UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 29, 2015
Commission File Number 1-4949
CUMMINS INC.
(Exact name of registrant as specified in its charter)
Indiana (State of Incorporation) | 35-0257090 (IRS Employer Identification No.) | |
500 Jackson Street
Box 3005
Columbus, Indiana 47202-3005
(Address of principal executive offices)
Telephone (812) 377-5000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of March 29, 2015, there were 181,311,804 shares of common stock outstanding with a par value of $2.50 per share.
Website Access to Company’s Reports
Cummins maintains an internet website at www.cummins.com. Investors can obtain copies of our filings from this website free of charge as soon as reasonably practicable after they are electronically filed with, or furnished, to the Securities and Exchange Commission.
CUMMINS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
Page | ||
Condensed Consolidated Statements of Income for the three months ended March 29, 2015 and March 30, 2014 | ||
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 29, 2015 and March 30, 2014 | ||
Condensed Consolidated Balance Sheets at March 29, 2015 and December 31, 2014 | ||
Condensed Consolidated Statements of Cash Flows for the three months ended March 29, 2015 and March 30, 2014 | ||
Condensed Consolidated Statements of Changes in Equity for the three months ended March 29, 2015 and March 30, 2014 | ||
2
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended | ||||||||
In millions, except per share amounts | March 29, 2015 | March 30, 2014 | ||||||
NET SALES (a) | $ | 4,709 | $ | 4,406 | ||||
Cost of sales | 3,514 | 3,307 | ||||||
GROSS MARGIN | 1,195 | 1,099 | ||||||
OPERATING EXPENSES AND INCOME | ||||||||
Selling, general and administrative expenses | 517 | 485 | ||||||
Research, development and engineering expenses | 195 | 190 | ||||||
Equity, royalty and interest income from investees (Note 4) | 68 | 90 | ||||||
Other operating income (expense), net | (3 | ) | (1 | ) | ||||
OPERATING INCOME | 548 | 513 | ||||||
Interest income | 5 | 5 | ||||||
Interest expense | 14 | 17 | ||||||
Other income, net | 9 | 10 | ||||||
INCOME BEFORE INCOME TAXES | 548 | 511 | ||||||
Income tax expense (Note 5) | 144 | 153 | ||||||
CONSOLIDATED NET INCOME | 404 | 358 | ||||||
Less: Net income attributable to noncontrolling interests | 17 | 20 | ||||||
NET INCOME ATTRIBUTABLE TO CUMMINS INC. | $ | 387 | $ | 338 | ||||
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. | ||||||||
Basic | $ | 2.14 | $ | 1.83 | ||||
Diluted | $ | 2.14 | $ | 1.83 | ||||
WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||||
Basic | 180.6 | 184.3 | ||||||
Dilutive effect of stock compensation awards | 0.4 | 0.4 | ||||||
Diluted | 181.0 | 184.7 | ||||||
CASH DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.78 | $ | 0.625 | ||||
____________________________________
(a) Includes sales to nonconsolidated equity investees of $325 million and $592 million for the three month periods ended March 29, 2015 and March 30, 2014, respectively.
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
3
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three months ended | ||||||||
In millions | March 29, 2015 | March 30, 2014 | ||||||
CONSOLIDATED NET INCOME | $ | 404 | $ | 358 | ||||
Other comprehensive (loss) income, net of tax (Note 11) | ||||||||
Change in pension and other postretirement defined benefit plans | 13 | 4 | ||||||
Foreign currency translation adjustments | (176 | ) | 31 | |||||
Unrealized loss on marketable securities | (1 | ) | (2 | ) | ||||
Unrealized gain on derivatives | — | 2 | ||||||
Total other comprehensive (loss) income, net of tax | (164 | ) | 35 | |||||
COMPREHENSIVE INCOME | 240 | 393 | ||||||
Less: Comprehensive income attributable to noncontrolling interests | 20 | 26 | ||||||
COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC. | $ | 220 | $ | 367 | ||||
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
4
CUMMINS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) | ||||||||
In millions, except par value | March 29, 2015 | December 31, 2014 | ||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 1,997 | $ | 2,301 | ||||
Marketable securities (Note 6) | 115 | 93 | ||||||
Total cash, cash equivalents and marketable securities | 2,112 | 2,394 | ||||||
Accounts and notes receivable, net | ||||||||
Trade and other | 2,930 | 2,744 | ||||||
Nonconsolidated equity investees | 310 | 202 | ||||||
Inventories (Note 7) | 2,936 | 2,866 | ||||||
Prepaid expenses and other current assets | 712 | 849 | ||||||
Total current assets | 9,000 | 9,055 | ||||||
Long-term assets | ||||||||
Property, plant and equipment | 7,046 | 7,123 | ||||||
Accumulated depreciation | (3,409 | ) | (3,437 | ) | ||||
Property, plant and equipment, net | 3,637 | 3,686 | ||||||
Investments and advances related to equity method investees | 968 | 981 | ||||||
Goodwill | 470 | 479 | ||||||
Other intangible assets, net | 340 | 343 | ||||||
Prepaid pensions | 714 | 637 | ||||||
Other assets | 607 | 595 | ||||||
Total assets | $ | 15,736 | $ | 15,776 | ||||
LIABILITIES | ||||||||
Current liabilities | ||||||||
Loans payable | $ | 71 | $ | 86 | ||||
Accounts payable (principally trade) | 2,013 | 1,881 | ||||||
Current maturities of long-term debt (Note 8) | 33 | 23 | ||||||
Current portion of accrued product warranty (Note 9) | 379 | 363 | ||||||
Accrued compensation, benefits and retirement costs | 390 | 508 | ||||||
Deferred revenue | 393 | 401 | ||||||
Other accrued expenses | 778 | 759 | ||||||
Total current liabilities | 4,057 | 4,021 | ||||||
Long-term liabilities | ||||||||
Long-term debt (Note 8) | 1,602 | 1,589 | ||||||
Pensions | 290 | 289 | ||||||
Postretirement benefits other than pensions | 359 | 369 | ||||||
Other liabilities and deferred revenue | 1,359 | 1,415 | ||||||
Total liabilities | $ | 7,667 | $ | 7,683 | ||||
Commitments and contingencies (Note 10) | ||||||||
EQUITY | ||||||||
Cummins Inc. shareholders’ equity | ||||||||
Common stock, $2.50 par value, 500 shares authorized, 222.3 and 222.3 shares issued | $ | 2,146 | $ | 2,139 | ||||
