at December 31, 2010, are denominated in foreign currencies. 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. The repatriation of cash balances from certain subsidiaries could have adverse tax consequences; however, those balances are generally available, without legal restrictions, to fund ordinary business operations at the local level. We have and will continue to transfer cash from these subsidiaries to us and to other international subsidiaries when it is cost effective to do so.
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 $8$13 million to $116$72 million over each of the next five years.
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.
| | | | Favorable/ (Unfavorable) 2010 vs. 2009 | | | Change 2012 vs. 2011 | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | In millions | 2010 | 2009 | Amount | Percent | 2012 | 2011 | Amount | Percent | ||||||||||||||||||
Cash and cash equivalents | Cash and cash equivalents | $ | 1,023 | $ | 930 | $ | 93 | 10 | % | $ | 1,369 | $ | 1,484 | $ | (115 | ) | (8 | )% | |||||||||
Marketable securities | Marketable securities | 339 | 190 | 149 | 78 | % | 247 | 277 | (30 | ) | (11 | )% | |||||||||||||||
Accounts and notes receivable | Accounts and notes receivable | 2,243 | 2,004 | 239 | 12 | % | 2,475 | 2,526 | (51 | ) | (2 | )% | |||||||||||||||
Inventories | Inventories | 1,977 | 1,341 | 636 | 47 | % | 2,221 | 2,141 | 80 | 4 | % | ||||||||||||||||
Other current assets | Other current assets | 707 | 538 | 169 | 31 | % | 855 | 663 | 192 | 29 | % | ||||||||||||||||
Current assets | 6,289 | 5,003 | 1,286 | 26 | % | ||||||||||||||||||||||
Accounts and loans payable | 1,444 | 994 | 450 | 45 | % | ||||||||||||||||||||||
Current portion of accrued warranty | 421 | 426 | (5 | ) | (1 | )% | |||||||||||||||||||||
Current assets | 7,167 | 7,091 | 76 | 1 | % | ||||||||||||||||||||||
Current maturities of long-term debt, accounts and loans payable | 1,416 | 1,671 | (255 | ) | (15 | )% | |||||||||||||||||||||
Current portion of accrued product warranty | 386 | 422 | (36 | ) | (9 | )% | |||||||||||||||||||||
Accrued compensation, benefits and retirement costs | 400 | 511 | (111 | ) | (22 | )% | |||||||||||||||||||||
Taxes payable (including taxes on income) | 173 | 282 | (109 | ) | (39 | )% | |||||||||||||||||||||
Other accrued expenses | Other accrued expenses | 1,395 | 1,012 | 383 | 38 | % | 761 | 771 | (10 | ) | (1 | )% | |||||||||||||||
Current liabilities | 3,260 | 2,432 | 828 | 34 | % | ||||||||||||||||||||||
Current liabilities | 3,136 | 3,657 | (521 | ) | (14 | )% | |||||||||||||||||||||
Working capital | Working capital | $ | 3,029 | $ | 2,571 | $ | 458 | 18 | % | $ | 4,031 | $ | 3,434 | ||||||||||||||
Current ratio | Current ratio | 1.93 | 2.06 | (0.13 | ) | (6 | )% | 2.29 | 1.94 | ||||||||||||||||||
Days' sales in receivables | Days' sales in receivables | 59 | 64 | (5 | ) | (8 | )% | 53 | 48 | ||||||||||||||||||
Inventory turnover | Inventory turnover | 5.8 | 5.2 | 0.6 | 12 | % | 5.7 | 6.3 |
Current assets increased 261 percent primarilyas increases in other current assets (primarily related to refundable income taxes) and higher inventory levels due to an increase of 47 percentthe unexpected decline in inventory levels to meet anticipated demand increasedwere mostly offset by decreased cash and cash equivalents, lower accounts and notes receivables due to higher sales volumes,receivable and increased investment inlower marketable securities.
Current liabilities increased 34decreased 14 percent primarily due to an increase of 45 percent inlower accounts and loans payable which was theas a result of reduced purchasing volumes, a decrease in accrued compensation, benefits and retirement costs due to lower variable compensation expense for 2012 and a decrease in taxes payable caused by lower earnings and higher estimated tax payments in 2012 compared to 2011.
Days' sales in receivables increased purchasingfive days compared to support2011. The increase was due to higher average receivable balances throughout 2012 on lower sales due to the decline in volume inover the businesses and the acquisitionsecond half of the majority interestyear.
Inventory turnover decreased 0.6 turns compared to 2011. The decrease was due to higher average inventory balances throughout 2012 on lower sales due to the decline in CWC.volume over the second half of the year.
Cash and cash equivalents increased $93decreased $115 million during the year ended December 31, 2010,2012, compared to a $504an increase of $461 million increase in cash and cash equivalents during the comparable period in 2009.2011. The change in cash and cash equivalents was as follows:
Operating Activities
| | | | | Change | | | | Change | ||||||||||||||||||||||||
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| | Years ended December 31, | Years ended December 31, | ||||||||||||||||||||||||||||||
| | 2010 vs. 2009 | 2009 vs. 2008 | 2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||||||||||||||||
In millions | In millions | 2010 | 2009 | 2008 | 2012 | 2011 | 2010 | ||||||||||||||||||||||||||
Consolidated net income | Consolidated net income | $ | 1,140 | $ | 484 | $ | 818 | $ | 656 | $ | (334 | ) | $ | 1,738 | $ | 1,946 | $ | 1,140 | $ | (208 | ) | $ | 806 | ||||||||||
Restructuring and other charges, net of cash payments | Restructuring and other charges, net of cash payments | — | 16 | 34 | (16 | ) | (18 | ) | 27 | — | — | 27 | — | ||||||||||||||||||||
Depreciation and amortization | Depreciation and amortization | 320 | 326 | 314 | (6 | ) | 12 | 361 | 325 | 320 | 36 | 5 | |||||||||||||||||||||
(Gain) loss on investments | (18 | ) | — | 45 | (18 | ) | (45 | ) | |||||||||||||||||||||||||
Gain on sale of businesses | (6 | ) | (121 | ) | — | 115 | (121 | ) | |||||||||||||||||||||||||
Gain on sale of equity investment | (13 | ) | — | — | (13 | ) | — | ||||||||||||||||||||||||||
Gain on fair value adjustment for consolidated investee | Gain on fair value adjustment for consolidated investee | (12 | ) | — | — | (12 | ) | — | (7 | ) | — | (12 | ) | (7 | ) | 12 | |||||||||||||||||
Deferred income taxes | Deferred income taxes | 56 | 5 | (1 | ) | 51 | 6 | 116 | 85 | 56 | 31 | 29 | |||||||||||||||||||||
Equity in income of investees, net of dividends | Equity in income of investees, net of dividends | (147 | ) | 23 | (45 | ) | (170 | ) | 68 | (15 | ) | (23 | ) | (147 | ) | 8 | 124 | ||||||||||||||||
Pension contributions in excess of expense | Pension contributions in excess of expense | (151 | ) | (36 | ) | (31 | ) | (115 | ) | (5 | ) | (68 | ) | (131 | ) | (151 | ) | 63 | 20 | ||||||||||||||
Other post-retirement benefits payments in excess of expense | Other post-retirement benefits payments in excess of expense | (35 | ) | (24 | ) | (35 | ) | (11 | ) | 11 | (21 | ) | (31 | ) | (35 | ) | 10 | 4 | |||||||||||||||
Stock-based compensation expense | Stock-based compensation expense | 22 | 20 | 28 | 2 | (8 | ) | 36 | 42 | 22 | (6 | ) | 20 | ||||||||||||||||||||
Excess tax (benefits) deficiencies on stock based awards | (10 | ) | 1 | (13 | ) | (11 | ) | 14 | |||||||||||||||||||||||||
Excess tax benefits on stock-based awards | (14 | ) | (5 | ) | (10 | ) | (9 | ) | 5 | ||||||||||||||||||||||||
Translation and hedging activities | Translation and hedging activities | 13 | 41 | (10 | ) | (28 | ) | 51 | — | 4 | 13 | (4 | ) | (9 | ) | ||||||||||||||||||
Changes in: | Changes in: | ||||||||||||||||||||||||||||||||
Accounts and notes receivable | (195 | ) | (181 | ) | 88 | (14 | ) | (269 | ) | ||||||||||||||||||||||||
Inventories | (574 | ) | 482 | (251 | ) | (1,056 | ) | 733 | |||||||||||||||||||||||||
Other current assets | (54 | ) | 33 | (54 | ) | (87 | ) | 87 | |||||||||||||||||||||||||
Accounts payable | 345 | (75 | ) | (174 | ) | 420 | 99 | ||||||||||||||||||||||||||
Accrued expenses | 233 | (132 | ) | 124 | 365 | (256 | ) | ||||||||||||||||||||||||||
Accounts and notes receivable | 87 | (350 | ) | (195 | ) | 437 | (155 | ) | |||||||||||||||||||||||||
Inventories | (32 | ) | (225 | ) | (574 | ) | 193 | 349 | |||||||||||||||||||||||||
Other current assets | (60 | ) | (21 | ) | (54 | ) | (39 | ) | 33 | ||||||||||||||||||||||||
Accounts payable | (256 | ) | 208 | 345 | (464 | ) | (137 | ) | |||||||||||||||||||||||||
Accrued expenses | (514 | ) | 234 | 233 | (748 | ) | 1 | ||||||||||||||||||||||||||
Changes in other liabilities and deferred revenue | Changes in other liabilities and deferred revenue | 133 | 155 | 109 | (22 | ) | 46 | 214 | 139 | 133 | 75 | 6 | |||||||||||||||||||||
Other, net | Other, net | (60 | ) | (1 | ) | 41 | (59 | ) | (42 | ) | (41 | ) | (3 | ) | (78 | ) | (38 | ) | 75 | ||||||||||||||
Net cash provided by operating activities | $ | 1,532 | $ | 2,073 | $ | 1,006 | $ | (541 | ) | $ | 1,067 | ||||||||||||||||||||||
Net cash provided by operating activities | $ | 1,006 | $ | 1,137 | $ | 987 | $ | (131 | ) | $ | 150 | ||||||||||||||||||||||
20102012 vs. 20092011
Net cash provided by operating activities decreased versus 2009,2011 primarily due to significantly higher inventory levels to meet anticipated demand, increased equity inunfavorable working capital fluctuations and lower consolidated net income, of investees net of dividends and higher pension contributions made in the year. This waswhich were partially offset by significantly higher consolidateda lower non-cash gain on disposition of certain assets and liabilities of our exhaust business and our light-duty filtration business in 2012. During 2012, the net incomeincrease in working capital resulted in a cash outflow of $775 million compared to a cash outflow of $154 million in 2011. This change of $621 million was primarily driven by lower accrued expenses and increasesa decrease in accounts payable, as volumes dropped in the second half of the year, and accrued expenses as the resulthigher cash tax payments of increased purchasing to support higher sales volumes.approximately $159 million. These were partially offset by a decrease in accounts and notes receivable and a smaller increase in inventory in 2012.
Pensions
The funded status of our pension plans is dependent upon a variety of variables and assumptions including return on invested assets, and market interest rate levels.rates and levels of voluntary contributions to the plans. In 2012, the return for our U.S. plan was 14 percent while our U.K. plan return exceeded 7 percent. Approximately 76 percent of our pension plan assets are held in highly liquid investments such as equity and fixed income securities. The remaining 24 percent of our plan assets are held in less liquid, but market valued investments, including real estate, private equity and insurance contracts. We made $221$132 million of pension contributions in 2010 (including2012. Claims and premiums for other postretirement benefits approximated $41 million, net of reimbursements, in 2012. The $132 million of pension contributions in 2012 included voluntary contributions of $108 million).$110 million. These contributions and payments include payments from our funds either to increase pension plan assets or to make direct payments to plan participants. We expect to contribute $130anticipate making total contributions of $170 million of cash to our globaldefined benefit pension plans in 2011.2013. Expected contributions to our defined benefit pension plans in 2013 will meet or exceed the current funding requirements.
20092011 vs. 20082010
Net cash provided by operating activities increased versus 2008,2010 primarily due to favorable working capital fluctuations, principally inventories,significantly higher consolidated net income, excluding the gain on the sale of certain assets and liabilities of our exhaust business and our light-duty filtration business, as a result of management's response to the challenging global economy and increasedhigher sales volumes, higher dividends from our equity investees which were partially offsetand favorable working capital fluctuations. During 2011, the net increase in working capital resulted in a cash outflow of $154 million compared to a cash outflow of $245 million in 2010. This decrease of $91 million was primarily driven by a smaller increase in inventory in 2011 as we significantly increased inventory levels in 2010 to meet anticipated post-recession demand.
| | | | Change | ||||||||||||
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| Years ended December 31, | |||||||||||||||
| 2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||
In millions | 2012 | 2011 | 2010 | |||||||||||||
Capital expenditures | $ | (690 | ) | $ | (622 | ) | $ | (364 | ) | $ | (68 | ) | $ | (258 | ) | |
Investments in internal use software | (87 | ) | (60 | ) | (43 | ) | (27 | ) | (17 | ) | ||||||
Proceeds from disposals of property, plant and equipment | 11 | 8 | 55 | 3 | (47 | ) | ||||||||||
Investments in and advances to equity investees | (70 | ) | (81 | ) | (2 | ) | 11 | (79 | ) | |||||||
Acquisition of businesses, net of cash acquired | (215 | ) | — | (104 | ) | (215 | ) | 104 | ||||||||
Proceeds from sale of businesses, net of cash sold | 10 | 199 | — | (189 | ) | 199 | ||||||||||
Investments in marketable securities-acquisitions | (561 | ) | (729 | ) | (823 | ) | 168 | 94 | ||||||||
Investments in marketable securities-liquidations | 585 | 750 | 690 | (165 | ) | 60 | ||||||||||
Proceeds from sale of equity investment | 23 | — | — | 23 | — | |||||||||||
Purchases of other investments | — | — | (62 | ) | — | 62 | ||||||||||
Cash flows from derivatives not designated as hedges | 12 | (18 | ) | 2 | 30 | (20 | ) | |||||||||
Other, net | — | 1 | — | (1 | ) | 1 | ||||||||||
Net cash used in investing activities | $ | (982 | ) | $ | (552 | ) | $ | (651 | ) | $ | (430 | ) | $ | 99 | ||
2012 vs. 2011
Net cash used in investing activities increased versus 2011 primarily due to cash investments for the acquisitions of Hilite and Cummins Central Power, proceeds from the 2011 disposition of certain
decreased incomeassets and liabilities of our exhaust business and light-duty filtration business, which did not repeat in 2012, and increased capital expenditures.
Capital expenditures were $690 million in 2012 compared to $622 million in 2011. Despite the challenging economies around the world, we continue to invest in new product lines and targeted capacity expansions. We plan to spend approximately $850 million in 2013 as we continue with product launches and facility improvements and prepare for future emission standards. Over one-half of our capital expenditures will be invested outside of the result of declining sales. Management's priorities included reducing inventory, aligning our cost and capacity with the real demand for our products and managing the business to generate positive cash flows by improving our working capital.U.S. in 2013.
Investing Activities
| | | | Change | |||||||||||||
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| Years ended December 31, | ||||||||||||||||
| 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||
In millions | 2010 | 2009 | 2008 | ||||||||||||||
Capital expenditures | $ | (364 | ) | $ | (310 | ) | $ | (543 | ) | $ | (54 | ) | $ | 233 | |||
Investments in internal use software | (43 | ) | (35 | ) | (82 | ) | (8 | ) | 47 | ||||||||
Proceeds from disposals of property, plant and equipment | 55 | 10 | 29 | 45 | (19 | ) | |||||||||||
Investments in and advances to equity investees | (2 | ) | (3 | ) | (89 | ) | 1 | 86 | |||||||||
Acquisition of businesses, net of cash acquired | (104 | ) | (2 | ) | (142 | ) | (102 | ) | 140 | ||||||||
Proceeds from the sale of businesses | — | — | 64 | — | (64 | ) | |||||||||||
Investments in marketable securities-acquisitions | (823 | ) | (431 | ) | (390 | ) | (392 | ) | (41 | ) | |||||||
Investments in marketable securities-liquidations | 690 | 335 | 409 | 355 | (74 | ) | |||||||||||
Purchases of other investments | (62 | ) | (62 | ) | (62 | ) | — | — | |||||||||
Cash flows from derivatives not designated as hedges | 2 | (18 | ) | (53 | ) | 20 | 35 | ||||||||||
Other, net | — | 7 | 11 | (7 | ) | (4 | ) | ||||||||||
Net cash used in investing activities | $ | (651 | ) | $ | (509 | ) | $ | (848 | ) | $ | (142 | ) | $ | 339 | |||
20102011 vs. 20092010
Net cash used in investing activities increaseddecreased versus 2009,2010 primarily due to acquisitionsproceeds received from the sale of certain assets and liabilities of our exhaust business and our light-duty filtration business (See Note 21, "ACQUISITIONS"2, "ACQUISITIONS AND DIVESTITURES" to ourConsolidated Financial Statements), higher capital expendituresdecreased acquisitions and increased investments inliquidations of marketable securities, whichthe acquisition of Cummins Western Canada in 2010 and decreased purchases of other investments. These drivers were partially offset by higherincreased capital expenditures, additional investments in and advances to equity investees and lower proceeds from the disposaldispositions of property, plant and equipment.
Capital expenditures were $364 million compared to $310 million in the comparable period in 2009. We continue to invest in the development of new products and we plan to spend approximately $600 million to $650 million in 2011 as we continue with product launches, facility improvements and prepare for future on-highway emission standards and product launches.
Net cash used in investing activities decreased versus 2008, primarily due to decreased capital expenditures and lower investments in the acquisition of businesses which were partially offset by increased net cash paid for investments in marketable securities and lower cash proceeds from the sale of a business. These decreases primarily occurred as a result of management's decision to conserve cash and maintain liquidity during the recession.
Capital expenditures decreased as management tightened capital spending substantially across all business by limiting expenditures to critical projects and investments in development of new products.
Financing Activities
| | | | | Change | | | | Change | ||||||||||||||||||||||||
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| | Years ended December 31, | Years ended December 31, | ||||||||||||||||||||||||||||||
| | 2010 vs. 2009 | 2009 vs. 2008 | 2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||||||||||||||||
In millions | In millions | 2010 | 2009 | 2008 | 2012 | 2011 | 2010 | ||||||||||||||||||||||||||
Proceeds from borrowings | Proceeds from borrowings | $ | 214 | $ | 76 | $ | 76 | $ | 138 | $ | — | $ | 64 | $ | 127 | $ | 214 | $ | (63 | ) | $ | (87 | ) | ||||||||||
Payments on borrowings and capital lease obligations | Payments on borrowings and capital lease obligations | (143 | ) | (97 | ) | (152 | ) | (46 | ) | 55 | (145 | ) | (237 | ) | (143 | ) | 92 | (94 | ) | ||||||||||||||
Net borrowings (payments) under short-term credit agreements | 9 | (2 | ) | 33 | 11 | (35 | ) | ||||||||||||||||||||||||||
Net borrowings under short-term credit agreements | 11 | 6 | 9 | 5 | (3 | ) | |||||||||||||||||||||||||||
Distributions to noncontrolling interests | Distributions to noncontrolling interests | (28 | ) | (34 | ) | (24 | ) | 6 | (10 | ) | (62 | ) | (56 | ) | (28 | ) | (6 | ) | (28 | ) | |||||||||||||
Dividend payments on common stock | Dividend payments on common stock | (172 | ) | (141 | ) | (122 | ) | (31 | ) | (19 | ) | (340 | ) | (255 | ) | (172 | ) | (85 | ) | (83 | ) | ||||||||||||
Repurchases of common stock | (256 | ) | (629 | ) | (241 | ) | 373 | (388 | ) | ||||||||||||||||||||||||
Proceeds from sale of common stock held by employee benefit trust | Proceeds from sale of common stock held by employee benefit trust | 58 | 72 | 63 | (14 | ) | 9 | — | — | 58 | — | (58 | ) | ||||||||||||||||||||
Repurchases of common stock | (241 | ) | (20 | ) | (128 | ) | (221 | ) | 108 | ||||||||||||||||||||||||
Excess tax benefits (deficiencies) on stock-based awards | 10 | (1 | ) | 13 | 11 | (14 | ) | ||||||||||||||||||||||||||
Excess tax benefits on stock-based awards | 14 | 5 | 10 | 9 | (5 | ) | |||||||||||||||||||||||||||
Other, net | Other, net | 26 | 6 | 4 | 20 | 2 | 20 | 14 | 26 | 6 | (12 | ) | |||||||||||||||||||||
Net cash used in financing activities | $ | (694 | ) | $ | (1,025 | ) | $ | (267 | ) | $ | 331 | $ | (758 | ) | |||||||||||||||||||
Net cash used in financing activities | $ | (267 | ) | $ | (141 | ) | $ | (237 | ) | $ | (126 | ) | $ | 96 | |||||||||||||||||||
20102012 vs. 20092011
Net cash used in financing activities increaseddecreased versus 2009,2011 primarily due to increasedsignificantly lower repurchases of common stock and decreased payments on borrowings and capital lease obligations, which waswere partially offset by higher dividend payments and decreased proceeds from borrowings primarily related to the acquisition of CWC and borrowings in Brazil.borrowings.
Our total debt was $843$775 million as of December 31, 2010,2012, compared with $703$783 million as of December 31, 2009.2011. Total debt as a percent of our total capital, including total long-term debt, was 14.410.0 percent at December 31, 2010,2012, compared with 14.911.8 percent at December 31, 2009. The increase in total debt was principally due to acquisitions and borrowings in Brazil which were subsequently invested in marketable securities.2011.
20092011 vs. 20082010
Net cash used in financing activities declinedincreased versus 2008,2010, primarily due to the decrease insignificantly higher repurchases of common stock, and lowerincreased payments on borrowings which was partially offset by a decrease inand capital lease obligations, decreased proceeds from borrowings and higher dividend payments.
Our total debt was $703$783 million as of December 31, 2009,2011, compared with $698$843 million atas of December 31, 2008.2010. Total debt as a percent of our total capital, including total long-term debt, was 14.911.8 percent at December 31, 2009,2011, compared to 16.7with 14.4 percent at December 31, 2008.2010.
Repurchase of Common Stock
In December 2007, the Board of Directors authorized the acquisition of up to $500 million of Cummins common stock. We began making purchases under the plan in March 2008 and purchased $128 million of stock during 2008 at an average cost of $55.49 per share.
In February 2009, we temporarily suspended our stock repurchase program to conserve cash. In the fourth quarter of 2009, we lifted the suspension and purchased $20 million of common stock, at an average cost of $46.52 per common share.
In 2010, we purchased $241 million of common stock through the following quarterly purchases:which was completed in February 2011. Repurchases under this plan by year were as follows:
In millions (except per share amounts) For each quarter ended | Shares Purchased | Average Cost Per Share | |||||
---|---|---|---|---|---|---|---|
March 28 | 0.7 | $ | 60.36 | ||||
June 27 | 1.8 | 67.39 | |||||
September 26 | 1.0 | 75.77 | |||||
December 31 | — | — | |||||
Total | 3.5 | $ | 68.57 | ||||
In millions (except per share amounts) | Shares Purchased | Average Cost Per Share | Total Cost of Repurchases | Remaining Authorized Capacity | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2008 | 2.3 | $ | 55.49 | $ | 128 | $ | 372 | ||||||
2009 | 0.4 | 46.52 | 20 | 352 | |||||||||
2010 | 3.5 | 68.57 | 241 | 111 | |||||||||
2011 | 1.1 | 104.47 | 111 | — | |||||||||
Total | 7.3 | $ | 500 | ||||||||||
In February 2011, the Board of Directors approved a new share repurchase program and authorized the acquisition of up to $1 billion of Cumminsour common stock upon the completion of the $500 million program. We purchased $111In 2011, we repurchased $518 million of shares under this authorization. In 2012, we made the following quarterly purchases under this plan:
In millions (except per share amounts) For each quarter ended | 2012 Shares Purchased | Average Cost Per Share | Total Cost of Repurchases | Remaining Authorized Capacity | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
April 1 | 0.1 | $ | 114.97 | $ | 8 | $ | 474 | ||||||
July 1 | 1.8 | 104.00 | 188 | 286 | |||||||||
September 30 | 0.4 | 84.95 | 35 | 251 | |||||||||
December 31 | 0.3 | 87.83 | 25 | 226 | |||||||||
Total | 2.6 | 99.47 | $ | 256 | |||||||||
In December 2012, the Board of Directors authorized the acquisition of up to $1 billion of our common stock in Februaryupon completion of the 2011 and completed the $500 million program as of this filing date.repurchase program.
Quarterly Dividends
In July 2012, the Board of Directors authorized a 25 percent increase to our quarterly cash dividend on our common stock from $0.40 per share to $0.50 per share. In July 2011, the Board of Directors approved a 52 percent increase to our quarterly cash dividend on our common stock from $0.2625 per share to $0.40 per share. In July 2010, our Board of Directors approved a 50 percent
increase in theour quarterly dividendscash dividend on our common stock from $0.175 per common share to $0.2625 per common share. In July 2008, our Board of Directors approved a 40 percent increase in the quarterly dividends on our common stock from $0.125 per common share to $0.175 per common share. Cash dividends per share paid to common shareholders for the last three years were as follows:
| Quarterly Dividends | Quarterly Dividends | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2009 | 2008 | 2012 | 2011 | 2010 | ||||||||||||||
First quarter | $ | 0.175 | $ | 0.175 | $ | 0.125 | $ | 0.40 | $ | 0.2625 | $ | 0.175 | ||||||||
Second quarter | 0.175 | 0.175 | 0.125 | 0.40 | 0.2625 | 0.175 | ||||||||||||||
Third quarter | 0.2625 | 0.175 | 0.175 | 0.50 | 0.40 | 0.2625 | ||||||||||||||
Fourth quarter | 0.2625 | 0.175 | 0.175 | 0.50 | 0.40 | 0.2625 | ||||||||||||||
Total | $ | 1.80 | $ | 1.325 | $ | 0.875 | ||||||||||||||
Total dividends paid to common shareholders in 2012, 2011 and 2010 2009 and 2008 were $172$340 million, $141$255 million and $122$172 million, respectively. Declaration and payment of dividends in the future depends upon our income and liquidity position, among other factors, and is subject to declaration by our Board of Directors, who meet quarterly to consider theour dividend payment. We expect to fund dividend payments with cash from operations.
A number of our contractual obligations and financing agreements, such as our revolving credit facility, have restrictive covenants and/or pricing modifications that may be triggered in the event of downward revisions to our corporate credit rating. There were no downgrades of our credit ratings in 20102012 that have impacted these covenants or pricing modifications.
In JanuarySeptember 2011, Fitch affirmed our ratings andStandard & Poor's Rating Services upgraded our outlookrating to positive. In September 2010, Standard and Poor's raised our senior unsecured debt ratings to BBB+'A' and changed our outlook to stable. In July 2010,November 2011, Moody's Investors Service, Inc. raised our senior unsecured debtrating to 'Baa1' and changed our outlook to positive. In October 2012, Fitch Ratings upgraded our ratings to Baa2.
Table of Contents'A' and changed our outlook to stable.
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. Our ratings and outlook from each of the credit rating agencies as of the date of filing are shown in the table below.
Credit Rating Agency | Senior L-T Debt Rating | Outlook | ||||
---|---|---|---|---|---|---|
Standard & Poor's Rating Services | A | Stable | ||||
Fitch Ratings | A | Stable | ||||
Moody's Investors Service, Inc. | ||||||
| ||||||
| Positive |
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
A summary of payments due for our contractual obligations and commercial commitments, as of December 31, 2010,2012, is shown in the tables below:
Contractual Cash Obligations | 2013 | 2014 - 2015 | 2016 - 2017 | After 2017 | Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | ||||||||||||||||
Loans payable | $ | 16 | $ | — | $ | — | $ | — | $ | 16 | ||||||
Long-term debt and capital lease obligations(1) | 120 | 200 | 116 | 1,476 | 1,912 | |||||||||||
Operating leases | 147 | 183 | 95 | 128 | 553 | |||||||||||
Capital expenditures | 549 | 310 | 24 | 18 | 901 | |||||||||||
Purchase commitments for inventory | 506 | 13 | — | — | 519 | |||||||||||
Other purchase commitments | 236 | 97 | 31 | 4 | 368 | |||||||||||
Pension funding(2) | 37 | 149 | — | — | 186 | |||||||||||
Other postretirement benefits | 47 | 88 | 78 | 265 | 478 | |||||||||||
Total | $ | 1,658 | $ | 1,040 | $ | 344 | $ | 1,891 | $ | 4,933 | ||||||
Contractual Cash Obligations | 2011 | 2012 - 2013 | 2014 - 2015 | After 2015 | Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | | | | | | |||||||||||
Loans payable | $ | 82 | $ | — | $ | — | $ | — | $ | 82 | ||||||
Long-term debt and capital lease obligations(1) | 121 | 323 | 119 | 1,436 | 1,999 | |||||||||||
Operating leases | 90 | 128 | 74 | 121 | 413 | |||||||||||
Capital expenditures | 146 | 16 | 4 | — | 166 | |||||||||||
Purchase commitments for inventory | 718 | — | — | — | 718 | |||||||||||
Other purchase commitments | 123 | 36 | 2 | — | 161 | |||||||||||
Pension funding(2) | 16 | 124 | 124 | — | 264 | |||||||||||
Other postretirement benefits | 51 | 99 | 94 | 246 | 490 | |||||||||||
Total | $ | 1,347 | $ | 726 | $ | 417 | $ | 1,803 | $ | 4,293 | ||||||
The contractual obligations reported above exclude our unrecognized tax benefits of $85$145 million as of December 31, 2010.2012. We are not able to reasonably estimate the period in which cash outflows relating to uncertain tax contingencies could occur. See Note 6,4, "INCOME TAXES," to theConsolidated Financial Statements for further details.
Our other commercial commitments as of December 31, 2010,2012, are as follows:
Other Commercial Commitments | 2011 | 2012 - 2013 | 2014 - 2015 | After 2015 | Total | 2013 | 2014 - 2015 | 2016 - 2017 | After 2017 | Total | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | | | | | | |||||||||||||||||||||||||||
Standby letters of credit under revolving credit agreement | $ | 31 | $ | 1 | $ | — | $ | — | $ | 32 | $ | 23 | $ | — | $ | — | $ | — | $ | 23 | ||||||||||||
International and other domestic letters of credit | 25 | 3 | — | 2 | 30 | 27 | 18 | — | 2 | 47 | ||||||||||||||||||||||
Performance and excise bonds | 18 | 7 | 52 | 1 | 78 | 14 | 52 | 3 | 1 | 70 | ||||||||||||||||||||||
Guarantees, indemnifications and other commitments | 2 | — | 28 | 47 | 77 | 3 | 13 | — | — | 16 | ||||||||||||||||||||||
Total | $ | 76 | $ | 11 | $ | 80 | $ | 50 | $ | 217 | $ | 67 | $ | 83 | $ | 3 | $ | 3 | $ | 156 | ||||||||||||
OFF BALANCE SHEET ARRANGEMENTS
Financing Arrangements for Affiliated Parties
In accordance with the provisions of various joint venture agreements, we may purchase and/or sell products and components from/to the joint ventures and the joint ventures may sell products and components to unrelated parties. The transfer price of products purchased from the joint ventures may differ from normal selling prices. Certain joint venture agreements transfer product to us at cost, some transfer product to us on a cost-plus basis and other agreements provide for the transfer of products at market value.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
A summary of our significant accounting policies is included in Note 1, "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES," of ourConsolidated Financial Statements which discusses accounting policies that we have selected from acceptable alternatives.
OurConsolidated Financial Statements are prepared in accordance with GAAP which often requires 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 ourConsolidated 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. We believe our critical accounting estimates include those addressing the estimation of liabilities for warranty programs, recoverability of investment related to new products, accounting for income taxes and pension benefits and annual assessment of recoverability of goodwill.benefits.
We estimate and record a liability for base warranty programs at the time our products are sold. Our estimates are based on historical experience and reflect management's best estimates of expected costs at the time products are sold and subsequent adjustment to those expected costs when actual costs differ. As a result of the uncertainty surrounding the nature and frequency of product recall
programs, the liability for such programs is recorded when we commit to a recall action or when a recall becomes probable and estimable, which generally occurs when it is announced. Our warranty liability is generally affected by component failure rates, repair costs and the point of failure within the product life cycle. Future events and circumstances related to these factors could materially change our estimates and require adjustments to our liability. New product launches require a greater use of judgment in developing estimates until historical experience becomes available. Product specific experience is typically available four or five quarters after product launch, with a clear experience trend evident eight quarters after launch. We generally record warranty expense for new products upon shipment using a preceding product's warranty history and a multiplicative factor based upon preceding similar product experience and new product assessment until sufficient new product data is available for warranty estimation. We then use a blend of actual new product experience and preceding product historical experience for several subsequent quarters, and new product specific experience thereafter. Note 10,11, "PRODUCT WARRANTY LIABILITY," to ourConsolidated Financial Statements contains a summary of the activity in our warranty liability account for 20102012 and 20092011 including adjustments to pre-existing warranties.
Recoverability of Investment Related to New Products
At December 31, 2010,2012, we have capitalized $218$233 million associated with the future launch of our new light-duty diesel engine product. Development of this product began in 2006. Market uncertainty related to the global recession that began in 2008 resulted in some customers delaying or cancelling their vehicle programs. At December 31, 2009, we reviewed our investment of $216 million for possible impairment. We used projections to assess whether future cash flows on an undiscounted basis related to the assets are likely to exceed the related carrying amount to determine if a write-down iswas appropriate. These projections required estimates about product volume and the size of the market for vehicles that are not yet developed. We used input from our customers in developing alternative cash flow scenarios. Our analysis indicated that the assets were recoverable. Customers that are expected to purchase sufficient quantities to recover our investment in the new light-duty diesel engine products remained active with the development of this product through 20102012, and there were no significant changes to the assumptions used in 2009. If customer expectations or projected volumes deteriorate and we do not identify alternative customers and/or product applications, we could be required to write-down these assets to net realizable value.
We determine our income tax expense using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax benefits of tax loss and credit carryforwards are also recognized as deferred tax assets. We evaluate the recoverability of our deferred tax assets each quarter by assessing the likelihood of future profitability and available tax planning strategies that could be implemented to realize our net deferred tax assets. At December 31, 2010,2012, we recorded net deferred tax assets of $511$396 million. These assets included $139$165 million for the value of tax loss and credit carryforwards. A valuation allowance of $50$95 million was recorded to reduce the tax assets to the net value management believed was more likely than not to be realized. In the event our operating performance deteriorates, future assessments could conclude that a larger valuation allowance will be needed to further reduce the deferred tax assets. In addition, we operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. We reduce our net tax assets for the estimated additional tax and interest that may result from tax authorities disputing uncertain tax positions we have taken and we believe we have made adequate provision for income taxes for all years that are subject to audit based upon the latest information available. A more complete description of our income taxes and the future benefits of our tax loss and
credit carryforwards is disclosed in Note 6,4, "INCOME TAXES," to ourConsolidated Financial Statements.
We sponsor a number of pension plans primarily in the U.S. and the U.K. and to a lesser degree in various other countries. In the U.S. and the U.K. we have several major defined benefit plans that are separately funded. We account for our pension programs in accordance with employers' accounting for defined benefit pension and other postretirement plans under GAAP. GAAP requires that amounts recognized in financial statements be determined using an actuarial basis. As a result, our pension benefit programs are based on a number of statistical and judgmental assumptions that attempt to anticipate future events and are used in calculating the expense and liability related to our plans each year at December 31. These assumptions include discount rates used to value liabilities, assumed rates of return on plan assets, future compensation increases, employee turnover rates, actuarial assumptions relating to retirement age, mortality rates and participant withdrawals. The actuarial assumptions we use may differ significantly from actual results due to changing economic conditions, participant life span and withdrawal rates. These differences may result in a material impact to the amount of net periodic pension expense to be recorded in ourConsolidated Financial Statements in the future.
The expected long-term return on plan assets is used in calculating the net periodic pension expense. We considered several factors in developing our expected rate of return on plan assets. The long-term rate of return considers historical returns and expected returns on current and projected asset allocations and is generally applied to a 5-yearfive-year average market value of return. Projected returns are based primarily on broad, publicly traded equity and fixed income indices and forward-looking estimates of active portfolio and investment management. As of December 31, 2010,2012, based upon our target asset allocations it is anticipated that our U.S. investment policy will generate an average annual return over the 20-year10-year projection period equal to or in excess of 7.5 percent approximately 40 percent of the time while returns of 8.49.0 percent or greater are anticipated 25 percent of the time. We expect additional positive returns from active investment management. The 20102012 one year return exceeded 15was 14 percent, combined with the very favorable returns in 20092011 has eliminated the significant deterioration in pension assets experienced in 2008 as a result of the credit crisis and related market recession. Based on the historical returns and forward-looking return expectations, we believe an investment return assumption of 8.0 percent per year in 20112013 for U.S. pension assets is reasonable.
The methodology used to determine the rate of return on pension plan assets in the U.K. was based on establishing an equity-risk premium over current long-term bond yields adjusted based on target asset allocations. As of December 31, 2010,2012, based upon our target asset allocations, it is anticipated that our U.K. investment policy will generate an average annual return over the 20-year projection period equal to or in excess of 6.55.6 percent approximately 50 percent of the time while returns of 9.36.5 percent or greater are anticipated 25 percent of the time. We expect additional positive returns from active investment management. The one year return for our UKU.K. plan was 13exceeded 7 percent for 20102012 and similar to our USU.S. plan, the 2008 market related deterioration in our plan assets has been eliminated. Our strategy with respect to our investments in pension plan assets is to be invested with a long-term outlook. Therefore, the risk and return balance of our asset portfolio should reflect a long-term horizon. Based on the historical returns and forward-looking return expectations, we believe an investment return
assumption of 7.05.8 percent in 20112013 for U.K. pension assets is reasonable. Our pension plan asset allocation at December 31, 20102012 and 20092011 and target allocation for 20112013 are as follows:
| | U.S. Plans | U.K. Plans | U.S. Plans | U.K. Plans | ||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Percentage of Plan Assets at December 31, | | Percentage of Plan Assets at December 31, | | Percentage of Plan Assets at December 31, | | Percentage of Plan Assets at December 31, | ||||||||||||||||||||||||||||||
| | Target Allocation 2011 | Target Allocation 2011 | Target Allocation 2013 | Target Allocation 2013 | ||||||||||||||||||||||||||||||||||
Investment description | Investment description | 2010 | 2009 | 2010 | 2009 | 2012 | 2011 | 2012 | 2011 | ||||||||||||||||||||||||||||||
Equity securities | Equity securities | 45.0 | % | 46.8 | % | 59.4 | % | 55.0 | % | 57.0 | % | 58.5 | % | 40.0 | % | 40.1 | % | 44.2 | % | 40.0 | % | 43.0 | % | 45.0 | % | ||||||||||||||
Fixed income | Fixed income | 40.0 | % | 41.2 | % | 32.6 | % | 40.0 | % | 40.0 | % | 38.2 | % | 45.0 | % | 47.5 | % | 42.2 | % | 45.0 | % | 46.0 | % | 46.0 | % | ||||||||||||||
Real estate/other | Real estate/other | 15.0 | % | 12.0 | % | 8.0 | % | 5.0 | % | 3.0 | % | 3.3 | % | 15.0 | % | 12.4 | % | 13.6 | % | 15.0 | % | 11.0 | % | 9.0 | % | ||||||||||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||||||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||||||||||
The differences between the actual return on plan assets and expected long-term return on plan assets are recognized in the asset value used to calculate net periodic expense over five years. The table below sets forth the expected return assumptions used to develop our pension expense for the period 2008-20102010-2012 and our expected rate of return for 2011.2013.
| Long-Term Expected Return Assumptions | Long-Term Expected Return Assumptions | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2011 | 2010 | 2009 | 2008 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||||
U.S. Plans | 8.00 | % | 8.00 | % | 8.25 | % | 8.25 | % | 8.00 | % | 8.00 | % | 8.00 | % | 8.00 | % | ||||||||||
Non-U.S. Plans | 7.00 | % | 7.25 | % | 7.25 | % | 7.25 | % | ||||||||||||||||||
U.K. Plans | 5.80 | % | 6.50 | % | 7.00 | % | 7.25 | % |
A lower expected rate of return will increase our net periodic pension expense and reduce profitability.
GAAP for pensions offers various acceptable alternatives to account for the differences that eventually arise between the estimates used in the actuarial valuations and the actual results. It is acceptable to delay or immediately recognize these differences. Under the delayed recognition alternative, changes in pension obligation (including those resulting from plan amendments) and changes in the value of assets set aside to meet those obligations are not recognized in net periodic pension cost as they occur but are recognized initially in comprehensive income and subsequently amortized as components of net periodic pension cost systematically and gradually over future periods. In addition to this approach, GAAP also allows immediate recognition of actuarial gains or losses. Immediate recognition introduces volatility in financial results. We have chosen to delay recognition and amortize actuarial differences over future periods. If we adopted the immediate recognition approach, we would record a loss of $1,082 million ($724 million after-tax) for our U.S. and U.K. pension plans.
The difference between the expected return and the actual return on plan assets is deferred from recognition in our results of operations and, under certain circumstances such as when the difference
exceeds 10 percent of the market value of plan assets or the projected benefit obligation (PBO), amortized over future years of service. This is also true of changes to actuarial assumptions. As of December 31, 2010,2012, we had net pension actuarial losses of $692$734 million and $227$349 million for the U.S. and non-U.S.U.K. pension plans, respectively. Under GAAP, the actuarial gains and losses are recognized and recorded in accumulated other comprehensive loss. DecreasesIncreases in actuarial losses increaseddecreased our shareholders' equity by $125$83 million (after-tax) in 2010.2012. The decreases resultedincreases were due to liability losses from reduced discount rates, partially offset by improved plan asset performance in 2010.2012. As these amounts exceed 10 percent of our PBO, the excess is amortized over the average remaining service lives of participating employees.
The table below sets forth the net periodic pension expense for the period 20082010 through 20102012 and our expected expense for 2011.2013.
| Net Periodic Pension Expense | Net Periodic Pension Expense | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | 2011 | 2010 | 2009 | 2008 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||||
Pension expense | $ | 67 | $ | 70 | $ | 93 | $ | 71 | $ | 97 | $ | 64 | $ | 68 | $ | 70 |
We expect 20112013 pension expense to be slightly under 2010,increased significantly over 2012, due to strongthe unfavorable impacts of higher service cost due to increased headcount, decreased discount rates and lower expected asset returns and higherfor our U.K. plan as we de-risk plan trust assets partially offset by a decrease in the discount rate.moving toward more conservative investments. The decrease in periodic pension expense in 2012 compared to 2011 was due to improved returns on assets and strong contributions in 2011. The decrease in periodic pension expense in 2011 compared to 2010 was due to improved returns on assets as the capital markets began to recover and strong contributions in 2009 and the absence of any curtailment charges. The increase in periodic pension expense in 2009 was due to lower than historical returns on assets driven by the global economic recession.2010. Another key assumption used in the development of the net periodic pension expense is the discount rate. The
weighted average discount rates used to develop our net periodic pension expense are set forth in the table below.
| Discount Rates | Discount Rates | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2011 | 2010 | 2009 | 2008 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||||
U.S. Plans | 5.42 | % | 5.60 | % | 6.20 | % | 6.10 | % | 3.97 | % | 4.82 | % | 5.42 | % | 5.60 | % | ||||||||||
Non-U.S. Plans | 5.80 | % | 5.80 | % | 6.20 | % | 5.80 | % | ||||||||||||||||||
U.K. Plans | 4.70 | % | 5.20 | % | 5.80 | % | 5.80 | % |
Changes in the discount rate assumptions will impact the interest cost component of the net periodic pension expense calculation.
