UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: February 4, 2016
CUMMINS INC.
(Exact name of registrant as specified in its charter)
Indiana (State or other Jurisdiction of Incorporation) | 1-4949 (Commission File Number) | 35-0257090 (I.R.S. Employer Identification No.) |
500 Jackson Street
P. O. Box 3005
Columbus, IN 47202-3005
(Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (812) 377-5000
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
[ ] | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
[ ] | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
[ ] | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
[ ] | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
1
Item 2.02. Results of Operations and Financial Condition.
On February 4, 2016, Cummins Inc. (“Cummins,” “the Company,” “the registrant,” “we,” “our,” or “us”) issued the attached press release reporting its financial results for the fourth quarter and full year of 2015, which is furnished herewith as Exhibit 99.
The information furnished pursuant to this Item 2.02, including Exhibit 99, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Exchange Act.
Item 9.01. Financial Statements and Exhibits.
(d) | The following exhibit is furnished pursuant to Item 2.02 herewith: |
99-Press Release dated February 4, 2016
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: February 4, 2016
CUMMINS INC. |
/s/ Marsha L. Hunt |
Marsha L. Hunt Vice President - Corporate Controller (Principal Accounting Officer) |
2
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (a)
Three months ended | ||||||||
In millions, except per share amounts | December 31, 2015 | December 31, 2014 | ||||||
NET SALES | $ | 4,766 | $ | 5,090 | ||||
Cost of sales | 3,554 | 3,817 | ||||||
GROSS MARGIN | 1,212 | 1,273 | ||||||
OPERATING EXPENSES AND INCOME | ||||||||
Selling, general and administrative expenses | 508 | 568 | ||||||
Research, development and engineering expenses | 177 | 187 | ||||||
Equity, royalty and interest income from investees | 75 | 76 | ||||||
Impairment of light-duty diesel assets | 211 | — | ||||||
Restructuring actions and other charges | 90 | — | ||||||
Other operating expense, net | (72 | ) | (13 | ) | ||||
OPERATING INCOME | 229 | 581 | ||||||
Interest income | 4 | 6 | ||||||
Interest expense | 18 | 17 | ||||||
Other (expense) income, net | (3 | ) | 42 | |||||
INCOME BEFORE INCOME TAXES | 212 | 612 | ||||||
Income tax expense | 34 | 145 | ||||||
CONSOLIDATED NET INCOME | 178 | 467 | ||||||
Less: Net income attributable to noncontrolling interests | 17 | 23 | ||||||
NET INCOME ATTRIBUTABLE TO CUMMINS INC. | $ | 161 | $ | 444 | ||||
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. | ||||||||
Basic | $ | 0.92 | $ | 2.45 | ||||
Diluted | $ | 0.92 | $ | 2.44 | ||||
WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||||
Basic | 175.5 | 181.4 | ||||||
Diluted | 175.8 | 181.9 | ||||||
CASH DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.975 | $ | 0.78 | ||||
(a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America. | ||||||||
3
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (a)
Years ended December 31, | ||||||||
In millions, except per share amounts | 2015 | 2014 | ||||||
NET SALES | $ | 19,110 | $ | 19,221 | ||||
Cost of sales | 14,163 | 14,360 | ||||||
GROSS MARGIN | 4,947 | 4,861 | ||||||
OPERATING EXPENSES AND INCOME | ||||||||
Selling, general and administrative expenses | 2,092 | 2,095 | ||||||
Research, development and engineering expenses | 735 | 754 | ||||||
Equity, royalty and interest income from investees | 315 | 370 | ||||||
Impairment of light-duty diesel assets | 211 | — | ||||||
Restructuring actions and other charges | 90 | — | ||||||
Other operating expense, net | (77 | ) | (17 | ) | ||||
OPERATING INCOME | 2,057 | 2,365 | ||||||
Interest income | 24 | 23 | ||||||
Interest expense | 65 | 64 | ||||||
Other income, net | 9 | 110 | ||||||