Retained earnings | 9,792 | 9,545 | ||||||
Treasury stock, at cost, 41.0 and 40.1 shares | (2,975 | ) | (2,844 | ) | ||||
Common stock held by employee benefits trust, at cost, 1.0 and 1.1 shares | (12 | ) | (13 | ) | ||||
Accumulated other comprehensive loss (Note 11) | (1,245 | ) | (1,078 | ) | ||||
Total Cummins Inc. shareholders’ equity | 7,706 | 7,749 | ||||||
Noncontrolling interests | 363 | 344 | ||||||
Total equity | $ | 8,069 | $ | 8,093 | ||||
Total liabilities and equity | $ | 15,736 | $ | 15,776 | ||||
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
5
CUMMINS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | ||||||||
Three months ended | ||||||||
In millions | March 29, 2015 | March 30, 2014 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Consolidated net income | $ | 404 | $ | 358 | ||||
Adjustments to reconcile consolidated net income to net cash provided by operating activities | ||||||||
Depreciation and amortization | 128 | 105 | ||||||
Deferred income taxes | (1 | ) | 22 | |||||
Equity in income of investees, net of dividends | (53 | ) | (52 | ) | ||||
Pension contributions in excess of expense | (96 | ) | (100 | ) | ||||
Other post-retirement benefits payments in excess of expense | (8 | ) | (8 | ) | ||||
Stock-based compensation expense | 5 | 10 | ||||||
Translation and hedging activities | 7 | (3 | ) | |||||
Changes in current assets and liabilities, net of acquisitions | ||||||||
Accounts and notes receivable | (276 | ) | (232 | ) | ||||
Inventories | (98 | ) | (135 | ) | ||||
Other current assets | 20 | 2 | ||||||
Accounts payable | 147 | 302 | ||||||
Accrued expenses | (35 | ) | (95 | ) | ||||
Changes in other liabilities and deferred revenue | 59 | 50 | ||||||
Other, net | (30 | ) | 39 | |||||
Net cash provided by operating activities | 173 | 263 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Capital expenditures | (100 | ) | (107 | ) | ||||
Investments in internal use software | (8 | ) | (14 | ) | ||||
Investments in and advances to equity investees | 10 | (6 | ) | |||||
Acquisitions of businesses, net of cash acquired | (11 | ) | (90 | ) | ||||
Investments in marketable securities—acquisitions (Note 6) | (95 | ) | (84 | ) | ||||
Investments in marketable securities—liquidations (Note 6) | 71 | 108 | ||||||
Cash flows from derivatives not designated as hedges | 4 | 5 | ||||||
Other, net | 4 | 1 | ||||||
Net cash used in investing activities | (125 | ) | (187 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from borrowings | 2 | 7 | ||||||
Payments on borrowings and capital lease obligations | (18 | ) | (25 | ) | ||||
Distributions to noncontrolling interests | (1 | ) | (13 | ) | ||||
Dividend payments on common stock | (140 | ) | (115 | ) | ||||
Repurchases of common stock | (137 | ) | (419 | ) | ||||
Other, net | (2 | ) | (37 | ) | ||||
Net cash used in financing activities | (296 | ) | (602 | ) | ||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | (56 | ) | 5 | |||||
Net decrease in cash and cash equivalents | (304 | ) | (521 | ) | ||||
Cash and cash equivalents at beginning of year | 2,301 | 2,699 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 1,997 | $ | 2,178 | ||||
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
6
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
In millions | Common Stock | Additional paid-in Capital | Retained Earnings | Treasury Stock | Common Stock Held in Trust | Accumulated Other Comprehensive Loss | Total Cummins Inc. Shareholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2013 | $ | 556 | $ | 1,543 | $ | 8,406 | $ | (2,195 | ) | $ | (16 | ) | $ | (784 | ) | $ | 7,510 | $ | 360 | $ | 7,870 | ||||||||||||||
Net income | 338 | 338 | 20 | 358 | |||||||||||||||||||||||||||||||
Other comprehensive income (loss) | 29 | 29 | 6 | 35 | |||||||||||||||||||||||||||||||
Issuance of shares | 1 | 1 | — | 1 | |||||||||||||||||||||||||||||||
Employee benefits trust activity | 9 | 1 | 10 | — | 10 | ||||||||||||||||||||||||||||||
Acquisition of shares | (419 | ) | (419 | ) | — | (419 | ) | ||||||||||||||||||||||||||||
Cash dividends on common stock | (115 | ) | (115 | ) | — | (115 | ) | ||||||||||||||||||||||||||||
Distributions to noncontrolling interests | — | (13 | ) | (13 | ) | ||||||||||||||||||||||||||||||
Stock based awards | (8 | ) | 14 | 6 | — | 6 | |||||||||||||||||||||||||||||
Other shareholder transactions | — | 1 | 1 | ||||||||||||||||||||||||||||||||
BALANCE AT MARCH 30, 2014 | $ | 556 | $ | 1,545 | $ | 8,629 | $ | (2,600 | ) | $ | (15 | ) | $ | (755 | ) | $ | 7,360 | $ | 374 | $ | 7,734 | ||||||||||||||
BALANCE AT DECEMBER 31, 2014 | $ | 556 | $ | 1,583 | $ | 9,545 | $ | (2,844 | ) | $ | (13 | ) | $ | (1,078 | ) | $ | 7,749 | $ | 344 | $ | 8,093 | ||||||||||||||
Net income | 387 | 387 | 17 | 404 | |||||||||||||||||||||||||||||||
Other comprehensive income (loss) | (167 | ) | (167 | ) | 3 | (164 | ) | ||||||||||||||||||||||||||||
Issuance of shares | 1 | 1 | — | 1 | |||||||||||||||||||||||||||||||
Employee benefits trust activity | 11 | 1 | 12 | — | 12 | ||||||||||||||||||||||||||||||
Acquisition of shares | (137 | ) | (137 | ) | — | (137 | ) | ||||||||||||||||||||||||||||
Cash dividends on common stock | (140 | ) | (140 | ) | — | (140 | ) | ||||||||||||||||||||||||||||
Distributions to noncontrolling interests | — | (1 | ) | (1 | ) | ||||||||||||||||||||||||||||||
Stock based awards | (5 | ) | 6 | 1 | — | 1 | |||||||||||||||||||||||||||||
BALANCE AT MARCH 29, 2015 | $ | 556 | $ | 1,590 | $ | 9,792 | $ | (2,975 | ) | $ | (12 | ) | $ | (1,245 | ) | $ | 7,706 | $ | 363 | $ | 8,069 | ||||||||||||||
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
7
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS
Cummins Inc. (“Cummins,” “we,” “our” or “us”) was founded in 1919 as a corporation in Columbus, Indiana and as one of the first diesel engine manufacturers. We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We serve our customers through a network of approximately 600 company-owned and independent distributor locations and approximately 7,200 dealer locations in more than 190 countries and territories.