The discount rate enables us to state expected future cash payments for benefits as a present value on the measurement date. The guidelines for setting this rate are discussed in GAAP which suggests the use of a high-quality corporate bond rate. We used bond information provided by Moody's Investor Service Inc., Standard & Poors,Poor's Rating Services, Fitch Ratings and Dominion Bond Rating. All bonds used to develop our hypothetical portfolio in the U.S. and U.K. were high-quality, non-callable bonds (Aa or better) as of December 31, 2010.2012, by at least two of the bond rating agencies. The average yield of this hypothetical bond portfolio was used as the benchmark for determining the discount rate to be used to value the obligations of the plans subject to GAAP for pensions and other postretirement benefits.
Our model called for 80 years of benefit payments for the U.S. plans and 60 years of payments for the U.K. For both countries, our model matches the present value of the plan's projected benefit payments to the market value of the theoretical settlement bond portfolio. A single equivalent discount rate is determined to align the present value of the required cash flow with the value of the bond portfolio. The resulting discount rate is reflective of both the current interest rate environment and the plan's distinct liability characteristics.
The table below sets forth the estimated impact on our 20112013 net periodic pension expense relative to a change in the discount rate and a change in the expected rate of return on plan assets.
In millions | Impact on Pension Expense Increase (Decrease) | ||||
---|---|---|---|---|---|
Discount rate used to value liabilities: | |||||
0.25 percent increase | $ | (4 | ) | ||
0.25 percent decrease | 3 | ||||
Expected rate of return on assets: | |||||
1 percent increase | (30 | ) | |||
1 percent decrease | 29 |
In millions | Impact on Pension Expense Increase (Decrease) | |||
---|---|---|---|---|
Discount rate used to value liabilities | ||||
0.25 percent increase | $ | (9 | ) | |
0.25 percent decrease | 9 | |||
Expected rate of return on assets | ||||
One percent increase | (34 | ) | ||
One percent decrease | 34 |
The above sensitivities reflect the impact of changing one assumption at a time. A higher discount rate decreases the plan obligations and decreases our net periodic pension expense. A lower discount rate increases the plan obligations and increases our net periodic pension expense. It should be noted that economic factors and conditions often affect multiple assumptions simultaneously and the effects of changes in key assumptions are not necessarily linear.
Note 11,12, "PENSION AND OTHER POSTRETIREMENT BENEFITS," to ourConsolidated Financial Statements provides a summary of our pension benefit plan activity, the funded status of our plans and the amounts recognized in ourConsolidated Financial Statements.
Annual Assessment for Recoverability of Goodwill
Under GAAP for goodwill and other intangible assets, the carrying value of goodwill must be tested for impairment on an annual basis and between annual tests in certain circumstances where impairment may be indicated. The fair value of each reporting unit was estimated by discounting the future cash flows less requirements for working capital and fixed asset additions. In accordance with GAAP, our reporting units are generally defined as one level below an operating segment. However, there were two situations where we have aggregated two or more components which share similar economic characteristics and thus are aggregated into a single reporting unit for testing purposes. These two situations are described further below. This analysis has resulted in the following reporting units for our goodwill testing:
No other reporting units have goodwill. Our valuation method requires us to make projections of revenue, operating expenses, working capital investment and fixed asset additions for the reporting units over a multi-year period. Additionally, management must estimate a weighted-average cost of capital, which reflects a market rate, for each reporting unit for use as a discount rate. The discounted cash flows are compared to the carrying value of the reporting unit and, if less than the carrying value, a separate valuation of the goodwill is required to determine if an impairment loss has occurred. In addition, we also perform a sensitivity analysis to determine how much our forecasts can fluctuate before the fair value of a reporting unit would be lower than its carrying amount. As of the end of the third quarter in 2010, we performed the annual impairment assessment required by GAAP and determined that our goodwill was not impaired. At December 31, 2010, our recorded goodwill was $367 million, approximately 90 percent of which resided in the emission solutions plus filtration reporting unit. For this reporting unit, the fair value of the reporting unit exceeded its carrying value by a substantial margin. Changes in our projections or estimates, a deterioration of our operating results and the related cash flow effect or a significant increase in the discount rate could decrease the estimated fair value of our reporting units and result in a future impairment of goodwill.
RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Accounting Pronouncements Recently Adopted
In July 2010,June 2011, the Financial Accounting Standards Board (FASB) amended its standardsrules regarding the disclosures for credit qualitypresentation of financing receivables and the allowance for credit losses.comprehensive income. The objective of this amendment was to improve the amendment iscomparability, consistency and transparency of financial reporting and to provide a greater levelincrease the prominence of disaggregated information about the credit quality of financing receivables, the allowance for credit losses, and timely recognition of such losses.items reported in other comprehensive income. Specifically, thethis amendment requires an entity to disclose credit quality indicators, past due informationthat all non-owner changes in shareholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, the standard also requires disclosure of the location of reclassification adjustments between other comprehensive income and modificationsnet income on the face of its financing receivables.the financial statements. The new rules arebecame effective for us beginning January 1, 2012. In December 31, 2010. Our level2011, the FASB deferred certain aspects of receivables that qualify as financing receivables, as defined bythis standard beyond the current effective date, specifically the provisions dealing with reclassification adjustments. Because the standard areonly impacts the display of comprehensive income and does not material for disclosure.impact what is included in comprehensive income, the standard did not have a significant impact on ourConsolidated Financial Statements.
In January 2010,May 2011, the FASB amended its standards related to fair value measurements and disclosures, which are effective for interim and annual fiscal periods beginning after December 15, 2009, except for disclosures about certain Level 3 activity which will not become effective until interim and annual periods beginning after December 15, 2010.disclosures. The new standard requires usobjective of the amendment was to disclose transfers in and outimprove the comparability of Level 1 and Level 2 fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards. Primarily this amendment changed the wording used to describe many of the reasonsrequirements in U.S. GAAP for the transfers as well as activity in Level 3measuring fair value measurements.and for disclosing information about fair value measurements in addition to clarifying the Board's intent about the application of existing fair value measurement requirements. The new standard also requires a more detailed level of disaggregation of the assets and liabilities being measured as well as increasedadditional disclosures regarding inputs and valuation techniquesrelated to fair value measurements categorized within Level 3 of the fair value measurements.hierarchy and requires disclosure of the categorization in the hierarchy for items which are not recorded at fair value but fair value is required to be disclosed. The new rules were effective for us beginning January 1, 2012. As of December 31, 2012, we had no fair value measurements categorized within Level 3 outside of our pension plans. The only impact for us is the disclosure of the categorization in the fair value hierarchy for those items where fair value is only disclosed (primarily our debt
obligations). Our disclosuresdisclosure related to the new standard areis included in Note 4,6, "FAIR VALUE OF FINANCIAL INSTRUMENTS," to theConsolidated Financial Statements.
In June 2009, the FASB amended its standards for accounting for transfers of financial assets, which was effective for interim and annual fiscal periods beginning after November 15, 2009. The new standard removes the concept of a qualifying special-purpose entity from GAAP. The new standard modifies the financial components approach used in previous standards and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized. The new standard also requires enhanced disclosure regarding transfers of financial interests and a transferor's continuing involvement with transferred assets. The new standard requires us to report any activity under our receivable sales program as secured borrowings. As of December 31, 2010, there were no outstanding amounts under our receivable sales program and there was no significant activity during the year.
In June 2009, the FASB amended its existing standards related to the consolidation of variable interest entities, which was effective for interim and annual fiscal periods beginning after November 15, 2009. The new standard requires entities to analyze whether their variable interests give it a controlling financial interest of a variable interest entity (VIE) and outlines what defines a primary beneficiary. The new standard amends GAAP by: (a) changing certain rules for determining whether an entity is a VIE; (b) replacing the quantitative approach previously required for determining the primary beneficiary with a more qualitative approach; and (c) requiring entities to continuously analyze whether they are the primary beneficiary of a VIE among other amendments. The new standard also requires enhanced disclosures regarding an entity's involvement in a VIE. The only significant impact of the adoption of this standard was to deconsolidate Cummins Komatsu Engine Corporation (CKEC) as of January 1, 2010 and to account for CKEC under GAAP for equity method investees. CKEC is an engine manufacturing entity jointly owned and operated by us and our equity partner. Prior to January 1, 2010, we were deemed the primary beneficiary of this VIE due to the pricing arrangements of purchases and the substantial volume of purchases we made from the VIE. The impact of the deconsolidation on ourConsolidated Statements of Income was minimal as all sales were eliminated in consolidation in the past. The most significant impacts on ourConsolidated Balance Sheets were to decrease current assets by $9 million, decrease long-term assets by $10 million, increase investments and advances related to equity method investees by $11 million and decrease noncontrolling interest by $11 million.
Accounting Pronouncements Issued But Not Yet Effective
In October 2009,December 2011, the FASB amended its rules regardingstandards related to offsetting assets and liabilities. This amendment requires entities to disclose both gross and net information about certain instruments and transactions eligible for offset in the accounting for multiple element revenue arrangements. The objectivestatement of financial position and certain instruments and transactions subject to an agreement similar to a master netting agreement. This information will enable users of the amendment isfinancial statements to allow vendors to account for revenue for different deliverables separately as opposed to partunderstand the effect of a combined unit when those deliverables are provided at different times. Specifically, this amendment addresses how to separate deliverables and simplifies the process of allocating revenue to the different deliverables when more than one deliverable exists.arrangements on its financial position. The new rules arewill become effective for usannual reporting periods beginning on or after January 1, 2011.2013, and interim periods within those annual periods. It is also required that the new disclosures are applied for all comparative periods presented. In January 2013, the FASB further amended this standard to limit its scope to derivatives, repurchase and reverse repurchase agreements, securities borrowings and lending transactions. We do not believe this amendment will have a significant impacteffect on ourConsolidated Financial Statements. While we are still finalizing our analysis, due to the scope limitation we also do not expect any significant changes to our footnote disclosures.
In February 2013, the FASB amended its standards on comprehensive income by requiring disclosure in the footnotes of information about amounts reclassified out of accumulated other comprehensive income by component. Specifically, the amendment will require disclosure of the line items of net income in which the item was reclassified only if it is reclassified to net income in its entirety in the same reporting period. It will also require cross reference to other disclosures for amounts that are not reclassified in their entirety in the same reporting period. The new disclosures will be required for us prospectively only for annual periods beginning January 1, 2013 and interim periods within those annual periods.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial risk resulting from volatility in foreign exchange rates, commodity prices and interest rates. This risk is closely monitored and managed through the use of financial derivative instruments including foreign currency forward contracts, commodity swap contracts, commodity zero-cost collars and interest rate swaps. As stated in our policies and procedures, financial derivatives are used expressly for hedging purposes, and under no circumstances are they used for speculative purposes. When material, we adjust the value of our derivative contracts for counter-party or our credit risk. The results and status of our hedging transactions are reported to senior management on a monthly and quarterly basis.
Further information regarding financial instruments and risk management is contained in Note 19,21, "DERIVATIVES," to ourConsolidated Financial Statements.
The following describes our risk exposures and provides results of sensitivity analysis performed as of December 31, 2010.2012. The sensitivity analysis assumes instantaneous, parallel shifts in foreign currency exchange rates and commodity prices.
As a result of our international business presence, we are exposed to foreign currency exchange risks. We transact business in foreign currencies and, as a result, our income experiences some volatility related to movements in foreign currency exchange rates. To help manage our exposure to exchange rate volatility, we use foreign exchange forward contracts on a regular basis to hedge forecasted intercompany and third-party sales and purchases denominated in non-functional currencies. Our internal policy allows for managing anticipated foreign currency cash flows for up to one year. These foreign currency forward contracts are designated and qualify as foreign currency cash flow hedges under GAAP. The effective portion of the unrealized gain or loss on the forward contract is deferred
and reported as a component of "Accumulated other comprehensive loss" (AOCL). When the hedged forecasted transaction (sale or purchase) occurs, the unrealized gain or loss is reclassified into income in the same line item associated with the hedged transaction in the same period or periods during which the hedged transaction affects income. The ineffective portion of the hedge, unrealized gain or loss, if any, is recognized in current income during the period of change. As of December 31, 2010,2012, the amount we expect to reclassify from AOCL to income over the next year is aan unrealized net unrealized lossgain of $1 million. For the years ended December 31, 20102012 and 2009,2011, there were no circumstances that would have resulted in the discontinuance of a foreign currency cash flow hedge.
To minimize the income volatility resulting from the remeasurement of net monetary assets and payables denominated in a currency other than the functional currency, we enter into foreign currency forward contracts, which are considered economic hedges. The objective is to offset the gain or loss from remeasurement with the gain or loss from the fair market valuation of the forward contract. These derivative instruments are not designated as hedges under GAAP.
As of December 31, 2010,2012, the potential gain or loss in the fair value of our outstanding foreign currency contracts, assuming a hypothetical 10 percent fluctuation in the currencies of such contracts,
would be approximately $52$45 million. The sensitivity analysis of the effects of changes in foreign currency exchange rates assumes the notional value to remain constant for the next 12 months. The analysis ignores the impact of foreign exchange movements on our competitive position and potential changes in sales levels. It should be noted that any change in the value of the contracts, real or hypothetical, would be significantly offset by an inverse change in the value of the underlying hedged items (see Note 19,21, "DERIVATIVES," to ourConsolidated Financial Statements).
We are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through the use of interest rate swaps. The objective of the swaps is to more effectively balance our borrowing costs and interest rate risk.
In November 2005, we entered into an interest rate swap to effectively convert our $250 million debt issue, due in 2028, from a fixed rate of 7.125%7.125 percent to a floating rate based on a LIBOR spread. The terms of the swap mirror those of the debt, with interest paid semi-annually. This swap qualifies as a fair value hedge under GAAP. The gain or loss on this derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current income as "Interest expense." The following table summarizes these gains and losses for the years presented below:
| For the years ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2009 | |||||||||||
In millions | Gain/(Loss) on Swaps | Gain/(Loss) on Borrowings | Gain/(Loss) on Swaps | Gain/(Loss) on Borrowings | |||||||||
Income Statement Classification | |||||||||||||
Interest expense | $ | 16 | $ | (16 | ) | $ | (54 | ) | $ | 54 |
| For the years ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | |||||||||||
In millions Income Statement Classification | Gain/(Loss) on Swaps | Gain/(Loss) on Borrowings | Gain/(Loss) on Swaps | Gain/(Loss) on Borrowings | |||||||||
Interest expense | $ | 6 | $ | (6 | ) | $ | 41 | $ | (41 | ) |
We are exposed to fluctuations in commodity prices due to contractual agreements with component suppliers. In order to protect ourselves against future price volatility and, consequently, fluctuations in gross margins, we periodically enter into commodity swap contracts with designated banks to fix the cost of certain raw material purchases with the objective of minimizing changes in inventory cost due to market price fluctuations. TheCertain commodity swap contracts are derivative contracts that are designated as cash flow hedges under GAAP. TheWe also have commodity swap contracts that represent an economic hedge but are not designated for hedge accounting and are marked to market through earnings. For those contracts that qualify for hedge accounting, the effective
portion of the unrealized gain or loss is deferred and reported as a component of AOCL. When the hedged forecasted transaction (purchase) occurs, the unrealized gain or loss is reclassified into income in the same line item associated with the hedged transaction in the same period or periods during which the hedged transaction affects income. The ineffective portion of the hedge, if any, is recognized in current income in the period in which the ineffectiveness occurs. As of December 31, 2010,2012, we expect to reclassify an unrealized net gainloss of $15less than $1 million from AOCL to income over the next year. For the year ended December 31, 2010, there were no material circumstances that would have resulted in the discontinuance of a cash flow hedge. For the year ended December 31, 2009, we discontinued hedge accounting on certain contracts where the forecasted transactions were no longer probable. The amount reclassified to income as a result of this action was a loss of $4 million. Our internal policy allows for managing these cash flow hedges for up to three years.
As of December 31, 2010,2012, the potential gain or loss related to the outstanding commodity swap contracts, assuming a hypothetical 10 percent fluctuation in the price of such commodities, was $8$11 million. The sensitivity analysis of the effects of changes in commodity prices assumes the notional value to remain constant for the next 12 months. The analysis ignores the impact of commodity price movements on our competitive position and potential changes in sales levels. It should be noted that any change in the value of the swap contracts, real or hypothetical, would be significantly offset by an inverse change in the value of the underlying hedged items (see Note 19,21, "DERIVATIVES," to theConsolidated Financial Statements).
ITEM 8. Financial Statements and Supplementary Data
Index to Financial Statements
NOTE 1 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
NOTE 2 | ACQUISITIONS AND DIVESTITURES | |
NOTE 3 | INVESTMENTS IN EQUITY INVESTEES | |
NOTE | INCOME TAXES | |
NOTE 5 | MARKETABLE SECURITIES | |
NOTE | FAIR VALUE OF FINANCIAL INSTRUMENTS | |
NOTE | INVENTORIES | |
NOTE | ||
| PROPERTY, PLANT AND EQUIPMENT | |
NOTE | GOODWILL AND OTHER INTANGIBLE ASSETS | |
NOTE | DEBT | |
NOTE | PRODUCT WARRANTY LIABILITY | |
NOTE | PENSION AND OTHER POSTRETIREMENT BENEFITS | |
NOTE | OTHER LIABILITIES AND DEFERRED REVENUE | |
NOTE | COMMITMENTS AND CONTINGENCIES | |
NOTE | ||
NOTE | OTHER COMPREHENSIVE INCOME (LOSS) | |
NOTE | STOCK INCENTIVE AND STOCK OPTION PLANS | |
NOTE | NONCONTROLLING INTERESTS | |
| ||
NOTE 19 | ||
| ||
| ||
| RESTRUCTURING AND OTHER CHARGES | |
NOTE | ||
NOTE | ||
NOTE | OPERATING SEGMENTS | |
|
MANAGEMENT'S REPORT TO SHAREHOLDERS
Management's Report on Financial Statements and Practices
The accompanyingConsolidated Financial Statements of our CompanyCummins Inc. were prepared by management, which is responsible for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles and include amounts that are based on management's best judgments and estimates. The other financial information included in the annual report is consistent with that in the financial statements.
Management also recognizes its responsibility for conducting our affairs according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in key policy statements issued from time to time regarding, among other things, conduct of its business activities within the laws of the host countries in which we operate, within The Foreign Corrupt Practices Act and potentially conflicting interests of its employees. We maintain a systematic program to assess compliance with these policies.
To comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we designed and implemented a structured and comprehensive compliance process to evaluate our internal control over financial reporting across the enterprise.
Management's Report on Internal Control Over Financial Reporting
ManagementThe management of Cummins Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internalInternal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of the Company'sourConsolidated Financial Statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Management assessed the effectiveness of our internal control over financial reporting and concluded it was effective as of December 31, 2010.2012. In making its assessment, management utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework.
The effectiveness of the Company'sour internal control over financial reporting as of December 31, 2010,2012, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Please refer to Exhibits 31(a) and 31(b) attached to this report for certifications required under Section 302 of the Sarbanes-Oxley Act of 2002.
/s/ Chairman and Chief Executive Officer | /s/ PATRICK J. WARD Vice President and Chief Financial Officer |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Cummins Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Cummins Inc. and its subsidiaries at December 31, 20102012 and 2009,2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20102012 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010,2012, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying "Management's Report on Internal Control overOver Financial Reporting." Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Indianapolis, Indiana
February 24, 201120, 2013
CUMMINS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In millions, except per share amounts | 2012 | 2011 | 2010 | |||||||
NET SALES(a) | $ | 17,334 | $ | 18,048 | $ | 13,226 | ||||
Cost of sales | 12,826 | 13,459 | 10,058 | |||||||
GROSS MARGIN | 4,508 | 4,589 | 3,168 | |||||||
OPERATING EXPENSES AND INCOME | ||||||||||
Selling, general and administrative expenses | 1,900 | 1,837 | 1,487 | |||||||
Research, development and engineering expenses (Note 1) | 728 | 629 | 414 | |||||||
Equity, royalty and interest income from investees (Note 3) | 384 | 416 | 351 | |||||||
Gain on sale of businesses (Note 2) | 6 | 121 | — | |||||||
Other operating income (expense), net | (16 | ) | 21 | (16 | ) | |||||
OPERATING INCOME | 2,254 | 2,681 | 1,602 | |||||||
Interest income | 25 | 34 | 21 | |||||||
Interest expense (Note 10) | 32 | 44 | 40 | |||||||
Other income (expense), net | 24 | — | 34 | |||||||
INCOME BEFORE INCOME TAXES | 2,271 | 2,671 | 1,617 | |||||||
Income tax expense (Note 4) | 533 | 725 | 477 | |||||||
CONSOLIDATED NET INCOME | 1,738 | 1,946 | 1,140 | |||||||
Less: Net income attributable to noncontrolling interests | 93 | 98 | 100 | |||||||
NET INCOME ATTRIBUTABLE TO CUMMINS INC. | $ | 1,645 | $ | 1,848 | $ | 1,040 | ||||
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. (Note 20) | ||||||||||
Basic | $ | 8.69 | $ | 9.58 | $ | 5.29 | ||||
Diluted | $ | 8.67 | $ | 9.55 | $ | 5.28 |
| Years ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
In millions, except per share amounts | 2010 | 2009 | 2008 | ||||||||
NET SALES(a) | $ | 13,226 | $ | 10,800 | $ | 14,342 | |||||
Cost of sales | 10,058 | 8,631 | 11,402 | ||||||||
GROSS MARGIN | 3,168 | 2,169 | 2,940 | ||||||||
OPERATING EXPENSES AND INCOME | |||||||||||
Selling, general and administrative expenses | 1,487 | 1,239 | 1,450 | ||||||||
Research, development and engineering expenses | 414 | 362 | 422 | ||||||||
Equity, royalty and interest income from investees (Note 2) | 351 | 214 | 253 | ||||||||
Restructuring and other charges (Note 22) | — | 99 | 37 | ||||||||
Other operating (expense) income, net | (16 | ) | (1 | ) | (12 | ) | |||||
OPERATING INCOME | 1,602 | 682 | 1,272 | ||||||||
Interest income | 21 | 8 | 18 | ||||||||
Interest expense (Note 9) | 40 | 35 | 42 | ||||||||
Other income (expense), net (Note 20) | 34 | (15 | ) | (70 | ) | ||||||
INCOME BEFORE INCOME TAXES | 1,617 | 640 | 1,178 | ||||||||
Income tax expense (Note 6) | 477 | 156 | 360 | ||||||||
CONSOLIDATED NET INCOME | 1,140 | 484 | 818 | ||||||||
Less: Net income attributable to noncontrolling interests | 100 | 56 | 63 | ||||||||
NET INCOME ATTRIBUTABLE TO CUMMINS INC. | $ | 1,040 | $ | 428 | $ | 755 | |||||
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. (Note 18) | |||||||||||
Basic | $ | 5.29 | $ | 2.17 | $ | 3.87 | |||||
Diluted | $ | 5.28 | $ | 2.16 | $ | 3.84 |
The accompanying notes are an integral part of our Consolidated Financial StatementsStatements.
CUMMINS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In millions | 2012 | 2011 | 2010 | |||||||
CONSOLIDATED NET INCOME | $ | 1,738 | $ | 1,946 | $ | 1,140 | ||||
Other comprehensive income (loss), net of tax | ||||||||||
Foreign currency translation adjustments | 29 | (147 | ) | 37 | ||||||
Change in pension and other postretirement defined benefit plans (Note 12) | (70 | ) | (78 | ) | 142 | |||||
Unrealized gain (loss) on derivatives (Note 21) | 20 | (32 | ) | 4 | ||||||
Unrealized gain (loss) on marketable securities (Note 5) | 2 | 1 | 4 | |||||||
Total other comprehensive income (loss), net of tax | (19 | ) | (256 | ) | 187 | |||||
COMPREHENSIVE INCOME | 1,719 | 1,690 | 1,327 | |||||||
Less: Comprehensive income attributable to noncontrolling interest | 86 | 60 | 112 | |||||||
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC. | $ | 1,633 | $ | 1,630 | $ | 1,215 | ||||
The accompanying notes are an integral part of our Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | December 31, | December 31, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions, except par value | In millions, except par value | 2010 | 2009 | 2012 | 2011 | ||||||||||||||
ASSETS | ASSETS | ||||||||||||||||||
Current assets | Current assets | ||||||||||||||||||
Cash and cash equivalents | $ | 1,369 | $ | 1,484 | |||||||||||||||
Marketable securities (Note 5) | 247 | 277 | |||||||||||||||||
Cash and cash equivalents | $ | 1,023 | $ | 930 | |||||||||||||||
Total cash, cash equivalents and marketable securities | 1,616 | 1,761 | |||||||||||||||||
Accounts and notes receivable, net | |||||||||||||||||||
Trade and other | 2,235 | 2,252 | |||||||||||||||||
Nonconsolidated equity investees | 240 | 274 | |||||||||||||||||
Inventories (Note 7) | 2,221 | 2,141 | |||||||||||||||||
Prepaid expenses and other current assets | 855 | 663 | |||||||||||||||||
Marketable securities (Note 3) | 339 | 190 | |||||||||||||||||
Accounts and notes receivable, net | |||||||||||||||||||
Trade and other | 1,935 | 1,730 | |||||||||||||||||
Nonconsolidated equity investees | 308 | 274 | |||||||||||||||||
Inventories (Note 5) | 1,977 | 1,341 | |||||||||||||||||
Deferred income taxes (Note 6) | 314 | 244 | |||||||||||||||||
Prepaid expenses and other current assets | 393 | 294 | |||||||||||||||||
Total current assets | 6,289 | 5,003 | |||||||||||||||||
Total current assets | 7,167 | 7,091 | |||||||||||||||||
Long-term assets | Long-term assets | ||||||||||||||||||
Property, plant and equipment, net (Note 8) | 2,724 | 2,288 | |||||||||||||||||
Investments and advances related to equity method investees (Note 3) | 897 | 838 | |||||||||||||||||
Goodwill (Note 9) | 445 | 339 | |||||||||||||||||
Other intangible assets, net (Note 9) | 369 | 227 | |||||||||||||||||
Other assets | 946 | 885 | |||||||||||||||||
Property, plant and equipment, net (Note 7) | 2,041 | 1,886 | |||||||||||||||||
Investments and advances related to equity method investees (Note 2) | 734 | 574 | |||||||||||||||||
Goodwill (Note 8) | 367 | 364 | |||||||||||||||||
Other intangible assets, net (Note 8) | 222 | 228 | |||||||||||||||||
Deferred income taxes (Note 6) | 203 | 436 | |||||||||||||||||
Other assets | 546 | 325 | |||||||||||||||||
Total assets | $ | 10,402 | $ | 8,816 | |||||||||||||||
Total assets | $ | 12,548 | $ | 11,668 | |||||||||||||||
LIABILITIES | LIABILITIES | ||||||||||||||||||
Current liabilities | Current liabilities | ||||||||||||||||||
Loans payable (Note 10) | $ | 16 | $ | 28 | |||||||||||||||
Accounts payable (principally trade) | 1,339 | 1,546 | |||||||||||||||||
Current maturities of long-term debt (Note 10) | 61 | 97 | |||||||||||||||||
Current portion of accrued product warranty (Note 11) | 386 | 422 | |||||||||||||||||
Accrued compensation, benefits and retirement costs | 400 | 511 | |||||||||||||||||
Deferred revenue | 215 | 208 | |||||||||||||||||
Taxes payable (including taxes on income) | 173 | 282 | |||||||||||||||||
Other accrued expenses | 546 | 563 | |||||||||||||||||
Loans payable (Note 9) | $ | 82 | $ | 37 | |||||||||||||||
Accounts payable (principally trade) | 1,362 | 957 | |||||||||||||||||
Current portion of accrued product warranty (Note 10) | 421 | 426 | |||||||||||||||||
Accrued compensation, benefits and retirement costs | 468 | 366 | |||||||||||||||||
Deferred revenue | 182 | 128 | |||||||||||||||||
Taxes payable (including taxes on income) | 202 | 94 | |||||||||||||||||
Other accrued expenses | 543 | 424 | |||||||||||||||||
Total current liabilities | 3,260 | 2,432 | |||||||||||||||||
Total current liabilities | 3,136 | 3,657 | |||||||||||||||||
Long-term liabilities | Long-term liabilities | ||||||||||||||||||
Long-term debt (Note 10) | 698 | 658 | |||||||||||||||||
Postretirement benefits other than pensions (Note 12) | 432 | 432 | |||||||||||||||||
Other liabilities and deferred revenue (Note 13) | 1,308 | 1,090 | |||||||||||||||||
Long-term debt (Note 9) | 709 | 637 | |||||||||||||||||
Total liabilities | 5,574 | 5,837 | |||||||||||||||||
Pensions (Note 11) | 195 | 514 | |||||||||||||||||
Commitments and contingencies (Note 14) | — | — | |||||||||||||||||
EQUITY | |||||||||||||||||||
Cummins Inc. shareholders' equity (Note 15) | |||||||||||||||||||
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.2 shares issued | 2,058 | 2,001 | |||||||||||||||||
Retained earnings | 7,343 | 6,038 | |||||||||||||||||
Treasury stock, at cost, 32.6 and 30.2 shares | (1,830 | ) | (1,587 | ) | |||||||||||||||
Common stock held by employee benefits trust, at cost, 1.5 and 1.8 shares | (18 | ) | (22 | ) | |||||||||||||||
Accumulated other comprehensive loss | |||||||||||||||||||
Defined benefit postretirement plans | (794 | ) | (724 | ) | |||||||||||||||
Other | (156 | ) | (214 | ) | |||||||||||||||
Postretirement benefits other than pensions (Note 11) | 439 | 453 | |||||||||||||||||
Total accumulated other comprehensive loss | (950 | ) | (938 | ) | |||||||||||||||
Other liabilities and deferred revenue (Note 12) | 803 | 760 | |||||||||||||||||
Total Cummins Inc. shareholders' equity | 6,603 | 5,492 | |||||||||||||||||
Noncontrolling interests (Note 18) | 371 | 339 | |||||||||||||||||
Total liabilities | 5,406 | 4,796 | |||||||||||||||||
Commitments and contingencies (Note 13) | — | — | |||||||||||||||||
EQUITY | |||||||||||||||||||
Cummins Inc. shareholders' equity (Note 14) | |||||||||||||||||||
Common stock, $2.50 par value, 500 shares authorized, 221.8 and 222.0 shares issued | 1,934 | 1,860 | |||||||||||||||||
Retained earnings | 4,445 | 3,575 | |||||||||||||||||
Treasury stock, at cost, 24.0 and 20.7 shares | (964 | ) | (731 | ) | |||||||||||||||
Common stock held by employee benefits trust, at cost, 2.1 and 3.0 shares | (25 | ) | (36 | ) | |||||||||||||||
Accumulated other comprehensive loss | |||||||||||||||||||
Defined benefit postretirement plans | (646 | ) | (788 | ) | |||||||||||||||
Other | (74 | ) | (107 | ) | |||||||||||||||
Total accumulated other comprehensive loss | (720 | ) | (895 | ) | |||||||||||||||
Total Cummins Inc. shareholders' equity | 4,670 | 3,773 | |||||||||||||||||
Noncontrolling interests (Note 17) | 326 | 247 | |||||||||||||||||
Total equity | 4,996 | 4,020 | |||||||||||||||||
Total equity | 6,974 | 5,831 | |||||||||||||||||
Total liabilities and equity | Total liabilities and equity | $ | 10,402 | $ | 8,816 | $ | 12,548 | $ | 11,668 | ||||||||||
The accompanying notes are an integral part of our Consolidated Financial StatementsStatements..
CUMMINS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | Years ended December 31, | Years ended December 31, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | In millions | 2010 | 2009 | 2008 | 2012 | 2011 | 2010 | |||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||||||||||||
Consolidated net income | $ | 1,140 | $ | 484 | $ | 818 | ||||||||||||||||
Adjustments to reconcile consolidated net income to net cash provided by operating activities: | ||||||||||||||||||||||
Restructuring and other charges, net of cash payments (Note 22) | — | 16 | 34 | |||||||||||||||||||
Depreciation and amortization | 320 | 326 | 314 | |||||||||||||||||||
(Gain) loss on investments | (18 | ) | — | 45 | ||||||||||||||||||
Gain on fair value adjustment for consolidated investee (Note 21) | (12 | ) | — | — | ||||||||||||||||||
Deferred income taxes (Note 6) | 56 | 5 | (1 | ) | ||||||||||||||||||
Equity in income of investees, net of dividends | (147 | ) | 23 | (45 | ) | |||||||||||||||||
Pension contributions in excess of expense (Note 11) | (151 | ) | (36 | ) | (31 | ) | ||||||||||||||||
Other post-retirement benefits payments in excess of expense (Note 11) | (35 | ) | (24 | ) | (35 | ) | ||||||||||||||||
Stock-based compensation expense (Note 16) | 22 | 20 | 28 | |||||||||||||||||||
Excess tax (benefits) deficiencies on stock based awards | (10 | ) | 1 | (13 | ) | |||||||||||||||||
Translation and hedging activities | 13 | 41 | (10 | ) | ||||||||||||||||||
Changes in current assets and liabilities, net of acquisitions and dispositions: (Note 1) | (245 | ) | 127 | (267 | ) | |||||||||||||||||
Changes in other liabilities and deferred revenue | 133 | 155 | 109 | |||||||||||||||||||
Other, net | (60 | ) | (1 | ) | 41 | |||||||||||||||||
Consolidated net income | $ | 1,738 | $ | 1,946 | $ | 1,140 | ||||||||||||||||
Adjustments to reconcile consolidated net income to net cash provided by operating activities | ||||||||||||||||||||||
Restructuring and other charges, net of cash payments (Note 19) | 27 | — | — | |||||||||||||||||||
Depreciation and amortization | 361 | 325 | 320 | |||||||||||||||||||
Gain on sale of businesses (Note 2) | (6 | ) | (121 | ) | — | |||||||||||||||||
Gain on sale of equity investment | (13 | ) | — | — | ||||||||||||||||||
Gain on fair value adjustment for consolidated investee (Note 2) | (7 | ) | — | (12 | ) | |||||||||||||||||
Deferred income taxes (Note 4) | 116 | 85 | 56 | |||||||||||||||||||
Equity in income of investees, net of dividends | (15 | ) | (23 | ) | (147 | ) | ||||||||||||||||
Pension contributions in excess of expense (Note 12) | (68 | ) | (131 | ) | (151 | ) | ||||||||||||||||
Other post-retirement benefits payments in excess of expense (Note 12) | (21 | ) | (31 | ) | (35 | ) | ||||||||||||||||
Stock-based compensation expense | 36 | 42 | 22 | |||||||||||||||||||
Excess tax benefits on stock-based awards | (14 | ) | (5 | ) | (10 | ) | ||||||||||||||||
Translation and hedging activities | — | 4 | 13 | |||||||||||||||||||
Changes in current assets and liabilities, net of acquisitions and divestitures (Note 1) | (775 | ) | (154 | ) | (245 | ) | ||||||||||||||||
Changes in other liabilities and deferred revenue | 214 | 139 | 133 | |||||||||||||||||||
Other, net | (41 | ) | (3 | ) | (78 | ) | ||||||||||||||||
Net cash provided by operating activities | Net cash provided by operating activities | 1,006 | 1,137 | 987 | 1,532 | 2,073 | 1,006 | |||||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||||||||||||
Capital expenditures | (364 | ) | (310 | ) | (543 | ) | ||||||||||||||||
Investments in internal use software | (43 | ) | (35 | ) | (82 | ) | ||||||||||||||||
Proceeds from disposals of property, plant and equipment | 55 | 10 | 29 | |||||||||||||||||||
Investments in and advances to equity investees | (2 | ) | (3 | ) | (89 | ) | ||||||||||||||||
Acquisition of businesses, net of cash acquired (Note 21) | (104 | ) | (2 | ) | (142 | ) | ||||||||||||||||
Proceeds from the sale of businesses (Note 21) | — | — | 64 | |||||||||||||||||||
Investments in marketable securities-acquisitions (Note 3) | (823 | ) | (431 | ) | (390 | ) | ||||||||||||||||
Investments in marketable securities-liquidations (Note 3) | 690 | 335 | 409 | |||||||||||||||||||
Purchases of other investments | (62 | ) | (62 | ) | (62 | ) | ||||||||||||||||
Cash flows from derivatives not designated as hedges | 2 | (18 | ) | (53 | ) | |||||||||||||||||
Other, net | — | 7 | 11 | |||||||||||||||||||
Capital expenditures | (690 | ) | (622 | ) | (364 | ) | ||||||||||||||||
Investments in internal use software | (87 | ) | (60 | ) | (43 | ) | ||||||||||||||||
Proceeds from disposals of property, plant and equipment | 11 | 8 | 55 | |||||||||||||||||||
Investments in and advances to equity investees | (70 | ) | (81 | ) | (2 | ) | ||||||||||||||||
Acquisition of businesses, net of cash acquired (Note 2) | (215 | ) | — | (104 | ) | |||||||||||||||||
Proceeds from sale of businesses, net of cash sold (Note 2) | 10 | 199 | — | |||||||||||||||||||
Investments in marketable securities-acquisitions (Note 5) | (561 | ) | (729 | ) | (823 | ) | ||||||||||||||||
Investments in marketable securities-liquidations (Note 5) | 585 | 750 | 690 | |||||||||||||||||||
Proceeds from sale of equity investment | 23 | — | — | |||||||||||||||||||
Purchases of other investments | — | — | (62 | ) | ||||||||||||||||||
Cash flows from derivatives not designated as hedges | 12 | (18 | ) | 2 | ||||||||||||||||||
Other, net | — | 1 | — | |||||||||||||||||||
Net cash used in investing activities | Net cash used in investing activities | (651 | ) | (509 | ) | (848 | ) | (982 | ) | (552 | ) | (651 | ) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||||||||||||
Proceeds from borrowings | 214 | 76 | 76 | |||||||||||||||||||
Payments on borrowings and capital lease obligations | (143 | ) | (97 | ) | (152 | ) | ||||||||||||||||
Net borrowings (payments) under short-term credit agreements | 9 | (2 | ) | 33 | ||||||||||||||||||
Distributions to noncontrolling interests | (28 | ) | (34 | ) | (24 | ) | ||||||||||||||||
Dividend payments on common stock (Note 14) | (172 | ) | (141 | ) | (122 | ) | ||||||||||||||||
Proceeds from sale of common stock held by employee benefit trust (Note 14) | 58 | 72 | 63 | |||||||||||||||||||
Repurchases of common stock (Note 14) | (241 | ) | (20 | ) | (128 | ) | ||||||||||||||||
Excess tax benefits (deficiencies) on stock-based awards | 10 | (1 | ) | 13 | ||||||||||||||||||
Other, net | 26 | 6 | 4 | |||||||||||||||||||
Proceeds from borrowings | 64 | 127 | 214 | |||||||||||||||||||
Payments on borrowings and capital lease obligations | (145 | ) | (237 | ) | (143 | ) | ||||||||||||||||
Net borrowings under short-term credit agreements | 11 | 6 | 9 | |||||||||||||||||||
Distributions to noncontrolling interests | (62 | ) | (56 | ) | (28 | ) | ||||||||||||||||
Dividend payments on common stock (Note 15) | (340 | ) | (255 | ) | (172 | ) | ||||||||||||||||
Repurchases of common stock (Note 15) | (256 | ) | (629 | ) | (241 | ) | ||||||||||||||||
Proceeds from sale of common stock held by employee benefit trust (Note 15) | — | — | 58 | |||||||||||||||||||
Excess tax benefits on stock-based awards | 14 | 5 | 10 | |||||||||||||||||||
Other, net | 20 | 14 | 26 | |||||||||||||||||||
Net cash used in financing activities | Net cash used in financing activities | (267 | ) | (141 | ) | (237 | ) | (694 | ) | (1,025 | ) | (267 | ) | |||||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | 5 | 17 | (53 | ) | 29 | (35 | ) | 5 | |||||||||||||
Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | 93 | 504 | (151 | ) | (115 | ) | 461 | 93 | |||||||||||||
Cash and cash equivalents at beginning of year | Cash and cash equivalents at beginning of year | 930 | 426 | 577 | 1,484 | 1,023 | 930 | |||||||||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 1,023 | $ | 930 | $ | 426 | $ | 1,369 | $ | 1,484 | $ | 1,023 | |||||||||
The accompanying notes are an integral part of our Consolidated Financial StatementsStatements..