INCOME BEFORE INCOME TAXES | 2,025 | 2,434 | ||||||
Income tax expense | 555 | 698 | ||||||
CONSOLIDATED NET INCOME | 1,470 | 1,736 | ||||||
Less: Net income attributable to noncontrolling interests | 71 | 85 | ||||||
NET INCOME ATTRIBUTABLE TO CUMMINS INC. | $ | 1,399 | $ | 1,651 | ||||
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. | ||||||||
Basic | $ | 7.86 | $ | 9.04 | ||||
Diluted | $ | 7.84 | $ | 9.02 | ||||
WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||||
Basic | 178.0 | 182.7 | ||||||
Diluted | 178.4 | 183.1 | ||||||
CASH DIVIDENDS DECLARED PER COMMON SHARE | $ | 3.51 | $ | 2.81 | ||||
(a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America. | ||||||||
4
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (a)
In millions, except par value | December 31, 2015 | December 31, 2014 | ||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 1,711 | $ | 2,301 | ||||
Marketable securities | 100 | 93 | ||||||
Total cash, cash equivalents and marketable securities | 1,811 | 2,394 | ||||||
Accounts and notes receivable, net | 2,820 | 2,946 | ||||||
Inventories | 2,707 | 2,866 | ||||||
Prepaid expenses and other current assets | 609 | 849 | ||||||
Total current assets | 7,947 | 9,055 | ||||||
Long-term assets | ||||||||
Property, plant and equipment, net | 3,745 | 3,686 | ||||||
Investments and advances related to equity method investees | 975 | 981 | ||||||
Goodwill and other intangible assets, net | 810 | 822 | ||||||
Other assets | 1,657 | 1,220 | ||||||
Total assets | $ | 15,134 | $ | 15,764 | ||||
LIABILITIES | ||||||||
Current liabilities | ||||||||
Accounts payable (principally trade) | $ | 1,706 | $ | 1,881 | ||||
Loans payable | 24 | 86 | ||||||
Accrued expenses | 2,073 | 2,054 | ||||||
Total current liabilities | 3,803 | 4,021 | ||||||
Long-term liabilities | ||||||||
Long-term debt | 1,576 | 1,577 | ||||||
Other liabilities | 2,005 | 2,073 | ||||||
Total liabilities | $ | 7,384 | $ | 7,671 | ||||
EQUITY | ||||||||
Cummins Inc. shareholders’ equity | ||||||||
Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.3 shares issued | $ | 2,178 | $ | 2,139 | ||||
Retained earnings | 10,322 | 9,545 | ||||||
Treasury stock, at cost, 47.2 and 40.1 shares | (3,735 | ) | (2,844 | ) | ||||
Common stock held by employee benefits trust, at cost, 0.9 and 1.1 shares | (11 | ) | (13 | ) | ||||
Accumulated other comprehensive loss | (1,348 | ) | (1,078 | ) | ||||
Total Cummins Inc. shareholders’ equity | 7,406 | 7,749 | ||||||
Noncontrolling interests | 344 | 344 | ||||||
Total equity | $ | 7,750 | $ | 8,093 | ||||
Total liabilities and equity | $ | 15,134 | $ | 15,764 | ||||
(a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America. | ||||||||
5
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (a)
Years ended December 31, | ||||||||
In millions | 2015 | 2014 | ||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | $ | 2,059 | $ | 2,266 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Capital expenditures | (744 | ) | (743 | ) | ||||
Investments in internal use software | (55 | ) | (55 | ) | ||||
Investments in and advances to equity investees | (7 | ) | (60 | ) | ||||
Acquisitions of businesses, net of cash acquired | (117 | ) | (436 | ) | ||||
Investments in marketable securities—acquisitions | (282 | ) | (275 | ) | ||||
Investments in marketable securities—liquidations | 270 | 336 | ||||||
Cash flows from derivatives not designated as hedges | 8 | (14 | ) | |||||
Other, net | 9 | 13 | ||||||
Net cash used in investing activities | (918 | ) | (1,234 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from borrowings | 44 | 55 | ||||||
Payments on borrowings and capital lease obligations | (76 | ) | (94 | ) | ||||
Net payments under short-term credit agreements | (41 | ) | (40 | ) | ||||
Distributions to noncontrolling interests | (49 | ) | (83 | ) | ||||
Dividend payments on common stock | (622 | ) | (512 | ) | ||||
Repurchases of common stock | (900 | ) | (670 | ) | ||||