NOTE 2. BASIS OF PRESENTATION
The unaudited Condensed Consolidated Financial Statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows. All such adjustments are of a normal recurring nature. The Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations. Certain reclassifications have been made to prior period amounts to conform to the presentation of the current period condensed financial statements.
Our reporting period usually ends on the Sunday closest to the last day of the quarterly calendar period. The first quarters of 2015 and 2014 ended on March 29 and March 30, respectively. Our fiscal year ends on December 31, regardless of the day of the week on which December 31 falls.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the Condensed Consolidated Financial Statements. Significant estimates and assumptions in these Condensed Consolidated Financial Statements require the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, estimates of future cash flows and other assumptions associated with goodwill and long-lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, determination of discount and other rate assumptions for pension and other postretirement benefit expenses, income taxes and deferred tax valuation allowances, lease classifications and contingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.
The weighted-average diluted common shares outstanding exclude the anti-dilutive effect of certain stock options since such options had an exercise price in excess of the monthly average market value of our common stock. The options excluded from diluted earnings per share for the three month periods ended March 29, 2015 and March 30, 2014, were as follows:
Three months ended | |||||
March 29, 2015 | March 30, 2014 | ||||
Options excluded | 339,878 | 1,430 | |||
These interim condensed financial statements should be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2014. Our interim period financial results for the three month interim periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
8
NOTE 3. PENSION AND OTHER POSTRETIREMENT BENEFITS
The components of net periodic pension and other postretirement benefit costs under our plans were as follows:
Pension | ||||||||||||||||||||||||
U.S. Plans | U.K. Plans | Other Postretirement Benefits | ||||||||||||||||||||||
Three months ended | ||||||||||||||||||||||||
In millions | March 29, 2015 | March 30, 2014 | March 29, 2015 | March 30, 2014 | March 29, 2015 | March 30, 2014 | ||||||||||||||||||
Service cost | $ | 20 | $ | 17 | $ | 7 | $ | 6 | $ | — | $ | — | ||||||||||||
Interest cost | 25 | 26 | 14 | 16 | 4 | 4 | ||||||||||||||||||
Expected return on plan assets | (47 | ) | (44 | ) | (23 | ) | (22 | ) | — | — | ||||||||||||||
Recognized net actuarial loss | 11 | 8 | 9 | 7 | 1 | — | ||||||||||||||||||
Net periodic benefit cost | $ | 9 | $ | 7 | $ | 7 | $ | 7 | $ | 5 | $ | 4 | ||||||||||||
NOTE 4. EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES
Equity, royalty and interest income from investees included in our Condensed Consolidated Statements of Income for the interim reporting periods was as follows:
Three months ended | ||||||||
In millions | March 29, 2015 | March 30, 2014 | ||||||
Distribution Entities | ||||||||
North American distributors | $ | 10 | $ | 32 | ||||
Komatsu Cummins Chile, Ltda. | 7 | 6 | ||||||
All other distributors | 1 | 1 | ||||||
Manufacturing Entities | ||||||||
Dongfeng Cummins Engine Company, Ltd. | 14 | 14 | ||||||
Chongqing Cummins Engine Company, Ltd. | 12 | 11 | ||||||
Beijing Foton Cummins Engine Co., Ltd. (Light-duty) | 8 | 6 | ||||||
Beijing Foton Cummins Engine Co., Ltd. (Heavy-duty) | (1 | ) | (6 | ) | ||||
All other manufacturers | 7 | 15 | ||||||
Cummins share of net income | 58 | 79 | ||||||
Royalty and interest income | 10 | 11 | ||||||
Equity, royalty and interest income from investees | $ | 68 | $ | 90 | ||||
NOTE 5. INCOME TAXES
Our effective tax rate for the year is expected to approximate 29.5 percent, excluding any one-time items that may arise. The expected tax rate does not include the benefits of the research tax credit, which expired December 31, 2014 and has not yet been renewed by Congress. If the research credit is reinstated during 2015, we would anticipate the 2015 effective tax rate to be reduced to 28.5 percent. Our tax rate is generally less than the 35 percent U.S. statutory income tax rate primarily due to lower tax rates on foreign income.
The effective tax rate for the three month period ended March 29, 2015, was 26.3 percent. This tax rate included an $18 million discrete tax benefit to reflect the release of reserves for uncertain tax positions related to a favorable federal audit settlement.