CUMMINS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
In millions | Common Stock | Additional paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Common Stock Held in Trust | Unearned Compensation | Total Cummins Inc. Shareholders' Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
BALANCE AT DECEMBER 31, 2009 | $ | 555 | $ | 1,306 | $ | 3,575 | $ | (895 | ) | $ | (731 | ) | $ | (36 | ) | $ | (1 | ) | $ | 3,773 | $ | 247 | $ | 4,020 | |||||||
Net income | 1,040 | 1,040 | 100 | 1,140 | |||||||||||||||||||||||||||
Other comprehensive income (loss) | 175 | 175 | 12 | 187 | |||||||||||||||||||||||||||
Issuance of shares | 7 | 7 | — | 7 | |||||||||||||||||||||||||||
Employee benefits trust activity | 68 | 11 | 79 | — | 79 | ||||||||||||||||||||||||||
Acquisition of shares | (241 | ) | (241 | ) | — | (241 | ) | ||||||||||||||||||||||||
Cash dividends on common stock | (172 | ) | (172 | ) | — | (172 | ) | ||||||||||||||||||||||||
Distribution to noncontrolling interests | — | (29 | ) | (29 | ) | ||||||||||||||||||||||||||
Stock option exercises | 8 | 8 | — | 8 | |||||||||||||||||||||||||||
Deconsolidation of variable interest entity (Note 3) | — | (11 | ) | (11 | ) | ||||||||||||||||||||||||||
Other shareholder transactions | (1 | ) | (1 | ) | 2 | 1 | 1 | 7 | 8 | ||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2010 | $ | 554 | $ | 1,380 | $ | 4,445 | $ | (720 | ) | $ | (964 | ) | $ | (25 | ) | $ | — | $ | 4,670 | $ | 326 | $ | 4,996 | ||||||||
Net income | 1,848 | 1,848 | 98 | 1,946 | |||||||||||||||||||||||||||
Other comprehensive income (loss) | (218 | ) | (218 | ) | (38 | ) | (256 | ) | |||||||||||||||||||||||
Issuance of shares | 1 | 13 | 14 | — | 14 | ||||||||||||||||||||||||||
Employee benefits trust activity | 25 | 3 | 28 | — | 28 | ||||||||||||||||||||||||||
Acquisition of shares | (629 | ) | (629 | ) | — | (629 | ) | ||||||||||||||||||||||||
Cash dividends on common stock | (255 | ) | (255 | ) | — | (255 | ) | ||||||||||||||||||||||||
Distribution to noncontrolling interests | — | (56 | ) | (56 | ) | ||||||||||||||||||||||||||
Stock option exercises | 6 | 6 | — | 6 | |||||||||||||||||||||||||||
Other shareholder transactions | 28 | 28 | 9 | 37 | |||||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2011 | $ | 555 | $ | 1,446 | $ | 6,038 | $ | (938 | ) | $ | (1,587 | ) | $ | (22 | ) | $ | — | $ | 5,492 | $ | 339 | $ | 5,831 | ||||||||
Net income | 1,645 | 1,645 | 93 | 1,738 | |||||||||||||||||||||||||||
Other comprehensive income (loss) | (12 | ) | (12 | ) | (7 | ) | (19 | ) | |||||||||||||||||||||||
Issuance of shares | 1 | 6 | 7 | — | 7 | ||||||||||||||||||||||||||
Employee benefits trust activity | 27 | 4 | 31 | — | 31 | ||||||||||||||||||||||||||
Acquisition of shares | (256 | ) | (256 | ) | — | (256 | ) | ||||||||||||||||||||||||
Cash dividends on common stock | (340 | ) | (340 | ) | — | (340 | ) | ||||||||||||||||||||||||
Distribution to noncontrolling interests | — | (76 | ) | (76 | ) | ||||||||||||||||||||||||||
Stock option exercises | 13 | 13 | — | 13 | |||||||||||||||||||||||||||
Other shareholder transactions | 23 | 23 | 22 | 45 | |||||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2012 | $ | 556 | $ | 1,502 | $ | 7,343 | $ | (950 | )(1) | $ | (1,830 | ) | $ | (18 | ) | $ | — | $ | 6,603 | $ | 371 | $ | 6,974 | ||||||||
In millions | Common Stock | Additional paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Common Stock Held in Trust | Unearned Compensation | Total Cummins Inc. Shareholders' Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
BALANCE AT DECEMBER 31, 2007 | $ | 551 | $ | 1,168 | $ | 2,660 | $ | (286 | ) | $ | (593 | ) | $ | (79 | ) | $ | (11 | ) | $ | 3,410 | $ | 292 | $ | 3,702 | |||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||||
Net income attributable to Cummins Inc. | 755 | 755 | 63 | 818 | |||||||||||||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||||||||
Unrealized gain on marketable securities | (1 | ) | (1 | ) | (2 | ) | (3 | ) | |||||||||||||||||||||||||
Unrealized loss on derivatives | (70 | ) | (70 | ) | — | (70 | ) | ||||||||||||||||||||||||||
Foreign currency translation adjustments | (289 | ) | (289 | ) | (34 | ) | (323 | ) | |||||||||||||||||||||||||
Change in pensions and other postretirement defined benefit plans | (418 | ) | (418 | ) | — | (418 | ) | ||||||||||||||||||||||||||
Total comprehensive income | (23 | ) | 27 | 4 | |||||||||||||||||||||||||||||
Effect of change in pension plan measurement date | (5 | ) | (2 | ) | (7 | ) | — | (7 | ) | ||||||||||||||||||||||||
Issuance of shares | 3 | 4 | 7 | 9 | 16 | ||||||||||||||||||||||||||||
Employee benefits trust activity | 46 | 18 | 64 | — | 64 | ||||||||||||||||||||||||||||
Acquisition of shares | (128 | ) | (128 | ) | — | (128 | ) | ||||||||||||||||||||||||||
Reduction of noncontrolling interests | — | (54 | ) | (54 | ) | ||||||||||||||||||||||||||||
Cash dividends on common stock | (122 | ) | (122 | ) | — | (122 | ) | ||||||||||||||||||||||||||
Distribution to noncontrolling interests | — | (24 | ) | (24 | ) | ||||||||||||||||||||||||||||
Stock option exercises | (1 | ) | 6 | 5 | — | 5 | |||||||||||||||||||||||||||
Other shareholder transactions | 22 | 6 | 28 | (4 | ) | 24 | |||||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2008 | $ | 554 | $ | 1,239 | $ | 3,288 | $ | (1,066 | ) | $ | (715 | ) | $ | (61 | ) | $ | (5 | ) | $ | 3,234 | $ | 246 | $ | 3,480 | |||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||||
Net income attributable to Cummins Inc. | 428 | 428 | 56 | 484 | |||||||||||||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||||||||
Unrealized gain on derivatives | 75 | 75 | — | 75 | |||||||||||||||||||||||||||||
Foreign currency translation adjustments | 86 | 86 | 14 | 100 | |||||||||||||||||||||||||||||
Change in pensions and other postretirement defined benefit plans | 10 | 10 | — | 10 | |||||||||||||||||||||||||||||
Total comprehensive income | 599 | 70 | 669 | ||||||||||||||||||||||||||||||
Issuance of shares | 1 | 6 | 7 | — | 7 | ||||||||||||||||||||||||||||
Employee benefits trust activity | 61 | 25 | 86 | — | 86 | ||||||||||||||||||||||||||||
Acquisition of shares | (20 | ) | (20 | ) | — | (20 | ) | ||||||||||||||||||||||||||
Cash dividends on common stock | (141 | ) | (141 | ) | — | (141 | ) | ||||||||||||||||||||||||||
Distribution to noncontrolling interests | — | (34 | ) | (34 | ) | ||||||||||||||||||||||||||||
Stock option exercises | (2 | ) | 4 | 2 | — | 2 | |||||||||||||||||||||||||||
Conversion to capital lease (Note 13) | — | (35 | ) | (35 | ) | ||||||||||||||||||||||||||||
Other shareholder transactions | 2 | 4 | 6 | — | 6 | ||||||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2009 | $ | 555 | $ | 1,306 | $ | 3,575 | $ | (895 | ) | $ | (731 | ) | $ | (36 | ) | $ | (1 | ) | $ | 3,773 | $ | 247 | $ | 4,020 | |||||||||
CUMMINS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued)
In millions | Common Stock | Additional paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Common Stock Held in Trust | Unearned Compensation | Total Cummins Inc. Shareholders' Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Comprehensive income: | |||||||||||||||||||||||||||||||||
Net income attributable to Cummins Inc. | 1,040 | 1,040 | 100 | 1,140 | |||||||||||||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||||||||
Unrealized gain on marketable securities | 2 | 2 | 2 | 4 | |||||||||||||||||||||||||||||
Unrealized gain on derivatives | 4 | 4 | — | 4 | |||||||||||||||||||||||||||||
Foreign currency translation adjustments | 27 | 27 | 10 | 37 | |||||||||||||||||||||||||||||
Change in pensions and other postretirement defined benefit plans | 142 | 142 | — | 142 | |||||||||||||||||||||||||||||
Total comprehensive income | 1,215 | 112 | 1,327 | ||||||||||||||||||||||||||||||
Issuance of shares | 7 | 7 | — | 7 | |||||||||||||||||||||||||||||
Employee benefits trust activity | 68 | 11 | 79 | — | 79 | ||||||||||||||||||||||||||||
Acquisition of shares | (241 | ) | (241 | ) | — | (241 | ) | ||||||||||||||||||||||||||
Cash dividends on common stock | (172 | ) | (172 | ) | — | (172 | ) | ||||||||||||||||||||||||||
Distribution to noncontrolling interests | — | (29 | ) | (29 | ) | ||||||||||||||||||||||||||||
Stock option exercises | 8 | 8 | — | 8 | |||||||||||||||||||||||||||||
Deconsolidation of variable interest entity (Note 1) | — | (11 | ) | (11 | ) | ||||||||||||||||||||||||||||
Other shareholder transactions | (1 | ) | (1 | ) | 2 | 1 | 1 | 7 | 8 | ||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2010 | $ | 554 | $ | 1,380 | $ | 4,445 | $ | (720 | )(1) | $ | (964 | ) | $ | (25 | ) | $ | — | $ | 4,670 | $ | 326 | $ | 4,996 | ||||||||||
The accompanying notes are an integral part of our Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cummins Inc. 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 electric power generation systems and engine-related component products, including filtration, exhaust aftertreatment, turbochargers, fuel systems, controls andsystems, 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 more thanapproximately 600 company-owned and independent distributor locations and more than 6,000approximately 6,500 dealer locations in more than 190 countries and territories.
OurConsolidated Financial Statements include the accounts of all wholly-owned and majority-owned domestic and foreign subsidiaries where our ownership is more than 50 percent of common stockoutstanding equity interests except for majority-owned subsidiaries that are considered variable interest entities (VIEs) where we are not deemed to have a controlling financial interest. In addition, we also consolidate, regardless of our ownership percentage, VIEs for which we are deemed to have a controlling financial interest. See "Recently Adopted and Recently Issued Accounting Pronouncements" below for revised VIE standards effective January 1, 2010. Intercompany balances and transactions are eliminated in consolidation. Where our ownership interest is less than 100 percent, the noncontrolling ownership interests are reported in ourConsolidated Balance Sheets. The noncontrolling ownership interest in our income, net of tax, is classified as "Net income attributable to noncontrolling interests" in ourConsolidated Statements of Income.
Certain amounts for 20092011 and 20082010 have been reclassified to conform to the current classifications.
We have variable interests in several businesses accounted for under the equity method of accounting that are deemed to be VIEs and are subject to the provisions of accounting principles generally accepted in the United States of America (GAAP) for variable interest entities. Most of these VIEs are unconsolidated and as such are included in the summary of disclosures in Note 3, "INVESTMENTS IN EQUITY INVESTEES." The VIEs, including the consolidated VIEs, are not material individually or in the aggregate to ourConsolidated Balance Sheets orConsolidated Statements of Income.
Investments in Equity Investees
We use the equity method to account for our investments in joint ventures, affiliated companies and alliances in which we have the ability to exercise significant influence, generally represented by common stockequity ownership or partnership equity of at least 20 percent but not more than 50 percent. Generally, under the equity method, original investments in these entities are recorded at cost and subsequently adjusted by our share of equity in income or losses after the date of acquisition. Investment amounts in excess of our share of an investee's net assets are amortized over the life of the related asset creating the excess. If the excess is goodwill, then it is not amortized. Equity in income or losses of each investee is recorded according to our level of ownership; if losses accumulate, we record our share of losses until our investment has been fully depleted. If our investment has been fully depleted, we recognize additional losses only when we are the primary funding source. We eliminate (to the extent of our ownership percentage) in ourConsolidated Financial Statements the profit in inventory held by our equity method investees that has not yet been sold to a third-party. Our investments are classified
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
as "Investments and advances related to equity method investees" in ourConsolidated Balance Sheets. Our share of the results from joint ventures, affiliated companies and alliances is reported in ourConsolidated Statements of Income as "Equity, royalty and interest income from investees," and is reported net of all applicable income taxes.
Our foreign equity investees are presented net of applicable foreign income taxes in ourConsolidated Statements of Income. The vast majority of our United States (U.S.) equity investees are
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
partnerships (non-taxable), thus there is no difference between gross or net of tax presentation as the investees are not taxed.
Use of Estimates in the Preparation of the Financial Statements
Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP)GAAP requires management to make estimates and assumptions that affect reported amounts presented and disclosed in ourConsolidated Financial Statements. Significant estimates and assumptions in theseConsolidated Financial Statements require the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, estimates of future cash flows and other assumptions associated with goodwill and long-lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, determination of discount and other rate assumptions for pension and other postretirement benefit expenses, restructuring costs, income taxes and deferred tax valuation allowances, lease classification and contingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.
We recognize revenue, net of estimated costs of returns, allowances and sales incentives, when it is realized or realizable, which generally occurs when:
Products are generally sold on open account under credit terms customary to the geographic region of distribution. We perform ongoing credit evaluations of our customers and generally do not require collateral to secure our accounts receivable. For engines, service parts, service tools and other items sold to independent distributors and to partially-owned distributors accounted for under the equity method, revenues are recorded when title and risk of ownership transfers. This transfer is based on the agreement in effect with the respective distributor, andwhich in the U.S. and most international locations, generally occurs when the products are shipped. To the extent of our ownership percentage, margins on sales to distributors accounted for under the equity method are deferred until the distributor sells the product to unrelated parties.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
We provide various sales incentives to both our distribution network and our OEM customers. These programs are designed to promote the sale of our product in the channel or encourage the usage of our products by OEM customers. Sales incentives primarily fall into three categories:
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
For volume rebates, we provide certain customers with rebate opportunities for attaining specified volumes during a particular quarter or year. We accrue for the expected amount of these rebates at the time of the original sale and update our accruals quarterly based on our best estimate of the volume levels the customer will reach during the measurement period. For market share rebates, we provide certain customers with rebate opportunities based on the percentage of their production that utilizes a Cumminsour product. These rebates are typically measured either quarterly or annually and are accrued at the time of the original sale based on the current market shares, with adjustments made as the level changes. For aftermarket rebates we provide incentives to promote sales to certain dealers and end-markets. These rebates are typically paid on a quarterly, or more frequent, basis and estimates are made at the end of each quarter as to the amount yet to be paid. These estimates are based on historical experience with the particular program. The incentives are classified as a reduction in sales in ourConsolidated Statements of Income.
Rights of return do not exist for a large portionthe majority of our sales, other than for quality issues. We do offer certain return rights in our aftermarket business, where some aftermarket customers are permitted to return small amounts of parts and filters each year and in our power generation business, which sells portable generators to retail customers. An estimate of future returns is accrued at the time of sale based on historical return rates.
Foreign Currency Transactions and Translation
We translate assets and liabilities of foreign entities to U.S. dollars, where the local currency is the functional currency, at year-end exchange rates. We translate income and expenses to U.S. dollars using weighted-average exchange rates for the year. We record adjustments resulting from translation in a separate component of accumulated other comprehensive lossincome (loss) and include the adjustments in net income only upon sale or liquidation of the underlying foreign investment.
Foreign currency transaction gains and losses are included in current net income. For foreign entities where the U.S. dollar is the functional currency, including those operating in highly inflationary economies when applicable, we remeasure inventory, property, plant and equipmentnon-monetary balances and the related income statement using historical exchange rates. We include in income the resulting gains and losses, including the effect of derivatives in ourConsolidated Statements of Income, which combined with transaction gains and losses amounted to a net loss of $14 million in 2012, net loss of $14 million in 2011 and net loss of $1 million in 2010, net loss of $20 million in 2009 and a net loss of $46 million in 2008.2010.
We make use of derivative instruments in foreign exchange, commodity price and interest rate hedging programs. Derivatives currently in use are foreign currency forward contracts, commodity swap
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
contracts, commodity zero-cost collars and an interest rate swap. These contracts are used strictly for hedging and not for speculative purposes.
Due to our international business presence, we are exposed to foreign currency exchange risk. We transact in foreign currencies and have significant assets and liabilities denominated in foreign currencies. Consequently, our income experiences some volatility related to movements in foreign currency exchange rates. In order to benefit from global diversification and after considering naturally offsetting currency positions, we enter into foreign currency forward contracts to minimize our existing exposures (recognized assets and liabilities) and hedge forecasted transactions.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
We are exposed to fluctuations in commodity prices due to contractual agreements with component suppliers. In order to protect ourselves against future price volatility and, consequently, fluctuations in gross margins, we periodically enter into commodity swap contracts with designated banks to fix the cost of certain raw material purchases with the objective of minimizing changes in inventory cost due to market price fluctuations.
We record all derivatives at fair value in our financial statements. Note 19, "DERIVATIVES"21, "DERIVATIVES," provides further information on our hedging strategy and accounting for derivative financial instruments.
We determine our income tax expense using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax benefits of tax loss and credit carryforwards are also recognized as deferred tax assets. We evaluate the recoverability of our deferred tax assets each quarter by assessing the likelihood of future profitability and available tax planning strategies that could be implemented to realize our net deferred tax assets. At December 31, 2010,2012, we recorded net deferred tax assets of $511$396 million. These assets included $139$165 million for the value of tax loss and credit carryforwards. A valuation allowance of $50$95 million was recorded to reduce the tax assets to the net value management believed was more likely than not to be realized. In the event our operating performance deteriorates, future assessments could conclude that a larger valuation allowance will be needed to further reduce the deferred tax assets. In addition, we operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. We reduce our net tax assets for the estimated additional tax and interest that may result from tax authorities disputing uncertain tax positions we have taken and we believe we have made adequate provision for income taxes for all years that are subject to audit based upon the latest information available. A more complete description of our income taxes and the future benefits of our tax loss and credit carryforwards is disclosed in Note 6,4, "INCOME TAXES".TAXES."
Cash equivalents are defined as short-term, highly liquid investments with an original maturity of 90 days or less at the time of purchase. The carrying amounts reflected in ourConsolidated Balance Sheets for cash and cash equivalents approximate fair value due to the short-term maturity of these investments.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Statements of Cash Flows—SupplementalFlows-Supplemental Disclosures
| Years ended December 31, | Years ended December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | 2008 | 2012 | 2011 | 2010 | ||||||||||||||
Changes in current assets and liabilities, net of acquisitions and dispositions, were as follows: | ||||||||||||||||||||
Accounts and notes receivable | $ | (195 | ) | $ | (181 | ) | $ | 88 | $ | 87 | $ | (350 | ) | $ | (195 | ) | ||||
Inventories | (574 | ) | 482 | (251 | ) | (32 | ) | (225 | ) | (574 | ) | |||||||||
Other current assets | (54 | ) | 33 | (54 | ) | (60 | ) | (21 | ) | (54 | ) | |||||||||
Accounts payable | 345 | (75 | ) | (174 | ) | (256 | ) | 208 | 345 | |||||||||||
Accrued expenses | 233 | (132 | ) | 124 | (514 | ) | 234 | 233 | ||||||||||||
Total | $ | (245 | ) | $ | 127 | $ | (267 | ) | $ | (775 | ) | $ | (154 | ) | $ | (245 | ) | |||
Cash payments for income taxes, net of refunds | $ | 312 | $ | 128 | $ | 349 | $ | 691 | $ | 532 | $ | 312 | ||||||||
Cash payments for interest, net of capitalized interest | $ | 42 | $ | 31 | $ | 45 | $ | 32 | $ | 47 | $ | 42 |
We account for marketable securities in accordance with GAAP for certain investments in debt and equity securities. We determine the appropriate classification of all marketable securities as "held-to-maturity, "available-for-sale" or "trading" at the time of purchase, and re-evaluate such classifications at each balance sheet date. At December 31, 20102012 and 2009,2011, all of our investments were classified as available-for-sale.
Available-for-sale securities are carried at fair value with the unrealized gain or loss, net of tax, reported in other comprehensive income. Unrealized losses considered to be "other-than-temporary" are recognized currently in income. The cost of securities sold is based on the specific identification method. The fair value of most investment securities is determined by currently available market prices. Where quoted market prices are not available, we use the market price of similar types of securities that are traded in the market to estimate fair value. See Note 3,5, "MARKETABLE SECURITIES," for a detailed description of our investments in marketable securities.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount, which approximates fairnet realizable value, and generally do not bear interest. We have a trade receivables sales program, which is more fully discussed in Note 23, "SALES OF ACCOUNTS RECEIVABLE," which allows us to sell, without recourse, an interest in a pool of our trade receivables to a financial institution as necessary. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on our historical collection experience and by performing an analysis of our accounts receivable in light of the current economic environment. We review our allowance for doubtful accounts on a regular basis. In addition, when necessary, we provide an allowance for the full amount of specific accounts deemed to be uncollectible. Account balances are charged off against the allowance in the
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
charged off against the allowance in the period in which we determine that it is probable the receivable will not be recovered. The activity in our allowance for doubtful accounts iswas as follows:
| December 31, | December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | 2008 | 2012 | 2011 | 2010 | ||||||||||||||
Balance, beginning of year | $ | 13 | $ | 10 | $ | 12 | $ | 12 | $ | 15 | $ | 13 | ||||||||
Provision for bad debts | 5 | 11 | 9 | 6 | 6 | 5 | ||||||||||||||
Write-offs | (3 | ) | (9 | ) | (9 | ) | (5 | ) | (8 | ) | (3 | ) | ||||||||
Other | — | 1 | (2 | ) | — | (1 | ) | — | ||||||||||||
Balance, end of year | $ | 15 | $ | 13 | $ | 10 | $ | 13 | $ | 12 | $ | 15 | ||||||||
Our inventories are stated at the lower of cost or net realizable value.market. For the years ended December 31, 20102012 and 2009,2011, approximately 1614 percent and 17 percent, respectively, of our consolidated inventories (primarily heavy-duty and high-horsepower engines and parts) were valued using the last-in, first-out (LIFO) cost method. The cost of other inventories is generally valued using the first-in, first-out (FIFO) cost method. Our inventories at interim and year-end reporting dates include estimates for adjustments related to annual physical inventory results and for inventory cost changes under the LIFO cost method. Due to significant movements of partially-manufactured components and parts between manufacturing plants, we do not internally measure, nor do our accounting systems provide, a meaningful segregation between raw materials and work-in-process.
We record property, plant and equipment, inclusive of assets under capital leases, at cost. We depreciate the cost of the majority ofcertain engine production equipment using a modified units-of-production method, which is based upon units produced subject to a minimum level. We depreciate the cost of all other equipment using the straight-line method with depreciable lives ranging from 20 to 40 years for buildings and three to 20 years for machinery, equipment and fixtures. Capital lease amortization is recorded in depreciation expense. We expense normal maintenance and repair costs as incurred. Depreciation expense totaled $248$287 million, $269$264 million and $262$248 million for the years ended December 31, 2010, 20092012, 2011 and 2008,2010, respectively.
We review our long-lived assets for possible impairment whenever events or circumstances indicate that the carrying value of an asset or asset group may not be recoverable. We assess the recoverability of the carrying value of the long-lived assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. An impairment of a long-lived asset or asset group exists when the expected future pre-tax cash flows (undiscounted and without interest charges) estimated to be generated by the asset or asset group is less than its carrying value. If these cash flows are less than the carrying value of such asset or asset group, an impairment loss is measured based on the difference between the estimated fair value and carrying value of the asset or asset group. Assumptions and estimates used to estimate cash flows in the evaluation of impairment and the fair values used to determine the impairment are subject to a degree of judgment and complexity. Any
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
changes to the assumptions and estimates resulting from changes in actual results or market conditions from those anticipated may affect the carrying value of long-lived assets and could result in a future impairment charge.
Under GAAP for goodwill, and other intangible assets,we have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it is necessary to perform an annual two-step goodwill impairment test. The two-step impairment test is now only required if an entity determines through this qualitative analysis that it is more likely than not that the fair value of the reporting unit is less than its carrying value. In addition, carrying value of goodwill must be tested for impairment on an annualinterim basis and between annual tests in certain circumstances where impairment may be indicated. TheWhen we are required or opt to perform the two-step impairment test, the fair value of each reporting unit wasis estimated by discounting the after tax future cash flows less requirements for working capital and fixed asset additions. In accordance with GAAP, ourOur reporting units are generally defined as one level below an operating segment. However, there were two situations where we have aggregated two or more components which share similar economic characteristics and thus are aggregated into a single reporting unit for testing purposes. These two situations are described further below. This analysis has resulted in the following reporting units for our goodwill testing:
No other reporting units have goodwill. Our valuation method requires us to make projections of revenue, operating expenses, working capital investment and fixed asset additions for the reporting units over a multi-year period. Additionally, management must estimate a weighted-average cost of capital, which reflects a market rate, for each reporting unit for use as a discount rate. The discounted cash flows are compared to the carrying value of the reporting unit and, if less than the carrying value, a separate valuation of the goodwill is required to determine if an impairment loss has occurred. In addition, we also perform a sensitivity analysis to determine how much our forecasts can fluctuate before the fair value of a reporting unit would be lower than its carrying amount. AsWe performed the required procedures as of the end of theour fiscal third quarter in 2010, we performed the annual impairment assessment required by GAAP and determined that our goodwill was not impaired. At December 31, 2010,2012, our recorded goodwill was $367$445 million, approximately 90 percent of which resided in the emission solutions plus filtration reporting unit. For this reporting unit, the fair value of the reporting unit exceeded its carrying value by a substantial margin. Changes in our projections or estimates, a deterioration of our operating results and the related cash flow effect or a significant increase in the discount rate could decrease the estimated fair value of our reporting units and result in a future impairment of goodwill.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
significant increase in the discount rate could decrease the estimated fair value of our reporting units and result in a future impairment of goodwill.
We capitalize certain costs for software that are developed or obtained for internal use. Software costs are amortized on a straight-line basis over their estimated useful lives generally ranging from three to five12 years. Software assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. Upgrades and enhancements are capitalized if they result in significant modifications that enable the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion and business process reengineering costs are expensed in the period in which they are incurred.
We charge the estimated costs of warranty programs, other than product recalls, to income at the time products are shipped to customers. We use historical experience of warranty programs to estimatedevelop the remainingestimated liability for our various warranty programs. As a result of the uncertainty surrounding the nature and frequency of product recall programs, the liability for such programs is recorded when we commit to a recall action or when a recall becomes probable and estimable, which generally occurs when it is announced. The liability for these programs is reflected in the provision for warranties issued. We review and assess the liability for these programs on a quarterly basis. We also assess our ability to recover certain costs from our suppliers and record a receivable from the supplier when we believe a recovery is probable. At December 31, 2010,2012, we had $12$13 million of receivables related to estimated supplier recoveries of which $7 million was included in "Trade and other receivables, net" and $5$6 million was included in "Other assets" on ourConsolidated Balance Sheets. At December 31, 2009,2011, we had $10$14 million of receivables related to estimated supplier recoveries of which $5$7 million was included in "Trade and other receivables, net" and $5$7 million was included in "Other assets" on ourConsolidated Balance Sheets.
In addition, we sell extended warranty coverage on most of our engines. The revenue collected is initially deferred and is recognized as revenue in proportion to the costs expected to be incurred in performing services over the contract period. We compare the remaining deferred revenue balance quarterly to the estimated amount of future claims under extended warranty programs and provide an additional accrual when the deferred revenue balance is less than expected future costs.
Our research and development program is focused on product improvements, innovations and cost reductions for our customers. We expense researchResearch and development expenditures include salaries, contractor fees, building costs, utilities, administrative expenses and allocation of corporate costs and are expensed, net of contract reimbursements, when incurred. Research and development expenses, net of contract reimbursements, were $721 million in 2012, $621 million in 2011 and $402 million in 2010, $362 million in 2009 and $422 million in 2008.2010. Contract reimbursements were $86 million in 2012, $75 million in 2011 and $68 million in 2010, $92 million in 2009 and $61 million in 2008.
Related Party Transactions
In accordance with the provisions of various joint venture agreements, we may purchase products and components from the joint ventures, sell products and components to the joint ventures and the joint ventures may sell products and components to unrelated parties. Joint venture transfer prices to us may differ from normal selling prices. Certain joint venture agreements transfer product to us at cost, some transfer product to us on a cost-plus basis, and others transfer product to us at market2010.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In accordance with the provisions of various joint venture agreements, we may purchase products and components from our joint ventures, sell products and components to our joint ventures and our joint ventures may sell products and components to unrelated parties. Joint venture transfer prices may differ from normal selling prices. Certain joint venture agreements transfer product at cost, some transfer product on a cost-plus basis, and others transfer product at market value. Our related party sales are presented on the face of ourConsolidated Statements of Income. Our related party purchases were not material to our financial position or results of operations.
RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Accounting Pronouncements Recently Adopted
In July 2010,June 2011, the Financial Accounting Standards Board (FASB) amended its standardsrules regarding the disclosures for credit qualitypresentation of financing receivables and the allowance for credit losses.comprehensive income. The objective of this amendment was to improve the amendment iscomparability, consistency and transparency of financial reporting and to provide a greater levelincrease the prominence of disaggregated information about the credit quality of financing receivables, the allowance for credit losses, and timely recognition of such losses.items reported in other comprehensive income. Specifically, thethis amendment requires an entity to disclose credit quality indicators, past due informationthat all non-owner changes in shareholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, the standard also requires disclosure of the location of reclassification adjustments between other comprehensive income and modificationsnet income on the face of its financing receivables.the financial statements. The new rules arebecame effective for us beginning January 1, 2012. In December 31, 2010. Our level2011, the FASB deferred certain aspects of receivables that qualify as financing receivables, as defined bythis standard beyond the current effective date, specifically the provisions dealing with reclassification adjustments. Because the standard areonly impacts the display of comprehensive income and does not material for disclosure.impact what is included in comprehensive income, the standard did not have a significant impact on ourConsolidated Financial Statements.
In January 2010,May 2011, the FASB amended its standards related to fair value measurements and disclosures, which are effective for interim and annual fiscal periods beginning after December 15, 2009, except for disclosures about certain Level 3 activity which will not become effective until interim and annual periods beginning after December 15, 2010.disclosures. The new standard requires usobjective of the amendment was to disclose transfers in and outimprove the comparability of Level 1 and Level 2 fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards. Primarily this amendment changed the wording used to describe many of the reasonsrequirements in U.S. GAAP for the transfers as well as activity in Level 3measuring fair value measurements.and for disclosing information about fair value measurements in addition to clarifying the Board's intent about the application of existing fair value measurement requirements. The new standard also requires a more detailed level of disaggregation of the assets and liabilities being measured as well as increasedadditional disclosures regarding inputs and valuation techniquesrelated to fair value measurements categorized within Level 3 of the fair value measurements.hierarchy and requires disclosure of the categorization in the hierarchy for items which are not recorded at fair value but fair value is required to be disclosed. The new rules were effective for us beginning January 1, 2012. As of December 31, 2012, we had no fair value measurements categorized within Level 3 outside of our pension plans. The only impact for us is the disclosure of the categorization in the fair value hierarchy for those items where fair value is only disclosed (primarily our debt obligations). Our disclosuresdisclosure related to the new standard areis included in Note 4,6, "FAIR VALUE OF FINANCIAL INSTRUMENTS," to theConsolidated Financial Statements.
Accounting Pronouncements Issued But Not Yet Effective
In June 2009,December 2011, the FASB amended its standards for accounting for transfers of financial assets, which was effective for interim and annual fiscal periods beginning after November 15, 2009. The new standard removes the concept of a qualifying special-purpose entity from GAAP. The new standard modifies the financial components approach used in previous standards and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized. The new standard also requires enhanced disclosure regarding transfers of financial interests and a transferor's continuing involvement with transferred assets. The new standard requires us to report any activity under our receivable sales program as secured borrowings. As of December 31, 2010, there were no outstanding amounts under our receivable sales program and there was no significant activity during the year.
In June 2009, the FASB amended its existing standards related to the consolidation of variable interest entities, which was effective for interimoffsetting assets and annual fiscal periods beginning after November 15, 2009. The new standardliabilities. This amendment requires entities to analyze whether their variable interests give it a controlling financial interest of a variable interest entity (VIE)disclose both gross and outlines what defines a primary beneficiary. The new standard amends GAAP by: (a) changingnet information about certain rules for determining whether an entity is a VIE; (b) replacing the quantitative approach previously required for determining the primary beneficiary with a more qualitative approach;instruments and (c) requiring entities to continuously analyze whether they are the primary beneficiary of a VIE among other amendments. The new standard also requires enhanced disclosures regarding an entity's involvement in a VIE. The only significant impact of the adoption of this standard was to deconsolidate Cummins Komatsu Engine Corporation (CKEC) as of January 1, 2010 and to account for CKEC under GAAP for equity method investees. CKEC is an
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
engine manufacturing entity jointly ownedtransactions eligible for offset in the statement of financial position and operated by uscertain instruments and our equity partner. Priortransactions subject to January 1, 2010, we were deemed the primary beneficiary of this VIE duean agreement similar to the pricing arrangements of purchases and the substantial volume of purchases we made from the VIE. The impacta master netting agreement. This information will enable users of the deconsolidationfinancial statements to understand the effect of those arrangements on ourConsolidated Statements of Income was minimal as all sales were eliminated in consolidation in the past. The most significant impacts on ourConsolidated Balance Sheets were to decrease current assets by $9 million, decrease long-term assets by $10 million, increase investments and advances related to equity method investees by $11 million and decrease noncontrolling interest by $11 million.
Accounting Pronouncements Issued But Not Yet Effective
In October 2009, the FASB amended its rules regarding the accounting for multiple element revenue arrangements. The objective of the amendment is to allow vendors to account for revenue for different deliverables separately as opposed to part of a combined unit when those deliverables are provided at different times. Specifically, this amendment addresses how to separate deliverables and simplifies the process of allocating revenue to the different deliverables when more than one deliverable exists.financial position. The new rules arewill become effective for usannual reporting periods beginning on or after January 1, 2011.2013, and interim periods within those annual periods. It is also required that the new disclosures are applied for all comparative periods presented. In January 2013, the FASB further amended this standard to limit its scope to derivatives, repurchase and reverse repurchase agreements, securities borrowings and lending transactions. We do not believe this amendment will have a significant impacteffect on ourConsolidated Financial Statements. While we are still finalizing our analysis, due to the scope limitation we also do not expect any significant changes to our footnote disclosures.
In February 2013, the FASB amended its standards on comprehensive income by requiring disclosure in the footnotes of information about amounts reclassified out of accumulated other comprehensive income by component. Specifically, the amendment will require disclosure of the line items of net income in which the item was reclassified only if it is reclassified to net income in its entirety in the same reporting period. It will also require cross reference to other disclosures for amounts that are not reclassified in their entirety in the same reporting period. The new disclosures will be required for us prospectively only for annual periods beginning January 1, 2013 and interim periods within those annual periods.
NOTE 2. INVESTMENTS IN EQUITY INVESTEESACQUISITIONS AND DIVESTITURES
InvestmentsIn April 2012, we reached an agreement to acquire the doser technology and business assets from Hilite Germany GmbH (Hilite) in a cash transaction. Dosers are products that enable compliance with emission standards in certain aftertreatment systems and advancescomplement our current product offerings. The transaction was approved by German regulators in June and closed on July 18, 2012. The purchase price was $176 million and is summarized below. There was no contingent consideration associated with this transaction. During 2012, we expensed approximately $4 million of acquisition related costs.
The acquisition of Hilite was accounted for as a business combination, with the results of the acquired entity and the goodwill included in the Components operating segment in the third quarter of 2012. The majority of the purchase price was allocated to equity investeestechnology and customer related intangible assets and goodwill, most of which is expected to be fully deductible for tax purposes. We expect the Hilite acquisition to strengthen our ownership percentage areaftertreatment product offerings. This acquisition enhances our technical capabilities and keeps us in a strong position to meet the needs of current customers and grow into new markets, especially as follows:an increasing number of regions around the world adopt tougher emission standards.
| | December 31, | |||||||
---|---|---|---|---|---|---|---|---|---|
In millions | Ownership % | 2010 | 2009 | ||||||
Dongfeng Cummins Engine Company, Ltd. | 50% | $ | 150 | $ | 85 | ||||
North American distributors | 30% - 50% | 114 | 112 | ||||||
Komatsu alliances | 20% - 50% | 91 | 48 | ||||||
Chongqing Cummins Engine Company, Ltd. | 50% | 78 | 50 | ||||||
Cummins-Scania XPI Manufacturing, LLC | 50% | 57 | 52 | ||||||
Tata Cummins, Ltd. | 50% | 49 | 40 | ||||||
Beijing Foton Cummins Engine Co. Ltd. | 50% | 38 | 52 | ||||||
Shanghai Fleetguard Filter Co., Ltd. | 50% | 25 | 19 | ||||||
Other | Various | 132 | 116 | ||||||
Total | $ | 734 | $ | 574 | |||||
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENTS IN EQUITY INVESTEESACQUISITIONS AND DIVESTITURES (Continued)
Equity, royalty and interest income from investees, net of applicable taxes, wasIntangible assets by asset class, including weighted average amortization life, were as follows:
| For the years ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | 2008 | |||||||||
Distribution Entities | ||||||||||||
North American distributors | $ | 101 | $ | 100 | $ | 100 | ||||||
Komatsu Cummins Chile, Ltda | 16 | 12 | 7 | |||||||||
All other distributors | 3 | 3 | 5 | |||||||||
Manufacturing Entities | ||||||||||||
Dongfeng Cummins Engine Company, Ltd. | 99 | 33 | 55 | |||||||||
Chongqing Cummins Engine Company, Ltd. | 46 | 36 | 30 | |||||||||
Tata Cummins, Ltd. | 14 | 5 | 7 | |||||||||
Shanghai Fleetguard Filter Co., Ltd. | 12 | 7 | 8 | |||||||||
Komatsu manufacturing alliances | 11 | (2 | ) | 3 | ||||||||
Cummins Westport, Inc. | 10 | 3 | 6 | |||||||||
Valvoline Cummins, Ltd. | 8 | 7 | 2 | |||||||||
Cummins MerCruiser Diesel Marine, LLC | (3 | ) | (10 | ) | 3 | |||||||
Beijing Foton Cummins Engine Co., Ltd. | (16 | ) | (5 | ) | (4 | ) | ||||||
All other manufacturers | 20 | 7 | 9 | |||||||||
Cummins share of net income | 321 | 196 | 231 | |||||||||
Royalty and interest income | 30 | 18 | 22 | |||||||||
Equity, royalty and interest income from investees | $ | 351 | $ | 214 | $ | 253 | ||||||
Dollars in millions | Purchase price allocation | Weighted average amortization life in years | |||||
---|---|---|---|---|---|---|---|
Technology | $ | 52 | 10.6 | ||||
Customer | 23 | 4.5 | |||||
License arrangements | 8 | 6.0 | |||||
Total intangible assets | $ | 83 | 8.5 | ||||
The purchase price was allocated as follows:
In millions | | |||
---|---|---|---|---|
Inventory | $ | 5 | ||
Fixed assets | 5 | |||
Intangible assets | 83 | |||
Goodwill | 91 | |||
Liabilities | (8 | ) | ||
Total purchase price | $ | 176 | ||
Distribution Entities Net sales for Hilite were $104 million for 2012, of which $46 million was included in ourConsolidated Statements of Income and represented less than 1 percent of consolidated sales, and $77 million in 2011.
We have In July 2012, we acquired an extensive worldwide distributor and dealer network through whichadditional 45 percent interest in Cummins Central Power from the former principal for consideration of approximately $20 million. The acquisition was accounted for as a business combination, with the results of the acquired entity included in the Distribution operating segment in the third quarter of 2012. Distribution segment results also included a $7 million gain, as we sell and distributewere required to re-measure our products and services. Generally, our distributors are divided by geographic region with some of our distributors being wholly-owned by Cummins, some partially-owned and the majority independently owned. We consolidate all wholly-owned distributors and partially-owned distributors where we are the primary beneficiary and account for other partially-owned distributors using the equity method of accounting.
In the second quarter of 2011, we consolidate. While each distributor is a separate legal entity, the business of each is the same as thatsold certain assets and liabilities of our wholly-owned distributors based in other parts of the world. All of our distributors, irrespective of their legal structure or ownership, offer the full range of ourexhaust business which manufactures exhaust products and servicesselect components for emission systems for a variety of applications not core to customersour other product offerings. This business was historically included in our Components segment. The sales price was $123 million. We recognized a gain on the sale of $68 million ($37 million after-tax), which included a goodwill allocation of $19 million. The gain was excluded from segment results as it was not considered in our evaluation of operating results for the year ended December 31, 2011.
Sales for this business were $62 million and end-users$171 million in their respective markets.
We also have 50 percent equity interests in five other international distributors.2011 (through closing) and 2010, respectively.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENTS IN EQUITY INVESTEESACQUISITIONS AND DIVESTITURES (Continued)
We are contractually obligated to repurchase new engines, parts During the fourth quarter of 2011, we sold certain assets and components, special tools and signage from our North American distributors following an ownership transfer or termination of the distributor. In addition, in certain cases where we own a partial interest in a distributor, we are obligated to purchase the other equity holders' interests if certain events occur (such as the death of the distributor principal or a change in control of Cummins Inc.). The purchase price of the equity interests is determined based on the fair value of the distributor's assets. Outside of North America, repurchase obligations and practices vary by region. All distributors that are partially-owned are considered to be related parties in ourConsolidated Financial Statements.
Manufacturing Entities
Manufacturing joint ventures are generally formed with customers and allow us to increase our market penetration in geographic regions, reduce capital spending, streamline our supply chain management and develop technologies. Our largest manufacturing joint ventures are based in China and are included in the list below. Our engine manufacturing joint ventures are supplied by our Components segment in the same manner as they supply our wholly-owned Engine segment and Power Generation segment manufacturing facilities. Components segment joint ventures and wholly owned entities provide fuel system, filtration and turbocharger products that are used in our engines as well as some competitors' products. These joint ventures are not included in ourConsolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENTS IN EQUITY INVESTEES (Continued)
Equity Investee Financial Summaryyear ended December 31, 2011.
We have approximately $399Sales for this business were $64 million and $74 million in 2011 (through closing) and 2010, respectively. Income before income taxes for this business were approximately $13 million and $9 million in 2011 (through closing) and 2010, respectively.
In the second quarter of 2012, we recorded an additional $6 million gain ($4 million after-tax) related to final purchase price adjustments for our investment account at2011 divestitures. The gain was excluded from segment results as it was not considered in our evaluation of operating results for the year ended December 31, 2010, that represents cumulative undistributed income in our equity investees. Summary financial information for our equity investees is as follows:2012.
| As of and for the years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | 2008 | |||||||
Net sales | $ | 7,107 | $ | 5,554 | $ | 6,610 | ||||
Gross margin | 1,651 | 1,365 | 1,509 | |||||||
Net income | 668 | 427 | 498 | |||||||
Cummins share of net income | $ | 321 | $ | 196 | $ | 231 | ||||
Royalty and interest income | 30 | 18 | 22 | |||||||
Total equity, royalty and interest income from investees | $ | 351 | $ | 214 | $ | 253 | ||||
Current assets | $ | 2,741 | $ | 2,005 | ||||||
Noncurrent assets | 1,253 | 1,123 | ||||||||
Current liabilities | (1,837 | ) | (1,406 | ) | ||||||
Noncurrent liabilities | (499 | ) | (390 | ) | ||||||
Net assets | $ | 1,658 | $ | 1,332 | ||||||
Cummins share of net assets | $ | 744 | $ | 587 |
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. MARKETABLE SECURITIESINVESTMENTS IN EQUITY INVESTEES
A summary of marketable securities, all of which are classified as current, isInvestments in and advances to equity investees and our ownership percentage was as follows:
| December 31, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2009 | ||||||||||||||||||
In millions | Cost | Gross unrealized gains/(losses) | Estimated fair value | Cost | Gross unrealized gains/(losses) | Estimated fair value | ||||||||||||||
Available-for-sale: | ||||||||||||||||||||
Debt mutual funds | $ | 179 | $ | 1 | $ | 180 | $ | 123 | $ | — | $ | 123 | ||||||||
Bank debentures | 85 | — | 85 | 34 | — | 34 | ||||||||||||||
Certificates of deposit | 59 | — | 59 | 21 | — | 21 | ||||||||||||||
Government debt securities—non-U.S. | 4 | (1 | ) | 3 | 4 | (1 | ) | 3 | ||||||||||||
Corporate debt securities | 2 | — | 2 | 2 | — | 2 | ||||||||||||||
Equity securities and other | — | 10 | 10 | — | 7 | 7 | ||||||||||||||
Total marketable securities | $ | 329 | $ | 10 | $ | 339 | $ | 184 | $ | 6 | $ | 190 | ||||||||
| | December 31, | |||||||
---|---|---|---|---|---|---|---|---|---|
In millions | Ownership % | 2012 | 2011 | ||||||
North American distributors | 30% - 50% | $ | 139 | $ | 127 | ||||
Komatsu alliances | 20% - 50% | 132 | 115 | ||||||
Dongfeng Cummins Engine Company, Ltd. | 50% | 113 | 131 | ||||||
Beijing Foton Cummins Engine Co. Ltd. | 50% | 91 | 87 | ||||||
Cummins-Scania XPI Manufacturing, LLC | 50% | 65 | 62 | ||||||
Chongqing Cummins Engine Company, Ltd. | 50% | 58 | 71 | ||||||
Tata Cummins, Ltd. | 50% | 52 | 49 | ||||||
Cummins Olayan Energy | 49% | 34 | 30 | ||||||
Shanghai Fleetguard Filter Co., Ltd. | 50% | 31 | 29 | ||||||
Guangxi Cummins Industiral Power Co., Ltd. | 50% | 30 | — | ||||||
Valvoline Cummins, Ltd. | 50% | 25 | 20 | ||||||
Fleetguard Filters Private, Ltd. | 50% | 23 | 22 | ||||||
Other | Various | 104 | 95 | ||||||
Total | $ | 897 | $ | 838 | |||||
Proceeds from On January 1, 2010, with the adoption of the new FASB standard regarding consolidation of VIEs, we deconsolidated Cummins Komatsu Engine Corporation to account for it as an equity investee. The impact of the deconsolidation on ourConsolidated Statements of Income was minimal as all sales were eliminated in consolidation in the past. The most significant impacts on ourConsolidated Balance Sheets were to decrease current assets by $9 million, decrease long-term assets by $10 million, increase investments and maturities of marketable securities were $690 million, $335advances related to equity method investees by $11 million and $409decrease noncontrolling interest by $11 million in 2010, 2009 and 2008, respectively. Gross realized gains from the sale of available-for-sale securities were less than $1 million for the year ended 2010, $2 million for the year ended 2009 and $1 million for the year ended 2008. Gross realized losses from the sale of available-for-sale securities were less than $1 million for the years ended December 31, 2010, 2009 and 2008.