Other, net | — | 1 | ||||||
Net cash used in financing activities | (1,644 | ) | (1,343 | ) | ||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | (87 | ) | (87 | ) | ||||
Net decrease in cash and cash equivalents | (590 | ) | (398 | ) | ||||
Cash and cash equivalents at beginning of year | 2,301 | 2,699 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 1,711 | $ | 2,301 | ||||
(a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America. | ||||||||
6
CUMMINS INC. AND SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)
In millions | Engine | Distribution | Components | Power Generation | Non-segment Items (1) | Total | ||||||||||||||||||||
Three months ended December 31, 2015 | ||||||||||||||||||||||||||
External sales | $ | 1,793 | $ | 1,699 | $ | 906 | $ | 368 | $ | — | $ | 4,766 | ||||||||||||||
Intersegment sales | 735 | 8 | 330 | 286 | (1,359 | ) | — | |||||||||||||||||||
Total sales | 2,528 | 1,707 | 1,236 | 654 | (1,359 | ) | 4,766 | |||||||||||||||||||
Depreciation and amortization(2) | 61 | 27 | 27 | 15 | — | 130 | ||||||||||||||||||||
Research, development and engineering expenses | 107 | 2 | 53 | 15 | — | 177 | ||||||||||||||||||||
Equity, royalty and interest income from investees | 44 | 18 | 9 | 4 | — | 75 | ||||||||||||||||||||
Interest income | 2 | 1 | 1 | — | — | 4 | ||||||||||||||||||||
Segment EBIT (excluding impairment of light-duty diesel assets and restructuring actions and other charges) | $ | 189 | (5) | $ | 111 | (6) | $ | 175 | $ | 27 | $ | 29 | $ | 531 | ||||||||||||
Impairment of light-duty diesel assets(3) | 202 | — | 9 | — | — | 211 | ||||||||||||||||||||
Restructuring actions and other charges(4) | 26 | 23 | 13 | 19 | 9 | 90 | ||||||||||||||||||||
Segment EBIT | $ | (39 | ) | (5) | $ | 88 | (6) | $ | 153 | $ | 8 | $ | 20 | $ | 230 | |||||||||||
Segment EBIT (excluding impairment of light-duty diesel assets and restructuring actions and other charges) as a percentage of total sales | 7.5 | % | 6.5 | % | 14.2 | % | 4.1 | % | 11.1 | % | ||||||||||||||||
Segment EBIT as a percentage of total sales | (1.5 | )% | 5.2 | % | 12.4 | % | 1.2 | % | 4.8 | % | ||||||||||||||||
Three months ended December 31, 2014 | ||||||||||||||||||||||||||
External sales | $ | 1,988 | $ | 1,682 | $ | 970 | $ | 450 | $ | — | $ | 5,090 | ||||||||||||||
Intersegment sales | 851 | 12 | 351 | 310 | (1,524 | ) | — | |||||||||||||||||||
Total sales | 2,839 | 1,694 | 1,321 | 760 | (1,524 | ) | 5,090 | |||||||||||||||||||
Depreciation and amortization(2) | 54 | 28 | 27 | 15 | — | 124 | ||||||||||||||||||||
Research, development and engineering expenses | 103 | 2 | 60 | 22 | — | 187 | ||||||||||||||||||||
Equity, royalty and interest income from investees | 30 | 28 | 9 | 9 | — | 76 | ||||||||||||||||||||
Interest income | 3 | 2 | 1 | — | — | 6 | ||||||||||||||||||||
Segment EBIT | 315 | 158 | (6) | 160 | 22 | (7) | (26 | ) | 629 | |||||||||||||||||
Segment EBIT as a percentage of total sales | 11.1 | % | 9.3 | % | 12.1 | % | 2.9 | % | 12.4 | % | ||||||||||||||||
(1 | ) | Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three months ended December 31, 2015 and December 31, 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." | ||||||||||||||||||||||||
(3 | ) | See Note 2, "IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETS," for additional information. | ||||||||||||||||||||||||
(4 | ) | See Note 3, "RESTRUCTURING ACTIONS AND OTHER CHARGES," for additional information. | ||||||||||||||||||||||||
(5 | ) | Engine segment EBIT included an accrual for a loss contingency of $60 million. See Note 4, "LOSS CONTINGENCY," for additional information. | ||||||||||||||||||||||||
(6 | ) | Distribution segment EBIT included gains of $1 million and $35 million on the fair value adjustments resulting from the acquisition of the controlling interests in North American distributors for the three months ended December 31, 2015 and December 31, 2014, respectively. | ||||||||||||||||||||||||