Our effective tax rate for the three month period ended March 30, 2014, was 29.9 percent. This tax rate included a $12 million discrete tax expense attributable primarily to state deferred tax adjustments, as well as a $5 million discrete net tax benefit resulting from a $70 million dividend paid from China earnings generated prior to 2012.
The decrease in the three month effective tax rate from 2014 to 2015 is primarily due to the 2015 favorable discrete tax item.
9
NOTE 6. MARKETABLE SECURITIES
A summary of marketable securities, all of which are classified as current, was as follows:
March 29, 2015 | December 31, 2014 | |||||||||||||||||||||||
In millions | Cost | Gross unrealized gains/(losses) | Estimated fair value | Cost | Gross unrealized gains/(losses) | Estimated fair value | ||||||||||||||||||
Available-for-sale | ||||||||||||||||||||||||
Level 2(1) | ||||||||||||||||||||||||
Debt mutual funds | $ | 90 | $ | — | $ | 90 | $ | 75 | $ | 1 | $ | 76 | ||||||||||||
Equity mutual funds | 9 | — | 9 | 9 | — | 9 | ||||||||||||||||||
Bank debentures | 14 | — | 14 | 6 | — | 6 | ||||||||||||||||||
Government debt securities | 2 | — | 2 | 2 | — | 2 | ||||||||||||||||||
Total marketable securities | $ | 115 | $ | — | $ | 115 | $ | 92 | $ | 1 | $ | 93 | ||||||||||||
____________________________________
(1) The fair value of Level 2 securities is estimated primarily using actively quoted prices for similar instruments from brokers and observable inputs, including market transactions and third-party pricing services. We do not currently have any Level 3 securities, and there were no transfers between Level 2 or 3 during the first three months of 2015 and 2014.
The proceeds from sales and maturities of marketable securities and gross realized gains and losses from the sale of available-for-sale securities were as follows:
Three months ended | ||||||||
In millions | March 29, 2015 | March 30, 2014 | ||||||
Proceeds from sales and maturities of marketable securities | $ | 71 | $ | 108 | ||||
Gross realized gains from the sale of available-for-sale securities | 1 | 1 | ||||||
At March 29, 2015, the fair value of available-for-sale investments in debt securities that utilize a Level 2 fair value measure by contractual maturity was as follows:
Maturity date | Fair value (in millions) | |||
1 year or less | $ | 91 | ||
1 - 5 years | 6 | |||
5 - 10 years | 9 | |||
Total | $ | 106 | ||
NOTE 7. INVENTORIES
Inventories are stated at the lower of cost or market. Inventories included the following:
In millions | March 29, 2015 | December 31, 2014 | ||||||
Finished products | $ | 1,896 | $ | 1,859 | ||||
Work-in-process and raw materials | 1,161 | 1,129 | ||||||
Inventories at FIFO cost | 3,057 | 2,988 | ||||||
Excess of FIFO over LIFO | (121 | ) | (122 | ) | ||||
Total inventories | $ | 2,936 | $ | 2,866 | ||||
10
NOTE 8. DEBT
A summary of long-term debt was as follows:
In millions | March 29, 2015 | December 31, 2014 | ||||||
Long-term debt | ||||||||
Senior notes, 3.65%, due 2023 | $ | 500 | $ | 500 | ||||
Debentures, 6.75%, due 2027 | 58 | 58 | ||||||
Debentures, 7.125%, due 2028 | 250 | 250 | ||||||
Senior notes, 4.875%, due 2043 | 500 | 500 | ||||||
Debentures, 5.65%, due 2098 (effective interest rate 7.48%) | 165 | 165 | ||||||
Credit facilities related to consolidated joint ventures | 3 | 3 | ||||||
Other debt | 51 | 31 | ||||||
Unamortized discount | (47 | ) | (47 | ) | ||||
Fair value adjustments due to hedge on indebtedness | 73 | 65 | ||||||
Capital leases | 82 | 87 | ||||||
Total long-term debt | 1,635 | 1,612 | ||||||
Less: Current maturities of long-term debt | (33 | ) | (23 | ) | ||||
Long-term debt | $ | 1,602 | $ | 1,589 | ||||
Principal payments required on long-term debt during the next five years are as follows:
Required Principal Payments | ||||||||||||||||||||
In millions | 2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||||
Principal payments | $ | 25 | $ | 39 | $ | 15 | $ | 16 | $ | 11 | ||||||||||
Fair Value of Debt
Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our risk premium, the fair value and carrying value of total debt, including current maturities, was as follows:
In millions | March 29, 2015 | December 31, 2014 | ||||||
Fair value of total debt(1) | $ | 2,043 | $ | 1,993 | ||||
Carrying value of total debt | 1,706 | 1,698 | ||||||
_________________________________________________
(1) The fair value of debt is derived from Level 2 inputs.
NOTE 9. PRODUCT WARRANTY LIABILITY
A tabular reconciliation of the product warranty liability, including the deferred revenue related to our extended warranty coverage and accrued recall programs was as follows:
In millions | March 29, 2015 | March 30, 2014 | ||||||
Balance, beginning of year | $ | 1,283 | $ | 1,129 | ||||
Provision for warranties issued | 109 | 84 | ||||||
Deferred revenue on extended warranty contracts sold | 56 | 53 | ||||||
Payments | (94 | ) | (102 | ) | ||||
Amortization of deferred revenue on extended warranty contracts | (43 | ) | (34 | ) | ||||
Changes in estimates for pre-existing warranties | 15 | 2 | ||||||
Foreign currency translation | (6 | ) | 1 | |||||
Balance, end of period | $ | 1,320 | $ | 1,133 | ||||
11
Warranty related deferred revenue, supplier recovery receivables and the long-term portion of the warranty liability on our March 29, 2015, balance sheet were as follows:
In millions | March 29, 2015 | Balance Sheet Location | ||||
Deferred revenue related to extended coverage programs | ||||||
Current portion | $ | 173 | Deferred revenue | |||
Long-term portion | 447 | Other liabilities and deferred revenue | ||||
Total | $ | 620 | ||||
Receivables related to estimated supplier recoveries | ||||||
Current portion | $ | 8 | Trade and other receivables | |||
Long-term portion | 4 | Other assets | ||||
Total | $ | 12 | ||||
Long-term portion of warranty liability | $ | 321 | Other liabilities and deferred revenue | |||
NOTE 10. COMMITMENTS AND CONTINGENCIES
We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We also have been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are material individually or in the aggregate. While we believe we have also established adequate accruals for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition or cash flows.