At December 31, 2010, the fair value of available-for-sale investments in debt securities by contractual maturity is as follows:
Maturity date | Fair value | |||
---|---|---|---|---|
In millions | | |||
1 year or less | $ | 82 | ||
1 - 5 years | 6 | |||
5 - 10 years | 1 | |||
After 10 years | 1 | |||
Total | $ | 90 | ||
NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS2010.
In January 2010, the FASB amended its standards related to fair value measurements and disclosures, which are effective for interim and annual fiscal periods beginning after December 15, 2009, except for disclosures about certain Level 3 activity which will not become effective until interim and annual periods beginning after December 15, 2010. The new standard requires us to disclose transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers as well as activity in Level 3 fair value measurements. The new standard also requires a more detailed level of disaggregation of the assets and liabilities being measured as well as increased disclosures regarding inputs and valuation techniques of the fair value measurements. The amended
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS3. INVESTMENTS IN EQUITY INVESTEES (Continued)
Equity, royalty and interest income from investees, net of applicable taxes, was as follows:
| For the years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In millions | 2012 | 2011 | 2010 | |||||||
Distribution Entities | ||||||||||
North American distributors | $ | 147 | $ | 134 | $ | 101 | ||||
Komatsu Cummins Chile, Ltda. | 26 | 22 | 16 | |||||||
All other distributors | 4 | 4 | 3 | |||||||
Manufacturing Entities | ||||||||||
Chongqing Cummins Engine Company, Ltd. | 61 | 68 | 46 | |||||||
Dongfeng Cummins Engine Company, Ltd. | 52 | 80 | 99 | |||||||
Cummins Westport, Inc. | 14 | 14 | 10 | |||||||
Shanghai Fleetguard Filter Co., Ltd. | 13 | 15 | 12 | |||||||
Tata Cummins, Ltd. | 11 | 14 | 14 | |||||||
Valvoline Cummins, Ltd. | 8 | 7 | 8 | |||||||
Beijing Foton Cummins Engine Co., Ltd. | 5 | (7 | ) | (16 | ) | |||||
Komatsu manufacturing alliances | (3 | ) | 3 | 11 | ||||||
All other manufacturers | 9 | 21 | 17 | |||||||
Cummins share of net income | 347 | 375 | 321 | |||||||
Royalty and interest income | 37 | 41 | 30 | |||||||
Equity, royalty and interest income from investees | $ | 384 | $ | 416 | $ | 351 | ||||
standards do not require retroactive restatement of prior periods. The adoption did not materially impact ourConsolidated Financial Statements.Distribution Entities
Fair value is the price that would be received toWe have an extensive worldwide distributor and dealer network through which we sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about riskand distribute our products and services. Generally, our distributors are divided by geographic region with some of our distributors being wholly-owned by Cummins, some partially-owned and the risks inherentmajority independently owned. We consolidate all wholly-owned distributors and partially-owned distributors where we are the primary beneficiary and account for other partially-owned distributors using the equity method of accounting.
We primarily apply the market approach for recurring fair value measurements and utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. We are able to classify fair value balances based on the observability of those inputs. The amended standards establish a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted pricesalso have 50 percent equity interests in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy defined by GAAP are as follows:
Level 1—Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as listed equities and publicly traded bonds.
Level 2—Pricing inputs aresix other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category include non-exchange-traded derivatives such as over-the-counter forwards and options.
Level 3—Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management's best estimate of fair value. At each balance sheet date, we perform an analysis of all instruments subject to fair value accounting under GAAP and include, in Level 3, all of those whose fair value is based on significant unobservable inputs. At December 31, 2010, we did not have any Level 3 financial assets or liabilities, other than those in our pension plan (see Note 11, "PENSION BENEFITS AND OTHER POST RETIREMENT BENEFITS").
The majority of the assets and liabilities we carry at fair value are available-for-sale (AFS) securities and derivatives. AFS securities are derived from Level 1 or Level 2 inputs. The predominance of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The fair value measurement of derivatives results primarily from Level 2 inputs. Many of our derivative contracts are valued utilizing publicly available pricing data of contracts with similar terms. In other cases, the contracts are valued using current spot market data adjusted for the appropriate current forward curves provided byinternational distributors.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS3. INVESTMENTS IN EQUITY INVESTEES (Continued)
external financial institutions. We participateare contractually obligated to repurchase new engines, parts and components, special tools and signage from our North American distributors following an ownership transfer or termination of the distributor. In addition, in commodity swap contracts, currency forward contracts,certain cases where we own a partial interest in a distributor, we are obligated to purchase the other equity holders' interests if certain events occur (such as the death of the distributor principal or a change in control of Cummins Inc.). The purchase price of the equity interests is determined based on the fair value of the distributor's assets. Outside of North America, repurchase obligations and practices vary by region. All distributors that are partially-owned are considered to be related parties in ourConsolidated Financial Statements.
Our manufacturing joint ventures have generally been formed with customers and generally are intended to allow us to increase our market penetration in geographic regions, reduce capital spending, streamline our supply chain management and develop technologies. Our largest manufacturing joint ventures are based in China and are included in the list below. Our engine manufacturing joint ventures are supplied by our Components segment in the same manner as it supplies our wholly-owned Engine segment and Power Generation segment manufacturing facilities. Our Components segment joint ventures and wholly owned entities provide fuel system, filtration and turbocharger products that are used in our engines as well as some competitors' products. The results and investments in our joint ventures in which we have 50 percent or less ownership interest are included in "Equity, royalty and interest rate swaps. When material, we adjust the valuesincome from investees" and "Investments and advances related to equity method investees" in ourConsolidated Statements of our derivative contracts for counter-party or our credit risk. There were no transfers into or out of Levels 2 or 3 during 2010.
Income The following table summarizes our financial instruments recorded at fair value in ourandConsolidated Balance Sheets at December 31, 2010:, respectively.
| Fair Value Measurements Using | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | |||||||||||
Available-for-sale debt securities: | |||||||||||||||
Debt mutual funds | $ | 75 | $ | 105 | $ | — | $ | 180 | |||||||
Bank debentures | — | 85 | — | 85 | |||||||||||
Certificates of deposit | — | 59 | — | 59 | |||||||||||
Government debt securities—non-U.S. | — | 3 | — | 3 | |||||||||||
Corporate debt securities | — | 2 | — | 2 | |||||||||||
Total available-for-sale debt securities | 75 | 254 | — | 329 | |||||||||||
Available-for-sale equity securities: | |||||||||||||||
Financial services industry | 10 | — | — | 10 | |||||||||||
Total available-for-sale equity securities | 10 | — | — | 10 | |||||||||||
Derivative assets: | |||||||||||||||
Commodity swap contracts | — | 21 | — | 21 | |||||||||||
Interest rate contracts | — | 41 | — | 41 | |||||||||||
Total derivative assets | — | 62 | — | 62 | |||||||||||
Total | $ | 85 | $ | 316 | $ | — | $ | 401 | |||||||
The substantial majorityElectric Co. Ltd. This joint venture manufactures several models of our assets were valued utilizingheavy-duty and high-horsepower diesel engines, primarily serving the industrial and stationary power markets in China.
Debt mutual funds—Assetsheavy-duty truck manufacturers in Level 2 consist of exchange traded mutual funds that lack sufficient trading volumeChina. DCEC produces Cummins 4- to be classified at Level 1. The fair value measure for these investments is the daily net asset value published on a regulated governmental website. Daily quoted prices are available from the issuing brokerage and are used on a test basis to corroborate this Level 2 input.
Bank debentures and Certificates of deposit—These investments provide us13-liter mechanical engines, full-electronic diesel engines, with a fixed ratepower range from 125 to 545 horsepower, and natural gas engines.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. FAIR VALUE OF3. INVESTMENTS IN EQUITY INVESTEES (Continued)
which are used in automotive and industrial applications. Products include transmission fluids, hydraulic lubricants, automotive filters, cooling system products, greases and specialty products.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INSTRUMENTSSTATEMENTS (Continued)
Government debt securities—non-U.S. and Corporate debt securities —The fair value measure for these securities are broker quotes received from reputable firms. These securities are infrequently traded on a national stock exchange and these values are used on a test basis to corroborate our Level 2 input measure.NOTE 3. INVESTMENTS IN EQUITY INVESTEES (Continued)
Foreign currency forward contracts—The fair value measure for these contracts are determined based on forward foreign exchange rates received from third-party pricing services. These rates are based upon market transactions and are periodically corroborated by comparing to third-party broker quotes.Equity Investee Financial Summary
Commodity swap contracts—The fair value measure for these contracts are current spot market data adjusted for the appropriate current forward curves provided by external financial institutions. The current spot price is the most significant component of this valuation and is based upon market transactions. We use third-party pricing services for the spot price component of this valuation which is periodically corroborated by market data from broker quotes.
Interest rate contracts—We currently have only one interest rate contract. We utilize the month-end statement from the issuing financial institution as our fair value measure for this investment. We corroborate this valuation through the use of a third-party pricing service for similar assets and liabilities.
The following tables summarize our financial instruments recorded at fair valueapproximately $469 million in ourConsolidated Balance Sheets investment account at December 31, 2009:2012, that represents cumulative undistributed income in our equity investees. Dividends from our unconsolidated equity investees were $329 million, $341 million and $178 million in 2012, 2011 and 2010, respectively. Summary financial information for our equity investees was as follows:
| As of and for the years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In millions | 2012 | 2011 | 2010 | |||||||
Net sales | $ | 8,296 | $ | 8,659 | $ | 7,107 | ||||
Gross margin | 1,870 | 1,948 | 1,651 | |||||||
Net income | 747 | 788 | 668 | |||||||
Cummins share of net income | $ | 347 | $ | 375 | $ | 321 | ||||
Royalty and interest income | 37 | 41 | 30 | |||||||
Total equity, royalty and interest income from investees | $ | 384 | $ | 416 | $ | 351 | ||||
Current assets | $ | 2,843 | $ | 2,892 | ||||||
Non-current assets | 1,588 | 1,440 | ||||||||
Current liabilities | (2,039 | ) | (2,055 | ) | ||||||
Non-current liabilities | (431 | ) | (391 | ) | ||||||
Net assets | $ | 1,961 | $ | 1,886 | ||||||
Cummins share of net assets | $ | 886 | $ | 855 | ||||||
NOTE 4. INCOME TAXES
| Fair Value Measurements Using | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | |||||||||||
Available-for-sale debt securities: | |||||||||||||||
Debt mutual funds | $ | 120 | $ | 3 | $ | — | $ | 123 | |||||||
Bank debentures | — | 34 | — | 34 | |||||||||||
Certificates of deposit | — | 21 | — | 21 | |||||||||||
Government debt securities-non-U.S. | — | 3 | — | 3 | |||||||||||
Corporate debt securities | — | 2 | — | 2 | |||||||||||
Total available-for-sale debt securities | 120 | 63 | — | 183 | |||||||||||
Available-for-sale equity securities: | |||||||||||||||
Financial services industry | 7 | — | — | 7 | |||||||||||
Total available-for-sale equity securities | 7 | — | — | 7 | |||||||||||
Derivative assets: | |||||||||||||||
Commodity swap contracts | — | 17 | — | 17 | |||||||||||
Interest rate contracts | — | 25 | — | 25 | |||||||||||
Total derivative assets | — | 42 | — | 42 | |||||||||||
Total | $ | 127 | $ | 105 | $ | — | $ | 232 | |||||||
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In millions | 2012 | 2011 | 2010 | |||||||
Income before income taxes | ||||||||||
U.S. income | $ | 998 | $ | 881 | $ | 242 | ||||
Foreign income | 1,273 | 1,790 | 1,375 | |||||||
Total | $ | 2,271 | $ | 2,671 | $ | 1,617 | ||||
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTSINCOME TAXES (Continued)
Fair value Income tax expense consists of foreign currency forward contacts and total derivative liabilities on ourConsolidated Balance Sheets are not material.
Fair Value of Other Financial Instruments
Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our risk premium, the fair value and carrying value of total debt, including current maturities, at December 31, 2010 and December 31, 2009, are set forth in the table below. The carrying values of all other receivables and liabilities approximated fair values.
| December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | |||||
Fair value of total debt | $ | 886 | $ | 674 | |||
Carrying value of total debt | 843 | 703 |
NOTE 5. INVENTORIES
Inventories included the following:
| December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | |||||
Finished products | $ | 1,019 | $ | 785 | |||
Work-in-process and raw materials | 1,048 | 638 | |||||
Inventories at FIFO cost | 2,067 | 1,423 | |||||
Excess of FIFO over LIFO | (90 | ) | (82 | ) | |||
Total inventories | $ | 1,977 | $ | 1,341 | |||
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In millions | 2012 | 2011 | 2010 | |||||||
Current | ||||||||||
U.S. federal and state | $ | 118 | $ | 116 | $ | 11 | ||||
Foreign | 299 | 524 | 410 | |||||||
Total current | 417 | 640 | 421 | |||||||
Deferred | ||||||||||
U.S. federal and state | 108 | 69 | 49 | |||||||
Foreign | 8 | 16 | 7 | |||||||
Total deferred | 116 | 85 | 56 | |||||||
Income tax expense | $ | 533 | $ | 725 | $ | 477 | ||||
NOTE 6. INCOME TAXES A reconciliation of the U.S. federal income tax rate of 35 percent to the actual effective tax rate was as follows:
| Years ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | 2008 | ||||||||
Income (loss) before income taxes: | |||||||||||
U.S. income | $ | 242 | $ | (47 | ) | $ | (25 | ) | |||
Foreign income | 1,375 | 687 | 1,203 | ||||||||
$ | 1,617 | $ | 640 | $ | 1,178 | ||||||
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | |||||||
U.S. federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||
State income tax, net of federal effect | 1.0 | 0.4 | 0.6 | |||||||
Research tax credits | (0.4 | ) | (4.7 | ) | (1.3 | ) | ||||
Differences in rates and taxability of foreign subsidiaries and joint ventures | (12.1 | ) | (4.6 | ) | (4.7 | ) | ||||
Other, net | — | 1.0 | (0.1 | ) | ||||||
Effective tax rate | 23.5 | % | 27.1 | % | 29.5 | % | ||||
Our income tax rates are generally less than the 35 percent U.S. statutory income tax rate primarily because of lower taxes on foreign earnings and research tax credits. Our 2012 income tax provision includes a one-time $134 million tax benefit resulting from transactions entered into and tax return elections made with respect to our United Kingdom (U.K.) operations.
Retained earnings of our U.K. domiciled subsidiaries and certain Singapore, German and Indian subsidiaries are considered to be permanently reinvested. In addition, earnings of our China operations generated after December 31, 2011, are considered to be permanently reinvested and additional U.S. deferred tax is no longer being provided on these earnings generated after 2011. China's permanently reinvested earnings are expected to be used for items such as capital expenditures and to fund joint ventures in China. The total permanently reinvested retained earnings and related cumulative translation adjustment balances for these entities were $2.3 billion, $1.5 billion and $1.2 billion for the years ended December 31, 2012, 2011 and 2010, respectively. These amounts were determined primarily based on book retained earnings balances for these subsidiaries translated at historical rates. The determination of the deferred tax liability related to these retained earnings and cumulative translation adjustment balances which are considered to be permanently reinvested outside the U.S. is not practicable. We may periodically repatriate a portion of these earnings to the extent we can do so essentially tax-free or at minimal tax cost.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6.4. INCOME TAXES (Continued)
Income tax expense consists of the following:
| Years ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | 2008 | |||||||||
Current: | ||||||||||||
U.S. federal and state | $ | 11 | $ | 4 | $ | 16 | ||||||
Foreign | 410 | 147 | 345 | |||||||||
Total current | 421 | 151 | 361 | |||||||||
Deferred: | ||||||||||||
U.S. federal and state | 49 | (38 | ) | (26 | ) | |||||||
Foreign | 7 | 43 | 25 | |||||||||
Total deferred | 56 | 5 | (1 | ) | ||||||||
Income tax expense | $ | 477 | $ | 156 | $ | 360 | ||||||
A reconciliation of the U.S. federal income tax rate of 35 percent to the actual effective tax rate is as follows:
| Years ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2009 | 2008 | ||||||||
U.S. federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | |||||
State income tax, net of federal effect | 0.6 | (0.3 | ) | — | |||||||
Research tax credits | (1.3 | ) | (2.4 | ) | (0.8 | ) | |||||
Differences in rates and taxability of foreign subsidiaries and joint ventures | (4.7 | ) | (5.5 | ) | (4.3 | ) | |||||
Settlement of tax audits | — | — | (0.1 | ) | |||||||
Other, net | (0.1 | ) | (2.4 | ) | 0.8 | ||||||
Effective tax rate | 29.5 | % | 24.4 | % | 30.6 | % | |||||
Retained earnings of the United Kingdom (U.K.) group and certain Singapore, German, and Indian subsidiaries are considered to be permanently reinvested. The determination of the deferred tax liability, if any, that might be due should that income be distributed is not practicable. However, we may periodically repatriate a portion of these earnings to the extent we can do so essentially tax-free, or at minimal cost. For our remaining subsidiary companies and joint ventures outside the U.S., we provide for the additional taxes that would be due upon the dividend distribution of the income of those foreign subsidiaries and joint ventures assuming the full utilization of foreign tax credits. During 2010, we released $3Deferred taxes on unremitted earnings of foreign subsidiaries and joint ventures, including those in China generated in years prior to 2012, were $213 million and $222 million at December 31, 2012 and 2011, respectively. We have $702 million of retained earnings and related cumulative translation adjustments in our China operations generated prior to December 31, 2011, and have provided a U.S. deferred tax liabilitiesliability of $158 million relating to these earnings and related translation adjustments. We anticipate that these earnings will be distributed to prior years unremitted income of certain German and Indian subsidiaries of our U.K. group now considered to also be permanently reinvested.the U.S. within the next five years.
Income before income taxes includes equity income of foreign joint ventures of $218$192 million, $117$234 million and $140$218 million for the years ended December 31, 2010, 20092012, 2011 and 2008,2010, respectively. This equity income is recorded net of foreign taxes. Additional U.S. income taxes of $50$9 million, $31$49 million and $30$50 million for the years ended December 31, 2012, 2011 and 2010, 2009 and 2008,
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. INCOME TAXES (Continued)
respectively, were provided for the additional U.S. taxes that will ultimately be due upon the distribution of the foreign joint venture equity income.
Carryforward tax benefits and the tax effect of temporary differences between financial and tax reporting that give rise to net deferred tax assets arewere as follows:
| | December 31, | December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | In millions | 2010 | 2009 | 2012 | 2011 | ||||||||||
Deferred tax assets: | |||||||||||||||
U.S. federal and state carryforward benefits | $ | 106 | $ | 131 | |||||||||||
Foreign carryforward benefits | 33 | 20 | |||||||||||||
Employee benefit plans | 342 | 429 | |||||||||||||
Warranty and marketing expenses | 300 | 309 | |||||||||||||
Deferred research and development expenses | 20 | 40 | |||||||||||||
Other | 78 | 64 | |||||||||||||
Deferred tax asset | |||||||||||||||
U.S. federal and state carryforward benefits | $ | 115 | $ | 86 | |||||||||||
Foreign carryforward benefits | 50 | 42 | |||||||||||||
Employee benefit plans | 369 | 334 | |||||||||||||
Warranty and marketing expenses | 308 | 302 | |||||||||||||
Deferred research and development expenses | — | 6 | |||||||||||||
Accrued expenses | 75 | 73 | |||||||||||||
Other | 78 | 47 | |||||||||||||
Gross deferred tax assets | Gross deferred tax assets | 879 | 993 | 995 | 890 | ||||||||||
Valuation allowance | Valuation allowance | (50 | ) | (44 | ) | (95 | ) | (71 | ) | ||||||
Total deferred tax assets | Total deferred tax assets | 829 | 949 | 900 | 819 | ||||||||||
Deferred tax liabilities: | |||||||||||||||
Property, plant and equipment | (145 | ) | (146 | ) | |||||||||||
Unremitted income of foreign subsidiaries and joint ventures | (126 | ) | (100 | ) | |||||||||||
Other | (47 | ) | (25 | ) | |||||||||||
Deferred tax liabilities | |||||||||||||||
Property, plant and equipment | (218 | ) | (158 | ) | |||||||||||
Unremitted income of foreign subsidiaries and joint ventures | (213 | ) | (222 | ) | |||||||||||
Other | (73 | ) | (22 | ) | |||||||||||
Total deferred tax liabilities | Total deferred tax liabilities | (318 | ) | (271 | ) | (504 | ) | (402 | ) | ||||||
Net deferred tax assets | Net deferred tax assets | $ | 511 | $ | 678 | $ | 396 | $ | 417 | ||||||
Our 2012 U.S. federal and state carryforward benefits include $20 million of foreign tax credit carryforward benefits that expire in 2019, $32 million of federal general business credit carryforward benefits that begin to expire in 2029, and $54$115 million of state credit and net operating loss carryforward benefits that begin to expire in 2012.2013. Our foreign carryforward benefits include $33$50 million of net operating loss carryforwards that begin to expire in 2013. A valuation allowance is recorded to reduce the gross deferred tax assets to an amount we believe is more likely
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. INCOME TAXES (Continued)
than not to be realized. The valuation allowance increased in 20102012 by a net $6$24 million and increased in 20092011 by a net $19$21 million. The valuation allowance is primarily attributable to the uncertainty regarding the realization of a portion of the U.S. state and foreign net operating loss and tax credit carryforward benefits. Prepaid and other current assets includes deferred tax assets of $232 million and $268 million for the years ended December 31, 2012 and 2011, respectively. In addition, prepaid and other current assets includes refundable income taxes of $240 million and $45 million for the years ended December 31, 2012 and 2011, respectively. Other assets includes deferred tax assets of $177 million and $167 million for the years ended December 31, 2012 and 2011, respectively. Other liabilities and deferred revenue includes deferred tax liabilities of $6$13 million and $2$18 million for the years ended December 31, 20102012 and 2009,2011, respectively.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. INCOME TAXES (Continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits iswas as follows:
In millions | | | ||||||
---|---|---|---|---|---|---|---|---|
Balance at December 31, 2007 | $ | 49 | ||||||
Additions based on tax positions related to the current year | 5 | |||||||
Additions based on tax positions related to the prior years | 5 | |||||||
Reductions for tax positions relating to settlements with taxing authorities | (2 | ) | ||||||
Balance at December 31, 2008 | $ | 57 | ||||||
Additions based on tax positions related to the current year | 1 | |||||||
Additions based on tax positions related to the prior years | 4 | |||||||
Reductions for tax positions related to prior years | (3 | ) | ||||||
Reductions for tax positions relating to settlements with taxing authorities | (5 | ) | ||||||
Effects of foreign currency translations | 2 | |||||||
Balance at December 31, 2009 | $ | 56 | $ | 56 | ||||
Additions based on tax positions related to the current year | 2 | 2 | ||||||
Additions based on tax positions related to the prior years | 35 | 35 | ||||||
Reductions for tax positions related to prior years | (5 | ) | (5 | ) | ||||
Reductions for tax positions relating to lapse of statute of limitations | (3 | ) | (3 | ) | ||||
Balance at December 31, 2010 | $ | 85 | 85 | |||||
Additions based on tax positions related to the current year | 5 | |||||||
Additions based on tax positions related to the prior years | 44 | |||||||
Reductions for tax positions related to prior years | (3 | ) | ||||||
Reductions for tax positions relating to settlements with taxing authorities | (39 | ) | ||||||
Reductions for tax positions relating to lapse of statute of limitations | (6 | ) | ||||||
Balance at December 31, 2011 | 86 | |||||||
Additions based on tax positions related to the current year | 4 | |||||||
Additions based on tax positions related to the prior years | 57 | |||||||
Reductions for tax positions related to prior years | (2 | ) | ||||||
Balance at December 31, 2012 | $ | 145 | ||||||
Included in the December 31, 20102012 and 2009,2011, balances are $33$87 million and $75 million related to tax positions that, if recognized, would favorably impact the effective tax rate in future periods. Also, we had accrued interest expense related to the unrecognized tax benefits of $30$2 million, $22$7 million and $14$30 million as of December 31, 2010, 20092012, 2011 and 2008,2010, respectively. We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years ending December 31, 2010, 20092012, 2011 and 2008,2010, we recognized approximately $5$(3) million, $4$(15) million and $2$5 million in net interest expense, respectively.
It is reasonably possible that In 2011, as a result of the settlement of certain tax positions with tax authorities in China, we reduced our liability associatedfor unrecognized tax benefits by $39 million and the related net accrued interest of $16 million. The $39 million reduction was fully offset by adjustments to other income tax balance sheet accounts resulting in zero net income statement impact. As the settlement with the tax authorities included no interest or penalties being incurred, we recognized a $16 million income tax benefit in 2011 from the release of the accrued interest previously recorded related to the unrecognized tax benefits will increase or decrease within the next 12 months. These changes may be the resultthat were settled.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. INCOME TAXES (Continued)
Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although we believe that adequate provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on our earnings. Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, thus having a positive impact on earnings. It is anticipated that audit settlements will be reached during 2011 that could have aWe do not expect any significant earnings impact. Duechange to our unrecognized tax benefits within the uncertainty of amounts and in accordance with our accounting policies, we have not recorded any potential impact of these settlements.next year.
As a result of our global operations, we file income tax returns in various jurisdictions including U.S. federal, state and foreign jurisdictions. We are routinely subject to examination by taxing authorities throughout the world, including Australia, Belgium, Brazil, Canada, China, France, India, Mexico, the U.K. and the U.S. Our U.S. federal income tax returns have been examined through 2005. With few exceptions, our U.S. federal, major state and foreign jurisdictions are no longer subject to income tax examinationsassessments for years before 2005.2009.
NOTE 5. MARKETABLE SECURITIES
A summary of marketable securities, all of which are classified as current, was as follows:
| December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | |||||||||||||||||
In millions | Cost | Gross unrealized gains/(losses) | Estimated Fair Value | Cost | Gross unrealized gains/(losses) | Estimated Fair Value | |||||||||||||
Available-for-sale | |||||||||||||||||||
Debt mutual funds | $ | 139 | $ | 3 | $ | 142 | $ | 115 | $ | 2 | $ | 117 | |||||||
Bank debentures | 45 | — | 45 | 82 | — | 82 | |||||||||||||
Certificates of deposit | 47 | — | 47 | 66 | — | 66 | |||||||||||||
Government debt securities-non-U.S. | 3 | — | 3 | 3 | — | 3 | |||||||||||||
Corporate debt securities | 1 | — | 1 | 2 | — | 2 | |||||||||||||
Equity securities and other | — | 9 | 9 | — | 7 | 7 | |||||||||||||
Total marketable securities | $ | 235 | $ | 12 | $ | 247 | $ | 268 | $ | 9 | $ | 277 | |||||||
Proceeds from sales and maturities of marketable securities were $585 million, $750 million and $690 million in 2012, 2011 and 2010, respectively. Gross realized gains from the sale of available-for-sale (AFS) securities were $3 million for the year ended 2012, $3 million for the year ended 2011 and less than $1 million for the year ended 2010. Gross realized losses from the sale of AFS securities were less than $1 million for the years ended December 31, 2012, 2011 and 2010.
At December 31, 2012, the fair value of AFS investments in debt securities by contractual maturity was as follows:
Maturity date | Fair value | |||
---|---|---|---|---|
In millions | | |||
1 year or less | $ | 46 | ||
1 - 5 years | 2 | |||
5 - 10 years | 1 | |||
Total | $ | 49 | ||
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. PROPERTY, PLANT AND EQUIPMENT6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Details of our property, plantFair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and equipment balance are as follows:
| December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | |||||
Land and buildings | $ | 955 | $ | 868 | |||
Machinery, equipment and fixtures | 3,525 | 3,494 | |||||
Construction in process | 447 | (1) | 403 | ||||
4,927 | 4,765 | ||||||
Less: accumulated depreciation | (2,886 | ) | (2,879 | ) | |||
Property, plant and equipment, net | $ | 2,041 | $ | 1,886 | |||
NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the changesrisks inherent in the carrying amount of goodwillinputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. We primarily apply the market approach for 2010 and 2009:
In millions | Components | Power Generation | Engine | Distribution | Total | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Goodwill at December 31, 2008 | $ | 336 | $ | 13 | $ | 6 | $ | 7 | $ | 362 | |||||||
Additions | — | — | — | — | — | ||||||||||||
Dispositions | — | — | — | — | — | ||||||||||||
Translation and other | 1 | — | — | 1 | 2 | ||||||||||||
Goodwill at December 31, 2009 | $ | 337 | $ | 13 | $ | 6 | $ | 8 | $ | 364 | |||||||
Additions | — | — | — | 3 | 3 | ||||||||||||
Dispositions | — | — | — | — | — | ||||||||||||
Translation and other | 1 | (1 | ) | — | — | — | |||||||||||
Goodwill at December 31, 2010 | $ | 338 | $ | 12 | $ | 6 | $ | 11 | $ | 367 | |||||||
We have elected to perform the annual impairment test of our recorded goodwill as required by GAAP as of the end of our third quarter. The results of this annual impairment test indicated that therecurring fair value measurements and utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of eachobservable inputs and minimize the use of our reporting units asunobservable inputs. We are able to classify fair value balances based on the observability of September 26, 2010 and September 27, 2009, exceeded their carrying, or book value, including goodwill, and therefore our recorded goodwill was not subject to impairment.those inputs. The fair value was determinedhierarchy prioritizes the inputs used to measure fair value giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). At December 31, 2012, we did not have any Level 3 financial assets or liabilities, other than those in our pension plan (see Note 12, "PENSION BENEFITS AND OTHER POST RETIREMENT BENEFITS").
The majority of the assets and liabilities we carry at fair value are AFS securities and derivatives. AFS securities are derived from Level 1 or Level 2 inputs. The predominance of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The fair value measurement of derivatives are valued primarily using Level 2 inputs. Many of our derivative contracts are valued utilizing publicly available pricing data of contracts with similar terms. In other cases, the expected present valuecontracts are valued using current spot market data adjusted for the appropriate current forward curves provided by external financial institutions. We participate in commodity swap contracts, commodity zero-cost collar contracts, currency forward contracts and interest rate swaps. When material, we adjust the values of future cash flows.our derivative contracts for counter-party or our credit risk. There were no transfers into or out of Levels 2 or 3 during 2012.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS6. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Intangible assets that have finite useful lives are amortized over their estimated useful lives. The following table summarizes our other intangible assets with finite useful lives that are subject to amortization:financial instruments recorded at fair value in ourConsolidated Balance Sheets at December 31, 2012:
| December 31, | |||||||
---|---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | ||||||
Software | $ | 389 | $ | 407 | ||||
Accumulated amortization | (179 | ) | (190 | ) | ||||
Net software | 210 | 217 | ||||||
Trademarks, patents and other | 49 | 34 | ||||||
Accumulated amortization | (37 | ) | (23 | ) | ||||
Net trademarks, patents and other | 12 | 11 | ||||||
Total | $ | 222 | $ | 228 | ||||
| Fair Value Measurements Using | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | |||||||||
Available-for-sale debt securities | |||||||||||||
Debt mutual funds | $ | 100 | $ | 42 | $ | — | $ | 142 | |||||
Bank debentures | — | 45 | — | 45 | |||||||||
Certificates of deposit | — | 47 | — | 47 | |||||||||
Government debt securities-non-U.S. | — | 3 | — | 3 | |||||||||
Corporate debt securities | — | 1 | — | 1 | |||||||||
Available-for-sale equity securities | |||||||||||||
Financial services industry | 9 | — | — | 9 | |||||||||
Derivative assets | |||||||||||||
Interest rate contracts | — | 88 | — | 88 | |||||||||
Foreign currency forward contracts | — | 3 | — | 3 | |||||||||
Commodity swap contracts | — | 1 | — | 1 | |||||||||
Commodity call option contracts | — | 1 | — | 1 | |||||||||
Total assets | $ | 109 | $ | 231 | $ | — | $ | 340 | |||||
Derivative liabilities | |||||||||||||
Commodity swap contracts | — | 2 | — | 2 | |||||||||
Commodity put option contracts | — | 1 | — | 1 | |||||||||
Total liabilities | $ | — | $ | 3 | $ | — | $ | 3 | |||||
Amortization expense for software and other intangibles totaled $69 million, $55 million and $50 million for the years ended December 31, 2010, 2009 and 2008, respectively. Internal and external software costs (excluding those related to research, re-engineering and training), trademarks and patents are amortized generally over a three to five-year period. The following table represents the projected amortization expensesubstantial majority of our intangible assets assuming no further acquisitions or dispositions.were valued utilizing a market approach. A description of the valuation techniques and inputs used for our Level 2 fair value measures are as follows:
| For the years ended | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | 2011 | 2012 | 2013 | 2014 | 2015 | |||||||||||
Projected amortization expense | $ | 77 | $ | 63 | $ | 43 | $ | 24 | $ | 8 |
NOTE 9. DEBT Debt mutual funds—Assets in Level 2 consist of exchange traded mutual funds that lack sufficient trading volume to be classified at Level 1. The fair value measure for these investments is the daily net asset value published on a regulated governmental website. Daily quoted prices are available from the issuing brokerage and are used on a test basis to corroborate this Level 2 input.
Loans Payable
Loans payable at December 31, 2010 Bank debentures and 2009 were $82 million and $37 million, respectively, and consist primarilyCertificates of notes payable to financial institutions. The weighted-average interest rate for notes payable, bank overdrafts and current maturities of long-term debt at December 31, 2010, 2009 and 2008, was as follows:
| December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2009 | 2008 | |||||||
Weighted average interest rate | 4.76 | 5.61 | 7.03 |
For the years ended December 31, 2010, 2009 and 2008, total interest incurred was $45 million, $41 million and $53 million, respectively. For the same respective periods, interest capitalized was $5 million, $6 million and $11 million.
depositTable of Contents
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. DEBT (Continued)
Revolving Credit Facility
On July 16, 2010, we entered into a four-year revolving credit agreement with a syndicate of lenders. The credit agreement provides—These investments provide us with a $1.24 billion senior unsecured revolvingfixed rate of return and generally range in maturity from six months to three years. The counter-parties to these investments are reputable financial institutions with investment grade credit facility, the proceeds of whichratings. Since these instruments are tonot tradable and must be usedsettled directly by us with the respective financial institution, our fair value measure is the financial institutions' month-end statement.
Government debt securities-non-U.S. and Corporate debt securities —The fair value measure for working capital or other general corporate purposes.
The credit facility maturesthese securities are broker quotes received from reputable firms. These securities are infrequently traded on July 16, 2014. Amounts payable undera national stock exchange and these values are used on a test basis to corroborate our revolving credit facility will rank pro rata with all of our unsecured, unsubordinated indebtedness. Up to $150 million under our credit facility is available for swingline loans denominated in U.S. dollars. Advances under the facility bear interest at (i) a base rate or (ii) a rate equal to the LIBOR Rate plus an applicable margin based on the credit ratings of our outstanding senior unsecured long-term debt. Based on our current long-term debt ratings, the applicable margin on LIBOR Rate loans was 2.00 percent per annum as of December 31, 2010. Advances under the facility may be prepaid without premium or penalty, subject to customary breakage costs.
The credit agreement includes various covenants, including, among others, maintaining a leverage ratio of no more than 3.0 to 1.0 and maintaining an interest coverage ratio of at least 1.5 to 1.0. As of December 31, 2010, we were in compliance with all such covenants.
The table below is a reconciliation of the maximum capacity of our revolver to the amount available under the facility as of December 31, 2010 and 2009. There were no outstanding borrowings under this facility at December 31, 2010.
| Revolving Credit Capacity at December 31, | |||||||
---|---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | ||||||
Maximum credit capacity of the revolving credit facility | $ | 1,240 | $ | 1,100 | ||||
Less: | ||||||||
Letters of credit against revolving credit facility | 32 | 35 | ||||||
Amount available for borrowing under the revolving credit facility | $ | 1,208 | $ | 1,065 | ||||
As of December 31, 2010, we also had $278 million available for borrowings under our international and other domestic short-term credit facilities. Commitments against the other domestic and international facilities were $82 million as of December 31, 2010 and $37 million at the end of 2009.Level 2 input measure.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. DEBT6. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Long-term Debt Foreign currency forward contracts—The fair value measure for these contracts are determined based on forward foreign exchange rates received from third-party pricing services. These rates are based upon market transactions and are periodically corroborated by comparing to third-party broker quotes.
Commodity swap contracts—The fair value measure for these contracts are current spot market data adjusted for the appropriate current forward curves provided by external financial institutions. The current spot price is the most significant component of this valuation and is based upon market transactions. We use third-party pricing services for the spot price component of this valuation which is periodically corroborated by market data from broker quotes.
Commodity call and put option contracts—We utilize the month-end statement from the issuing financial institution as our fair value measure for this investment. We corroborate this valuation through the use of a third-party pricing service for similar assets and liabilities.
Interest rate contracts—We currently have only one interest rate contract. We utilize the month-end statement from the issuing financial institution as our fair value measure for this investment. We corroborate this valuation through the use of a third-party pricing service for similar assets and liabilities.
The following tables summarize our financial instruments recorded at fair value in ourConsolidated Balance Sheets at December 31, 2011:
| December 31, | |||||||
---|---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | ||||||
Long-term debt: | ||||||||
Export financing loan, 4.5%, due 2012 | $ | 52 | $ | 49 | ||||
Export financing loan, 4.5%, due 2013 | 55 | — | ||||||
Debentures, 6.75%, due 2027 | 58 | 58 | ||||||
Debentures, 7.125%, due 2028 | 250 | 250 | ||||||
Debentures, 5.65%, due 2098 (effective interest rate 7.48%) | 165 | 165 | ||||||
Other | 56 | 39 | ||||||
636 | 561 | |||||||
Unamortized discount | (36 | ) | (36 | ) | ||||
Fair value adjustment due to hedge on indebtedness | 41 | 25 | ||||||
Capital leases | 120 | 117 | ||||||
Total long-term debt | 761 | 667 | ||||||
Less current maturities of long-term debt | (52 | ) | (30 | ) | ||||
Long-term debt | $ | 709 | $ | 637 | ||||
| Fair Value Measurements Using | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | |||||||||
Available-for-sale debt securities | |||||||||||||
Debt mutual funds | $ | 53 | $ | 64 | $ | — | $ | 117 | |||||
Bank debentures | — | 82 | — | 82 | |||||||||
Certificates of deposit | — | 66 | — | 66 | |||||||||
Government debt securities-non-U.S. | — | 3 | — | 3 | |||||||||
Corporate debt securities | — | 2 | — | 2 | |||||||||
Available-for-sale equity securities | |||||||||||||
Financial services industry | 7 | — | — | 7 | |||||||||
Derivative assets | |||||||||||||
Interest rate contracts | — | 82 | — | 82 | |||||||||
Total assets | $ | 60 | $ | 299 | $ | — | $ | 359 | |||||
Derivative liabilities | |||||||||||||
Commodity swap contracts | — | 22 | — | 22 | |||||||||
Foreign currency forward contracts | — | 8 | — | 8 | |||||||||
Total liabilities | $ | — | $ | 30 | $ | — | $ | 30 | |||||
Principal payments required on long-term debt during the next five years are:
| Required principal payments | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | 2011 | 2012 | 2013 | 2014 | 2015 | |||||||||||
Payment | $ | 52 | $ | 116 | $ | 67 | $ | 18 | $ | 8 |
Interest on the 6.75% debentures is payable on February 15 and August 15 each year.
Interest on the $250 million 7.125% debentures and $165 million 5.65% debentures is payable on March 1 and September 1 of each year. The debentures are unsecured and are not subject to any sinking fund requirements. We can redeem the 7.125% debentures and the 5.65% debentures at any time prior to maturity at the greater of par plus accrued interest or an amount designed to ensure that the debenture holders are not penalized by the early redemption.
During 2010, two of our wholly-owned Brazilian subsidiaries entered into a loan agreement for a loan in local currency in an amount equivalent to US $50 million, at drawdown, at a fixed rate of 4.5 percent to finance its exports over the next three years. The principal of the loan has a two-year grace period and will begin amortizing in 2012.
In October 2009, one wholly-owned subsidiary, Cummins Brasil Ltda, entered into a loan agreement with the Brazil development bank, BNDES, for a loan in local currency in an amount equivalent to US $45 million, at drawdown, at a fixed rate of 4.5 percent to finance its exports over the next three years. The principal of the loan has a two-year grace period and will begin amortizing in 2011.