(7 | ) | Power Generation segment EBIT for the three months ended December 31, 2014, included actions taken to reduce its future cost structure. Costs associated with these actions were $32 million and are primarily related to the closure of a plant in Germany. | ||||||||||||||||||||||||
7
CUMMINS INC. AND SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)
In millions | Engine | Distribution | Components | Power Generation | Non-segment Items (1) | Total | ||||||||||||||||||||
Year ended December 31, 2015 | ||||||||||||||||||||||||||
External sales | $ | 7,540 | $ | 6,198 | $ | 3,745 | $ | 1,627 | $ | — | $ | 19,110 | ||||||||||||||
Intersegment sales | 2,909 | 31 | 1,427 | 1,113 | (5,480 | ) | — | |||||||||||||||||||
Total sales | 10,449 | 6,229 | 5,172 | 2,740 | (5,480 | ) | 19,110 | |||||||||||||||||||
Depreciation and amortization(2) | 239 | 105 | 109 | 58 | — | 511 | ||||||||||||||||||||
Research, development and engineering expenses | 428 | 10 | 236 | 61 | — | 735 | ||||||||||||||||||||
Equity, royalty and interest income from investees | 171 | 78 | 35 | 31 | — | 315 | ||||||||||||||||||||
Interest income | 13 | 4 | 4 | 3 | — | 24 | ||||||||||||||||||||
Segment EBIT (excluding impairment of light-duty diesel assets and restructuring actions and other charges) | $ | 1,035 | (5) | $ | 435 | (6) | $ | 749 | $ | 175 | $ | (3 | ) | $ | 2,391 | |||||||||||
Impairment of light-duty diesel assets(3) | 202 | — | 9 | — | — | 211 | ||||||||||||||||||||
Restructuring actions and other charges(4) | 26 | 23 | 13 | 19 | 9 | 90 | ||||||||||||||||||||
Segment EBIT | $ | 807 | (5) | $ | 412 | (6) | $ | 727 | $ | 156 | $ | (12 | ) | $ | 2,090 | |||||||||||
Segment EBIT (excluding impairment of light-duty diesel assets and restructuring actions and other charges) as a percentage of total sales | 9.9 | % | 7.0 | % | 14.5 | % | 6.4 | % | 12.5 | % | ||||||||||||||||
Segment EBIT as a percentage of total sales | 7.7 | % | 6.6 | % | 14.1 | % | 5.7 | % | 10.9 | % | ||||||||||||||||
Year ended December 31, 2014 | ||||||||||||||||||||||||||
External sales | $ | 8,437 | $ | 5,135 | $ | 3,791 | $ | 1,858 | $ | — | $ | 19,221 | ||||||||||||||
Intersegment sales | 2,525 | 39 | 1,327 | 1,038 | (4,929 | ) | — | |||||||||||||||||||
Total sales | 10,962 | 5,174 | 5,118 | 2,896 | (4,929 | ) | 19,221 | |||||||||||||||||||
Depreciation and amortization(2) | 207 | 86 | 106 | 53 | — | 452 | ||||||||||||||||||||
Research, development and engineering expenses | 438 | 9 | 230 | 77 | — | 754 | ||||||||||||||||||||
Equity, royalty and interest income from investees | 147 | 148 | 36 | 39 | — | 370 | ||||||||||||||||||||
Interest income | 12 | 4 | 4 | 3 | — | 23 | ||||||||||||||||||||
Segment EBIT | 1,225 | 491 | (6) | 684 | 168 | (7) | (70 | ) | 2,498 | |||||||||||||||||
Segment EBIT as a percentage of total sales | 11.2 | % | 9.5 | % | 13.4 | % | 5.8 | % | 13.0 | % | ||||||||||||||||
(1 | ) | Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the years ended December 31, 2015 and December 31, 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 $3 million and $3 million for the years ended December 31, 2015 and 2014, respectively. | ||||||||||||||||||||||||
(3 | ) | See Note 2, "IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETS," for additional information. | ||||||||||||||||||||||||
(4 | ) | See Note 3, "RESTRUCTURING ACTIONS AND OTHER CHARGES," for additional information. | ||||||||||||||||||||||||
(5 | ) | Engine segment EBIT included an accrual for a loss contingency of $60 million. See Note 4, "LOSS CONTINGENCY," for additional information. | ||||||||||||||||||||||||
(6 | ) | Distribution segment EBIT included gains of $18 million and $73 million on the fair value adjustments resulting from the acquisition of the controlling interests in North American distributors for the years ended December 31, 2015 and December 31, 2014, respectively. | ||||||||||||||||||||||||