We conduct significant business operations in Brazil that are subject to the Brazilian federal, state and local labor, social security, tax and customs laws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding the application of these laws to particular circumstances.
U.S. Distributor Commitments
Our distribution agreements with 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.
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Other Guarantees and Commitments
In addition to the matters discussed above, from time to time we enter into other guarantee arrangements, including guarantees of non-U.S. distributor financings, residual value guarantees on equipment under operating leases and other miscellaneous guarantees of third-party obligations. As of March 29, 2015, the maximum potential loss related to these other guarantees was $5 million.
We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. The penalty amounts are less than our purchase commitments and essentially allow the supplier to recover their tooling costs in most instances. As of March 29, 2015, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $70 million, of which $36 million relates to a contract with an engine parts supplier that extends to 2016. These arrangements enable us to secure critical components. We do not currently anticipate paying any penalties under these contracts.
During 2014, we began entering into physical forward contracts with suppliers of platinum and palladium to purchase minimum volumes of the commodities at contractually stated prices for various periods, not to exceed two years. As of March 29, 2015, the total commitments under these contracts were $55 million. These arrangements enable us to fix the prices of these commodities, which otherwise are subject to market volatility.
We have guarantees with certain customers that require us to satisfactorily honor contractual or regulatory obligations, or compensate for monetary losses related to nonperformance. These performance bonds and other performance-related guarantees were $73 million at March 29, 2015 and $76 million at December 31, 2014.
Indemnifications
Periodically, we enter into various contractual arrangements where we agree to indemnify a third-party against certain types of losses. Common types of indemnities include:
• | product liability and license, patent or trademark indemnifications; |
• | asset sale agreements where we agree to indemnify the purchaser against future environmental exposures related to the asset sold; and |
• | any contractual agreement where we agree to indemnify the counter-party for losses suffered as a result of a misrepresentation in the contract. |
We regularly evaluate the probability of having to incur costs associated with these indemnities and accrue for expected losses that are probable. Because the indemnifications are not related to specified known liabilities and due to their uncertain nature, we are unable to estimate the maximum amount of the potential loss associated with these indemnifications.
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NOTE 11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Following are the changes in accumulated other comprehensive income (loss) by component:
In millions | Change in pensions and other postretirement defined benefit plans | Foreign currency translation adjustment | Unrealized gain (loss) on marketable securities | Unrealized gain (loss) on derivatives | Total attributable to Cummins Inc. | Noncontrolling interests | Total | |||||||||||||||||||||
Balance at December 31, 2013 | $ | (611 | ) | $ | (179 | ) | $ | 7 | $ | (1 | ) | $ | (784 | ) | ||||||||||||||
Other comprehensive income before reclassifications | ||||||||||||||||||||||||||||
Before tax amount | (7 | ) | 24 | (1 | ) | 3 | 19 | $ | 7 | $ | 26 | |||||||||||||||||
Tax (expense) benefit | 1 | — | — | (1 | ) | — | — | — | ||||||||||||||||||||
After tax amount | (6 | ) | 24 | (1 | ) | 2 | 19 | 7 | 26 | |||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income(1)(2) | 10 | — | — | — | 10 | (1 | ) | 9 | ||||||||||||||||||||
Net current period other comprehensive income (loss) | 4 | 24 | (1 | ) | 2 | 29 | $ | 6 | $ | 35 | ||||||||||||||||||
Balance at March 30, 2014 | $ | (607 | ) | $ | (155 | ) | $ | 6 | $ | 1 | $ | (755 | ) | |||||||||||||||
Balance at December 31, 2014 | $ | (669 | ) | $ | (406 | ) | $ | (1 | ) | $ | (2 | ) | $ | (1,078 | ) | |||||||||||||
Other comprehensive income before reclassifications | ||||||||||||||||||||||||||||
Before tax amount | (3 | ) | (204 | ) | 1 | 1 | (205 | ) | $ | 4 | $ | (201 | ) | |||||||||||||||
Tax (expense) benefit | 1 | 23 | — | — | 24 | — | 24 | |||||||||||||||||||||
After tax amount | (2 | ) | (181 | ) | 1 | 1 | (181 | ) | 4 | (177 | ) | |||||||||||||||||
Amounts reclassified from accumulated other comprehensive income(1)(2) | 15 | — | (1 | ) | — | 14 | (1 | ) | 13 | |||||||||||||||||||
Net current period other comprehensive income (loss) | 13 | (181 | ) | — | 1 | (167 | ) | $ | 3 | $ | (164 | ) | ||||||||||||||||
Balance at March 29, 2015 | $ | (656 | ) | $ | (587 | ) | $ | (1 | ) | $ | (1 | ) | $ | (1,245 | ) | |||||||||||||
____________________________________
(1) Amounts are net of tax.
(2) See reclassifications out of accumulated other comprehensive income (loss) disclosure below for further details.