Our debt agreements contain several restrictive covenants. The most restrictive of these covenants applies to our revolving credit facility which will, among other things, limit our ability to incur
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. DEBT6. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
additional
Fair Value of Other Financial Instruments
Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our risk premium, the fair value and carrying value of total debt, or issue preferred stock, enter into sale-leaseback transactions, pay dividends, sell or create liens on our assets, make investments and merge or consolidate with any other person. In addition, we are subject to various financial covenants including a maximum debt-to-EBITDA ratio and a minimum interest coverage ratio. As ofcurrent maturities, at December 31, 2010, we2012 and December 31, 2011, are set forth in the table below. The carrying values of all other receivables and liabilities approximated fair values (derived from Level 2 inputs).
| December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2012 | 2011 | |||||
Fair value of total debt | $ | 926 | $ | 901 | |||
Carrying value of total debt | 775 | 783 |
NOTE 7. INVENTORIES
Inventories are stated at the lower of cost or market. Inventories included the following:
| December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2012 | 2011 | |||||
Finished products | $ | 1,393 | $ | 1,220 | |||
Work-in-process and raw materials | 939 | 1,019 | |||||
Inventories at FIFO cost | 2,332 | 2,239 | |||||
Excess of FIFO over LIFO | (111 | ) | (98 | ) | |||
Total inventories | $ | 2,221 | $ | 2,141 | |||
NOTE 8. PROPERTY, PLANT AND EQUIPMENT
Details of our property, plant and equipment balance were as follows:
| December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2012 | 2011 | |||||
Land and buildings | $ | 1,228 | $ | 1,001 | |||
Machinery, equipment and fixtures | 3,910 | 3,562 | |||||
Construction in process | 738 | (1) | 682 | ||||
Property, plant and equipment, gross | 5,876 | 5,245 | |||||
Less: Accumulated depreciation | (3,152 | ) | (2,957 | ) | |||
Property, plant and equipment, net | $ | 2,724 | $ | 2,288 | |||
Table of the covenants under our borrowing agreements.Contents
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the changes in the carrying amount of goodwill for 2012 and 2011:
In millions | Components | Distribution | Power Generation | Engine | Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Goodwill at December 31, 2010 | $ | 338 | $ | 11 | $ | 12 | $ | 6 | $ | 367 | ||||||
Divestitures | (25 | ) | — | — | — | (25 | ) | |||||||||
Translation and other | (2 | ) | (1 | ) | — | — | (3 | ) | ||||||||
Goodwill at December 31, 2011 | 311 | 10 | 12 | 6 | 339 | |||||||||||
Acquisitions | 91 | 9 | — | — | 100 | |||||||||||
Translation and other | 6 | — | — | — | 6 | |||||||||||
Goodwill at December 31, 2012 | $ | 408 | $ | 19 | $ | 12 | $ | 6 | $ | 445 | ||||||
Intangible assets that have finite useful lives are amortized over their estimated useful lives. The following table summarizes our other intangible assets with finite useful lives that are subject to amortization:
| December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2012 | 2011 | |||||
Software | $ | 495 | $ | 409 | |||
Less: Accumulated amortization | (218 | ) | (191 | ) | |||
Net software | 277 | 218 | |||||
Trademarks, patents and other | 140 | 44 | |||||
Less: Accumulated amortization | (48 | ) | (35 | ) | |||
Net trademarks, patents and other | 92 | 9 | |||||
Total | $ | 369 | $ | 227 | |||
Amortization expense for software and other intangibles totaled $64 million, $57 million and $69 million for the years ended December 31, 2012, 2011 and 2010, respectively. Internal and external software costs (excluding those related to research, re-engineering and training), trademarks and patents are amortized generally over a three to 12 year period. The following table represents the projected amortization expense of our intangible assets, assuming no further acquisitions or dispositions.
| For the years ended | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | 2013 | 2014 | 2015 | 2016 | 2017 - 2018 | |||||||||||
Projected amortization expense | $ | 77 | $ | 74 | $ | 72 | $ | 66 | $ | 56 |
NOTE 10. DEBT
Loans payable at December 31, 2012 and 2011 were $16 million and $28 million, respectively, and consisted primarily of notes payable to financial institutions. The weighted-average interest rate for
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. DEBT (Continued)
notes payable, bank overdrafts and current maturities of long-term debt at December 31, 2012, 2011 and 2010, was as follows:
| December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | |||||||
Weighted average interest rate | 3.21 | 4.19 | 4.76 |
For the years ended December 31, 2012, 2011 and 2010, total interest incurred was $39 million, $48 million and $45 million, respectively. For the same respective periods, interest capitalized was $7 million, $4 million and $5 million.
On November 9, 2012, we entered into a five-year revolving credit agreement with a syndicate of lenders. The credit agreement provides us with a $1.75 billion senior unsecured revolving credit facility, the proceeds of which are to be used by us for working capital or other general corporate purposes.
The credit facility matures on November 9, 2017. Amounts payable under our revolving credit facility will rank pro rata with all of our unsecured, unsubordinated indebtedness. Up to $200 million under our credit facility is available for swingline loans denominated in U.S. dollars. Advances under the facility bear interest at (i) a base rate or (ii) a rate equal to the LIBOR Rate plus an applicable margin based on the credit ratings of our outstanding senior unsecured long-term debt. Based on our current long-term debt ratings, the applicable margin on LIBOR Rate loans was 0.875 percent per annum as of December 31, 2012. Advances under the facility may be prepaid without premium or penalty, subject to customary breakage costs.
The credit agreement includes various covenants, including, among others, maintaining a leverage ratio of no more than 3.25 to 1.0. As of December 31, 2012, we were in compliance with the covenants.
The table below is a reconciliation of the maximum capacity of our revolver to the amount available under the facility as of December 31, 2012. There were no outstanding borrowings under this facility at December 31, 2012.
In millions | Revolving Credit Capacity at December 31, 2012 | |||
---|---|---|---|---|
Maximum credit capacity of the revolving credit facility | $ | 1,750 | ||
Less: Letters of credit against revolving credit facility | 23 | |||
Amount available for borrowing under the revolving credit facility | $ | 1,727 | ||
As of December 31, 2012, we also had $301 million available for borrowings under our international and other domestic short-term credit facilities. Commitments against the other domestic and international facilities were $16 million as of December 31, 2012 and $28 million at the end of 2011.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. DEBT (Continued)
| December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2012 | 2011 | |||||
Long-term debt | |||||||
Export financing loan, 4.5%, due 2012 | $ | — | $ | 31 | |||
Export financing loan, 4.5%, due 2013 | 23 | 44 | |||||
Debentures, 6.75%, due 2027 | 58 | 58 | |||||
Debentures, 7.125%, due 2028 | 250 | 250 | |||||
Debentures, 5.65%, due 2098 (effective interest rate 7.48%) | 165 | 165 | |||||
Other | 157 | 90 | |||||
653 | 638 | ||||||
Unamortized discount | (35 | ) | (36 | ) | |||
Fair value adjustments due to hedge on indebtedness | 88 | 82 | |||||
Capital leases | 53 | 71 | |||||
Total long-term debt | 759 | 755 | |||||
Less: Current maturities of long-term debt | (61 | ) | (97 | ) | |||
Long-term debt | $ | 698 | $ | 658 | |||
Principal payments required on long-term debt during the next five years are:
| Required Principal Payments | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | 2013 | 2014 | 2015 | 2016 | 2017 | |||||||||||
Payment | $ | 61 | $ | 41 | $ | 72 | $ | 20 | $ | 13 |
Interest on the 6.75% debentures is payable on February 15 and August 15 each year.
Interest on the $250 million 7.125% debentures and $165 million 5.65% debentures is payable on March 1 and September 1 of each year. The debentures are unsecured and are not subject to any sinking fund requirements. We can redeem the 7.125% debentures and the 5.65% debentures at any time prior to maturity at the greater of par plus accrued interest or an amount designed to ensure that the debenture holders are not penalized by the early redemption.
During 2010, two of our wholly-owned Brazilian subsidiaries entered into a loan agreement for a loan in local currency in an amount equivalent to US $50 million, at drawdown, at a fixed rate of 4.5 percent to finance its exports over the next three years. The principal of the loan had a two-year grace period and began amortizing in 2012.
During 2009, one wholly-owned subsidiary, Cummins Brasil Ltda, entered into a loan agreement with the Brazil development bank, BNDES, for a loan in local currency in an amount equivalent to US $45 million, at drawdown, at a fixed rate of 4.5 percent to finance its exports over the next three years. The principal of the loan had a two-year grace period which began amortizing in 2011 and was completed in August of 2012.
Our debt agreements contain several restrictive covenants. The most restrictive of these covenants applies to our revolving credit facility which will upon default, among other things, limit our ability to
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. DEBT (Continued)
incur additional debt or issue preferred stock, enter into sale-leaseback transactions, sell or create liens on our assets, make investments and merge or consolidate with any other person. In addition, we are subject to a maximum debt-to-EBITDA ratio financial covenant. As of December 31, 2012, we were in compliance with all of the covenants under our borrowing agreements.
NOTE 11. PRODUCT WARRANTY LIABILITY
We charge the estimated costs of warranty programs, other than product recalls, to income at the time products are shipped to customers. We use historical claims experience to develop the estimated liability. We review product recall programs on a quarterly basis and, if necessary, record a liability when we commit to an action or when they become probable and estimable, which is reflected in the provision for warranties issued line. We also sell extended warranty coverage on several engines. The following is a tabular reconciliation of the product warranty liability, including the deferred revenue related to our extended warranty coverage and accrued recall programs:
| December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | |||||
Balance, beginning of year | $ | 989 | $ | 962 | |||
Provision for warranties issued | 401 | 364 | |||||
Deferred revenue on extended warranty contracts sold | 105 | 109 | |||||
Payments | (421 | ) | (472 | ) | |||
Amortization of deferred revenue on extended warranty contracts | (86 | ) | (72 | ) | |||
Changes in estimates for pre-existing warranties | (7 | ) | 84 | ||||
Foreign currency translation | (1 | ) | 14 | ||||
Balance, end of year | $ | 980 | $ | 989 | |||
Warranty related deferred revenue, supplier recovery receivables and the long-term portion of the warranty liability on our balance sheets were as follows:
| December 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | Balance Sheet Locations | |||||||
Deferred revenue related to extended coverage programs: | ||||||||||
Current portion | $ | 91 | $ | 71 | Deferred revenue | |||||
Long-term portion | 193 | 191 | Other liabilities and deferred revenue | |||||||
Total | $ | 284 | $ | 262 | ||||||
Receivables related to estimated supplier recoveries: | ||||||||||
Current portion | $ | 7 | $ | 5 | Trade and other receivables | |||||
Long-term portion | 5 | 5 | Other assets | |||||||
Total | $ | 12 | $ | 10 | ||||||
Long-term portion of warranty liability | $ | 275 | $ | 301 | Other liabilities and deferred revenue | |||||
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. PRODUCT WARRANTY LIABILITY (Continued)
During 2009, actual cost trends for certain midrange engine products, including products launched in 2007 and for which warranty periods can extend to five years, indicated higher per claim repair cost than the products on which the initial accrual rate was developed. These products include more electronic parts than historical models contributing to the higher cost per claim. In addition, certain products introduced in 2003 and sold prior to 2007 for which the warranty period extended five years also demonstrated a higher cost per claim than that of predecessor products. We increased our liability in 2009 as these experience trends became evident.
NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFITS
PENSION PLANS
We sponsor several contributory and noncontributory pension plans covering substantially all employees. Generally, hourly employee pension benefits are earned based on years of service and compensation during active employment while future benefits for salaried employees are determined using a cash balance formula. However, the level of benefits and terms of vesting may vary among plans. Pension plan assets are administered by trustees and are principally invested in equity securities and fixed income securities. It is our policy to make contributions to our various qualified plans in accordance with statutory and contractual funding requirements and any additional contributions we determine are appropriate.
Obligations, Assets and Funded Status
The following tables present the changes in the benefit obligations and the various plan assets, the funded status of the plans, and the amounts recognized in ourConsolidated Balance Sheets for our significant pension plans. Non-U.S. plans represent plans sponsored in the U.K. Benefit obligation balances presented below reflect the projected benefit obligation (PBO) for our pension plans.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
| Qualified and Non-Qualified Pension Plans | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. Plans | Non-U.S. Plans | |||||||||||
In millions | 2010 | 2009 | 2010 | 2009 | |||||||||
Change in benefit obligation | |||||||||||||
Benefit obligation at beginning of year | $ | 2,053 | $ | 1,949 | $ | 1,075 | $ | 861 | |||||
Service cost | 45 | 47 | 19 | 18 | |||||||||
Interest cost | 111 | 115 | 58 | 57 | |||||||||
Plan participants' contributions | — | — | 1 | 1 | |||||||||
Actuarial losses (gains) | 53 | 120 | (57 | ) | 108 | ||||||||
Benefits paid from fund | (144 | ) | (176 | ) | (37 | ) | (58 | ) | |||||
Benefits paid directly by employer | (9 | ) | (8 | ) | — | — | |||||||
Exchange rate changes | — | — | (46 | ) | 99 | ||||||||
Curtailment loss (gain) | — | 5 | — | (10 | ) | ||||||||
Other | 1 | 1 | — | (1 | ) | ||||||||
Benefit obligation at end of year | $ | 2,110 | $ | 2,053 | $ | 1,013 | $ | 1,075 | |||||
Change in plan assets | |||||||||||||
Fair value of plan assets at beginning of year | $ | 1,677 | $ | 1,484 | $ | 929 | $ | 745 | |||||
Actual return on plan assets | 273 | 269 | 121 | 134 | |||||||||
Employer contributions | 100 | 100 | 112 | 21 | |||||||||
Plan participants' contributions | — | — | 1 | 1 | |||||||||
Benefits paid | (144 | ) | (176 | ) | (37 | ) | (58 | ) | |||||
Exchange rate changes | — | — | (39 | ) | 86 | ||||||||
Other | — | — | 1 | — | |||||||||
Fair value of plan assets at end of year | $ | 1,906 | $ | 1,677 | $ | 1,088 | $ | 929 | |||||
Funded status (including underfunded and nonfunded plans) at end of year | $ | (204 | ) | $ | (376 | ) | $ | 75 | $ | (146 | ) | ||
Amounts recognized in consolidated balance sheets | |||||||||||||
Other assets—long term assets | $ | — | $ | — | $ | 75 | $ | — | |||||
Accrued compensation, benefits and retirement costs—current liabilities | (9 | ) | (8 | ) | — | — | |||||||
Pensions—long-term liabilities | (195 | ) | (368 | ) | — | (146 | ) | ||||||
Net amount recognized | $ | (204 | ) | $ | (376 | ) | $ | 75 | $ | (146 | ) | ||
Amounts recognized in accumulated other comprehensive loss consist of: | |||||||||||||
Net actuarial loss | $ | 692 | $ | 801 | $ | 227 | $ | 364 | |||||
Prior service (credit) cost | (5 | ) | (6 | ) | 4 | 6 | |||||||
Net amount recognized | $ | 687 | $ | 795 | $ | 231 | $ | 370 | |||||
In addition to the pension plans in the above table, we also maintain less significant defined benefit pension plans in 12 other countries outside the U.S. and the U.K. that comprise less than 3 percent and 4 percent of our pension plan assets and obligations, respectively. These plans are reflected in "Other liabilities and deferred revenue" on ourConsolidated Balance Sheets.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
The following table presents information regarding underfunded pension plans that are included in the preceding table:
| Qualified and Non-Qualified Pension Plans | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. Plans | Non-U.S. Plans | ||||||||||||
| December 31, | |||||||||||||
In millions | 2010 | 2009 | 2010 | 2009 | ||||||||||
Total accumulated benefit obligation | $ | 2,087 | $ | 2,033 | $ | — | $ | 1,019 | ||||||
Plans with accumulated benefit obligation in excess of plan assets: | ||||||||||||||
Accumulated benefit obligation | 2,087 | 2,033 | — | 1,019 | ||||||||||
Fair value of plan assets | 1,906 | 1,677 | — | 929 | ||||||||||
Plans with projected benefit obligation in excess of plan assets: | ||||||||||||||
Projected benefit obligation | 2,110 | 2,053 | — | 1,075 | ||||||||||
Fair value of plan assets | 1,906 | 1,677 | — | 929 |
Components of Net Periodic Pension Cost
The following table presents the net periodic pension cost under our plans:
| Qualified and Non-Qualified Pension Plans | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. Plans | Non-U.S. Plans | |||||||||||||||||
In millions | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||
Service cost | $ | 45 | $ | 47 | $ | 48 | $ | 19 | $ | 18 | $ | 26 | |||||||
Interest cost | 111 | 115 | 115 | 58 | 57 | 65 | |||||||||||||
Expected return on plan assets | (147 | ) | (142 | ) | (150 | ) | (71 | ) | (60 | ) | (73 | ) | |||||||
Amortization of prior service (credit) cost | (1 | ) | (1 | ) | (1 | ) | 3 | 3 | 3 | ||||||||||
Recognized net actuarial loss | 36 | 29 | 20 | 17 | 21 | 19 | |||||||||||||
Other | — | — | (1 | ) | — | — | — | ||||||||||||
Net periodic benefit cost before curtailments | $ | 44 | $ | 48 | $ | 31 | $ | 26 | $ | 39 | $ | 40 | |||||||
Curtailment loss | — | 5 | — | — | 1 | — | |||||||||||||
Net periodic benefit cost | $ | 44 | $ | 53 | $ | 31 | $ | 26 | $ | 40 | $ | 40 | |||||||
| December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2012 | 2011 | |||||
Balance, beginning of year | $ | 1,014 | $ | 980 | |||
Provision for warranties issued | 415 | 428 | |||||
Deferred revenue on extended warranty contracts sold | 210 | 124 | |||||
Payments | (416 | ) | (409 | ) | |||
Amortization of deferred revenue on extended warranty contracts | (103 | ) | (95 | ) | |||
Changes in estimates for pre-existing warranties | (33 | ) | (7 | ) | |||
Foreign currency translation | 1 | (7 | ) | ||||
Balance, end of year | $ | 1,088 | $ | 1,014 | |||
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFITSPRODUCT WARRANTY LIABILITY (Continued)
Other changes in benefit obligations and plan assets recognized in other comprehensive income in 2010, 2009 and 2008 are as follows:
In millions | 2010 | 2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Amortization of prior service cost | $ | (2 | ) | $ | (2 | ) | $ | (2 | ) | |
Curtailments | — | (1 | ) | — | ||||||
Recognized actuarial loss | (53 | ) | (50 | ) | (39 | ) | ||||
Incurred prior service cost | 1 | — | — | |||||||
Incurred actuarial (gain) loss | (181 | ) | 17 | 756 | ||||||
Foreign exchange translation adjustments | (12 | ) | 42 | (56 | ) | |||||
Total recognized in other comprehensive income | $ | (247 | ) | $ | 6 | $ | 659 | |||
Total recognized in net periodic pension cost and other comprehensive income | $ | (177 | ) | $ | 99 | $ | 730 | |||
The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic pension cost during the next fiscal year are as follows:
In millions | 2011 | |||
---|---|---|---|---|
Prior service cost | $ | 2 | ||
Net actuarial loss | 56 |
As disclosed in Note 22, "RESTRUCTURING AND OTHER CHARGES," we executed restructuring actions in 2009. As a result, our pension benefit plans were remeasured and we recognized curtailment losses, as prescribed under GAAP pension standards, due to the significant reduction in the expected aggregate years of future service of the employees affected by the actions. In 2009, we recorded net curtailment losses of $5 million and $1 million for U.S. and non-U.S. plans, respectively, and $2 million for our less significant plans in other countries outside the U.S. Warranty related deferred revenue, supplier recovery receivables and the U.K. The curtailment losses include recognition of the change in the PBO and along-term portion of the previously unrecognized prior service cost reflecting the reduction in expected future service.
Assumptions
The table below presents various assumptions used in determining the pension benefit obligation for each year and reflects weighted-average percentages for the various plans (Non-U.S. is the U.K.):
| Qualified and Non-Qualified Pension Plans | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. Plans | Non-U.S. Plans | |||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||
Discount rate | 5.42 | % | 5.60 | % | 5.80 | % | 5.80 | % | |||||
Compensation increase rate | 4.00 | % | 4.00 | % | 4.50 | % | 4.50 | % |
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
The table below presents various assumptions used in determining the net periodic pension cost and reflects weighted-average percentages for the various plans (Non-U.S. is the U.K.):
| Qualified and Non-Qualified Pension Plans | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. Plans | Non-U.S. Plans | |||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||
Discount rate | 5.60 | % | 6.20 | % | 6.10 | % | 5.80 | % | 6.20 | % | 5.80 | % | |||||||
Expected return on plan assets | 8.00 | % | 8.25 | % | 8.25 | % | 7.25 | % | 7.25 | % | 7.25 | % | |||||||
Compensation increase rate | 4.00 | % | 4.00 | % | 4.00 | % | 4.50 | % | 4.25 | % | 4.25 | % |
Plan Assets
Our investment policies in the U.S. and U.K. provide for the rebalancing of assets to maintain our long-term strategic asset allocation. We are committed to its long-term strategy and do not attempt to time the market given empirical evidence that asset allocation is more critical than individual asset or investment manager selection. Rebalancing of the assets has and continues to occur. The rebalancing is critical to having the proper weighting of assets to achieve the expected total portfolio returns. We believe that our portfolio is highly diversified and does not have any significant exposure to concentration risk. The plan assets for our defined benefit pension plans do not include any of our common stock.
U.S. Plan Assets
For the U.S. qualified pension plans, our assumption for the expected returnwarranty liability on assets was 8.0 percent in 2010. Projected returns are based primarily on broad, publicly traded equity and fixed income indices and forward-looking estimates of active portfolio and investment management. We expect additional positive returns from this active investment management. Based on the historical returns and forward-looking return expectations, we have elected to use an assumption of 8.0 percent per year in 2011.
The primary investment objective is to exceed, on a net-of-fee basis, the rate of return of a policy portfolio comprised of the following:
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CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
The fixed income component is structured to represent a custom bond benchmark constructed to closely represent the monthly change in the value of our liabilities. This component is structured in such a way that its benchmark covers 50 percent of the plan's exposure to changes in its discount rate (AA corporate bond yields). In order to achieve a hedge on more than the targeted 30 percent of plan assets invested in fixed income securities, the benefits policy committee may instruct the fixed income managers, other managers or the custodian/trustee to utilize derivative securities in an overlay fashion, which would further reduce the plan's risk of declining interest rates in what is referred to as a liability driven investment strategy. However, all managers hired to manage assets for the trust are prohibited from using leverage unless specifically discussed with the committee and allowed for in their guidelines.
UK Plan Assets
The methodology used to determine the rate of return on pension plan assets in the U.K. was based on establishing an equity-risk premium over current long-term bond yields adjusted based on target asset allocations. Our strategy with respect to our investments in these assets is to be invested in a suitable mixture of return-seeking assets (equities and real estate) and liability matching assets (bonds) with a long-term outlook. Therefore, the risk and return balance of our U.K. asset portfolio should reflect a long-term horizon. To achieve these objectives we have established the following targets:
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As part of our strategy in the U.K. we have not prohibited the use of any financial instrument, including derivatives.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
Fair Value of U.S. Plan Assets
The fair values of U.S. pension plan assets at December 31, 2010, by asset category are as follows:
| Fair Value Measurements as of December 31, 2010 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | |||||||||||
Equities | |||||||||||||||
U.S. | $ | 71 | $ | 458 | $ | — | $ | 529 | |||||||
Non-U.S. | 133 | 239 | — | 372 | |||||||||||
Fixed income | |||||||||||||||
Government debt | 345 | 73 | — | 418 | |||||||||||
Corporate debt | |||||||||||||||
U.S. | 192 | 101 | — | 293 | |||||||||||
Non-U.S. | 43 | — | — | 43 | |||||||||||
Asset/mortgaged backed securities | 13 | — | — | 13 | |||||||||||
Net cash equivalents(1) | 25 | — | — | 25 | |||||||||||
Derivative instruments(2) | — | 1 | — | 1 | |||||||||||
Private equity and real estate(3) | — | — | 208 | 208 | |||||||||||
Total | $ | 822 | $ | 872 | $ | 208 | $ | 1,902 | |||||||
Pending trade purchases/sales | (2 | ) | |||||||||||||
Accruals(4) | 6 | ||||||||||||||
Total | $ | 1,906 | |||||||||||||
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
The fair values of U.S. pension plan assets at December 31, 2009, by asset category are as follows:
| Fair Value Measurements as of December 31, 2009 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | |||||||||||
Equities | |||||||||||||||
U.S. | $ | 157 | $ | 457 | $ | — | $ | 614 | |||||||
Non-U.S. | 128 | 219 | — | 347 | |||||||||||
Fixed income | |||||||||||||||
Government debt | 260 | — | — | 260 | |||||||||||
Corporate debt | |||||||||||||||
U.S. | 298 | — | — | 298 | |||||||||||
Non-U.S. | 68 | — | — | 68 | |||||||||||
Asset/mortgaged backed securities | 14 | — | — | 14 | |||||||||||
Net cash equivalents(1) | 9 | — | — | 9 | |||||||||||
Derivative instruments(2) | — | 3 | — | 3 | |||||||||||
Private equity and real estate(3) | — | — | 139 | 139 | |||||||||||
Total | $ | 934 | $ | 679 | $ | 139 | $ | 1,752 | |||||||
Pending trade purchases/sales | (87 | ) | |||||||||||||
Accruals(4) | 12 | ||||||||||||||
Total | $ | 1,677 | |||||||||||||
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
The reconciliation of Level 3 assets is as follows:
| Fair Value Measurements as of December 31, Using Significant Unobservable Inputs (Level 3) | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Private Equity | Real Estate | Total | |||||||||
Ending December 31, 2008 | $ | 97 | $ | 57 | $ | 154 | ||||||
Actual return on plan assets: | ||||||||||||
Unrealized losses on assets still held at the reporting date | (6 | ) | (21 | ) | (27 | ) | ||||||
Purchases, sales and settlements | 13 | (1 | ) | 12 | ||||||||
Ending balance at December 31, 2009 | $ | 104 | $ | 35 | $ | 139 | ||||||
Actual return on plan assets: | ||||||||||||
Unrealized gains on assets still held at the reporting date | 14 | 3 | 17 | |||||||||
Purchases, sales and settlements | 8 | 44 | 52 | |||||||||
Ending balance at December 31, 2010 | $ | 126 | $ | 82 | $ | 208 | ||||||
Fair Value of U.K. Plan Assets
The fair values of U.K. pension plan assets at December 31, 2010, by asset category are as follows:
| Fair Value Measurements as of December 31, 2010 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | |||||||||||
Equities | |||||||||||||||
U.S. | $ | — | $ | 139 | $ | — | $ | 139 | |||||||
Non-U.S. | — | 464 | — | 464 | |||||||||||
Fixed income | |||||||||||||||
Government debt | 100 | — | — | 100 | |||||||||||
Corporate debt | |||||||||||||||
U.S. | 19 | — | — | 19 | |||||||||||
Non-U.S. | 81 | 212 | — | 293 | |||||||||||
Asset/mortgaged backed securities | 16 | — | — | 16 | |||||||||||
Net cash equivalents(1) | 40 | — | — | 40 | |||||||||||
Private equity and real estate(2) | — | — | 40 | 40 | |||||||||||
Total | $ | 256 | $ | 815 | $ | 40 | $ | 1,111 | |||||||
Pending trade purchases/sales | (26 | ) | |||||||||||||
Accruals(3) | 3 | ||||||||||||||
Total | $ | 1,088 | |||||||||||||
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
The fair values of U.K. pension plan assets at December 31, 2009, by asset category are as follows:
| Fair Value Measurements as of December 31, 2009 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | |||||||||||
Equities | |||||||||||||||
U.S. | $ | — | $ | 106 | $ | — | $ | 106 | |||||||
Non-U.S. | — | 434 | — | 434 | |||||||||||
Fixed income | |||||||||||||||
Government debt | 96 | 91 | — | 187 | |||||||||||
Corporate debt | |||||||||||||||
U.S. | 23 | 15 | — | 38 | |||||||||||
Non-U.S. | 60 | 69 | — | 129 | |||||||||||
Asset/mortgaged backed securities | 16 | — | — | 16 | |||||||||||
Net cash equivalents(1) | 4 | — | — | 4 | |||||||||||
Private equity and real estate(2) | — | — | 35 | 35 | |||||||||||
Total | $ | 199 | $ | 715 | $ | 35 | $ | 949 | |||||||
Pending trade purchases/sales | (21 | ) | |||||||||||||
Accruals(3) | 1 | ||||||||||||||
Total | $ | 929 | |||||||||||||
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
The reconciliation of Level 3 assets is as follows:
| Fair Value Measurements as of December 31, Using Significant Unobservable Inputs (Level 3) | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Private Equity | Real Estate | Total | |||||||||
Ending at December 31, 2008 | $ | 5 | $ | 36 | $ | 41 | ||||||
Actual return on plan assets: | ||||||||||||
Unrealized losses on assets still held at the reporting date | (2 | ) | (8 | ) | (10 | ) | ||||||
Purchases, sales and settlements | 1 | 3 | 4 | |||||||||
Ending balance at December 31, 2009 | $ | 4 | $ | 31 | $ | 35 | ||||||
Actual return on plan assets: | ||||||||||||
Unrealized gains (losses) on assets still held at the reporting date | 1 | (2 | ) | (1 | ) | |||||||
Purchases, sales and settlements | 5 | 1 | 6 | |||||||||
Ending balance at December 31, 2010 | $ | 10 | $ | 30 | $ | 40 | ||||||
The investments in private equity and real estate funds, for which quoted market prices are not available, are valued at their estimated fair value as determined by applicable investment managers or by quarterly financial statements of the funds. These financial statements are audited at least annually. The fair value of all real estate properties, held in the partnerships, are valued at least once per year by an independent professional real estate valuation firm. Fair value generally represents the fund's proportionate share of the net assets of the investment partnerships as reported by the general partners of the underlying partnerships. Some securities with no readily available market are initially valued at cost, utilizing independent professional valuation firms as well as market comparisons with subsequent adjustments to values which reflect either the basis of meaningful third-party transactions in the private market or the fair value deemed appropriate by the general partners of the underlying investment partnerships. In such instances, consideration is also given to the financial condition and operating results of the issuer, the amount that the investment partnerships can reasonably expect to realize upon the sale of the securities and any other factors deemed relevant. The estimated fair values are subject to uncertainty and therefore may differ from the values that would have been used had a ready market for such investments existed and such differences could be material.
Estimated Future Contributions and Benefit Payments
We plan to contribute approximately $130 million to our defined benefit pension plans in 2011. The table below presents expected future benefit payments under our pension plans:
| Qualified and Non-Qualified Pension Plans | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 - 2020 | |||||||||||||
Expected benefit payments | $ | 213 | $ | 214 | $ | 213 | $ | 217 | $ | 221 | $ | 1,144 |
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
Other Pension Plans
We also sponsor defined contribution plans for certain hourly and salaried employees. Our contributions to these plans were $44 million, $42 million and $30 million for the years ended December 31, 2010, 2009 and 2008.
OTHER POSTRETIREMENT BENEFITS
Our other postretirement benefit plans provide various health care and life insurance benefits to eligible employees, who retire and satisfy certain age and service requirements, and their dependents. The plans are contributory and contain cost-sharing features such as caps, deductibles, coinsurance and spousal contributions. Employer contributions are limited by formulas in each plan. Retiree contributions for health care benefits are adjusted annually and we reserve the right to change benefits covered under these plans. There were no plan assets for the postretirement benefit plans as our policy is to fund benefits and expenses for these plans as claims and premiums are incurred.
Obligations and Funded Status
The following tables present the changes in the benefit obligations, the funded status of the plans and the amounts recognized in ourConsolidated Balance Sheets for our significant other postretirement benefit plans. Benefit obligation balances presented below reflect the accumulated postretirement benefit obligations (APBO) for our other postretirement benefit plans.were as follows:
In millions | 2010 | 2009 | |||||
---|---|---|---|---|---|---|---|
Change in benefit obligation | |||||||
Benefit obligation at beginning of year | $ | 504 | $ | 503 | |||
Service cost | — | 1 | |||||
Interest cost | 27 | 29 | |||||
Plan participants' contributions | 10 | 9 | |||||
Amendments | (1 | ) | — | ||||
Actuarial loss | 14 | 17 | |||||
Benefits paid directly by employer | (64 | ) | (60 | ) | |||
Curtailment loss | — | 5 | |||||
Benefit obligation at end of year | $ | 490 | $ | 504 | |||
Funded status at end of year | $ | (490 | ) | $ | (504 | ) | |
Amounts recognized in consolidated balance sheets | |||||||
Accrued compensation, benefits and retirement costs—current liabilities | $ | (51 | ) | $ | (51 | ) | |
Postretirement benefits other than pensions—long-term liabilities | (439 | ) | (453 | ) | |||
Net amount recognized | $ | (490 | ) | $ | (504 | ) | |
Amounts recognized in accumulated other comprehensive loss consist of: | |||||||
Net actuarial loss | $ | 50 | $ | 35 | |||
Prior service credit | (14 | ) | (20 | ) | |||
| December 31, | | ||||||
---|---|---|---|---|---|---|---|---|
In millions | 2012 | 2011 | Balance Sheet Locations | |||||
Deferred revenue related to extended coverage programs | ||||||||
Current portion | $ | 111 | $ | 103 | Deferred revenue | |||
Long-term portion | 309 | 210 | Other liabilities and deferred revenue | |||||
Total | $ | 420 | $ | 313 | ||||
Receivables related to estimated supplier recoveries | ||||||||
Current portion | $ | 7 | $ | 7 | Trade and other receivables | |||
Long-term portion | 6 | 7 | Other assets | |||||
Total | $ | 13 | $ | 14 | ||||
Long-term portion of warranty liability | $ | 282 | $ | 279 | Other liabilities and deferred revenue | |||
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
In millions | 2010 | 2009 | |||||
---|---|---|---|---|---|---|---|
Net amount recognized | $ | 36 | $ | 15 | |||
Components of Net Periodic Other Postretirement Benefits Cost
The following table presents the net periodic other postretirement benefits cost under our plans:
In millions | 2010 | 2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Service cost | $ | — | $ | 1 | $ | 1 | ||||
Interest cost | 27 | 29 | 31 | |||||||
Amortization of prior service credit | (8 | ) | (9 | ) | (10 | ) | ||||
Recognized net actuarial gain | — | — | (1 | ) | ||||||
Other | — | (1 | ) | — | ||||||
Net periodic other postretirement benefit cost before curtailments | 19 | 20 | 21 | |||||||
Curtailment loss | — | 6 | — | |||||||
Net periodic other postretirement benefit cost | $ | 19 | $ | 26 | $ | 21 | ||||
Other changes in benefit obligations recognized in other comprehensive income in 2010, 2009 and 2008 are as follows:
In millions | 2010 | 2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Amortization of prior service credit | $ | 8 | $ | 9 | $ | 10 | ||||
Recognized actuarial gain | — | — | 1 | |||||||
Incurred actuarial loss (gain) | 14 | 17 | (20 | ) | ||||||
Incurred prior service credit | (2 | ) | — | (2 | ) | |||||
Other | 1 | (1 | ) | (2 | ) | |||||
Total recognized in other comprehensive income | 21 | 25 | (13 | ) | ||||||
Total recognized in net periodic other postretirement benefit cost and other comprehensive income | $ | 40 | $ | 51 | $ | 8 | ||||
The amount in accumulated other comprehensive loss that is expected to be recognized as a component of net periodic other postretirement benefit cost during the next fiscal year is a prior service credit of $8 million.
As disclosed in Note 22, "RESTUCTURING AND OTHER CHARGES," we executed restructuring actions in 2009. As a result, our U.S. postretirement benefit plans were remeasured and we recognized curtailment losses, as prescribed under GAAP other postretirement benefit standards, due to the significant reduction in the expected aggregate years of future service of the employees affected by the actions. In 2009, we recorded net curtailment losses of $6 million. The curtailment losses include recognition of the change in the APBO and a portion of the previously unrecognized prior service cost reflecting the reduction in expected future service.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
Assumptions
The table below presents assumptions used in determining the other postretirement benefit obligation for each year and reflects weighted-average percentages for our other postretirement plans:
| 2010 | 2009 | |||||
---|---|---|---|---|---|---|---|
Discount rate | 5.20 | % | 5.60 | % |
The table below presents assumptions used in determining the net periodic other postretirement benefits cost and reflects weighted-average percentages for the various plans:
| 2010 | 2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Discount rate | 5.60 | % | 6.20 | % | 6.00 | % |
Our consolidated other postretirement benefit obligation is determined by application of the terms of health care and life insurance plans, together with relevant actuarial assumptions and health care cost trend rates. For measurement purposes, an 8.00 percent annual rate of increase in the per capita cost of covered health care benefits was assumed in 2010. The rate was assumed to remain at 8.00 percent for three years and then decrease on a linear basis to 5.00 percent through 2019 and remain at that level thereafter. An increase in the health care cost trends of one percent would increase our APBO by $20 million as of December 31, 2010 and the net periodic other postretirement benefit expense for 2011 by $1 million. A decrease in the health care cost trends of one percent would decrease our APBO by $17 million as of December 31, 2010 and the net periodic other postretirement benefit expense for 2011 by $1 million.
The Medicare Prescription Drug Improvement and Modernization Act of 2003 was reflected in the APBO beginning December 31, 2004, assuming we will continue to provide a prescription drug benefit to retirees that is at least actuarially equivalent to Medicare Part D and we will receive the federal subsidy. We received a subsidy of approximately $4 million in 2010 and $5 million in 2009.
Estimated Benefit Payments
The table below presents expected benefit payments under our other postretirement benefit plans and also provides the Medicare subsidy receipts expected to be received:
In millions | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 - 2020 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Expected benefit payments, net of Medicare Part D subsidy—postretirement | $ | 51 | $ | 50 | $ | 49 | $ | 48 | $ | 46 | $ | 188 | |||||||
Medicare Part D subsidy | 2 | 3 | 3 | 3 | 3 | 12 |
NOTE 12. PENSION AND OTHER LIABILITIES AND DEFERRED REVENUEPOSTRETIREMENT BENEFITS
Other liabilitiesWe sponsor several contributory and deferred revenue includenoncontributory pension plans covering substantially all employees. Generally, hourly employee pension benefits are earned based on years of service and compensation during active employment while future benefits for salaried employees are determined using a cash balance formula. However, the following:level of benefits and terms of vesting may vary among plans. Pension plan assets are administered by trustees and are principally invested in equity securities and fixed income securities. It is our policy to make contributions to our various qualified plans in accordance with statutory and contractual funding requirements and any additional contributions we determine are appropriate.
Obligations, Assets and Funded Status
The following tables present the changes in the benefit obligations and the various plan assets, the funded status of the plans, and the amounts recognized in ourConsolidated Balance Sheets for our
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
significant pension plans. Benefit obligation balances presented below reflect the projected benefit obligation (PBO) for our pension plans.
Qualified and Non-Qualified Pension Plans | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, | U.S. Plans | U.K. Plans | |||||||||||||||||
In millions | 2010 | 2009 | 2012 | 2011 | 2012 | 2011 | ||||||||||||||
Accrued warranty | $ | 275 | $ | 301 | ||||||||||||||||
Change in benefit obligation | ||||||||||||||||||||
Benefit obligation at beginning of year | $ | 2,243 | $ | 2,110 | $ | 1,128 | $ | 1,013 | ||||||||||||
Service cost | 58 | 51 | 21 | 20 | ||||||||||||||||
Interest cost | 103 | 109 | 59 | 58 | ||||||||||||||||
Plan participants' contributions | — | — | 1 | 1 | ||||||||||||||||
Actuarial losses | 207 | 126 | 52 | 82 | ||||||||||||||||
Benefits paid from fund | (148 | ) | (146 | ) | (42 | ) | (39 | ) | ||||||||||||
Benefits paid directly by employer | (10 | ) | (8 | ) | — | — | ||||||||||||||
Exchange rate changes | — | — | 52 | (7 | ) | |||||||||||||||
Curtailment gain | — | — | (2 | ) | — | |||||||||||||||
Other | 1 | 1 | — | — | ||||||||||||||||
Benefit obligation at end of year | $ | 2,454 | $ | 2,243 | $ | 1,269 | $ | 1,128 | ||||||||||||
Change in plan assets | ||||||||||||||||||||
Fair value of plan assets at beginning of year | $ | 2,091 | $ | 1,906 | $ | 1,200 | $ | 1,088 | ||||||||||||
Actual return on plan assets | 284 | 231 | 88 | 65 | ||||||||||||||||
Employer contributions | 100 | 100 | 22 | 91 | ||||||||||||||||
Plan participants' contributions | — | — | 1 | 1 | ||||||||||||||||
Benefits paid | (148 | ) | (146 | ) | (42 | ) | (39 | ) | ||||||||||||
Exchange rate changes | — | — | 55 | (6 | ) | |||||||||||||||
Fair value of plan assets at end of year | $ | 2,327 | $ | 2,091 | $ | 1,324 | $ | 1,200 | ||||||||||||
Funded status (including underfunded and nonfunded plans) at end of year | $ | (127 | ) | $ | (152 | ) | $ | 55 | $ | 72 | ||||||||||
Amounts recognized in consolidated balance sheets | ||||||||||||||||||||
Other assets—long term assets | $ | 127 | $ | 63 | $ | 55 | $ | 72 | ||||||||||||
Accrued compensation, benefits and retirement costs-current liabilities | (10 | ) | (10 | ) | — | — | ||||||||||||||
Other liabilities and deferred revenue—long-term liabilities | (244 | ) | (205 | ) | — | — | ||||||||||||||
Net amount recognized | $ | (127 | ) | $ | (152 | ) | $ | 55 | $ | 72 | ||||||||||
Amounts recognized in accumulated other comprehensive loss consist of: | ||||||||||||||||||||
Net actuarial loss | $ | 734 | $ | 700 | $ | 349 | $ | 305 | ||||||||||||
Prior service (credit) cost | (1 | ) | (3 | ) | — | 1 | ||||||||||||||
Net amount recognized | $ | 733 | $ | 697 | $ | 349 | $ | 306 | ||||||||||||
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. PENSION AND OTHER LIABILITIES AND DEFERRED REVENUEPOSTRETIREMENT BENEFITS (Continued)
In addition to the pension plans in the above table, we also maintain less significant defined benefit pension plans in 14 other countries outside the U.S. and the U.K. that comprise less than 2 percent and 4 percent of our pension plan assets and obligations, respectively. These plans are reflected in "Other liabilities and deferred revenue" on ourConsolidated Balance Sheets.
The following table presents information regarding total accumulated benefit obligation and underfunded pension plans that are included in the preceding table:
| December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | |||||
Deferred revenue | 231 | 215 | |||||
Accrued compensation | 149 | 104 | |||||
Other long-term liabilities | 148 | 140 | |||||
Other liabilities and deferred revenue | $ | 803 | $ | 760 | |||
| Qualified and Non-Qualified Pension Plans | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. Plans | U.K. Plans | |||||||||||
In millions | 2012 | 2011 | 2012 | 2011 | |||||||||
Total accumulated benefit obligation | $ | 2,417 | $ | 2,211 | $ | 1,167 | $ | 1,027 | |||||
Plans with accumulated benefit obligation in excess of plan assets | |||||||||||||
Accumulated benefit obligation | 216 | 185 | — | — | |||||||||
Plans with projected benefit obligation in excess of plan assets | |||||||||||||
Projected benefit obligation | 254 | 215 | — | — |
Components of Net Periodic Pension Cost
The following table presents the net periodic pension cost under our plans:
| Qualified and Non-Qualified Pension Plans | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. Plans | U.K. Plans | |||||||||||||||||
In millions | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | |||||||||||||
Service cost | $ | 58 | $ | 51 | $ | 45 | $ | 21 | $ | 20 | $ | 19 | |||||||
Interest cost | 103 | 109 | 111 | 59 | 58 | 58 | |||||||||||||
Expected return on plan assets | (157 | ) | (151 | ) | (147 | ) | (81 | ) | (74 | ) | (71 | ) | |||||||
Amortization of prior service (credit) cost | (1 | ) | (1 | ) | (1 | ) | 1 | 3 | 3 | ||||||||||
Recognized net actuarial loss | 47 | 39 | 36 | 14 | 14 | 17 | |||||||||||||
Net periodic pension cost | $ | 50 | $ | 47 | $ | 44 | $ | 14 | $ | 21 | $ | 26 | |||||||
Other changes in benefit obligations and plan assets recognized in other comprehensive income in 2012, 2011 and 2010 are as follows:
In millions | 2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Amortization of prior service cost | $ | (1 | ) | $ | (2 | ) | $ | (2 | ) | |
Recognized actuarial loss | (61 | ) | (53 | ) | (53 | ) | ||||
Incurred prior service cost | 1 | 1 | 1 | |||||||
Incurred actuarial (gain) loss | 124 | 138 | (181 | ) | ||||||
Foreign exchange translation adjustments | 16 | — | (12 | ) | ||||||
Total recognized in other comprehensive income | $ | 79 | $ | 84 | $ | (247 | ) | |||
Total recognized in net periodic pension cost and other comprehensive income | $ | 143 | $ | 152 | $ | (177 | ) | |||
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13. COMMITMENTS12. PENSION AND CONTINGENCIESOTHER POSTRETIREMENT BENEFITS (Continued)
The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic pension cost during the next fiscal year are as follows:
In millions | 2013 | |||
---|---|---|---|---|
Prior service credit | $ | (1 | ) | |
Net actuarial loss | 89 |
Assumptions
The table below presents various assumptions used in determining the pension benefit obligation for each year and reflects weighted-average percentages for the various plans:
| Qualified and Non-Qualified Pension Plans | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. Plans | U.K. Plans | |||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||
Discount rate | 3.97 | % | 4.82 | % | 4.70 | % | 5.20 | % | |||||
Compensation increase rate | 4.90 | % | 4.00 | % | 4.00 | % | 4.25 | % |
The table below presents various assumptions used in determining the net periodic pension cost and reflects weighted-average percentages for the various plans:
| Qualified and Non-Qualified Pension Plans | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. Plans | U.K. Plans | |||||||||||||||||
| 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | |||||||||||||
Discount rate | 4.82 | % | 5.42 | % | 5.60 | % | 5.20 | % | 5.80 | % | 5.80 | % | |||||||
Expected return on plan assets | 8.00 | % | 8.00 | % | 8.00 | % | 6.50 | % | 7.00 | % | 7.25 | % | |||||||
Compensation increase rate | 4.00 | % | 4.00 | % | 4.00 | % | 4.25 | % | 4.50 | % | 4.50 | % |
Plan Assets
Our investment policies in the U.S. and U.K. provide for the rebalancing of assets to maintain our long-term strategic asset allocation. We are subjectcommitted to numerous lawsuitsits long-term strategy and claims arising outdo not attempt to time the market given empirical evidence that asset allocation is more critical than individual asset or investment manager selection. Rebalancing of the ordinary courseassets has and continues to occur. The rebalancing is critical to having the proper weighting of assets to achieve the expected total portfolio returns. We believe that our portfolio is highly diversified and does not have any significant exposure to concentration risk. The plan assets for our defined benefit pension plans do not include any of our business, including actions related to product liability; personal injury;common stock.