(7 | ) | Power Generation segment EBIT for the year ended December 31, 2014, included actions taken to reduce its future cost structure. Costs associated with these actions were $32 million and are primarily related to the closure of a plant in Germany. | ||||||||||||||||||||||||
8
CUMMINS INC. AND SUBSIDIARIES
RECONCILIATION OF SEGMENT INFORMATION
(Unaudited)
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 | Years ended | |||||||||||||||
In millions | December 31, 2015 | December 31, 2014 | December 31, 2015 | December 31, 2014 | ||||||||||||
Total segment EBIT | $ | 230 | $ | 629 | $ | 2,090 | $ | 2,498 | ||||||||
Less: Interest expense | 18 | 17 | 65 | 64 | ||||||||||||
Income before income taxes | $ | 212 | $ | 612 | $ | 2,025 | $ | 2,434 | ||||||||
9
CUMMINS INC. AND SUBSIDIARIES
SELECTED FOOTNOTE DATA
(Unaudited)
NOTE 1. EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES
Equity, royalty and interest income from investees included in our Condensed Consolidated Statements of Income for the reporting periods was as follows:
Three months ended | Years ended | |||||||||||||||
In millions | December 31, 2015 | December 31, 2014 | December 31, 2015 | December 31, 2014 | ||||||||||||
Distribution Entities | ||||||||||||||||
North American distributors | $ | 6 | $ | 18 | $ | 33 | $ | 107 | ||||||||
Komatsu Cummins Chile, Ltda. | 8 | 7 | 31 | 29 | ||||||||||||
All other distributors | 1 | 2 | 3 | 4 | ||||||||||||
Manufacturing Entities | ||||||||||||||||
Beijing Foton Cummins Engine Co., Ltd. | 15 | (8 | ) | 62 | (2 | ) | ||||||||||
Dongfeng Cummins Engine Company, Ltd. | 11 | 16 | 51 | 67 | ||||||||||||
Chongqing Cummins Engine Company, Ltd. | 9 | 12 | 41 | 51 | ||||||||||||
All other manufacturers | 11 | 20 | 52 | 74 | ||||||||||||
Cummins share of net income | 61 | 67 | 273 | 330 | ||||||||||||
Royalty and interest income | 14 | 9 | 42 | 40 | ||||||||||||
Equity, royalty and interest income from investees | $ | 75 | $ | 76 | $ | 315 | $ | 370 | ||||||||
NOTE 2. IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETS
We began development of a new North American light-duty diesel engine (LDD) platform in July of 2006 for use in a variety of on- and off-highway applications. Since that time, and as of December 31, 2015, we capitalized investments of approximately $279 million, with a net book value prior to the impairment of $246 million ($235 million of which is in our Engine segment and $11 million of which is in our Components segment). Market uncertainty due to the global recession in 2008/2009 resulted in some customers delaying or canceling their vehicle programs, while others remained active. We announced an agreement with Nissan Motor Co. Ltd. in 2013 to supply our light-duty diesel engine and began commercial shipment in 2015. In the fourth quarter of 2015, we learned that we were not successful in our bid to supply this product for an additional customer. In addition, the recent deterioration in global economic conditions and excess manufacturing capacity in other markets make it unlikely that we will manufacture additional products on the LDD line to utilize its excess capacity during the asset recovery period. As a result, we concluded that the combination of these events presented a triggering event requiring an assessment of the recoverability of these assets in the fourth quarter of 2015. The assessment indicated that the projected undiscounted cash flows related to this asset group were not sufficient to recover its carrying value. Consequently, we were required to write down the LDD asset group to fair value. Our fourth quarter results included an impairment charge of $211 million ($133 million after-tax), of which $202 million is in the Engine segment and $9 million is in the Components segment, to reflect the assets at fair value. We remain committed to servicing existing contracts and are not exiting this product line.