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Following are the items reclassified out of accumulated other comprehensive income (loss) and the related tax effects:
In millions | Three months ended | |||||||||
(Gain)/Loss Components | March 29, 2015 | March 30, 2014 | Statement of Income Location | |||||||
Change in pension and other postretirement defined benefit plans | ||||||||||
Recognized actuarial loss | $ | 22 | $ | 15 | (1) | |||||
Total before taxes | 22 | 15 | ||||||||
Tax effect | (7 | ) | (5 | ) | Income tax expense | |||||
Net change in pensions and other postretirement defined benefit plans | $ | 15 | $ | 10 | ||||||
Realized (gain) loss on marketable securities | $ | (1 | ) | $ | (1 | ) | Other income (expense), net | |||
Tax effect | (1 | ) | — | Income tax expense | ||||||
Net realized (gain) loss on marketable securities | $ | (2 | ) | $ | (1 | ) | ||||
Realized (gain) loss on derivatives | ||||||||||
Foreign currency forward contracts | $ | — | $ | (2 | ) | Net sales | ||||
Commodity swap contracts | — | 2 | Cost of sales | |||||||
Total before taxes | — | — | ||||||||
Tax effect | — | — | Income tax expense | |||||||
Net realized (gain) loss on derivatives | $ | — | $ | — | ||||||
Total reclassifications for the period | $ | 13 | $ | 9 | ||||||
____________________________________
(1) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 3, ''PENSION AND OTHER POSTRETIREMENT BENEFITS'').
NOTE 12. 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, Distribution, Components and Power Generation. This reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines and parts for sale to customers in on-highway and various industrial markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, mining, agriculture, marine, oil and gas, rail and military equipment. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers and fuel systems. The Power Generation segment is an integrated provider of power systems, which sells engines, generator sets and alternators.
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 our Condensed Consolidated Financial Statements. We prepared the financial results of our operating segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. We 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 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,
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prior service costs or credits, changes in cash surrender value of corporate owned life insurance or income taxes to individual segments. Segment EBIT may not be consistent with measures used by other companies.
Summarized financial information regarding our reportable operating segments for the three month periods is shown in the table below:
In millions | Engine | Distribution | Components | Power Generation | Non-segment Items (1) | Total | ||||||||||||||||||
Three months ended March 29, 2015 | ||||||||||||||||||||||||
External sales | $ | 1,889 | $ | 1,469 | $ | 931 | $ | 420 | $ | — | $ | 4,709 | ||||||||||||
Intersegment sales | 707 | 7 | 368 | 260 | (1,342 | ) | — | |||||||||||||||||
Total sales | 2,596 | 1,476 | 1,299 | 680 | (1,342 | ) | 4,709 | |||||||||||||||||
Depreciation and amortization(2) | 58 | 27 | 26 | 16 | — | 127 | ||||||||||||||||||
Research, development and engineering expenses | 114 | 3 | 61 | 17 | — | 195 | ||||||||||||||||||
Equity, royalty and interest income from investees | 30 | 20 | 9 | 9 | — | 68 | ||||||||||||||||||
Interest income | 2 | 1 | 1 | 1 | — | 5 | ||||||||||||||||||
Segment EBIT | 253 | 88 | 195 | 49 | (23 | ) | 562 | |||||||||||||||||
Three months ended March 30, 2014 | ||||||||||||||||||||||||
External sales | $ | 2,090 | $ | 942 | $ | 922 | $ | 452 | $ | — | $ | 4,406 | ||||||||||||
Intersegment sales | 473 | 8 | 308 | 187 | (976 | ) | — | |||||||||||||||||
Total sales | 2,563 | 950 | 1,230 | 639 | (976 | ) | 4,406 | |||||||||||||||||
Depreciation and amortization(2) | 51 | 16 | 26 | 12 | — | 105 | ||||||||||||||||||
Research, development and engineering expenses | 116 | 2 | 53 | 19 | — | 190 | ||||||||||||||||||
Equity, royalty and interest income from investees | 32 | 41 | 9 | 8 | — | 90 | ||||||||||||||||||
Interest income | 2 | 1 | 1 | 1 | — | 5 | ||||||||||||||||||
Segment EBIT | 269 | 76 | (3) | 167 | 25 | (9 | ) | 528 | ||||||||||||||||
(1) Includes intersegment sales and profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three months ended March 29, 2015 and March 30, 2014.
(2) Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Income as "Interest expense." The amortization of debt discount and deferred costs were $1 million and less than $1 million for the three months ended March 29, 2015 and March 30, 2014, respectively.
(3) Distribution segment EBIT included a gain of $6 million on the fair value adjustment resulting from the acquisition of a controlling interest in a North American distributor for the three months ended March 30, 2014.
A reconciliation of our segment information to the corresponding amounts in the Condensed Consolidated Statements of Income is shown in the table below:
Three months ended | ||||||||
In millions | March 29, 2015 | March 30, 2014 | ||||||
Total EBIT | $ | 562 | $ | 528 | ||||
Less: Interest expense | 14 | 17 | ||||||
Income before income taxes | $ | 548 | $ | 511 | ||||
NOTE 13. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2015, the Financial Accounting Standards Board (FASB) amended its standards related to the consolidation of certain legal entities. The amendment will change the method of analysis that we must perform to determine whether certain types of legal entities should be consolidated, primarily limited partnerships and similar structures. The amendment will eliminate three of the original six conditions for evaluating whether a fee paid to a decision-maker or a service provider represents a variable interest in a variable interest entity (VIE). The new rules will become effective for annual and interim periods beginning December 15, 2015. Early adoption is permitted. We do not believe that this amendment will have a significant effect on our Consolidated Financial Statements.
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In May 2014, the FASB amended its standards related to revenue recognition. This amendment replaces all existing revenue recognition guidance and provides a single, comprehensive revenue recognition model for all contracts with customers. The standard contains principles that we will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that we will recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that we expect to be entitled to in exchange for those goods or services. The standard allows either full or modified retrospective adoption. Early adoption is not permitted. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendment also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. The new rules will become effective for annual and interim periods beginning January 1, 2017. In April 2015, the FASB proposed a one year delay of the effective date of the standard to provide adequate time for implementation. It is important to note that the FASB's proposed deferral is not a final decision. We are in the process of evaluating the impact the amendment will have on our Consolidated Financial Statements, and we are further considering the impact of each method of adoption.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cummins Inc. and its consolidated subsidiaries are hereinafter sometimes referred to as “Cummins,” “we,” “our” or “us.”