U.S. Plan Assets
For the use and performance ofU.S. qualified pension plans, 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. In 2010, it was determined that we overpaid a Brazilian revenue based tax during the period 2004-2008. Our results include a pre-tax recovery of $32 million recorded in cost of sales ($21 million after-tax) related to tax credits on imported products arising from an overpayment. This recovery has been excluded from segment results as it was not considered by management in its evaluation of operating resultsassumption for the year.
In June 2008, fourexpected return on assets was 8.0 percent in 2012. Projected returns are based primarily on broad, publicly traded equity and fixed income indices and forward-looking estimates of our sites in Southern Indiana, including our Technical Center, experienced extensive flood damage.active portfolio and investment management. We have submitted a claim for $220 million to our insurance carriers, which includes a claim for business interruption. As of December 31, 2010, we have received $92 million in recoveriesexpect additional positive returns from this active investment management. Based on the insurance carriers. Our insurance carriers have disputed certain aspects of our claim and the parties have filed suit against each other. Although we believe that we are insured against the full amount of our claim, there is no assurance that we will be successful recovering the amounts we believe are due under the policies.historical
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13. COMMITMENTS12. PENSION AND CONTINGENCIESOTHER POSTRETIREMENT BENEFITS (Continued)
U.S. Distributor Commitments
Our distribution agreements with independentreturns and partially-owned distributors generally have a three-year term and are restricted to specified territories. Our distributors develop and maintain a network of dealers with whichforward-looking return expectations, we have no direct relationship. The distributors are permitted to sell other, noncompetitive products only with our consent. We license all of our distributorselected to use our name and logoan assumption of 8.0 percent per year beginning in connection with2013.
The primary investment objective is to exceed, on a net-of-fee basis, the sale and servicerate of our products, with no right to assign or sublicense the trademarks, except to authorized dealers, without our consent. Products are sold to the distributors at standard domestic or international distributor net prices, as applicable. Net prices are wholesale prices we establish to permit our distributors an adequate margin on their sales. Subject to local laws, we can generally refuse to renew these agreements upon expiration or terminate them upon written notice for inadequate sales, change in principal ownership and certain other reasons. Distributors also have the right to terminate the agreements upon 60-day notice without cause, or 30-day notice for cause. Upon termination or failure to renew, we are required to purchase the distributor's current inventory, signage and special tools, and may, at our option purchase other assetsreturn of a policy portfolio comprised of the distributor, but are under no obligation to do so.
Residual Value Guarantees
We have various residual value guarantees on equipment leased under operating leases. The total amount of these residual value guarantees at December 31, 2010 and 2009 was $2 million and $8 million, respectively.
Other Guarantees and Commitments
In addition to the guarantees discussed above, from time to time we enter into other guarantee arrangements, including guarantees of non-U.S. distributor financing and other miscellaneous guarantees of third-party obligations. As of December 31, 2010, the maximum potential loss related to these other guarantees is $76 million ($47 million of which relates to the Beijing Foton guarantee discussed below and $28 million relates to the Cummins Olayan Energy Limited guarantee discussed below).
We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. The penalty amounts are less than our purchase commitments and essentially allow the supplier to recover their tooling costs in most instances. As of December 31, 2010, if we were to stop purchasing from each of these suppliers, the amount of the penalty would be approximately $59 million, of which $53 million relates to a contract with an engine parts supplier that extends to 2013. This arrangement enables us to secure critical components. We do not currently anticipate paying any penalties under these contracts.
In July 2008, Beijing Foton Cummins Engine Company, a 50 percent owned entity accounted for under the equity method, entered into a line of credit agreement with a borrowing capacity of up to $181 million (at current exchange rates). The line will be used primarily to fund equipment purchases for a new manufacturing plant. As a part of this transaction, we guaranteed 50 percent of any outstanding borrowings up to a maximum guarantee of $91 million (at current exchange rates). As of December 31, 2010, outstanding borrowings under this agreement were $93 million and our guarantee was $47 million (at current exchange rates). We recorded a liability for the fair value of this guarantee.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued)
The amount of the liability was less than $1 million. The offset to this liability was an increase in our investment in the joint venture.
In February 2010, Cummins Olayan Energy Limited, a 49 percent owned entity accounted for under the equity method, executed a four-year $101 million (at current exchange rates) debt financing arrangement to acquire certain rental equipment assets. As a part of this transaction, we guaranteed 49 percent of the total outstanding loan amount or $50 million (at current exchange rates). As of December 31, 2010, outstanding borrowings under this agreement were $56 million and our guarantee was $28 million (at current exchange rates). We recorded a liability for the fair value of this guarantee. The amount of the liability was less than $1 million. The offset to this liability was an increase in our investment in the joint venture.
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 $78 million and $75 million as of December 31, 2010 and 2009, respectively.
Indemnifications
Periodically, we enter into various contractual arrangements where we agree to indemnify a third-party against certain types of losses. Common types of indemnifications include:
We regularly evaluate the probability of having to incur costs associated with these indemnifications 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.
Joint Venture Commitments
As of December 31, 2010, we have committed to invest an additional $96 million into existing joint ventures with $73 million to be funded in 2011.
Leases
We lease certain manufacturing equipment, facilities, warehouses, office space and equipment, aircraft and automobiles for varying periods under lease agreements. Most of the leases are non-cancelable operating leases with fixed rental payments, expire over the next ten years and contain renewal provisions. Rent expense under these leases approximated:
In millions | 2010 | 2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Rent expense | $ | 146 | $ | 130 | $ | 129 |
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued)
The following is a summary of the leased property under capital leases by major classes:
| Asset balances at December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | |||||
Building | $ | 68 | $ | 48 | |||
Equipment | 106 | 105 | |||||
Other | 7 | 7 | |||||
Less: Accumulated amortization | (74 | ) | (78 | ) | |||
Total | $ | 107 | $ | 82 | |||
Following is a summary of the future minimum lease payments due under capital and operating leases, including leases in our rental business discussed below, with terms of more than one year at December 31, 2010, together with the net present value of the minimum payments due under capital leases:
In millions | Capital Leases | Operating Leases | |||||
---|---|---|---|---|---|---|---|
2011 | $ | 31 | $ | 90 | |||
2012 | 43 | 74 | |||||
2013 | 24 | 54 | |||||
2014 | 20 | 41 | |||||
2015 | 9 | 33 | |||||
After 2015 | 28 | 121 | |||||
Total minimum lease payments | $ | 155 | $ | 413 | |||
Interest | (35 | ) | |||||
Present value of net minimum lease payments | $ | 120 | |||||
In addition, we have subleased certain of the facilities under operating lease to third parties. The future minimum lease payments due from lessees under those arrangements are $1 million per year for the years 2011 through 2015.
Sale and Leaseback Transaction Amendment and Extension
During 2001, we entered into a sale-leaseback transaction with a financial institution with regard to certain heavy-duty engine manufacturing equipment. The lease was classified as an operating lease with a lease term of 11.5 years, expiring June 28, 2013. The financial institution created a grantor trust to act as the lessor in the arrangement. The financial institution owns all of the equity in the trust. The grantor trust has no assets other than the equipment and its rights to the lease agreement with us. The terms of the agreement contained a guarantee of the residual value of the equipment and in December 2003, the grantor trust which acts as the lessor in the sale and leaseback transaction described above was consolidated as a result of the adoption of new accounting standards for variable interest entities, due primarily to the existence of the residual value guarantee.
In February 2009, we amended the lease agreement to extend the lease for an additional two years to June 2015 and we removed the residual value guarantee. As a result of removing the residual value
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued)
guarantee, we were no longer required to consolidate the grantor trust and we deconsolidated the trust in the first quarter of 2009. With the deconsolidation, we are now required to account for the leasing arrangement with the trust which qualifies as a capital lease. The deconsolidation of the trust had minimal impact on ourConsolidated Financial Statements as the present value of the minimum lease payments (including the extension) approximated the amount that was reported as noncontrolling interest as of the date of the amendment. The reduction in noncontrolling interests and increase in our capital lease liabilities was $35 million.
The future lease payments required under the amended lease are as follows:
In millions Due date | Payment amount | |||
---|---|---|---|---|
2011 | $ | — | ||
2012 | 12 | |||
2013 | 10 | |||
2014 | 14 | |||
2015 | 4 |
The lease agreement includes certain default provisions requiring us to make timely rent payments, maintain, service, repair and insure the equipment and maintain minimum debt ratings for our long-term senior unsecured debt obligations.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. CUMMINS INC. SHAREHOLDERS' EQUITY
Preferred and Preference Stock
We are authorized to issue one million shares each of zero par value preferred and preference stock with preferred shares being senior to preference shares. We can determine the number of shares of each series, and the rights, preferences and limitations of each series. At December 31, 2010, there was no preferred or preference stock outstanding.
Common Stock
Changes in shares of common stock, treasury stock and common stock held in trust for employee benefit plans are as follows:
In millions | Common Stock | Treasury Stock | Common Stock Held in Trust | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 31, 2007 | 220.4 | 18.2 | 6.5 | ||||||||
Shares acquired | — | 2.3 | — | ||||||||
Shares issued | 1.6 | (0.1 | ) | — | |||||||
Employee benefits trust activity | — | — | (1.4 | ) | |||||||
Other shareholder transactions | (0.3 | ) | — | — | |||||||
Balance at December 31, 2008 | 221.7 | 20.4 | 5.1 | ||||||||
Shares acquired | — | 0.4 | — | ||||||||
Shares issued | 0.9 | (0.1 | ) | — | |||||||
Employee benefits trust activity | — | — | (2.1 | ) | |||||||
Other shareholder transactions | (0.6 | ) | — | — | |||||||
Balance at December 31, 2009 | 222.0 | 20.7 | 3.0 | ||||||||
Shares acquired | — | 3.5 | — | ||||||||
Shares issued | 0.2 | (0.2 | ) | — | |||||||
Employee benefits trust activity | — | — | (0.9 | ) | |||||||
Other shareholder transactions | (0.4 | ) | — | — | |||||||
Balance at December 31, 2010 | 221.8 | 24.0 | 2.1 | ||||||||
Treasury Stock
Shares of common stock repurchased by us are recorded at cost as treasury stock and result in a reduction of shareholders' equity in ourConsolidated Balance Sheets. Treasury shares may be reissued as part of our stock-based compensation programs. When shares are reissued, we use the weighted-average cost method for determining cost. The gains between the cost of the shares and the issuance price are added to additional paid-in-capital. The losses are deducted from additional paid-in capital to the extent of the gains. Thereafter, the losses are deducted from retained earnings. Treasury stock activity for the three-year period ended December 31, 2010, consisting of shares issued and purchased is presented in ourConsolidated Statements of Changes in Equity.
In December 2007, the Board of Directors authorized the acquisition of up to $500 million of Cummins common stock. We began making purchases under the plan in March 2008 and purchased $128 million of stock during 2008 at an average cost of $55.49 per share.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. CUMMINS INC. SHAREHOLDERS' EQUITY (Continued)
In February 2009, we temporarily suspended our stock repurchase program to conserve cash. In the fourth quarter of 2009, we lifted the suspension and purchased $20 million of common stock at an average cost of $46.52 per common share.
In 2010, we purchased $241 million of common stock through the following quarterly purchases:
In millions (except per share amounts) For each quarter ended | Shares Purchased | Average Cost Per Share | |||||
---|---|---|---|---|---|---|---|
March 28 | 0.7 | $ | 60.36 | ||||
June 27 | 1.8 | 67.39 | |||||
September 26 | 1.0 | 75.77 | |||||
December 31 | — | — | |||||
Total | 3.5 | $ | 68.57 | ||||
In February 2011, the Board of Directors approved a new share repurchase program and authorized the acquisition of up to $1 billion of Cummins common stock upon the completion of the $500 million program which had $111 million of remaining capacity at December 31, 2010.
Quarterly Dividends
In July 2010, our Board of Directors approved a 50 percent increase in the quarterly dividends on our common stock from $0.175 per common share to $0.2625 per common share. In July 2008, our Board of Directors approved a 40 percent increase in the quarterly dividends on our common stock from $0.125 per common share to $0.175 per common share. Cash dividends per share paid to common shareholders for the last three years were as follows:
| Quarterly Dividends | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2009 | 2008 | |||||||
First quarter | $ | 0.175 | $ | 0.175 | $ | 0.125 | ||||
Second quarter | 0.175 | 0.175 | 0.125 | |||||||
Third quarter | 0.2625 | 0.175 | 0.175 | |||||||
Fourth quarter | 0.2625 | 0.175 | 0.175 |
Total dividends paid to common shareholders in 2010, 2009 and 2008 were $172 million, $141 million and $122 million, respectively. Declaration and payment of dividends in the future depends upon income and liquidity position, among other factors, and is subject to declaration by our Board of Directors, who meet quarterly to consider the dividend payment. We expect to fund dividend payments with cash from operations.
Employee Benefits Trust
In 1997, we established the Employee Benefits Trust (EBT) funded with common stock for use in meeting our future obligations under employee benefit and compensation plans. The primary sources of cash for the EBT are dividends received on unallocated shares of our common stock held by the EBT. The EBT may be used to fund matching contributions to employee accounts in the 401(k) Retirement Savings Plan (RSP) made in proportion to employee contributions under the terms of the RSP. In
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. CUMMINS INC. SHAREHOLDERS' EQUITY (Continued)
addition, we may direct the trustee to sell shares of the EBT on the open market to fund other non-qualified employee benefit plans. Matching contributions charged to income for the years ended December 31, 2010, 2009 and 2008 were $21 million, $13 million and $3 million, respectively. EBT shares sold on the open market and proceeds from those sales for the years ended December 31, 2010 and 2009 were as follows:
In millions | 2010 | 2009 | |||||
---|---|---|---|---|---|---|---|
EBT shares sold on open market | 0.7 | 1.5 | |||||
Proceeds from sale | $ | 58 | $ | 72 |
Employee Stock Ownership Plan
We have an ESOP Trust that was established in 1989 for certain domestic salaried and non-bargained employees participating in our RSP. The ESOP had a note payable to us which was funded through future employer contributions to the ESOP Trust. In 2010, the debt was repaid and the ESOP became an unleveraged plan.
Our annual cash contributions during plan year 2010, 2009 and 2008 along with dividends received on unallocated shares of our common stock held by the ESOP Trust and cash contributions from the EBT were equal to the required principal and interest payments due under the ESOP notes. Dividends received on allocated ESOP shares were used to purchase shares of our common stock from the EBT. Those shares were allocated to the participant accounts. Compensation expense was recorded as shares were allocated to plan participants each year and reduced by the common stock dividends received by the ESOP Trust. Unearned compensation was included in Cummins Inc. shareholders' equity and represented compensation expense which was recorded as the remaining shares were allocated to participants. All shares issued to the ESOP Trust were considered outstanding for purposes of computing earnings per share. Dividends on unallocated ESOP shares were used to service a portion of the principal and interest due on the ESOP notes.
In millions | 2010 | 2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Dividends on unallocated ESOP shares | $ | — | $ | — | $ | 1 | ||||
Annual cash contributions, dividends received on unallocated shares and cash contributions from EBT | 2 | 10 | 9 | |||||||
Annual compensation expense | 1 | 4 | 3 |
following:
Asset Class | Range | ||||||
---|---|---|---|---|---|---|---|
| % | +/-5.0 | % | ||||
| % | +/-4.0 | % | ||||
| % | +/-4.0 | % | ||||
Total | % | ||||||
Real estate | 7.5 | % | +2.5/-7.5 | % | |||
Private equity | 7.5 | % | +2.5/-7.5 | % | |||
Fixed income | 45.0 | % | +/-5.0 | % | |||
Total | 100.0 | % | |||||
The fixed income component is structured to represent a custom bond benchmark that will closely hedge the change in the value of our liabilities. This component is structured in such a way that its benchmark covers approximately 90 percent of the plan's exposure to changes in its discount rate (AA corporate bond yields). In order to achieve a hedge on more than the targeted 46 percent of plan assets invested in fixed income securities, the Benefits Policy Committee does permit the fixed income managers, other managers or the custodian/trustee to utilize derivative securities, as part of a liability driven investment strategy to further reduce the plan's risk of declining interest rates. However, all managers hired to manage assets for the trust are prohibited from using leverage unless specifically discussed with the committee and allowed for in their guidelines.
U.K. Plan Assets
For the U.K. qualified pension plans, our assumption for the expected return on assets was 6.5 percent in 2012. The methodology used to determine the rate of return on pension plan assets in the U.K. was based on establishing an equity-risk premium over current long-term bond yields adjusted based on target asset allocations. Our strategy with respect to our investments in these assets is to be invested in a suitable mixture of return-seeking assets (equities and real estate) and liability matching assets (bonds) with a long-term outlook. Therefore, the risk and return balance of our U.K. asset portfolio should reflect a long-term horizon. To achieve these objectives we have established the following targets:
Asset Class | Target | Range | |||||
---|---|---|---|---|---|---|---|
Global equities | 40.0 | % | +7.5/- 5.0 | % | |||
Real estate | 5.0 | % | +7.5/- 5.0 | % | |||
Re-insurance | 5.0 | % | +7.5/- 5.0 | % | |||
Private equity | 5.0 | % | +7.5/- 5.0 | % | |||
Fixed income | 45.0 | % | +5.5/- 2.0 | % | |||
Total | 100.0 | % | |||||
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15.12. PENSION AND OTHER COMPREHENSIVE INCOME (LOSS)POSTRETIREMENT BENEFITS (Continued)
Following areAs part of our strategy in the items includedU.K. we have not prohibited the use of any financial instrument, including derivatives. Based on the above discussion, we have elected to use our assumption of 5.8 percent per year beginning in other comprehensive income (loss) and the related tax effects:2013.
Fair Value of U.S. Plan Assets
The fair values of U.S. pension plan assets at December 31, 2012, by asset category were as follows:
| Fair Value Measurements as of December 31, 2012 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | |||||||||
Equities | |||||||||||||
U.S. | $ | 113 | $ | 542 | $ | — | $ | 655 | |||||
Non-U.S. | 177 | 127 | — | 304 | |||||||||
Fixed income | |||||||||||||
Government debt | 475 | 132 | — | 607 | |||||||||
Corporate debt | |||||||||||||
U.S. | 203 | 191 | — | 394 | |||||||||
Non-U.S. | 42 | — | — | 42 | |||||||||
Asset/mortgaged backed securities | 13 | — | — | 13 | |||||||||
Net cash equivalents(1) | 35 | — | — | 35 | |||||||||
Private equity and real estate(2) | — | — | 286 | 286 | |||||||||
Total | $ | 1,058 | $ | 992 | $ | 286 | $ | 2,336 | |||||
Pending trade/purchases/sales | (16 | ) | |||||||||||
Accruals(3) | 7 | ||||||||||||
Total | $ | 2,327 | |||||||||||
In millions | Before Tax Amount | Tax (Provision) Benefit | After Tax Amount | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Year ended December 31, 2010 | |||||||||||
Change in pensions and other postretirement defined benefit plans | $ | 207 | $ | (65 | ) | $ | 142 | ||||
Foreign currency translation adjustments | 52 | (25 | ) | 27 | |||||||
Unrealized gain on marketable securities: | |||||||||||
Holding gain | 2 | — | 2 | ||||||||
Reclassification of realized gain to net income | — | — | — | ||||||||
Net unrealized gain | 2 | — | 2 | ||||||||
Unrealized gain on derivatives: | |||||||||||
Holding gain | 8 | (3 | ) | 5 | |||||||
Reclassification of realized gain to net income | (2 | ) | 1 | (1 | ) | ||||||
Net unrealized gain | 6 | (2 | ) | 4 | |||||||
Other comprehensive income attributable to Cummins Inc. | 267 | (92 | ) | 175 | |||||||
Noncontrolling interests | 12 | — | 12 | ||||||||
Total other comprehensive income | $ | 279 | $ | (92 | ) | $ | 187 | ||||
Year ended December 31, 2009 | |||||||||||
Change in pensions and other postretirement defined benefit plans | $ | 14 | $ | (4 | ) | $ | 10 | ||||
Foreign currency translation adjustments | 95 | (9 | ) | 86 | |||||||
Unrealized (loss) gain on marketable securities: | |||||||||||
Holding gain | 2 | (1 | ) | 1 | |||||||
Reclassification of realized gain to net income | (2 | ) | 1 | (1 | ) | ||||||
Net unrealized (loss) gain | — | — | — | ||||||||
Unrealized gain on derivatives: | |||||||||||
Holding gain | 81 | (25 | ) | 56 | |||||||
Reclassification of realized loss to net income | 25 | (6 | ) | 19 | |||||||
Net unrealized gain | 106 | (31 | ) | 75 | |||||||
Other comprehensive income attributable to Cummins Inc. | 215 | (44 | ) | 171 | |||||||
Noncontrolling interests | 14 | — | 14 | ||||||||
Total other comprehensive income | $ | 229 | $ | (44 | ) | $ | 185 | ||||
Year ended December 31, 2008 | |||||||||||
Change in pensions and other postretirement defined benefit plans | $ | (643 | ) | $ | 225 | $ | (418 | ) | |||
Foreign currency translation adjustments | (312 | ) | 23 | (289 | ) | ||||||
Unrealized loss on marketable securities: | |||||||||||
Holding gain | 1 | — | 1 | ||||||||
Reclassification of realized gain to net income | (2 | ) | — | (2 | ) | ||||||
Net unrealized loss | (1 | ) | — | (1 | ) | ||||||
Unrealized loss on derivatives: | |||||||||||
Holding loss | (92 | ) | 25 | (67 | ) | ||||||
Reclassification of realized gain to net income | (5 | ) | 2 | (3 | ) | ||||||
Net unrealized loss | (97 | ) | 27 | (70 | ) | ||||||
Other comprehensive loss attributable to Cummins Inc. | (1,053 | ) | 275 | (778 | ) | ||||||
Noncontrolling interests | (37 | ) | 1 | (36 | ) | ||||||
Total other comprehensive loss | $ | (1,090 | ) | $ | 276 | $ | (814 | ) | |||
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
The fair values of U.S. pension plan assets at December 31, 2011, by asset category were as follows:
| Fair Value Measurements as of December 31, 2011 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | |||||||||
Equities | |||||||||||||
U.S. | $ | 95 | $ | 511 | $ | — | $ | 606 | |||||
Non-U.S. | 149 | 168 | — | 317 | |||||||||
Fixed income | |||||||||||||
Government debt | 336 | 101 | — | 437 | |||||||||
Corporate debt | |||||||||||||
U.S. | 245 | 115 | — | 360 | |||||||||
Non-U.S. | 54 | — | — | 54 | |||||||||
Asset/mortgaged backed securities | 11 | — | — | 11 | |||||||||
Net cash equivalents(1) | 59 | — | — | 59 | |||||||||
Derivative instruments(2) | — | 4 | — | 4 | |||||||||
Private equity and real estate(3) | — | — | 266 | 266 | |||||||||
Total | $ | 949 | $ | 899 | $ | 266 | $ | 2,114 | |||||
Pending trade/purchases/sales | (30 | ) | |||||||||||
Accruals(4) | 7 | ||||||||||||
Total | $ | 2,091 | |||||||||||
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
The reconciliation of Level 3 assets was as follows:
| Fair Value Measurements as of December 31, Using Significant Unobservable Inputs (Level 3) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In millions | Private Equity | Real Estate | Total | |||||||
Ending balance at December 31, 2010 | $ | 126 | $ | 82 | $ | 208 | ||||
Actual return on plan assets | ||||||||||
Unrealized (losses) gains on assets still held at the reporting date | 18 | 6 | 24 | |||||||
Purchases, sales and settlements, net | 3 | 31 | 34 | |||||||
Ending balance at December 31, 2011 | 147 | 119 | 266 | |||||||
Actual return on plan assets | ||||||||||
Unrealized (losses) gains on assets still held at the reporting date | 15 | 9 | 24 | |||||||
Purchases, sales and settlements, net | (6 | ) | 2 | (4 | ) | |||||
Ending balance at December 31, 2012 | $ | 156 | $ | 130 | $ | 286 | ||||
Fair Value of U.K. Plan Assets
In July 2012, the U.K. pension plan purchased an insurance contract that will guarantee payment of specified pension liabilities. The contract defers payment for 10 years. This is included in the table below in Level 3 at a value of $424 million.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
The fair values of U.K. pension plan assets at December 31, 2012, by asset category were as follows:
| Fair Value Measurements as of December 31, 2012 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | |||||||||
Equities | |||||||||||||
U.S. | $ | — | $ | 251 | $ | — | $ | 251 | |||||
Non-U.S. | — | 325 | — | 325 | |||||||||
Fixed income | |||||||||||||
Government debt | — | 191 | — | 191 | |||||||||
Net cash equivalents(1) | 10 | — | — | 10 | |||||||||
Re-insurance | — | 61 | — | 61 | |||||||||
Private equity, real estate & insurance(2) | — | — | 486 | 486 | |||||||||
Total | $ | 10 | $ | 828 | $ | 486 | $ | 1,324 | |||||
Pending trade/purchases/sales | — | ||||||||||||
Accruals(3) | — | ||||||||||||
Total | $ | 1,324 | |||||||||||
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
The fair values of U.K. pension plan assets at December 31, 2011, by asset category were as follows:
| Fair Value Measurements as of December 31, 2011 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | |||||||||
Equities | |||||||||||||
U.S. | $ | — | $ | 239 | $ | — | $ | 239 | |||||
Non-U.S. | — | 253 | — | 253 | |||||||||
Fixed income | |||||||||||||
Government debt | 162 | 311 | — | 473 | |||||||||
Corporate debt | |||||||||||||
U.S. | 17 | 9 | — | 26 | |||||||||
Non-U.S. | 90 | 45 | — | 135 | |||||||||
Asset/mortgaged backed securities | 21 | — | — | 21 | |||||||||
Net cash equivalents(1) | 10 | — | — | 10 | |||||||||
Derivative instruments(2) | — | (5 | ) | — | (5 | ) | |||||||
Re-insurance | — | 56 | — | 56 | |||||||||
Private equity and real estate(3) | — | — | 47 | 47 | |||||||||
Total | $ | 300 | $ | 908 | $ | 47 | $ | 1,255 | |||||
Pending trade/purchases/sales | (58 | ) | |||||||||||
Accruals(4) | 3 | ||||||||||||
Total | $ | 1,200 | |||||||||||
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
The reconciliation of Level 3 assets was as follows:
| Fair Value Measurements as of December 31, Using Significant Unobservable Inputs (Level 3) | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Insurance | Real Estate | Private Equity | Total | |||||||||
Ending balance at December 31, 2010 | $ | — | $ | 30 | $ | 10 | $ | 40 | |||||
Actual return on plan assets | |||||||||||||
Unrealized (losses) gains on assets still held at the reporting date | — | — | 2 | 2 | |||||||||
Purchases, sales and settlements, net | — | 3 | 2 | 5 | |||||||||
Ending balance at December 31, 2011 | — | 33 | 14 | 47 | |||||||||
Actual return on plan assets | |||||||||||||
Unrealized (losses) gains on assets still held at the reporting date | 13 | 1 | 1 | 15 | |||||||||
Purchases, sales and settlements, net | 411 | — | 13 | 424 | |||||||||
Ending balance at December 31, 2012 | $ | 424 | $ | 34 | $ | 28 | $ | 486 | |||||
Level 3 Assets
The investments in an insurance contract, private equity and real estate funds, for which quoted market prices are not available, are valued at their estimated fair value as determined by applicable investment managers or by quarterly financial statements of the funds. These financial statements are audited at least annually. In conjunction with our investment consultant, we monitor the fair value of the insurance contract as periodically reported by our insurer and their counterparty risk. The fair value of all real estate properties, held in the partnerships, are valued at least once per year by an independent professional real estate valuation firm. Fair value generally represents the fund's proportionate share of the net assets of the investment partnerships as reported by the general partners of the underlying partnerships. Some securities with no readily available market are initially valued at cost, utilizing independent professional valuation firms as well as market comparisons with subsequent adjustments to values which reflect either the basis of meaningful third-party transactions in the private market or the fair value deemed appropriate by the general partners of the underlying investment partnerships. In such instances, consideration is also given to the financial condition and operating results of the issuer, the amount that the investment partnerships can reasonably expect to realize upon the sale of the securities and any other factors deemed relevant. The estimated fair values are subject to uncertainty and therefore may differ from the values that would have been used had a ready market for such investments existed and such differences could be material.
Estimated Future Contributions and Benefit Payments
We plan to contribute approximately $170 million to our defined benefit pension plans in 2013. The table below presents expected future benefit payments under our pension plans:
| Qualified and Non-Qualified Pension Plans | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 - 2022 | |||||||||||||
Expected benefit payments | $ | 215 | $ | 216 | $ | 222 | $ | 228 | $ | 232 | $ | 1,218 |
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
Other Pension Plans
We also sponsor defined contribution plans for certain hourly and salaried employees. Our contributions to these plans were $74 million, $72 million and $44 million for the years ended December 31, 2012, 2011 and 2010.
Our other postretirement benefit plans provide various health care and life insurance benefits to eligible employees, who retire and satisfy certain age and service requirements, and their dependents. The plans are contributory and contain cost-sharing features such as caps, deductibles, coinsurance and spousal contributions. Employer contributions are limited by formulas in each plan. Retiree contributions for health care benefits are adjusted annually and we reserve the right to change benefits covered under these plans. There were no plan assets for the postretirement benefit plans as our policy is to fund benefits and expenses for these plans as claims and premiums are incurred.
Obligations and Funded Status
The following tables present the changes in the benefit obligations, the funded status of the plans and the amounts recognized in ourConsolidated Balance Sheets for our significant other postretirement benefit plans. Benefit obligation balances presented below reflect the accumulated postretirement benefit obligations (APBO) for our other postretirement benefit plans.
In millions | 2012 | 2011 | |||||
---|---|---|---|---|---|---|---|
Change in benefit obligation | |||||||
Benefit obligation at beginning of year | $ | 483 | $ | 490 | |||
Interest cost | 21 | 24 | |||||
Plan participants' contributions | 8 | 10 | |||||
Plan amendments | (4 | ) | — | ||||
Actuarial losses | 21 | 18 | |||||
Benefits paid directly by employer | (51 | ) | (59 | ) | |||
Benefit obligation at end of year | $ | 478 | $ | 483 | |||
Funded status at end of year | $ | (478 | ) | $ | (483 | ) | |
Amounts recognized in consolidated balance sheets | |||||||
Accrued compensation, benefits and retirement costs-current liabilities | $ | (46 | ) | $ | (51 | ) | |
Postretirement benefits other than pensions-long-term liabilities | (432 | ) | (432 | ) | |||
Net amount recognized | $ | (478 | ) | $ | (483 | ) | |
Amounts recognized in accumulated other comprehensive loss consist of: | |||||||
Net actuarial loss | $ | 83 | $ | 66 | |||
Prior service credit | (6 | ) | (6 | ) | |||
Net amount recognized | $ | 77 | $ | 60 | |||
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
In addition to the other postretirement plans in the above table, we also maintain less significant postretirement plans in three other countries outside the U.S. that comprise less than 1 percent of our postretirement obligations. These plans are reflected in "Other liabilities and deferred revenue" in ourConsolidated Balance Sheets.
Components of Net Periodic Other Postretirement Benefits Cost
The following table presents the net periodic other postretirement benefits cost under our plans:
In millions | 2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Interest cost | $ | 21 | $ | 24 | $ | 27 | ||||
Amortization of prior service credit | (5 | ) | (8 | ) | (8 | ) | ||||
Recognized net actuarial loss | 3 | — | — | |||||||
Other | 1 | 1 | — | |||||||
Net periodic other postretirement benefit cost | $ | 20 | $ | 17 | $ | 19 | ||||
Other changes in benefit obligations recognized in other comprehensive income in 2012, 2011 and 2010 were as follows:
In millions | 2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Amortization of prior service credit | $ | 5 | $ | 8 | $ | 8 | ||||
Recognized net actuarial loss | (3 | ) | — | — | ||||||
Incurred actuarial loss | 20 | 16 | 14 | |||||||
Incurred prior service credit | (4 | ) | — | (2 | ) | |||||
Other | (1 | ) | — | 1 | ||||||
Total recognized in other comprehensive income | $ | 17 | $ | 24 | $ | 21 | ||||
Total recognized in net periodic other postretirement benefit cost and other comprehensive income | $ | 37 | $ | 41 | $ | 40 | ||||
The amount in accumulated other comprehensive loss that is expected to be recognized as a component of net periodic other postretirement benefit cost during the next fiscal year is an actuarial loss of $6 million.
Assumptions
The table below presents assumptions used in determining the other postretirement benefit obligation for each year and reflects weighted-average percentages for our other postretirement plans:
| 2012 | 2011 | |||||
---|---|---|---|---|---|---|---|
Discount rate | 3.70 | % | 4.70 | % |
The table below presents assumptions used in determining the net periodic other postretirement benefits cost and reflects weighted-average percentages for the various plans:
| 2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Discount rate | 4.70 | % | 5.20 | % | 5.60 | % |
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)
Our consolidated other postretirement benefit obligation is determined by application of the terms of health care and life insurance plans, together with relevant actuarial assumptions and health care cost trend rates. For measurement purposes, an 8.00 percent annual rate of increase in the per capita cost of covered health care benefits was assumed in 2012. The rate was assumed to remain at 8.00 percent in 2013 and then decrease on a linear basis to 5.00 percent through 2019 and remain at that level thereafter. An increase in the health care cost trends of 1 percent would increase our APBO by $27 million as of December 31, 2012 and the net periodic other postretirement benefit expense for 2013 by $1 million. A decrease in the health care cost trends of 1 percent would decrease our APBO by $23 million as of December 31, 2012 and the net periodic other postretirement benefit expense for 2013 by $1 million.
Estimated Benefit Payments
The table below presents expected benefit payments under our other postretirement benefit plans:
In millions | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 - 2022 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Expected benefit payments | $ | 47 | $ | 45 | $ | 43 | $ | 40 | $ | 38 | $ | 157 |
NOTE 13. OTHER LIABILITIES AND DEFERRED REVENUE
Other liabilities and deferred revenue included the following:
| December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2012 | 2011 | |||||
Deferred revenue | $ | 368 | $ | 252 | |||
Accrued warranty | 282 | 279 | |||||
Pensions | 244 | 205 | |||||
Accrued compensation | 168 | 165 | |||||
Other long-term liabilities | 246 | 189 | |||||
Other liabilities and deferred revenue | $ | 1,308 | $ | 1,090 | |||
NOTE 14. 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
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. COMMITMENTS AND CONTINGENCIES (Continued)
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. In 2010, it was determined that we overpaid a Brazilian revenue based tax during the period 2004-2008. Our results include a recovery of $32 million recorded in cost of sales ($21 million after-tax) related to tax credits on imported products arising from an overpayment. This recovery has been excluded from segment results as it was not considered in our evaluation of operating results for the year.
In June 2008, four of our sites in Southern Indiana, including our Technical Center, experienced extensive flood damage. In October 2011, we received $40 million from our insurance carriers to settle all outstanding 2008 flood claims. As a result, we recognized a gain of approximately $38 million ($24 million after-tax), net of any remaining flood related expenses, in "Other operating income (expense), net" in ourConsolidated Statements of Income.
Our distribution agreements with independent and partially-owned distributors generally have a renewable three-year term and are restricted to specified territories. Our distributors develop and maintain a network of dealers with which we have no direct relationship. Our distributors are permitted to sell other, noncompetitive products only with our consent. We license all of our distributors to use our name and logo in connection with the sale and service of our products, with no right to assign or sublicense the trademarks, except to authorized dealers, without our consent. Products are sold to the distributors at standard domestic or international distributor net prices, as applicable. Net prices are wholesale prices we establish to permit our distributors an adequate margin on their sales. Subject to local laws, we can generally refuse to renew these agreements upon expiration or terminate them upon written notice for inadequate sales, change in principal ownership and certain other reasons. Distributors also have the right to terminate the agreements upon 60-day notice without cause, or 30-day notice for cause. Upon termination or failure to renew, we are required to purchase the distributor's current inventory, signage and special tools, and may, at our option purchase other assets of the distributor, but are under no obligation to do so.
Other Guarantees and Commitments
In addition to the matters discussed above, from time to time we enter into other guarantee arrangements, including guarantees of non-U.S. distributor financing, residual value guarantees on equipment under operating leases and other miscellaneous guarantees of third-party obligations. As of December 31, 2012, the maximum potential loss related to these other guarantees is summarized as
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. COMMITMENTS AND CONTINGENCIES (Continued)
follows (where the guarantee is in a foreign currency the amount below represents the amount in U.S. dollars at current exchange rates):
In millions | | |||
---|---|---|---|---|
Cummins Olayan Energy Limited debt guarantee | $ | 11 | ||
Xi'an Cummins Engine Company Limited debt guarantee | 2 | |||
Residual value guarantees | 1 | |||
Other debt guarantees | 2 | |||
Maximum potential loss | $ | 16 | ||
The amount of liabilities related to the above guarantees was $2 million.
We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. The penalty amounts are less than our purchase commitments and essentially allow the supplier to recover their tooling costs in most instances. As of December 31, 2012, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $94 million, of which $90 million relates to a contract with an engine parts supplier that extends to 2016. In addition, we also have a "take or pay" contract with an emission solutions business supplier requiring us to purchase approximately $73 million annually through 2018. These arrangements enable us to secure critical components. We do not currently anticipate paying any penalties under these contracts.
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 $70 million and $81 million as of December 31, 2012 and 2011, respectively.
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:
We regularly evaluate the probability of having to incur costs associated with these indemnities and accrue for expected losses that are probable. Because the indemnities 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.
As of December 31, 2012, we have committed to invest an additional $86 million into existing joint ventures with $75 million to be funded in 2013.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. COMMITMENTS AND CONTINGENCIES (Continued)
We lease certain manufacturing equipment, facilities, warehouses, office space and equipment, aircraft and automobiles for varying periods under lease agreements. Most of the leases are non-cancelable operating leases with fixed rental payments, expire over the next 10 years and contain renewal provisions. Rent expense under these leases approximated:
| December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In millions | 2012 | 2011 | 2010 | |||||||
Rent expense | $ | 176 | $ | 166 | $ | 146 |
The following is a summary of the leased property under capital leases by major classes:
| Asset balances at December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2012 | 2011 | |||||
Building | $ | 66 | $ | 69 | |||
Equipment | 110 | 110 | |||||
Other | 15 | 7 | |||||
Less: Accumulated amortization | (103 | ) | (91 | ) | |||
Total | $ | 88 | $ | 95 | |||
Following is a summary of the future minimum lease payments due under capital and operating leases, including leases in our rental business, with terms of more than one year at December 31, 2012, together with the net present value of the minimum payments due under capital leases:
In millions | Capital Leases | Operating Leases | |||||
---|---|---|---|---|---|---|---|
2013 | $ | 24 | $ | 147 | |||
2014 | 9 | 107 | |||||
2015 | 9 | 76 | |||||
2016 | 7 | 54 | |||||
2017 | 7 | 41 | |||||
After 2017 | 16 | 128 | |||||
Total minimum lease payments | $ | 72 | $ | 553 | |||
Interest | (19 | ) | |||||
Present value of net minimum lease payments | $ | 53 | |||||
In addition, we have subleased certain of the facilities under operating lease to third parties. The future minimum lease payments due from lessees under those arrangements are $1 million per year for the years 2013 through 2016.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. SHAREHOLDERS' EQUITY
Preferred and Preference Stock
We are authorized to issue one million shares each of zero par value preferred and preference stock with preferred shares being senior to preference shares. We can determine the number of shares of each series, and the rights, preferences and limitations of each series. At December 31, 2012, there was no preferred or preference stock outstanding.
Changes in shares of common stock, treasury stock and common stock held in trust for employee benefit plans are as follows:
In millions | Common Stock | Treasury Stock | Common Stock Held in Trust | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Balance at December 31, 2009 | 222.0 | 20.7 | 3.0 | |||||||
Shares acquired | — | 3.5 | — | |||||||
Shares issued | 0.2 | (0.2 | ) | — | ||||||
Employee benefits trust activity | — | — | (0.9 | ) | ||||||
Other shareholder transactions | (0.4 | ) | — | — | ||||||
Balance at December 31, 2010 | 221.8 | 24.0 | 2.1 | |||||||
Shares acquired | — | 6.4 | — | |||||||
Shares issued | 0.4 | (0.2 | ) | — | ||||||
Employee benefits trust activity | — | — | (0.3 | ) | ||||||
Balance at December 31, 2011 | 222.2 | 30.2 | 1.8 | |||||||
Shares acquired | — | 2.6 | — | |||||||
Shares issued | 0.4 | (0.2 | ) | — | ||||||
Employee benefits trust activity | — | — | (0.3 | ) | ||||||
Other shareholder transactions | (0.2 | ) | — | — | ||||||
Balance at December 31, 2012 | 222.4 | 32.6 | 1.5 | |||||||
Shares of common stock repurchased by us are recorded at cost as treasury stock and result in a reduction of shareholders' equity in ourConsolidated Balance Sheets. Treasury shares may be reissued as part of our stock-based compensation programs. When shares are reissued, we use the weighted-average cost method for determining cost. The gains between the cost of the shares and the issuance price are added to additional paid-in-capital. The losses are deducted from additional paid-in capital to the extent of the gains. Thereafter, the losses are deducted from retained earnings. Treasury stock activity for the three-year period ended December 31, 2012, consisting of shares issued and repurchased is presented in ourConsolidated Statements of Changes in Equity.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. SHAREHOLDERS' EQUITY (Continued)
In February 2011, the Board of Directors approved a share repurchase program and authorized the acquisition of up to $1 billion of our common stock. In 2012, we made the following quarterly purchases under this plan:
In millions (except per share amounts) For each quarter ended | 2012 Shares Purchased | Average Cost Per Share | Total Cost of Repurchases | Remaining Authorized Capacity | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
April 1 | 0.1 | $ | 114.97 | $ | 8 | $ | 474 | ||||||
July 1 | 1.8 | 104.00 | 188 | 286 | |||||||||
September 30 | 0.4 | 84.95 | 35 | 251 | |||||||||
December 31 | 0.3 | 87.83 | 25 | 226 | |||||||||
Total | 2.6 | 99.47 | $ | 256 | |||||||||
In December 2012, the Board of Directors authorized the acquisition of up to $1 billion of our common stock upon completion of the 2011 repurchase program.