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Certain parts of this quarterly report contain forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those that are based on current expectations, estimates and projections about the industries in which we operate and management’s beliefs and assumptions. Forward-looking statements are generally accompanied by words such as "anticipates," "expects," "forecasts," "intends," "plans," "believes," "seeks," "estimates," "could," "should" or words of similar meaning. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which we refer to as "future factors," which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some future factors that could cause our results to differ materially from the results discussed in such forward-looking statements are discussed below and shareholders, potential investors and other readers are urged to consider these future factors carefully in evaluating forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. Future factors that could affect the outcome of forward-looking statements include the following:
• | a sustained slowdown or significant downturn in our markets; |
• | a slowdown in infrastructure development; |
• | unpredictability in the adoption, implementation and enforcement of emission standards around the world; |
• | the actions of, and income from, joint ventures and other investees that we do not directly control; |
• | changes in the engine outsourcing practices of significant customers; |
• | a downturn in the North American truck industry or financial distress of a major truck customer; |
• | a major customer experiencing financial distress; |
• | any significant problems in our new engine platforms; |
• | supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers; |
•variability in material and commodity costs;
• | product recalls; |
• | competitor pricing activity; |
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• | increasing competition, including increased global competition among our customers in emerging markets; |
• | exposure to information technology security threats and sophisticated "cyber attacks;" |
• | political, economic and other risks from operations in numerous countries; |
• | changes in taxation; |
• | global legal and ethical compliance costs and risks; |
• | aligning our capacity and production with our demand; |
• | product liability claims; |
• | the development of new technologies; |
• | obtaining additional customers for our new light-duty diesel engine platform and avoiding any related write-down in our investments in such platform; |
• | increasingly stringent environmental laws and regulations; |
• | foreign currency exchange rate changes; |
• | the price and availability of energy; |
• | the performance of our pension plan assets; |
• | labor relations; |
• | changes in accounting standards; |
• | our sales mix of products; |
• | protection and validity of our patent and other intellectual property rights; |
• | technological implementation and cost/financial risks in our increasing use of large, multi-year contracts; |
• | the cyclical nature of some of our markets; |
• | the outcome of pending and future litigation and governmental proceedings; |
• | continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support our future business; |
• | the consummation and integration of the planned acquisitions of our partially-owned United States and Canadian distributors; and |
• | other risk factors described in our Form 10-K, Part I, Item 1A under the caption “Risk Factors.” |
Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this quarterly report and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
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ORGANIZATION OF INFORMATION
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) was prepared to provide the reader with a view and perspective of our business through the eyes of management and should be read in conjunction with our Management's Discussion and Analysis of Financial Condition and Results of Operations section of our 2014 Form 10-K. Our MD&A is presented in the following sections:
•Executive Summary and Financial Highlights
•Outlook
•Results of Operations
•Operating Segment Results
•Liquidity and Capital Resources
•Application of Critical Accounting Estimates
•Recently Issued Accounting Pronouncements
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EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS
We are a global power leader that designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation systems. We sell our products to original equipment manufacturers (OEMs), distributors and other customers worldwide. We have long-standing relationships with many of the leading manufacturers in the markets we serve, including PACCAR Inc, Daimler Trucks North America, Chrysler Group, LLC (Chrysler), Volvo AB, Komatsu, Navistar International Corporation, Aggreko plc, Ford Motor Company and MAN Nutzfahrzeuge AG. We serve our customers through a network of approximately 600 company-owned and independent distributor locations and approximately 7,200 dealer locations in more than 190 countries and territories.
Our reportable operating segments consist of the following: Engine, Distribution, Components and Power Generation. This reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines and parts for sale to customers in on-highway and various industrial markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, mining, agriculture, marine, oil and gas, rail and military equipment. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers and fuel systems. The Power Generation segment is an integrated provider of power systems, which sells engines, generator sets and alternators.
Our financial performance depends, in large part, on varying conditions in the markets we serve, particularly the on-highway, construction and general industrial markets. Demand in these markets tends to fluctuate in response to overall economic conditions. Our sales may also be impacted by OEM inventory levels and production schedules and stoppages. Economic downturns in markets we serve generally result in reduced sales of our products and can result in price reductions in certain products and/or markets. As a worldwide business, our operations are also affected by currency, political, economic and regulatory matters, including adoption and enforcement of environmental and emission standards, in the countries we serve. As part of our growth strategy, we invest in businesses in certain countries that carry high levels of these risks such as China, Brazil, India, Mexico, Russia and countries in the Middle East and Africa. At the same time, our geographic diversity and broad product and service offerings have helped limit the impact from a drop in demand in any one industry or customer or the economy of any single country on our consolidated results.
Worldwide revenues increased 7 percent in the three months ended March 29, 2015, as compared to the same period in 2014, primarily due to the consolidation of partially-owned North American distributors since December 31, 2013. Revenue in the U.S. and Canada improved by 17 percent primarily due to improved Distribution segment sales related to the consolidation of North American distributors and higher demand in the North American on-highway markets, partially offset by lower demand in off-highway mining and construction markets. Continued international economic uncertainty in the first quarter of 2015, negatively impacted our international revenues (excluding the U.S. and Canada) which declined by 6 percent with sales down or relatively flat in many of our markets, especially Europe and Brazil. The decline in international revenue was led by lower demand in the Engine segment, especially the on-highway markets in Brazil and Korea, declines in international construction and commercial marine demand and unfavorable currency impacts of 3 percent (primarily in Europe, Brazil, Australia and the U.K.). These decreases were partially offset by increased international demand for power generation products.
The following table contains sales and earnings before interest expense, income taxes and noncontrolling interests (EBIT) results by operating segment for the three month periods ended March 29, 2015 and March 30, 2014. Refer to the section titled “Operating Segment Results” for a more detailed discussion of net sales and EBIT by operating segment, including the reconciliation of segment EBIT to income before taxes.