In July 2012, the Board of Directors authorized a 25 percent increase to our quarterly cash dividend on our common stock from $0.40 per share to $0.50 per share. In July 2011, the Board of Directors approved a 52 percent increase to our quarterly cash dividend on our common stock from $0.2625 per share to $0.40 per share. In July 2010, our Board of Directors approved a 50 percent increase in our quarterly cash dividend on our common stock from $0.175 per share to $0.2625 per share. Cash dividends per share paid to common shareholders for the last three years were as follows:
| Quarterly Dividends | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | |||||||
First quarter | $ | 0.40 | $ | 0.2625 | $ | 0.175 | ||||
Second quarter | 0.40 | 0.2625 | 0.175 | |||||||
Third quarter | 0.50 | 0.40 | 0.2625 | |||||||
Fourth quarter | 0.50 | 0.40 | 0.2625 | |||||||
Total | $ | 1.80 | $ | 1.325 | $ | 0.875 | ||||
Total dividends paid to common shareholders in 2012, 2011 and 2010 were $340 million, $255 million and $172 million, respectively. Declaration and payment of dividends in the future depends upon our income and liquidity position, among other factors, and is subject to declaration by our Board of Directors, who meet quarterly to consider our dividend payment. We expect to fund dividend payments with cash from operations.
In 1997, we established the Employee Benefits Trust (EBT) funded with common stock for use in meeting our future obligations under employee benefit and compensation plans. The primary sources of cash for the EBT are dividends received on unallocated shares of our common stock held by the EBT. The EBT may be used to fund matching contributions to employee accounts in the 401(k) Retirement Savings Plan (RSP) made in proportion to employee contributions under the terms of the RSP. In
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. SHAREHOLDERS' EQUITY (Continued)
addition, we may direct the trustee to sell shares of the EBT on the open market to fund other non-qualified employee benefit plans. Matching contributions charged to income for the years ended December 31, 2012, 2011 and 2010 were $27 million, $28 million and $21 million, respectively. EBT shares sold on the open market and proceeds from those sales for the years ended December 31, 2012, 2011 and 2010 were as follows:
In millions | 2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
EBT shares sold on open market | — | — | 0.7 | |||||||
Proceeds from sale | $ | — | $ | — | $ | 58 |
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. OTHER COMPREHENSIVE INCOME (LOSS)
Following are the items included in other comprehensive income (loss) and the related tax effects:
In millions | Before Tax Amount | Tax (Provision) Benefit | After Tax Amount | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Year ended December 31, 2012 | ||||||||||
Change in pensions and other postretirement defined benefit plans | $ | (103 | ) | $ | 33 | $ | (70 | ) | ||
Foreign currency translation adjustments | 25 | 12 | 37 | |||||||
Unrealized gain (loss) on marketable securities | ||||||||||
Holding gain (loss) | (2 | ) | 1 | (1 | ) | |||||
Reclassification of realized gain (loss) to net income | 3 | (1 | ) | 2 | ||||||
Net unrealized gain (loss) | 1 | — | 1 | |||||||
Unrealized gain (loss) on derivatives | ||||||||||
Holding gain (loss) | 16 | (5 | ) | 11 | ||||||
Reclassification of realized gain (loss) to net income | 14 | (5 | ) | 9 | ||||||
Net unrealized gain (loss) | 30 | (10 | ) | 20 | ||||||
Other comprehensive income (loss) attributable to Cummins Inc. | (47 | ) | 35 | (12 | ) | |||||
Noncontrolling interests | (7 | ) | — | (7 | ) | |||||
Total other comprehensive income (loss) | $ | (54 | ) | $ | 35 | $ | (19 | ) | ||
Year ended December 31, 2011 | ||||||||||
Change in pensions and other postretirement defined benefit plans | $ | (107 | ) | $ | 29 | $ | (78 | ) | ||
Foreign currency translation adjustments | (120 | ) | 12 | (108 | ) | |||||
Unrealized gain (loss) on marketable securities | ||||||||||
Holding gain (loss) | (3 | ) | 1 | (2 | ) | |||||
Reclassification of realized gain (loss) to net income | 3 | (1 | ) | 2 | ||||||
Net unrealized gain (loss) | — | — | — | |||||||
Unrealized gain (loss) on derivatives | ||||||||||
Holding gain (loss) | (26 | ) | 11 | (15 | ) | |||||
Reclassification of realized gain (loss) to net income | (22 | ) | 5 | (17 | ) | |||||
Net unrealized gain (loss) | (48 | ) | 16 | (32 | ) | |||||
Other comprehensive income (loss) attributable to Cummins Inc. | (275 | ) | 57 | (218 | ) | |||||
Noncontrolling interests | (38 | ) | — | (38 | ) | |||||
Total other comprehensive income (loss) | $ | (313 | ) | $ | 57 | $ | (256 | ) | ||
Year ended December 31, 2010 | ||||||||||
Change in pensions and other postretirement defined benefit plans | $ | 207 | $ | (65 | ) | $ | 142 | |||
Foreign currency translation adjustments | 52 | (25 | ) | 27 | ||||||
Unrealized gain (loss) on marketable securities | ||||||||||
Holding gain (loss) | 2 | — | 2 | |||||||
Reclassification of realized gain (loss) to net income | — | — | — | |||||||
Net unrealized gain (loss) | 2 | — | 2 | |||||||
Unrealized gain (loss) on derivatives | ||||||||||
Holding gain (loss) | 8 | (3 | ) | 5 | ||||||
Reclassification of realized gain (loss) to net income | (2 | ) | 1 | (1 | ) | |||||
Net unrealized gain (loss) | 6 | (2 | ) | 4 | ||||||
Other comprehensive income (loss) attributable to Cummins Inc. | 267 | (92 | ) | 175 | ||||||
Noncontrolling interests | 12 | — | 12 | |||||||
Total other comprehensive income (loss) | $ | 279 | $ | (92 | ) | $ | 187 | |||
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 17. STOCK INCENTIVE AND STOCK OPTION PLANS
In September 2003,May 2012, our shareholders approved the 2003 Stock Incentive2012 Omnibus Plan (The(the Plan), which replaced and succeeded the 19932003 Stock Incentive Plan. The Plan as amended February 2009, allows for the granting of up to 13.5 million stock-based awards to executives and employees, of which one-half must be in the form of stock options.options or stock appreciation rights. Awards available for grant under the planPlan include, but are not limited to, stock options, stock appreciation rights performanceand stock awards. Shares issued under the Plan may be newly issued shares restricted stock and other stock awards.or reissued treasury shares.
Stock options are generally granted with a strike price equal to the fair market value of the stock on the date of grant, a life of 10 years and a two-year vesting period. The strike price may be higher than the fair value of the stock on the date of the grant, but cannot be lower. Compensation expense is recorded on a straight-line basis over the vesting period beginning on the grant date. The compensation expense is based on the fair value of each option grant using the Black-Scholes option pricing model. Options granted to employees eligible for retirement under our retirement plan are fully expensed as of the grant date.
Stock options are also awarded through the Key Employee Stock Investment Plan (KESIP) which allows certain employees, other than officers, to purchase shares of common stock on an installment basis up to an established credit limit. Fifty stock options are granted for every even block of 100 KESIP shares purchased by the employee. The options granted through the KESIP program are considered awards under Thethe Plan and are vested immediately. Compensation expense for stock options granted through the KESIP program is recorded based on the fair value of each option grant using the Black-Scholes option pricing model.
Performance shares are granted as target awards and are earned based on our return on equity (ROE) performance. A payout factor has been established ranging from zero0 to 200 percent of the target award based on theour actual ROE performance. Shares granted during or prior to 2010, have a two-year performance during the two-yearperiod and a one year restriction period. Any shares earned are then restricted for one additional year. Employees leaving the company prior to the end of the restriction period forfeit their shares.any shares subject to the restriction period. Shares granted during 2011 or after, have a three-year performance period and no restriction period. The fair value of the award is equal to the average market price, adjusted for the present value of dividends over the vesting period, of our stock on the grant date. Compensation expense is recorded ratably over the period beginning on the grant date until the shares become unrestricted and is based on the amount of the award that is expected to be earned under the plan formula, adjusted each reporting period based on current information.
Restricted common stock is awarded from time to time at no cost to certain employees. Participants are entitled to cash dividends and voting rights. Restrictions limit the sale or transfer of the shares during a defined period. Generally, one-third of the shares are releasedbecome vested and free from restrictions after two years and one-third of the shares issued are releasedbecome vested and free from restrictions each year thereafter on the anniversary of the grant date, provided the participant remains an employee. The fair value of the award is equal to the average market price of our stock on the grant date. Compensation expense is determined at the grant date and is recognized over the four-year restriction period on a straight-line basis.
Compensation expense (net of estimated forfeitures) related to our share-based plans for the year ended December 31, 2010, 20092012, 2011 and 20082010 was approximately $20$35 million, $20$40 million and $28$20 million, respectively. The excess tax benefit/(deficiency) associated with our share-based plans for the years ended December 31, 2012, 2011 and 2010, 2009 and 2008, was $10$14 million, $(1)$5 million and $13 million, respectively. The total unrecognized compensation expense (net of estimated forfeitures) related to nonvested awards was approximately $26 million at December 31, 2010, and is expected to be recognized over a weighted-average period of less than two years.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. STOCK INCENTIVE AND STOCK OPTION PLANS (Continued)
The table below summarizes the activity in our stock option plans:
| Options | Weighted-average Exercise Price | Weighted-average Remaining Contractual Life (in years) | Aggregate Intrinsic Value | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance, December 31, 2007 | 532,750 | $ | 12.10 | |||||||||||
Granted | 105,350 | 27.34 | ||||||||||||
Exercised | (188,120 | ) | 11.21 | |||||||||||
Forfeited | (5,400 | ) | 9.93 | |||||||||||
Expired | (4,500 | ) | 13.92 | |||||||||||
Balance, December 31, 2008 | 440,080 | $ | 16.14 | |||||||||||
Granted | 598,510 | 25.31 | ||||||||||||
Exercised | (117,830 | ) | 14.66 | |||||||||||
Forfeited | (3,530 | ) | 25.05 | |||||||||||
Expired | (20,400 | ) | 10.63 | |||||||||||
Balance, December 31, 2009 | 896,830 | $ | 22.55 | |||||||||||
Granted | 387,250 | 62.74 | ||||||||||||
Exercised | (195,530 | ) | 17.36 | |||||||||||
Forfeited | (8,555 | ) | 41.54 | |||||||||||
Expired | (6,400 | ) | 9.33 | |||||||||||
Balance, December 31, 2010 | 1,073,595 | $ | 37.92 | 8.02 | $ | 77,902,023 | ||||||||
Exercisable, December 31, 2008 | 440,080 | $ | 16.14 | 4.50 | $ | 5,529,723 | ||||||||
Exercisable, December 31, 2009 | 376,450 | $ | 18.50 | 4.82 | $ | 10,709,436 | ||||||||
Exercisable, December 31, 2010 | 222,110 | $ | 26.36 | 5.40 | $ | 18,683,972 |
The weighted-average grant date fair value of options granted during the years ended December 31, 2010, 2009 and 2008, was $27.45, $10.57 and $12.38, respectively. The total intrinsic value of options exercised during the years ended December 31, 2010, 2009 and 2008, was approximately $13 million, $3 million and $9$10 million, respectively.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16.17. STOCK INCENTIVE AND STOCK OPTION PLANS (Continued)
The total unrecognized compensation expense (net of estimated forfeitures) related to nonvested awards was approximately $39 million at December 31, 2012, and is expected to be recognized over a weighted-average period of less than two years.
The tables below summarize the activity in the Plan:
| Options | Weighted-average Exercise Price | Weighted- average Remaining Contractual Life (in years) | Aggregate Intrinsic Value | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 31, 2009 | 896,830 | $ | 22.55 | |||||||||
Granted | 387,250 | 62.74 | ||||||||||
Exercised | (195,530 | ) | 17.36 | |||||||||
Forfeited | (8,555 | ) | 41.54 | |||||||||
Expired | (6,400 | ) | 9.33 | |||||||||
Balance at December 31, 2010 | 1,073,595 | 37.92 | ||||||||||
Granted | 316,159 | 115.71 | ||||||||||
Exercised | (134,520 | ) | 23.93 | |||||||||
Forfeited | (12,197 | ) | 57.68 | |||||||||
Balance at December 31, 2011 | 1,243,037 | 59.02 | ||||||||||
Granted | 321,945 | 119.34 | ||||||||||
Exercised | (241,815 | ) | 31.73 | |||||||||
Forfeited | (13,999 | ) | 67.86 | |||||||||
Balance at December 31, 2012 | 1,309,168 | $ | 78.80 | 7.30 | $ | 44,192,177 | ||||||
Exercisable, December 31, 2010 | 222,110 | $ | 26.36 | 5.40 | $ | 18,683,972 | ||||||
Exercisable, December 31, 2011 | 721,210 | $ | 38.75 | 6.25 | $ | 37,526,500 | ||||||
Exercisable, December 31, 2012 | 785,869 | $ | 51.40 | 6.26 | $ | 44,176,663 |
The weighted-average grant date fair value of options granted during the years ended December 31, 2012, 2011 and 2010, was $54.25, $51.23 and $27.45, respectively. The total intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010, was approximately $19 million, $12 million and $13 million, respectively.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 17. STOCK INCENTIVE AND STOCK OPTION PLANS (Continued)
The weighted-average grant date fair value of performance and restricted shares iswas as follows:
| Performance Shares | Restricted Shares | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Shares | Weighted-average Fair Value | Shares | Weighted-average Fair Value | |||||||||||||||||||||||
Nonvested at December 31, 2007 | 2,074,636 | $ | 26.34 | 208,800 | $ | 27.16 | |||||||||||||||||||||
Granted | 1,038,842 | 34.95 | — | — | |||||||||||||||||||||||
Vested | (842,300 | ) | 19.08 | (70,670 | ) | 26.49 | |||||||||||||||||||||
Forfeited | (64,692 | ) | 32.56 | — | — | ||||||||||||||||||||||
Nonvested at December 31, 2008 | 2,206,486 | $ | 32.98 | 138,130 | $ | 27.51 | |||||||||||||||||||||
Granted | 440,168 | 31.67 | — | — | |||||||||||||||||||||||
Vested | (1,382,720 | ) | 25.34 | (68,264 | ) | 27.33 | |||||||||||||||||||||
Forfeited | (50,548 | ) | 47.40 | — | — | Performance Shares | Restricted Shares | ||||||||||||||||||||
Shares | Weighted-average Fair Value | Shares | Weighted-average Fair Value | ||||||||||||||||||||||||
Nonvested at December 31, 2009 | Nonvested at December 31, 2009 | 1,213,386 | $ | 40.63 | 69,866 | $ | 27.68 | 1,213,386 | $ | 40.63 | 69,866 | $ | 27.68 | ||||||||||||||
Granted | Granted | 186,947 | 60.92 | 68,290 | 52.16 | 186,947 | 60.92 | 68,290 | 52.16 | ||||||||||||||||||
Vested | Vested | (704,931 | ) | 38.62 | (68,266 | ) | 27.33 | (704,931 | ) | 38.62 | (68,266 | ) | 27.33 | ||||||||||||||
Cancelled | Cancelled | (200,324 | ) | 56.53 | — | — | (200,324 | ) | 56.53 | — | — | ||||||||||||||||
Forefeited | (13,307 | ) | 30.98 | — | — | ||||||||||||||||||||||
Nonvested at December 31, 2010 | 481,771 | 45.10 | 69,890 | 51.94 | |||||||||||||||||||||||
Granted | 229,436 | 86.65 | 13,555 | 108.51 | |||||||||||||||||||||||
Vested | (178,653 | ) | 48.03 | (1,600 | ) | 42.61 | |||||||||||||||||||||
Forfeited | Forfeited | (13,307 | ) | 30.98 | — | — | (7,163 | ) | 59.15 | — | — | ||||||||||||||||
Nonvested at December 31, 2010 | 481,771 | $ | 45.10 | 69,890 | $ | 51.94 | |||||||||||||||||||||
Nonvested at December 31, 2011 | 525,391 | 62.05 | 81,845 | 61.49 | |||||||||||||||||||||||
Granted | 325,590 | 89.92 | 3,150 | 91.68 | |||||||||||||||||||||||
Vested | (194,484 | ) | 25.46 | (22,766 | ) | 52.16 | |||||||||||||||||||||
Forfeited | (26,413 | ) | 91.94 | — | — | ||||||||||||||||||||||
Nonvested at December 31, 2012 | 630,084 | $ | 86.49 | 62,229 | $ | 66.43 | |||||||||||||||||||||
The total fair value of performance shares vested during the years ended December 31, 2012, 2011 and 2010 2009 and 2008 was $27$24 million, $35$17 million and $16$42 million, respectively. The total fair value of restricted shares vested was $2$3 million, less than $1 million and $4 million for each of the years ended December 31, 2010, 20092012, 2011 and 2008.2010.
The fair value of each option grant was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:
| Years ended December 31, | Years ended December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2009 | 2008 | 2012 | 2011 | 2010 | ||||||||||||||
Expected life (years) | 5 | 5 | 7 | 5 | 5 | 5 | ||||||||||||||
Risk-free interest rate | 2.26 | % | 2.55 | % | 3.2 | % | 1.05 | % | 1.87 | % | 2.26 | % | ||||||||
Expected volatility | 54.23 | % | 50.55 | % | 49.6 | % | 58.98 | % | 55.39 | % | 54.23 | % | ||||||||
Dividend yield | 1.4 | % | 1.5 | % | 1.3 | % | 1.3 | % | 1.3 | % | 1.4 | % |
Expected life—The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding based upon our historical data.
Risk-free interest rate—The risk-free interest rate assumption is based upon the observed U.S. treasury security rate appropriate for the expected life of our employee stock options.
Expected volatility—The expected volatility assumption is based upon the weighted-average historical daily price changes of our common stock over the most recent period equal to the expected option life of the grant, adjusted for activity which is not expected to occur in the future.
Dividend yield—The dividend yield assumption is based on our history and expectation of dividend payouts.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 17. NONCONTROLLING INTERESTSSTOCK INCENTIVE AND STOCK OPTION PLANS (Continued)
Noncontrolling interests in the equity Dividend yield—The dividend yield assumption is based on our history and expectation of consolidated subsidiaries are as follows:dividend payouts.
| December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | |||||
Cummins India Ltd. | $ | 247 | $ | 185 | |||
Wuxi Cummins Turbo Technologies Co. Ltd. | 60 | 36 | |||||
Other | 19 | 26 | |||||
Total | $ | 326 | $ | 247 | |||
NOTE 18. EARNINGS PER SHARENONCONTROLLING INTERESTS
We calculate basic earnings per share (EPS) of common stock by dividing net income attributable to Cummins Inc. by the weighted-average number of common shares outstanding for the period. The calculation of diluted EPS assumes the issuance of common stock for all potentially dilutive share equivalents outstanding. We exclude shares of common stock heldNoncontrolling interests in the EBT (see Note 14, "CUMMINS INC. SHAREHOLDERS' EQUITY") from the calculationequity of the weighted-average common shares outstanding until those shares are distributed from the EBT to the RSP. Following are the computations for basic and diluted earnings per share:consolidated subsidiaries were as follows:
| Years ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Dollars in millions, except per share amounts | 2010 | 2009 | 2008 | ||||||||
Net income attributable to Cummins Inc. | $ | 1,040 | $ | 428 | $ | 755 | |||||
Weighted-average common shares outstanding: | |||||||||||
Basic | 196,699,155 | 197,445,998 | 194,958,370 | ||||||||
Dilutive effect of stock compensation awards | 449,252 | 249,126 | 1,572,178 | ||||||||
Diluted | 197,148,407 | 197,695,124 | 196,530,548 | ||||||||
Earnings per common share attributable to Cummins Inc.: | |||||||||||
Basic | $ | 5.29 | $ | 2.17 | $ | 3.87 | |||||
Diluted | 5.28 | 2.16 | 3.84 |
| December 31, | ||||||
---|---|---|---|---|---|---|---|
In millions | 2012 | 2011 | |||||
Cummins India Ltd. | $ | 260 | $ | 233 | |||
Wuxi Cummins Turbo Technologies Co. Ltd. | 75 | 75 | |||||
Other | 36 | 31 | |||||
Total | $ | 371 | $ | 339 | |||
The weighted-average diluted common shares outstanding for 2010, 2009 and 2008 excludes the effect of approximately 7,795, 53,750 and 16,020 weighted-average shares, respectively, of common stock options, since such options had an exercise price in excess of the monthly average market value of our common stock during that year.
NOTE 19. DERIVATIVESRESTRUCTURING AND OTHER CHARGES
We are exposedhave executed restructuring actions primarily in the form of involuntary separation programs in the fourth quarter of 2012. These actions were in response to financial risk resulting from volatility in foreign exchange rates, commodity prices and interest rates. This risk is closely monitored and managed through the use of financial derivative instruments including foreign currency forward contracts, commodity swap contracts and interest rate swaps. As stateddeterioration in our policiesU.S. businesses and procedures, financial derivatives are used expresslymost key markets around the world in the second half of 2012, as well as a reduction in orders in most U.S. and global markets for hedging purposes,2013. We reduced our worldwide professional workforce by approximately 650 employees, or 3 percent. We also reduced our hourly workforce by approximately 650 employees. During 2012, we incurred a pre-tax charge related to the professional and hourly workforce reductions of approximately $49 million.
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 no circumstances are they usedexisting severance plans or statutory requirements and the expected timetable for speculative purposes. When material,completion of the plan. Estimates of restructuring 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.
We incurred a $1 million charge for lease terminations and a $2 million charge for asset impairments and other non-cash charges. During 2012, we recorded restructuring and other charges of $52 million ($35 million after-tax). These restructuring actions included:
In millions | Year ended December 31, 2012 | |||
---|---|---|---|---|
Workforce reductions | $ | 49 | ||
Exit activities | 1 | |||
Other | 2 | |||
Restructuring and other charges | $ | 52 | ||
At December 31, 2012, of the approximately 1,300 employees to be affected by this plan, 1,130 had been terminated.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 19. DERIVATIVESRESTRUCTURING AND OTHER CHARGES (Continued)
we adjust the value of Restructuring and other charges were included in each segment in our derivative contracts for counter-party or our credit risk. Theoperating results and status of our hedging transactions are reported to senior management on a monthly and quarterly basis.as follows:
In millions | Year ended December 31, 2012 | |||
---|---|---|---|---|
Engine | $ | 20 | ||
Distribution | 14 | |||
Power Generation | 12 | |||
Components | 6 | |||
Restructuring and other charges | $ | 52 | ||
Foreign Exchange Rates
As a result of our international business presence, we are exposed to foreign currency exchange risks. We transact business in foreign currencies and, as a result, our income experiences some volatility related to movements in foreign currency exchange rates. To help manage our exposure to exchange rate volatility, we use foreign exchange forward contracts on a regular basis to hedge forecasted intercompany and third-party sales and purchases denominated in non-functional currencies. Our internal policy allows for managing anticipated foreign currency cash flows for up to one year. These foreign currency forward contracts are designated and qualify as foreign currency cash flow hedges under GAAP. The effective portion of the unrealized gain or loss on the forward contract is deferred and reported as a component of "Accumulated other comprehensive loss" (AOCL). When the hedged forecasted transaction (sale or purchase) occurs, the unrealized gain or loss is reclassified into income in the same line item associated with the hedged transaction in the same period or periods during which the hedged transaction affects income. The ineffective portion of the hedge, unrealized gain or loss, if any, is recognized in current income during the period of change. As of December 31, 2010, the amount we expect to reclassify from AOCL to income over the next year is a net unrealized loss of $1 million. For the years ended December 31, 2010 and 2009, there were no circumstances that would have resulted in the discontinuance of a foreign currency cash flow hedge.
To minimize the income volatility resulting from the remeasurement of net monetary assets and payables denominated in a currency other than the functional currency, we enter into foreign currency forward contracts, which are considered economic hedges. The objective is to offset the gain or loss from remeasurement with the gain or loss from the fair market valuation of the forward contract. These derivative instruments are not designated as hedges under GAAP.
The table below summarizes our outstanding foreign currency forward contracts. Only the U.S. dollar forward contracts are designatedactivity and qualifybalance of accrued restructuring charges, which is included in "Other accrued expenses" in ourConsolidated Balance Sheets for hedge accounting as of each period presented below. The currencies in this table represent 97 percent and 96 percent of the notional amounts of contracts outstanding as of December 31, 2010 and December 31, 2009.
| Notional amount in millions | ||||||
---|---|---|---|---|---|---|---|
Currency denomination | December 31, 2010 | December 31, 2009 | |||||
United States Dollar (USD) | 142 | 107 | |||||
British Pound Sterling (GBP) | 87 | 70 | |||||
Euro (EUR) | 46 | 12 | |||||
Singapore Dollar (SGD) | 17 | 15 | |||||
Indian Rupee (INR) | 1,275 | 616 | |||||
Japanese Yen (JPY) | 3,722 | 1,335 | |||||
Romanian Leu (RON) | — | 44 | |||||
Canadian Dollar (CAD) | 39 | — | |||||
South Korea Won (KRW) | 28,028 | 2,115 | |||||
Chinese Renmimbi (CNY) | 60 | 39 |
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 19. DERIVATIVES (Continued)
Commodity Price Risk
We are exposed to fluctuations in commodity prices due to contractual agreements with component suppliers. In order to protect ourselves against future price volatility and, consequently, fluctuations in gross margins, we periodically enter into commodity swap contracts with designated banks to fix the cost of certain raw material purchases with the objective of minimizing changes in inventory cost due to market price fluctuations. The swap contracts are derivative contracts that are designated as cash flow hedges under GAAP. The effective portion of the unrealized gain or loss is deferred and reported as a component of AOCL. When the hedged forecasted transaction (purchase) occurs, the unrealized gain or loss is reclassified into income in the same line item associated with the hedged transaction in the same period or periods during which the hedged transaction affects income. The ineffective portion of the hedge, if any, is recognized in current income in the period in which the ineffectiveness occurs. As of December 31, 2010, we expect to reclassify an unrealized net gain of $15 million from AOCL to income over the next year. For the year ended December 31, 2010, there were no material circumstances that would have resulted in the discontinuance of a cash flow hedge. For the year ended December 31, 2009, we discontinued hedge accounting on certain contracts2012.
In millions | Charges | Payments | Accrued Balance at December 31, 2012 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Restructuring charges(1) | $ | 50 | $ | 25 | $ | 25 |
The table below summarizes where the forecasted transactions were no longer probable. The amount reclassified to income as a result of this action was a loss of $4 million. Our internal policy allows for managing these cash flow hedges for up to three years.
The following table summarizes our outstanding commodity swap contracts that were entered into to hedge the cost of certain raw material purchases:
| December 31, 2010 | December 31, 2009 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Dollars in millions Commodity | Notional Amount | Quantity | Notional Amount | Quantity | ||||||
Copper | $ | 55 | 7,560 metric tons(1) | $ | 77 | 11,372 metric tons(1) | ||||
Platinum | 11 | 9,157 troy ounces(2) | 14 | 15,986 troy ounces(2) | ||||||
Palladium | 1 | 1,763 troy ounces(2) | 1 | 3,161 troy ounces(2) |
Interest Rate Risk
Werestructuring and other charges are exposed to market risk from fluctuationslocated in interest rates. We manage our exposure to interest rate fluctuations through the use of interest rate swaps. The objective of the swaps is to more effectively balance our borrowing costs and interest rate risk.
In November 2005, we entered into an interest rate swap to effectively convert our $250 million debt issue, due in 2028, from a fixed rate of 7.125% to a floating rate based on a LIBOR spread. The terms of the swap mirror those of the debt, with interest paid semi-annually. This swap qualifies as a fair value hedge under GAAP. The gain or loss on this derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current income as
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 19. DERIVATIVES (Continued)
"Interest expense." The following table summarizes these gains and losses for the years presented below:
| For the years ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2009 | |||||||||||
In millions Income Statement Classification | Gain/(Loss) on Swaps | Gain/(Loss) on Borrowings | Gain/(Loss) on Swaps | Gain/(Loss) on Borrowings | |||||||||
Interest expense | $ | 16 | $ | (16 | ) | $ | (54 | ) | $ | 54 |
Cash Flow Hedging
The following table summarizes the effect on ourConsolidated Statements of Income for derivative instruments classified as cash flow hedges for the years ended December 31, 2010 and 2009 presented below. The table does not include amounts related to ineffectiveness as it was not material for the periods presented.
| | For the years ended December 31, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | Amount of Gain/(Loss) Reclassified from AOCL into Income (Effective Portion) | |||||||||||
| | Amount of Gain/(Loss) Recognized in AOCL on Derivative (Effective Portion) | |||||||||||||
| Location of Gain/(Loss) Reclassified into Income (Effective Portion) | ||||||||||||||
In millions Derivatives in Cash Flow Hedging Relationships | 2010 | 2009 | 2010 | 2009 | |||||||||||
Foreign currency forward contracts | Net sales | $ | (5 | ) | $ | 7 | $ | (6 | ) | $ | (1 | ) | |||
Commodity swap contracts | Cost of sales | 13 | 74 | 8 | (24 | ) | |||||||||
Total | $ | 8 | $ | 81 | $ | 2 | $ | (25 | ) | ||||||
Derivatives Not Designated as Hedging Instruments
The following table summarizes the effect on ourConsolidated Statements of Income for derivative instruments that are not classified as hedges for the years ended December 31, 2010 and 2009.
| | For the years ended December 31, | |||||||
---|---|---|---|---|---|---|---|---|---|
| | Amount of Gain/(Loss) Recognized in Income on Derivatives | |||||||
| Location of Gain/(Loss) Recognized in Income on Derivatives | ||||||||
In millions Derivatives Not Designated as Hedging Instruments | 2010 | 2009 | |||||||
Foreign currency forward contracts | Cost of sales | $ | (3 | ) | $ | 2 | |||
Foreign currency forward contracts | Other income (expense), net | 4 | 12 |
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 19. DERIVATIVES (Continued)
Fair Value Amount and Location of Derivative Instruments
The following tables summarize the location and fair value of derivative instruments on ourConsolidated Balance Sheets:
| Derivative assets | ||||||||
---|---|---|---|---|---|---|---|---|---|
| Fair Value | | |||||||
In millions | December 31, 2010 | December 31, 2009 | Balance Sheet Location | ||||||
Derivatives Designated as Hedging Instruments | |||||||||
Commodity swap contracts | $ | 20 | $ | 9 | Prepaid expenses and other current assets | ||||
Commodity swap contracts | 1 | 8 | Other assets | ||||||
Interest rate contract | 41 | 25 | Other assets | ||||||
Total derivative assets | $ | 62 | $ | 42 | |||||
Fair value of foreign currency forward contacts and total derivative liabilities on ourConsolidated Balance Sheets are not material.
NOTE 20. OTHER INCOME (EXPENSE)
Other income (expense) included the following:
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | 2008 | |||||||
Change in cash surrender value of corporate owned life insurance(1) | $ | 12 | $ | (4 | ) | $ | (36 | ) | ||
Gain on acquisition of Cummins Western Canada (CWC) | 12 | — | — | |||||||
Dividend income | 7 | 5 | 6 | |||||||
Life insurance proceeds | 7 | — | — | |||||||
Foreign currency losses, net(2) | (1 | ) | (20 | ) | (46 | ) | ||||
Bank charges | (15 | ) | (14 | ) | (12 | ) | ||||
Other, net | 12 | 18 | 18 | |||||||
Total other income (expense), net | $ | 34 | $ | (15 | ) | $ | (70 | ) | ||
Table of Contents2012.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 21. ACQUISITIONS AND DIVESTITURES
On January 4, 2010, we acquired the remaining 70 percent interest in Cummins Western Canada (CWC) from our former principal for consideration of approximately $71 million. We formed a new partnership with a new distributor principal where we own 80 percent of CWC and the new distributor principal owns 20 percent. As of the acquisition date CWC ceased being a variable interest entity. The acquisition was effective on January 1, 2010. The $71 million of consideration consisted of:
In millions | | ||||
---|---|---|---|---|---|
Borrowings under credit revolver | $ | 44 | |||
Capital contributed by Cummins Inc. | 10 | ||||
Capital contributed by new principal, as described below | 8 | ||||
Funded from first quarter operations | 9 | ||||
Total consideration | $ | 71 | |||
In millions | Year ended December 31, 2012 | |||
---|---|---|---|---|
Cost of sales | $ | 29 | ||
Selling, general and administrative expenses | 20 | |||
Research, development and engineering expenses | 3 | |||
Restructuring and other charges | $ | 52 | ||
The purchase price was approximately $97 million as presented below. The intangible assets are primarily customer related and are being amortized over periods ranging from one to three years. The acquisition of CWC was accounted for as a business combination, with the results of the acquired entity and the goodwill included in the Distribution operating segment as of the acquisition date. Distribution segment results also include a $12 million gain for the three months ended March 28, 2010, as we were required to re-measure our pre-existing 30 percent ownership interest in CWC to fair value in accordance with GAAP. Net sales for CWC were $272 million for the twelve months ended December 31, 2010, which was approximately two percent of Cummins Inc. consolidated sales.
The purchase price was allocated as follows:
In millions | | ||||
---|---|---|---|---|---|
Accounts receivable | $ | 31 | |||
Inventory | 48 | ||||
Fixed assets | 45 | ||||
Intangible assets | 11 | ||||
Goodwill | 2 | ||||
Other assets | 2 | ||||
Current liabilities | (42 | ) | |||
Total purchase price | 97 | ||||
Fair value of pre-existing 30 percent interest | (26 | ) | |||
Consideration given | $ | 71 | |||
We provided a loan to our partner of approximately $8 million to fund the purchase of his 20 percent interest. The purchase transaction resulted in $8 million of noncontrolling interest (representing our partner's 20 percent interest) which was completely offset by the $8 million receivable from our partner, reducing the noncontrolling interest impact to zero as of the acquisition date. The interest-bearing loan is expected to be repaid over a period of 3-5 years. The partner also has periodic options to purchase an additional 10 to 15 percent interest in CWC up to a maximum of an additional 30 percent (total ownership not to exceed 50 percent).
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 21. ACQUISITIONS AND DIVESTITURES (Continued)
In November 2010, we purchased a majority interest in a previously independent North American distributorship. The acquisition was accounted for under the purchase method of accounting and resulted in an aggregate purchase price of $27 million. The assets of the acquired business were primarily accounts receivable, inventory, and fixed assets. The transaction generated $1 million of goodwill.
In July 2008, we entered into a transaction with two Fiat group companies to (1) sell our one-third interest in the European Engine Alliance (EEA) joint venture and simultaneously (2) purchase the remaining 50 percent interest in Consolidated Diesel Corporation (CDC). As a result, we now own 100 percent of CDC and no longer have an ownership interest in EEA. CDC was previously included in our consolidated results as we were considered the primary beneficiary under GAAP. We sold our remaining interest in EEA for $64 million and subsequently purchased the remaining interest in CDC for $61 million, however, because the transactions were entered into simultaneously with the same counterparty, it is considered a non-monetary exchange for accounting purposes. Thus, we accounted for the transactions at fair value in accordance with GAAP for exchanges of nonmonetary assets. Because fair value and book value were reasonably close, there was no material gain or loss recorded on the sale of EEA. In addition, there were no significant adjustments from book value for any assets or liabilities of CDC recorded upon the acquisition of the remaining 50 percent interest.
During 2008, we purchased a majority interest in three previously independent North American distributors in order to increase our ownership interests in key portions of the distribution channel. The acquisitions were accounted for under the purchase method of accounting and resulted in an aggregate purchase price of $81 million which we funded with $54 million of borrowings and $27 million of cash. The assets of the acquired businesses were primarily accounts receivable, inventory and fixed assets. There was less than $1 million of goodwill generated from these transactions.
NOTE 22. RESTRUCTURING AND OTHER CHARGES
2009 Restructuring Actions20. EARNINGS PER SHARE
In 2009, we executed restructuring actions in responseWe calculate basic earnings per share (EPS) of common stock by dividing net income attributable to a reduction in orders in mostCummins Inc. by the weighted-average number of our U.S. and foreign markets due tocommon shares outstanding for the deteriorationperiod. The calculation of diluted EPS assumes the issuance of common stock for all potentially dilutive share equivalents outstanding. We exclude shares of common stock held in the global economy. We reduced our global workforce by approximately 1,000 professional employees. In addition, we took numerous employee actions at many of our manufacturing locations, including approximately 3,200 hourly employees, significant downsizing at numerous facilities and complete closure of several facilities and branch distributor locations. Employee termination and severance costs were recorded based on approved plans developed byEBT (see Note 15, "SHAREHOLDERS' EQUITY") from the businesses and corporate management which specified positions to be eliminated, benefits to be paid under existing severance plans, union contracts or statutory requirements and the expected timetable for completioncalculation of the plan. Estimates of restructuring costs 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.
In response to closures and downsizing noted above, we incurred $2 million of restructuring expenses for lease terminations and $5 million of restructuring expenses for asset impairments. During 2009, we recorded a total pre-tax restructuring charge of $85 million, comprising $90 million of charges related to 2009 actions net of the $3 million favorable change in estimate related to 2008 actions andweighted-average common shares
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 22. RESTRUCTURING AND OTHER CHARGES20. EARNINGS PER SHARE (Continued)
outstanding until those shares are distributed from the EBT to the RSP. Following are the computations for basic and diluted earnings per share:
| Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Dollars in millions, except per share amounts | 2012 | 2011 | 2010 | |||||||
Net income attributable to Cummins Inc. | $ | 1,645 | $ | 1,848 | $ | 1,040 | ||||
Weighted-average common shares outstanding | ||||||||||
Basic | 189,286,821 | 192,972,211 | 196,699,155 | |||||||
Dilutive effect of stock compensation awards | 381,883 | 625,667 | 449,252 | |||||||
Diluted | 189,668,704 | 193,597,878 | 197,148,407 | |||||||
Earnings per common share attributable to Cummins Inc. | ||||||||||
Basic | $ | 8.69 | $ | 9.58 | $ | 5.29 | ||||
Diluted | 8.67 | 9.55 | 5.28 |
�� The weighted-average diluted common shares outstanding for 2012, 2011 and 2010 excludes the effect of 453,893, 177,460 and 7,795 weighted-average shares, respectively, of common stock options, since such options had an exercise price in excess of the monthly average market value of our common stock during that year.
NOTE 21. DERIVATIVES
We are exposed to financial risk resulting from volatility in foreign exchange rates, commodity prices and interest rates. This risk is closely monitored and managed through the $2 million favorable changeuse of financial derivative instruments including foreign currency forward contracts, commodity swap contracts, commodity zero-cost collars and interest rate swaps. As stated in estimateour policies and procedures, financial derivatives are used expressly for hedging purposes, and under no circumstances are they used for speculative purposes. When material, we adjust the value of our derivative contracts for counter-party or our credit risk.
As a result of our international business presence, we are exposed to foreign currency exchange risks. We transact business in foreign currencies and, as a result, our income experiences some volatility related to earlier 2009 actions,movements in "Restructuringforeign currency exchange rates. To help manage our exposure to exchange rate volatility, we use foreign exchange forward contracts on a regular basis to hedge forecasted intercompany and third-party sales and purchases denominated in non-functional currencies. Our internal policy allows for managing anticipated foreign currency cash flows for up to one year. These foreign currency forward contracts are designated and qualify as foreign currency cash flow hedges under GAAP. The effective portion of the unrealized gain or loss on the forward contract is deferred and reported as a component of "Accumulated other charges"comprehensive loss" (AOCL). When the hedged forecasted transaction (sale or purchase) occurs, the unrealized gain or loss is reclassified into income in the same line item associated with the hedged transaction in the same period or periods during which the hedged transaction affects income. The ineffective portion of the hedge, unrealized gain or loss, if any, is recognized in current income during the period of change. As of December 31, 2012, the amount we expect to reclassify from AOCL to income over the next year is an unrealized net gain of $1 million. For the years ended December 31, 2012 and 2011, there were no circumstances that would have resulted in the discontinuance of a foreign currency cash flow hedge.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 21. DERIVATIVES (Continued)
To minimize the income volatility resulting from the remeasurement of net monetary assets and payables denominated in a currency other than the functional currency, we enter into foreign currency forward contracts, which are considered economic hedges. The objective is to offset the gain or loss from remeasurement with the gain or loss from the fair market valuation of the forward contract. These derivative instruments are not designated as hedges under GAAP.
The table below summarizes our outstanding foreign currency forward contracts. Only the U.S. dollar forward contracts are designated and qualify for hedge accounting as of each period presented below. The currencies in this table represent 95 percent and 98 percent of the notional amounts of contracts outstanding as of December 31, 2012 and 2011.
| Notional amount in millions | ||||||
---|---|---|---|---|---|---|---|
Currency denomination | December 31, 2012 | December 31, 2011 | |||||
United States Dollar (USD) | 110 | 181 | |||||
British Pound Sterling (GBP) | 227 | 347 | |||||
Euro (EUR) | 28 | 47 | |||||
Singapore Dollar (SGD) | 3 | 20 | |||||
Indian Rupee (INR) | 1,943 | 1,701 | |||||
Japanese Yen (JPY) | 384 | 3,348 | |||||
Canadian Dollar (CAD) | 59 | 39 | |||||
South Korea Won (KRW) | 35,266 | 36,833 | |||||
Chinese Renmimbi (CNY) | 45 | 61 |
We are exposed to fluctuations in commodity prices due to contractual agreements with component suppliers. In order to protect ourselves against future price volatility and, consequently, fluctuations in gross margins, we periodically enter into commodity swap contracts with designated banks to fix the cost of certain raw material purchases with the objective of minimizing changes in inventory cost due to market price fluctuations. Certain commodity swap contracts are derivative contracts that are designated as cash flow hedges under GAAP. We also have commodity swap contracts that represent an economic hedge but are not designated for hedge accounting and are marked to market through earnings. For those contracts that qualify for hedge accounting, the effective portion of the unrealized gain or loss is deferred and reported as a component of AOCL. When the hedged forecasted transaction (purchase) occurs, the unrealized gain or loss is reclassified into income in the same line item associated with the hedged transaction in the same period or periods during which the hedged transaction affects income. The ineffective portion of the hedge, if any, is recognized in current income in the period in which the ineffectiveness occurs. As of December 31, 2012, we expect to reclassify an unrealized net loss of less than $1 million from AOCL to income over the next year. Our internal policy allows for managing these cash flow hedges for up to three years.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 21. DERIVATIVES (Continued)
The following table summarizes our outstanding commodity swap contracts that were entered into to hedge the cost of certain raw material purchases:
| December 31, 2012 | December 31, 2011 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Dollars in millions Commodity | Notional Amount | Quantity | Notional Amount | Quantity | ||||||
Copper | $ | 24 | 3,025 metric tons(1) | $ | 78 | 9,220 metric tons(1) | ||||
Platinum | 71 | 45,126 troy ounces(2) | 84 | 50,750 troy ounces(2) | ||||||
Palladium | 10 | 14,855 troy ounces(2) | 5 | 7,141 troy ounces(2) |
In the third quarter of 2012 we began to use a combination of call and put option contracts for copper in net-zero-cost collar arrangements (zero-cost collars) that establish ceiling and floor prices for copper. These contracts are used strictly for hedging and not for speculative purposes. For these zero-cost collars, if the average price of the copper during the calculation period is within the call and put price, the call and put contracts expire at no cost to us. If the price falls below the floor, the counter-party to the collar receives the difference from us, and if the price rises above the ceiling, the counter-party pays the difference to us. We believe that these zero-cost collars will act as economic hedges; however we have chosen not to designate them as hedges for accounting purposes, therefore we present the calls and puts on a gross basis on ourConsolidated Balance Sheets.