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Three months ended | ||||||||||||||||||||||||||||
Operating Segments | March 29, 2015 | March 30, 2014 | Percent change | |||||||||||||||||||||||||
Percent | Percent | 2015 vs. 2014 | ||||||||||||||||||||||||||
In millions | Sales | of Total | EBIT | Sales | of Total | EBIT | Sales | EBIT | ||||||||||||||||||||
Engine | $ | 2,596 | 55 | % | $ | 253 | $ | 2,563 | 58 | % | $ | 269 | 1 | % | (6 | )% | ||||||||||||
Distribution | 1,476 | 31 | % | 88 | 950 | 22 | % | 76 | 55 | % | 16 | % | ||||||||||||||||
Components | 1,299 | 28 | % | 195 | 1,230 | 28 | % | 167 | 6 | % | 17 | % | ||||||||||||||||
Power Generation | 680 | 14 | % | 49 | 639 | 14 | % | 25 | 6 | % | 96 | % | ||||||||||||||||
Intersegment eliminations | (1,342 | ) | (28 | )% | — | (976 | ) | (22 | )% | — | 38 | % | — | |||||||||||||||
Non-segment | — | — | (23 | ) | — | — | (9 | ) | — | NM | ||||||||||||||||||
Total | $ | 4,709 | 100 | % | $ | 562 | $ | 4,406 | 100 | % | $ | 528 | 7 | % | 6 | % | ||||||||||||
"NM" - not meaningful information | ||||||||||||||||||||||||||||
Net income attributable to Cummins was $387 million, or $2.14 per diluted share, on sales of $4.7 billion for the three months ended March 29, 2015, versus the comparable prior year period with net income attributable to Cummins of $338 million, or $1.83 per diluted share, on sales of $4.4 billion. The increase in net income and earnings per share was driven by improved gross margin, partially offset by higher selling, general and administrative expenses and lower equity, royalty and interest income from investees. The increase in gross margin was primarily due to improved Distribution segment sales related to the consolidation of partially-owned North American distributors since December 31, 2013, higher volumes and lower material and commodity costs, partially offset by higher warranty costs and unfavorable foreign currency fluctuations. Diluted earnings per share for the three months ended March 29, 2015, benefited $0.01 from lower shares outstanding due to 2015 purchases under the stock repurchase program.
We generated $173 million of operating cash flows for the three months ended March 29, 2015, compared to $263 million for the same period in 2014. Refer to the section titled “Cash Flows” in the “Liquidity and Capital Resources” section for a discussion of items impacting cash flows.
In September 2013, we announced our intention to acquire the equity that we do not already own in most of our partially-owned U.S. and Canadian distributors over a three to five year period. We plan to spend an additional $160 million to $200 million on North American distributor acquisitions and the related debt retirements in the second half of 2015.
We repurchased $137 million of stock under the 2012 Board of Directors Authorized Plan (2012 Plan) during the first three months of 2015.
Our debt to capital ratio (total capital defined as debt plus equity) at March 29, 2015, was 17.5 percent, compared to 17.3 percent at December 31, 2014. We have $2.1 billion in cash and marketable securities on hand and access to our credit facilities, if necessary, to meet currently anticipated investment and funding needs. As of the date of filing this Quarterly Report on Form 10-Q, our credit ratings were as follows:
Credit Rating Agency | Senior L-T Debt Rating | Outlook | Last Updated | |||
Standard & Poor’s Rating Services | A+ | Stable | August 2014 | |||
Fitch Ratings | A | Stable | October 2014 | |||
Moody’s Investors Service, Inc. | A2 | Stable | December 2014 | |||
Our global pension plans, including our unfunded and non-qualified plans, were 108 percent funded at December 31, 2014. Our U.S. qualified plan, which represents approximately 56 percent of the worldwide pension obligation, was 119 percent funded and our U.K. plan was 113 percent funded. We expect to contribute $175 million to our global pension plans in 2015. We anticipate pension and other postretirement benefit cost in 2015 to increase by approximately $8 million pre-tax, or approximately $0.03 per diluted share, when compared to 2014 due to lower discount rates and unfavorable demographics mostly offset by favorable expected return on asset performance. Refer to Note 3, "PENSION AND OTHER POSTRETIREMENT BENEFITS" for additional information regarding our pension plans.
We expect our effective tax rate for the full year of 2015 to approximate 29.5 percent, excluding any one-time tax items.
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OUTLOOK
Near-Term
Our outlook reflects the following positive trends for the remainder of 2015:
• | We expect continued growth in the North American heavy-duty and medium-duty on-highway markets compared to 2014. |
• | We expect North American light-duty demand to remain strong. |
• | We expect the new ISG engine, which began production in the second quarter of 2014 with our Beijing Foton Cummins Engine Co., Ltd. joint venture, to continue to gain market share in China in its first full year of production. |
• | We plan to acquire two more unconsolidated North American distributors in the second half of the year, which will increase our Distribution segment revenues and acquire the remaining equity in a consolidated North American distributor. |
• | Demand in India is expected to improve in some end markets as the economy improves throughout the year. |
Our outlook reflects the following challenges to our business that may reduce our earnings potential for the remainder of 2015:
• | Power generation markets are expected to remain weak. |
• | Weak economic growth in Brazil will continue to negatively impact our on-highway business. |
• | We do not anticipate end markets in China to improve. |
• | Demand in certain European markets could remain weak due to continued political and economic uncertainty. |
• | Growth in emerging markets could be negatively impacted if emission regulations are not strictly enforced. |
• | Foreign currency volatility could continue to put pressure on revenue and earnings. |
• | We expect market demand to decline in the oil and gas markets as the result of low crude oil prices. |
• | Domestic and international mining markets could continue to deteriorate if commodity prices continue to weaken. |
Long-Term
We believe that, over the longer term, there will be economic improvements in most of our current markets and that our opportunities for long-term profitable growth will continue as the result of the following four macroeconomic trends that should benefit our businesses:
• | tightening emissions controls across the world; |
• | infrastructure needs in emerging markets; |
• | energy availability and cost issues; and |
• | globalization of industries like ours. |