The following table summarizes our outstanding commodity zero-cost collar contracts that were entered into to hedge the cost of copper purchases:
| December 31, 2012 | ||||||
---|---|---|---|---|---|---|---|
Commodity | Average Floor or Cap | Quantity in metric tons(1) | |||||
Copper call options | $ | 8,196 | 4,100 | ||||
Copper put options | 7,005 | 4,100 |
We are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through the use of interest rate swaps. The objective of the swaps is to more effectively balance our borrowing costs and interest rate risk.
In November 2005, we entered into an interest rate swap to effectively convert our $250 million debt issue, due in 2028, from a fixed rate of 7.125 percent to a floating rate based on a LIBOR spread. The terms of the swap mirror those of the debt, with interest paid semi-annually. This swap qualifies as a fair value hedge under GAAP. The gain or loss on this derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current income as
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 21. DERIVATIVES (Continued)
"Interest expense." The following table summarizes these gains and losses for the years presented below:
| For the years ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | |||||||||||
In millions Income Statement Classification | Gain/(Loss) on Swaps | Gain/(Loss) on Borrowings | Gain/(Loss) on Swaps | Gain/(Loss) on Borrowings | |||||||||
Interest expense | $ | 6 | $ | (6 | ) | $ | 41 | $ | (41 | ) |
The following table summarizes the effect on ourConsolidated Statements of Income. These restructuring actions included: for derivative instruments classified as cash flow hedges for the years ended December 31, 2012 and 2011 presented below. The table does not include amounts related to ineffectiveness as it was not material for the periods presented.
In millions | Year ended December 31, 2009 | |||
---|---|---|---|---|
Workforce reductions | $ | 81 | ||
Exit activities | 7 | |||
Other | 2 | |||
Changes in estimate | (5 | ) | ||
Total restructuring charges | 85 | |||
Curtailment loss | 14 | |||
Total restructuring and other charges | $ | 99 | ||
| | For the years ended December 31, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amount of Gain/(Loss) Recognized in AOCL on Derivative (Effective Portion) | | | |||||||||||
| | Amount of Gain/(Loss) Reclassified from AOCL into Income (Effective Portion) | |||||||||||||
| Location of Gain/(Loss) Reclassified into Income (Effective Portion) | ||||||||||||||
In millions Derivatives in Cash Flow Hedging Relationships | 2012 | 2011 | 2012 | 2011 | |||||||||||
Foreign currency forward contracts | Net sales | $ | 8 | $ | (4 | ) | $ | (2 | ) | $ | 3 | ||||
Commodity swap contracts | Cost of sales | 8 | (22 | ) | (9 | ) | 19 | ||||||||
Total | $ | 16 | $ | (26 | ) | $ | (11 | ) | $ | 22 | |||||
In addition,
Derivatives Not Designated as a resultHedging Instruments
The following table summarizes the effect on ourConsolidated Statements of Income for derivative instruments that are not classified as hedges for the restructuring actions described above, we also recorded a $14 million curtailment loss in 2009 in our pension and other postretirement plans. See Note 11, "PENSION AND OTHER POST RETIREMENT BENEFITS," for additional detail.
Atyears ended December 31, 2010, of the approximately 4,200 employees affected by this plan, substantially all terminations were complete.
We do not include restructuring charges in our operating segment results. The pre-tax impact of allocating restructuring charges to the segment results would have been as follows:2012 and 2011.
In millions | Year ended December 31, 2009 | |||
---|---|---|---|---|
Engine | $ | 47 | ||
Power Generation | 12 | |||
Components | 35 | |||
Distribution | 5 | |||
Total restructuring and other charges | $ | 99 | ||
| | For the years ended December 31, | |||||||
---|---|---|---|---|---|---|---|---|---|
| | Amount of Gain/(Loss) Recognized in Income on Derivatives | |||||||
In millions Derivatives Not Designated as Hedging Instruments | Location of Gain/(Loss) Recognized in Income on Derivatives | ||||||||
2012 | 2011 | ||||||||
Foreign currency forward contracts | Cost of sales | $ | (4 | ) | $ | (2 | ) | ||
Foreign currency forward contracts | Other income (expense), net | 11 | (14 | ) | |||||
Commodity zero-cost collars | Cost of sales | 1 | — | ||||||
Commodity swap contracts | Cost of sales | — | (6 | ) |
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 22. RESTRUCTURING AND OTHER CHARGES21. DERIVATIVES (Continued)
Fair Value Amount and Location of Derivative Instruments
The following table summarizestables summarize the balancelocation and fair value of accrued restructuring charges by expense type and the changes in the accrued amounts for the applicable periods. The restructuring related accruals were recorded in "Other accrued expenses" in ourConsolidated Balance Sheets.
In millions | Severance Costs | Exit Activities | Other | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2009 Restructuring charges | $ | 81 | $ | 7 | $ | 2 | $ | 90 | |||||
Cash payments for 2009 actions | (70 | ) | (1 | ) | — | (71 | ) | ||||||
Non cash items | — | (5 | ) | (2 | ) | (7 | ) | ||||||
Changes in estimates | (2 | ) | — | — | (2 | ) | |||||||
Translation | 1 | — | — | 1 | |||||||||
Balance at December 31, 2009 | $ | 10 | $ | 1 | — | $ | 11 | ||||||
Cash payments for 2009 actions | (7 | ) | — | — | (7 | ) | |||||||
Changes in estimates | (3 | ) | (1 | ) | — | (4 | ) | ||||||
Balance at December 31, 2010 | $ | — | $ | — | $ | — | $ | — | |||||
2008 Restructuring Actions
We executed restructuring actions primarily in the form of voluntary and involuntary separation programs in the fourth quarter of 2008. These actions were in response to the continued deterioration in our U.S. businesses and most key markets around the world in the second half of 2008, as well as a reduction in orders in most U.S. and global markets for 2009. We reduced our worldwide professional workforce by approximately 650 employees, or 4.5 percent. We offered a voluntary retirement package to certain active professional employees in the U.S. based on a clearly defined set of criteria. We also took voluntary and involuntary actions which included approximately 800 hourly employees, the majority of which received severance benefits. The compensation packages contained salary and continuation of benefits, including health care, life insurance and outplacement services. The voluntary retirement package was accepted by approximately 150 employees. The remaining professional reductions of 500 employees were involuntary. The expenses recorded during the year ended December 31, 2008, included severance costs related to both voluntary and involuntary terminations. During 2008, we incurred a pre-tax charge related to the professional and hourly restructuring initiatives of approximately $37 million.
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. At December 31, 2008, of the approximately 1,450 employees affected by this plan, 1,250 had been terminated. All terminations were substantially complete as of December 31, 2009.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 22. RESTRUCTURING AND OTHER CHARGES (Continued)
We do not include restructuring charges in the segment results. The pre-tax impact of allocating restructuring charges for the year ended December 31, 2008, would have been as follows:
In millions | Year ended December 31, 2008 | |||
---|---|---|---|---|
Engine | $ | 17 | ||
Power Generation | 3 | |||
Components | 15 | |||
Distribution | 2 | |||
Total restructuring charges | $ | 37 | ||
The following table summarizes the balance of accrued restructuring expenses for 2008 actions, which were included in the balance of "Other accrued expenses" in ourConsolidated Balance Sheets as of December 31, 2009 and 2008:
In millions | Severance Costs | |||
---|---|---|---|---|
2008 | ||||
Restructuring charges | $ | 37 | ||
Cash payments for 2008 actions | (3 | ) | ||
Balance at December 31, 2008 | 34 | |||
2009 | ||||
Cash payments for 2008 actions | (31 | ) | ||
Change in estimate | (3 | ) | ||
Balance at December 31, 2009 | $ | — | ||
NOTE 23. SALES OF ACCOUNTS RECEIVABLE
In January 2004, we entered into a three-year facility agreement with a financial institution to sell a designated pool of trade receivables to Cummins Trade Receivables, LLC (CTR), a wholly-owned special purpose subsidiary. In July 2007, we amended the agreement to extend the facility until July 2010, and raised the purchase limitation from $200 million to $400 million. To maintain a balance in the designated pools of receivables sold, we sold new receivables to CTR as existing receivables were collected. Receivables sold to CTR in which an interest was not transferred to the financial institution are included in "Receivables, net"derivative instruments on ourConsolidated Balance Sheets.:
In April 2010, we terminated our existing trade receivables facility and entered into a new 364-day agreement (subject to renewal) with a financial institution to sell trade receivables from time to time to Cummins Trade Receivables, LLC (CTR), a wholly-owned special purpose subsidiary, for the purpose of obtaining credit secured by such receivables from one or more commercial paper conduit and committed institutional lenders. To support outstanding advances under the agreement, we sell new receivables to CTR as they arise. Receivables sold to CTR are included in "Receivables, net" on ourConsolidated Balance Sheets. The amount of aggregate advances that can be outstanding under the agreement at any point in time is limited to the lesser of $250 million or, with certain adjustments, the amount of eligible receivables held by CTR. There are no provisions in the agreement that require us to maintain a minimum investment credit rating; however, the terms of the agreement contain the same
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 23. SALES OF ACCOUNTS RECEIVABLE (Continued)
financial covenants as our revolving credit facility. In accordance with FASB Standards for transfer of financial assets, any activity under our receivable sales program will be accounted for as secured borrowings. As of December 31, 2010, the amount available under the agreement was $122 million and no advances were outstanding under the agreement.
CTR is a separate legal entity from Cummins and each of its affiliates and its assets and credit are not available to satisfy the debts and obligations of Cummins or any other entity. CTR's assets are listed separately on its balance sheet on a stand-alone basis. CTR's assets will be available first and foremost to satisfy claims of its creditors.
No accounts receivable sold to CTR were written off during 2010, 2009 or 2008. The sold receivables servicing portfolio, which is included in receivables and the proceeds from the sale of receivables and other related cash flows are as follows:
| As of and for the years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | 2008 | |||||||
Sold receivables servicing portfolio | $ | 416 | $ | 806 | $ | 652 | ||||
Receivables sold to special purpose subsidiary | 3,877 | 5,424 | 6,694 | |||||||
Collections reinvested in special purpose subsidiary | 4,267 | 5,270 | 6,801 | |||||||
Servicing fees and interest | 4 | 3 | 1 |
| Derivative Assets | |||||||
---|---|---|---|---|---|---|---|---|
| Fair Value | | ||||||
In millions | December 31, 2012 | December 31, 2011 | Balance Sheet Location | |||||
Derivatives designated as hedging instruments | ||||||||
Interest rate contract | $ | 88 | $ | 82 | Other assets | |||
Foreign currency forward contracts | 2 | — | Prepaid expenses and other current assets | |||||
Commodity swap contracts | 1 | — | Prepaid expenses and other current assets | |||||
Total derivatives designated as hedging instruments | 91 | 82 | ||||||
Derivatives not designated as hedging instruments | ||||||||
Foreign currency forward contracts | 1 | — | Prepaid expenses and other current assets | |||||
Commodity call option contracts | 1 | — | Other assets | |||||
Total derivatives not designated as hedging instruments | 2 | — | ||||||
Total derivative assets | $ | 93 | $ | 82 | ||||
NOTE 24. VARIABLE INTEREST ENTITIES
The FASB amended the standards related to the consolidation of variable interest entities, which was effective for us on January 1, 2010. The new standard requires us to analyze whether our variable interests give us a controlling financial interest of a variable interest entity and outlines what defines a primary beneficiary. The only significant impact of the adoption of this standard was to deconsolidate CKEC as of January 1, 2010 and to account for CKEC under GAAP for equity method investees. See Note 1, "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES," for additional information. We consolidate certain VIEs if we are deemed to be the primary beneficiary in accordance with the revised standard. We have variable interests in certain businesses accounted for under the equity method of accounting that are deemed VIEs and are subject to the provisions of GAAP for variable interest entities.
We have variable interests in two manufacturing entities that are deemed to be VIEs. In both cases, the entities are deemed to be VIEs because the variability in the results of the business are absorbed primarily through the product pricing arrangements as opposed to through the equity interests. In both cases, we concluded we were not the primary beneficiary as both entities are 50/50 joint ventures and all significant aspects of the entities are jointly controlled. We have not provided any loans or guarantees to either entity. Our maximum exposure to losses related to these entities is limited to our ownership interest which was $79 million at December 31, 2010.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 24. VARIABLE INTEREST ENTITIES22. OPERATING SEGMENTS (Continued)
We also have variable interests in a North American distributor that was deemed to be a VIE because ownership and profits are split differently due to a non-voting economic interest held by certain key employees. Our ownership percentage in this entity is 36 percent. We were not deemed to be the primary beneficiary as our equity ownership represents our only variable interest in the entity and we do not otherwise control the significant activities of the entity. The principal business of the distributor is to sell Cummins engines and related service parts as well as provide repair and maintenance services on engines, including warranty repairs. We have not provided any loans or guarantees to the entity. Our maximum potential loss related to this distributor as of December 31, 2010, consisted of our ownership interest totaling $3 million. In addition, under certain circumstances, we could be required to repurchase certain assets of the distributor at amounts approximating fair value as more fully discussed in Note 13, "COMMITMENTS AND CONTINGENCIES".
Selected financial information for these unconsolidated VIE's as of and for the year ended December 31, 2010, is as follows:
In millions | | |||
---|---|---|---|---|
Total assets | $ | 227 | ||
Total liabilities (including total debt of $19) | 74 | |||
Revenues | 365 | |||
Net income | 22 |
| Derivative Liabilities | |||||||
---|---|---|---|---|---|---|---|---|
| Fair Value | | ||||||
In millions | December 31, 2012 | December 31, 2011 | Balance Sheet Location | |||||
Derivatives designated as hedging instruments | ||||||||
Commodity swap contracts | $ | 2 | $ | 16 | Other accrued expenses | |||
Foreign currency forward contracts | — | 7 | Other accrued expenses | |||||
Total derivatives designated as hedging instruments | 2 | 23 | ||||||
Derivatives not designated as hedging instruments | ||||||||
Commodity put option contracts | 1 | — | Other accrued expenses | |||||
Commodity swap contracts | — | 6 | Other accrued expenses | |||||
Foreign currency forward contracts | — | 1 | Other accrued expenses | |||||
Total derivatives not designated as hedging instruments | 1 | 7 | ||||||
Total derivative liabilities | $ | 3 | $ | 30 | ||||
NOTE 25.22. 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 Executive Officer.
Our reportable operating segments consist of the following: Engine, Components, Power Generation Components and Distribution. This reporting structure is organized according to the products and markets each segment serves and allows management to focus its efforts on providing enhanced service to a wide range of customers. The Engine segment produces engines and parts for sale to customers in on-highway and various industrial markets. TheOur 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.military equipment. The Components segment sells filtration products, aftertreatment, turbochargers and fuel systems. The Power Generation segment is an integrated provider of power systems which sells engines, generator sets and alternators. The Components segment includes sales of filtration products, exhaust and aftertreatment systems, turbochargers and fuel systems. 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 original equipment manufacturers.OEMs throughout the world.
We use segment EBIT (defined as earnings before interest expense, 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 ourConsolidated Financial Statements. We prepared the financial results of our operating segments on a
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 25. OPERATING SEGMENTS (Continued)
basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. We have allocated certain common costs and expenses,
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 22. OPERATING SEGMENTS (Continued)
primarily corporate functions, among segments differently than we would for stand-alone financial information prepared in accordance with GAAP.accounting principles generally accepted in the United States of America (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, restructuring and other charges, flood damage gains or losses, divestiture gains or losses or income taxes to individual segments. In the third quarter of 2010,2012, non-segment items alsoincluded a $20 million reserve ($12 million after-tax) related to legal matters and a $6 million gain related to adjustments from our 2011 divestitures, while 2011 included the gain on disposition of certain assets and liabilities of our exhaust business and our light-duty filtration business and 2010 included a Brazil revenue tax recovery that wasrecovery. These gains were not allocated to the businesses as it wasthey were not considered by management in itsour evaluation of operating results for the year. Segment EBIT may not be consistent with measures used by other companies.
Summarized financial information regarding our reportable operating segments at December 31, is shown in the table below:
In millions | Engine | Components | Power Generation | Distribution | Non-segment Items(1) | Total | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 | |||||||||||||||||||
External sales | $ | 9,101 | $ | 2,809 | $ | 2,163 | $ | 3,261 | $ | — | $ | 17,334 | |||||||
Intersegment sales | 1,632 | 1,203 | 1,105 | 16 | (3,956 | ) | — | ||||||||||||
Total sales | 10,733 | 4,012 | 3,268 | 3,277 | (3,956 | ) | 17,334 | ||||||||||||
Depreciation and amortization(2) | 192 | 82 | 47 | 34 | — | 355 | |||||||||||||
Research, development and engineering expenses | 433 | 213 | 76 | 6 | — | 728 | |||||||||||||
Equity, royalty and interest income from investees | 127 | 29 | 40 | 188 | — | 384 | |||||||||||||
Interest income | 11 | 3 | 9 | 2 | — | 25 | |||||||||||||
Segment EBIT(3) | 1,248 | 426 | 285 | 369 | (25 | ) | 2,303 | ||||||||||||
Net assets | 3,373 | 1,830 | 1,582 | 1,392 | — | 8,177 | |||||||||||||
Investments and advances to equity investees | 401 | 127 | 88 | 281 | — | 897 | |||||||||||||
Capital expenditures | 399 | 134 | 95 | 62 | — | 690 | |||||||||||||
2011 | |||||||||||||||||||
External sales | $ | 9,649 | $ | 2,886 | $ | 2,492 | $ | 3,021 | $ | — | $ | 18,048 | |||||||
Intersegment sales | 1,658 | 1,177 | 1,006 | 23 | (3,864 | ) | — | ||||||||||||
Total sales | 11,307 | 4,063 | 3,498 | 3,044 | (3,864 | ) | 18,048 | ||||||||||||
Depreciation and amortization(2) | 181 | 73 | 42 | 25 | — | 321 | |||||||||||||
Research, development and engineering expenses | 397 | 175 | 54 | 3 | — | 629 | |||||||||||||
Equity, royalty and interest income from investees | 166 | 31 | 47 | 172 | — | 416 | |||||||||||||
Interest income | 18 | 5 | 8 | 3 | — | 34 | |||||||||||||
Segment EBIT | 1,384 | 470 | 373 | 386 | 102 | 2,715 | |||||||||||||
Net assets | 3,167 | 1,467 | 1,547 | 1,123 | — | 7,304 | |||||||||||||
Investments and advances to equity investees | 398 | 123 | 79 | 238 | — | 838 | |||||||||||||
Capital expenditures | 339 | 141 | 87 | 55 | — | 622 |
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 25.22. OPERATING SEGMENTS (Continued)
Summarized financial information regarding our reportable operating segments at December 31, is shown in the table below:
In millions | Engine | Components | Power Generation | Distribution | Non-segment Items(1) | Total | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | |||||||||||||||||||
External sales | $ | 6,594 | $ | 2,171 | $ | 2,150 | $ | 2,311 | $ | — | $ | 13,226 | |||||||
Intersegment sales | 1,294 | 875 | 769 | 13 | (2,951 | ) | — | ||||||||||||
Total sales | 7,888 | 3,046 | 2,919 | 2,324 | (2,951 | ) | 13,226 | ||||||||||||
Depreciation and amortization(2) | 171 | 79 | 41 | 25 | — | 316 | |||||||||||||
Research, development and engineering expenses | 263 | 114 | 36 | 1 | — | 414 | |||||||||||||
Equity, royalty and interest income from investees | 161 | 23 | 35 | 132 | — | 351 | |||||||||||||
Interest income | 12 | 2 | 5 | 2 | — | 21 | |||||||||||||
Segment EBIT | 809 | 278 | 299 | 297 | (26 | ) | 1,657 | ||||||||||||
Net assets | 2,662 | 1,450 | 1,286 | 929 | — | 6,327 | |||||||||||||
Investments and advances to equity investees | 355 | 106 | 73 | 200 | — | 734 | |||||||||||||
Capital expenditures | 197 | 78 | 53 | 36 | — | 364 |
In millions | Engine | Power Generation | Components | Distribution | Non-segment Items(1) | Total | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | ||||||||||||||||||||
External sales | $ | 6,594 | $ | 2,150 | $ | 2,171 | $ | 2,311 | $ | — | $ | 13,226 | ||||||||
Intersegment sales | 1,294 | 769 | 875 | 13 | (2,951 | ) | — | |||||||||||||
Total sales | 7,888 | 2,919 | 3,046 | 2,324 | (2,951 | ) | 13,226 | |||||||||||||
Depreciation and amortization(2) | 171 | 41 | 79 | 25 | — | 316 | ||||||||||||||
Research, development and engineering expenses | 263 | 36 | 114 | 1 | — | 414 | ||||||||||||||
Equity, royalty and interest income from investees | 161 | 35 | 23 | 132 | — | 351 | ||||||||||||||
Interest income | 12 | 5 | 2 | 2 | — | 21 | ||||||||||||||
Segment EBIT | 809 | 299 | 278 | 297 | (26 | ) | 1,657 | |||||||||||||
Net assets | 2,662 | 1,286 | 1,450 | 929 | — | 6,327 | ||||||||||||||
Investments and advances to equity investees | 355 | 73 | 106 | 200 | — | 734 | ||||||||||||||
Capital expenditures | 197 | 53 | 78 | 36 | — | 364 | ||||||||||||||
2009 | ||||||||||||||||||||
External sales | $ | 5,582 | $ | 1,879 | $ | 1,562 | $ | 1,777 | $ | — | $ | 10,800 | ||||||||
Intersegment sales | 823 | 538 | 793 | 7 | (2,161 | ) | — | |||||||||||||
Total sales | 6,405 | 2,417 | 2,355 | 1,784 | (2,161 | ) | 10,800 | |||||||||||||
Depreciation and amortization(2) | 185 | 49 | 73 | 17 | — | 324 | ||||||||||||||
Research, development and engineering expenses | 241 | 33 | 88 | — | — | 362 | ||||||||||||||
Equity, royalty and interest income from investees | 54 | 22 | 13 | 125 | — | 214 | ||||||||||||||
Restructuring and other charges | — | — | — | — | 99 | 99 | ||||||||||||||
Interest income | 3 | 3 | 1 | 1 | — | 8 | ||||||||||||||
Segment EBIT | 252 | 167 | 95 | 235 | (74 | ) | 675 | |||||||||||||
Net assets | 2,176 | 1,123 | 1,287 | 687 | — | 5,273 | ||||||||||||||
Investments and advances to equity investees | 261 | 50 | 91 | 172 | — | 574 | ||||||||||||||
Capital expenditures | 207 | 34 | 59 | 10 | — | 310 | ||||||||||||||
2008 | ||||||||||||||||||||
External sales | $ | 7,432 | $ | 2,601 | $ | 2,154 | $ | 2,155 | $ | — | $ | 14,342 | ||||||||
Intersegment sales | 1,378 | 899 | 998 | 9 | (3,284 | ) | — | |||||||||||||
Total sales | 8,810 | 3,500 | 3,152 | 2,164 | (3,284 | ) | 14,342 | |||||||||||||
Depreciation and amortization(2) | 180 | 41 | 65 | 25 | — | 311 | ||||||||||||||
Research, development and engineering expenses | 286 | 41 | 95 | — | — | 422 | ||||||||||||||
Equity, royalty and interest income from investees | 99 | 23 | 14 | 117 | — | 253 | ||||||||||||||
Restructuring and other charges | — | — | — | — | 37 | 37 | ||||||||||||||
Interest income | 10 | 3 | 3 | 2 | — | 18 | ||||||||||||||
Segment EBIT | 535 | 376 | 169 | 242 | (102 | ) | 1,220 | |||||||||||||
Net assets | 1,673 | 1,034 | 1,297 | 678 | — | 4,682 | ||||||||||||||
Investments and advances to equity investees | 287 | 52 | 91 | 158 | — | 588 | ||||||||||||||
Capital expenditures | 331 | 57 | 139 | 16 | — | 543 |
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 25. OPERATING SEGMENTS (Continued)
included $37 million of restructuring charges, a $36 million decrease in cash surrender value in corporate owned life insurance and $5 million of losses related to flood damage recoveries.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 22. OPERATING SEGMENTS (Continued)
A reconciliation of our segment information to the corresponding amounts in theConsolidated Statements of Income is shown in the table below:
| | Years ended December 31, | Years ended December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | In millions | 2010 | 2009 | 2008 | 2012 | 2011 | 2010 | ||||||||||||||
Segment EBIT | Segment EBIT | $ | 1,657 | $ | 675 | $ | 1,220 | $ | 2,303 | $ | 2,715 | $ | 1,657 | ||||||||
Less: | |||||||||||||||||||||
Interest expense | 40 | 35 | 42 | ||||||||||||||||||
Less: Interest expense | 32 | 44 | 40 | ||||||||||||||||||
Income before income taxes | Income before income taxes | $ | 1,617 | $ | 640 | $ | 1,178 | $ | 2,271 | $ | 2,671 | $ | 1,617 | ||||||||
| December 31, | December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | 2008 | 2012 | 2011 | 2010 | ||||||||||||||
Net assets for operating segments | $ | 6,327 | $ | 5,273 | $ | 4,682 | $ | 8,177 | $ | 7,304 | $ | 6,327 | ||||||||
Liabilities deducted in arriving at net assets | 4,412 | 4,018 | 4,186 | 4,913 | 4,832 | 4,412 | ||||||||||||||
Pension and other postretirement benefit adjustments excluded from net assets | (879 | ) | (1,180 | ) | (1,150 | ) | (977 | ) | (928 | ) | (879 | ) | ||||||||
Deferred tax assets not allocated to segments | 517 | 680 | 776 | 410 | 435 | 517 | ||||||||||||||
Debt-related costs not allocated to segments | 25 | 25 | 25 | 25 | 25 | 25 | ||||||||||||||
Total assets | $ | 10,402 | $ | 8,816 | $ | 8,519 | $ | 12,548 | $ | 11,668 | $ | 10,402 | ||||||||
The table below presents certain segment information by geographic area. Net sales attributed to geographic areas are based on the location of the customer.
| Years ended and as of December 31, | Years ended and as of December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | 2008 | |||||||||||||||||
Net sales | ||||||||||||||||||||
In millions Net Sales | 2012 | 2011 | 2010 | |||||||||||||||||
United States | $ | 4,817 | $ | 5,141 | $ | 5,817 | $ | 8,107 | $ | 7,354 | $ | 4,817 | ||||||||
China | 1,206 | 630 | 783 | 1,056 | 1,452 | 1,206 | ||||||||||||||
Brazil | 1,014 | 596 | 866 | 798 | 1,286 | 1,014 | ||||||||||||||
India | 808 | 592 | 702 | 757 | 859 | 808 | ||||||||||||||
Mexico | 692 | 631 | 415 | |||||||||||||||||
United Kingdom | 562 | 406 | 692 | 660 | 727 | 562 | ||||||||||||||
Canada | 506 | 327 | 619 | 642 | 653 | 506 | ||||||||||||||
Mexico | 415 | 240 | 377 | |||||||||||||||||
Other foreign countries | 3,898 | 2,868 | 4,486 | 4,622 | 5,086 | 3,898 | ||||||||||||||
Total net sales | $ | 13,226 | $ | 10,800 | $ | 14,342 | $ | 17,334 | $ | 18,048 | $ | 13,226 | ||||||||
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 25.22. OPERATING SEGMENTS (Continued)
| Years ended and as of December 31, | Years ended and as of December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | 2010 | 2009 | 2008 | |||||||||||||||||
Long-lived assets | ||||||||||||||||||||
In millions Long-lived assets | 2012 | 2011 | 2010 | |||||||||||||||||
United States | $ | 1,981 | $ | 1,811 | $ | 1,764 | $ | 2,440 | $ | 2,218 | $ | 1,981 | ||||||||
China | 446 | 322 | 342 | 589 | 520 | 446 | ||||||||||||||
United Kingdom | 266 | 188 | 177 | 339 | 318 | 266 | ||||||||||||||
India | 173 | 134 | 114 | 243 | 203 | 173 | ||||||||||||||
Brazil | 146 | 125 | 124 | 170 | 151 | 146 | ||||||||||||||
Netherlands | 130 | 111 | — | |||||||||||||||||
Mexico | 77 | 72 | 62 | |||||||||||||||||
Canada | 64 | 27 | 26 | 69 | 64 | 64 | ||||||||||||||
Mexico | 62 | 54 | 55 | |||||||||||||||||
Germany | 49 | 47 | 44 | |||||||||||||||||
Korea | 37 | 27 | 19 | |||||||||||||||||
Turkey | 29 | 19 | 1 | |||||||||||||||||
Australia | 48 | 11 | 12 | 25 | 34 | 48 | ||||||||||||||
Germany | 44 | 37 | 35 | |||||||||||||||||
United Arab Emirates | 16 | 14 | 9 | |||||||||||||||||
Singapore | 16 | 9 | 7 | |||||||||||||||||
Romania | 15 | 10 | 10 | |||||||||||||||||
France | 13 | 13 | 14 | |||||||||||||||||
Other foreign countries | 92 | 77 | 81 | 33 | 32 | 32 | ||||||||||||||
Total long-lived assets | $ | 3,322 | $ | 2,786 | $ | 2,730 | $ | 4,290 | $ | 3,862 | $ | 3,322 | ||||||||
NOTE 26. SUBSEQUENT EVENTS
In January Our largest customer is PACCAR Inc. Worldwide sales to this customer were $2,232 million in 2012, $2,144 million in 2011 we reached an agreement to sell certain assets and liabilities of our exhaust business which manufactures exhaust products and select components for emission systems for a variety of applications. The transaction is expected to close in our fiscal second quarter of 2011. This business has historically been included in our Components segment. The sales price is expected to range from $120 million to $130 million, subject to a final financial statement review. There are no earnouts or other contingencies associated with the sales price. We expect to recognize a pre-tax gain on the sale of approximately $70 million to $80 million, which includes an allocation of goodwill of approximately $15 million. Sales for this business were $171 million, $126 million and $169$986 million in 2010, 2009representing 13 percent, 12 percent and 2008, respectively. Income before income taxes for this business was approximately $22 million, $11 million and $19 million in 2010, 2009 and 2008, respectively.
In February 2011, we signed a non-binding letter of intent to sell certain assets and liabilities7 percent, respectively, of our light-duty filtration business which manufactures light-duty automotive and industrial filtration solutions. The transaction is expected to close in our fiscal second quarterconsolidated net sales. No other customer accounted for more than 10 percent of 2011. The sales price is expected to be approximately $70 million to $75 million, subject to a final financial statement review. There are no earnouts or other contingencies associated with the sales price. We expect to recognize a pre-tax gain on the sale of approximately $30 million to $35 million, which includes an allocation of goodwill of approximately $9 million. Sales for this business were $68 million, $55 million and $73 million in 2010, 2009 and 2008, respectively. Income before income taxes for this business was approximately $10 million, $3 million and $8 million in 2010, 2009 and 2008, respectively.
The assets and liabilities associated with these businesses have not been reclassified and separately presented in theConsolidated Balance Sheets as they are immaterial. We will enter into supply and other agreements with the operations that will represent ongoing involvement and as such, the results of these operations will not be presented as discontinued operations.consolidated net sales.
SELECTED QUARTERLY FINANCIAL DATA
UNAUDITED
| | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions, except per share amounts | In millions, except per share amounts | 2010 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||||||||||
Net sales | $ | 2,478 | $ | 3,208 | $ | 3,401 | $ | 4,139 | |||||||||||||||||||
Gross margin | 601 | 753 | 830 | 984 | |||||||||||||||||||||||
Net income attributable to Cummins Inc.(1) | 149 | 246 | 283 | 362 | |||||||||||||||||||||||
Net earnings per share attributable to Cummins Inc.—basic(2) | $ | 0.75 | $ | 1.25 | $ | 1.45 | $ | 1.85 | |||||||||||||||||||
Net earnings per share attributable to Cummins Inc.—diluted | 0.75 | 1.25 | 1.44 | 1.84 | |||||||||||||||||||||||
Cash dividends per share | 0.175 | 0.175 | 0.2625 | 0.2625 | |||||||||||||||||||||||
Stock price per share | |||||||||||||||||||||||||||
High | $ | 63.44 | $ | 77.10 | $ | 92.50 | $ | 111.87 | |||||||||||||||||||
Low | 44.84 | 58.91 | 63.04 | 87.00 | |||||||||||||||||||||||
2009 | 2012 | ||||||||||||||||||||||||||
Net sales | Net sales | $ | 2,439 | $ | 2,431 | $ | 2,530 | $ | 3,400 | $ | 4,472 | $ | 4,452 | $ | 4,118 | $ | 4,292 | ||||||||||
Gross margin | Gross margin | 445 | 448 | 503 | 773 | 1,198 | 1,210 | 1,042 | 1,058 | ||||||||||||||||||
Net income attributable to Cummins Inc.(1) | Net income attributable to Cummins Inc.(1) | 7 | 56 | 95 | 270 | 455 | 469 | 352 | 369 | ||||||||||||||||||
Net earnings per share attributable to Cummins Inc.—basic(2) | Net earnings per share attributable to Cummins Inc.—basic(2) | $ | 0.04 | $ | 0.28 | $ | 0.48 | $ | 1.36 | $ | 2.39 | $ | 2.47 | $ | 1.87 | $ | 1.96 | ||||||||||
Net earnings per share attributable to Cummins Inc.—diluted | Net earnings per share attributable to Cummins Inc.—diluted | 0.04 | 0.28 | 0.48 | 1.36 | 2.38 | 2.47 | 1.86 | 1.95 | ||||||||||||||||||
Cash dividends per share | Cash dividends per share | 0.175 | 0.175 | 0.175 | 0.175 | 0.40 | 0.40 | 0.50 | 0.50 | ||||||||||||||||||
Stock price per share | Stock price per share | ||||||||||||||||||||||||||
High | $ | 31.77 | $ | 37.40 | $ | 48.71 | $ | 51.65 | |||||||||||||||||||
Low | 18.34 | 23.99 | 31.32 | 41.51 | |||||||||||||||||||||||
High | $ | 129.51 | $ | 123.34 | $ | 105.63 | $ | 109.78 | |||||||||||||||||||
Low | 90.37 | 88.31 | 82.20 | 85.88 |
| 2011 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales | $ | 3,860 | $ | 4,641 | $ | 4,626 | $ | 4,921 | |||||
Gross margin | 957 | 1,203 | 1,188 | 1,241 | |||||||||
Net income attributable to Cummins Inc.(1) | 343 | 505 | 452 | 548 | |||||||||
Net earnings per share attributable to Cummins Inc.—basic(2) | $ | 1.75 | $ | 2.61 | $ | 2.35 | $ | 2.87 | |||||
Net earnings per share attributable to Cummins Inc.—diluted | 1.75 | 2.60 | 2.35 | 2.86 | |||||||||
Cash dividends per share | 0.2625 | 0.2625 | 0.40 | 0.40 | |||||||||
Stock price per share | |||||||||||||
High | $ | 114.81 | $ | 121.49 | $ | 114.00 | $ | 103.95 | |||||
Low | 93.50 | 91.13 | 79.62 | 79.53 |
At December 31, 2010,2012, there were approximately 3,8313,977 holders of record of Cummins Inc.'s $2.50 par value common stock.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, 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 Company's disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended December 31, 2010,2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
The information required by Item 9A relating to Management's Annual Report on Internal Control Over Financial Reporting and Attestation Report of the Registered Public Accounting Firm is incorporated herein by reference to the information set forth under the captions "Management's Report on Internal Control Over Financial Reporting" and "Report of Independent Registered Public Accounting Firm," respectively, under Item 8.
None.
ITEM 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 is incorporated by reference to the relevant information under the captions "Corporate Governance," "Election of Directors" and "Other Information—Section 16(a) Beneficial Ownership Reporting Compliance" in our 20112013 Proxy Statement, which will be filed within 120 days after the end of 2010.2012. Information regarding our executive officers may be found in Part 1 of this annual report under the caption "Executive Officers of the Registrant." Except as otherwise specifically incorporated by reference, our Proxy Statement is not deemed to be filed as part of this annual report.
ITEM 11. Executive Compensation
The information required by Item 11 is incorporated by reference to the relevant information under the caption "Executive Compensation" in our 20112013 Proxy Statement, which will be filed within 120 days after the end of 2010.2012.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information concerning our equity compensation plans as of December 31, 2010,2012, is as follows:
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights(1) | Weighted-average exercise price of outstanding options, warrants and rights(2) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column) | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Equity compensation plans approved by security holders | 2,001,481 | $ | 78.80 | 3,551,212 | ||||||
Equity compensation plans not approved by security holders | — | — | — | |||||||
Total | 2,001,481 | $ | 78.80 | 3,551,212 | ||||||
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights(1) | Weighted-average exercise price of outstanding options, warrants and rights(2) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column) | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Equity compensation plans approved by security holders | 1,625,256 | $ | 37.92 | 4,716,883 | ||||||
Equity compensation plans not approved by security holders | — | — | — | |||||||
Total | 1,625,256 | $ | 37.92 | 4,716,883 | ||||||
The remaining information required by Item 12 is incorporated by reference to the relevant information under the caption "Stock Ownership of Directors, Management and Others" in our 20112013 Proxy Statement, which will be filed within 120 days after the end of 2010.2012.
ITEM 13. Certain Relationships, Related Transactions and Director Independence
The information required by Item 13 is incorporated by reference to the relevant information under the captions "Corporate Governance" and "Other Information—Related Party Transactions" in our 20112013 Proxy Statement, which will be filed within 120 days after the end of 2010.2012.
ITEM 14. Principal Accountant Fees and Services
The information required by Item 14 is incorporated by reference to the relevant information under the caption "Selection of Independent Public Accountants" in our 20112013 Proxy Statement, which will be filed within 120 days after the end of 2010.2012.
ITEM 15. Exhibits and Financial Statement Schedules
Pursuant to the requirements of Section 13 or 15(d) 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. | ||||||
By: | /s/ PATRICK J. WARD Patrick J. Ward Vice President and Chief Financial Officer (Principal Financial Officer) | By: | /s/ MARSHA L. HUNT Marsha L. Hunt Vice President—Corporate Controller (Principal Accounting Officer) |
Date: February 20, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below are being filedby or have previously been filed on behalf of Cummins Inc.the following persons on behalf of the registrant and are incorporated herein by reference fromin the documents indicated and made a part hereof. Exhibits not identifiedcapacities as previously filed are filed herewith:of this February 20, 2013.
Signatures | Title | Date | ||||
---|---|---|---|---|---|---|
/s/ N. THOMAS LINEBARGER N. Thomas Linebarger | Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) | February 20, 2013 | ||||
/s/ PATRICK J. WARD Patrick J. Ward | Vice President and Chief Financial Officer (Principal Financial Officer) | February 20, 2013 | ||||
/s/ MARSHA L. HUNT Marsha L. Hunt | Vice President—Corporate Controller (Principal Accounting Officer) | February 20, 2013 | ||||
* Robert J. Bernhard | Director | February 20, 2013 | ||||
* Franklin R. Chang-Diaz | Director | February 20, 2013 | ||||
* Stephen B. Dobbs | Director | February 20, 2013 | ||||
* Robert K. Herdman | Director | February 20, 2013 |
Signatures | Title | Date | ||||
---|---|---|---|---|---|---|
* Alexis M. Herman | Director | February 20, 2013 | ||||
* William I. Miller | Director | February 20, 2013 | ||||
* Georgia R. Nelson | Director | February 20, 2013 | ||||
* Carl Ware | Director | February 20, 2013 | ||||
By: | /s/ PATRICK J. WARD Patrick J. Ward Attorney-in-fact |
Exhibit No. | Description of Exhibit | ||
---|---|---|---|
3(a | ) | Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3(a) to Cummins Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 28, 2009). | |
3(b | ) | By-laws, as amended and restated effective as of July 14, 2009 (incorporated by reference to Exhibit 3.1 to Cummins Inc.'s Current Report on Form 8-K dated July 17, 2009). | |
)# | 2003 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10(a) to Cummins Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009). | ||
)# | Target Bonus Plan (incorporated by reference to Exhibit 10(b) to Cummins Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009). | ||
)# | Deferred Compensation Plan, | ||
)# | Supplemental Life Insurance and Deferred Income Plan, as amended (incorporated by reference to Exhibit 10(d) to Cummins Inc.'s Annual Report on Form 10-K for the year ended December 31, | ||
10(e | ) | Credit Agreement, dated as of | |
)# | Deferred Compensation Plan for Non-Employee Directors, as amended (filed herewith). | ||
10(g | )# | Excess Benefit Retirement Plan, as amended (incorporated by reference to Exhibit 10(g) to Cummins Inc.'s Annual Report on Form 10-K for the year ended December 31, | |
)# | Employee Stock Purchase Plan, as amended (incorporated by reference to | ||
)# | Longer Term Performance Plan (incorporated by reference to Exhibit 10(i) to Cummins Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009). | ||
)# | 2006 Executive Retention Plan, as amended (incorporated by reference to Exhibit 10(j) to Cummins Inc.'s Annual Report on Form 10-K for the year ended December 31, | ||
)# | Senior Executive Target Bonus Plan (incorporated by reference to Exhibit 10(k) to Cummins Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009). | ||
)# | Senior Executive Longer Term Performance Plan (incorporated by reference to Exhibit 10(l) to Cummins Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009). | ||
)# | Form of Stock Option Agreement under the 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10(m) to Cummins Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009). | ||
)# | Form of Performance Share Award Agreement under the 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10(n) to Cummins Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009). | ||
Exhibit No. | Description of Exhibit | ||
---|---|---|---|
10(o | )# | 2012 Omnibus Incentive Plan (incorporated by reference to Annex A to Cummins Inc.'s definitive proxy statement filed with the Securities and Exchange Commission on Schedule 14A on March 27, 2012 (File No. 001-04949)). | |
10(p | )# | Form of Stock Option Agreement under the 2012 Omnibus Incentive Plan (filed herewith). | |
10(q | )# | Key Employee Stock Investment Plan (incorporated by reference to Exhibit 4.3 to Cummins Inc.'s Registration Statement on Form S-8 on November 6, 2012 (File No. 333-184786)). | |
12 | Calculation of Ratio of Earnings to Fixed Charges (filed herewith). | ||
21 | Subsidiaries of the Registrant (filed herewith). | ||
23 | Consent of PricewaterhouseCoopers LLP (filed herewith). | ||
24 | Powers of Attorney (filed herewith). | ||
31(a | ) | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |
31(b | ) | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |
32 | Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). | ||
101.INS | XBRL Instance | ||
101.SCH | XBRL Taxonomy Extension Schema | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by or on behalf of the following persons on behalf of the registrant and in the capacities as of this February 24, 2011.