NOTE 3. RESTRUCTURING ACTIONS AND OTHER CHARGES
In the fourth quarter of 2015, we announced and executed restructuring actions primarily in the form of voluntary and involuntary employee separation programs in response to the continued deterioration in our global markets in the second half of 2015, as well as expected reductions in orders in most U.S. and global markets in 2016. We reduced our worldwide professional workforce by approximately 1,900 employees, or 5 percent, including approximately 370 employees accepting voluntary retirement packages with the remainder of the reductions being involuntary. We incurred a charge of $90 million ($61 million after-tax) in the fourth quarter of 2015, which included $86 million for the severance costs related to both voluntary and involuntary terminations and $4 million for asset impairments and other charges.
Employee termination and severance costs were recorded based on approved plans developed by the businesses and corporate management which specified positions to be eliminated, benefits to be paid under existing severance plans or statutory requirements and the expected timetable for completion of the plan. Estimates of restructuring costs and benefits were made based on information available at the time charges were recorded. Due to the inherent uncertainty involved, actual amounts paid for such activities may differ from amounts initially recorded and we may need to revise previous estimates.
10
CUMMINS INC. AND SUBSIDIARIES
SELECTED FOOTNOTE DATA
(Unaudited)
NOTE 4. LOSS CONTINGENCY
Engines systems sold in the United States must be certified to comply with the Environmental Protection Agency (EPA) and California Air Resources Board (CARB) emission standards. EPA and CARB regulations require that in-use testing be performed on vehicles by the emission certificate holder and reported to the EPA and CARB in order to ensure ongoing compliance with these emission standards. We are the holder of this emission certificate for our engines, including engines installed in certain vehicles with one customer on which we did not also manufacture or sell the emission after treatment system. During 2015, a wash coat quality issue in certain of these third party after treatment systems caused some of our inter-related engines to fail in-use emission testing. In the fourth quarter, the vehicle manufacturer made a request that we assist in the design and bear the financial cost of a field campaign (Campaign) to address the technical issue purportedly causing some vehicles to fail the in-use testing.
While we are not responsible for the warranty issues related to a component that we did not manufacture or sell, as the emission compliance certificate holder, we are responsible for proposing a remedy to the EPA and CARB. As a result, we have proposed actions to the agencies that we believe will address the emission failures. As the certificate holder, we expect to participate in the cost of the proposed voluntary Campaign and have recorded a charge for this Campaign in other operating expenses of $60 million ($38 million after tax) in the fourth quarter. We are pursuing a cost sharing arrangement with the vehicle manufacturer which could reduce the economic cost of this Campaign. We will record a cost recovery in the period when a binding agreement is obtained.
We currently do not expect any fines or penalties from the EPA or CARB related to this matter.
NOTE 5. INCOME TAXES
Our income tax rates are generally less than the 35 percent U.S. income tax rate primarily because of lower taxes on foreign earnings and research tax credits. The effective tax rate for the three and twelve month periods ended December 31, 2015, was 16.0 percent and 27.4 percent, respectively. The effective tax rate for the three month period ended December 31, 2015 included U.S. tax legislation that was passed in the fourth quarter extending the federal research tax credit permanently. We recorded a $25 million benefit in the fourth quarter related to this legislation.
In addition to the fourth quarter item, the tax rate for the twelve month period ended December 31, 2015, included an $18 million one-time tax benefit primarily to reflect the release of reserves for uncertain tax positions related to a favorable federal audit settlement.
11
CUMMINS INC. AND SUBSIDIARIES
FINANCIAL MEASURES THAT SUPPLEMENT GAAP
(Unaudited)
Net income and diluted earnings per share (EPS) attributable to Cummins Inc. excluding special items
We believe these are useful measures of our operating performance for the periods presented as they illustrate our operating performance without regard to special items including tax adjustments. These measures are not in accordance with, or an alternative for, accounting principles generally accepted in the United States of America (GAAP) and may not be consistent with measures used by other companies. It should be considered supplemental data. The following table reconciles net income attributable to Cummins Inc. to net income attributable to Cummins Inc. excluding special items for the following periods:
Three months ended | ||||||||||||||||||
December 31, 2015 | December 31, 2014 | |||||||||||||||||
In millions | Net Income | Diluted EPS | Net Income | Diluted EPS | ||||||||||||||
Net income attributable to Cummins Inc. | $ | 161 | $ | 0.92 | $ | 444 | $ | 2.44 | ||||||||||
Add | ||||||||||||||||||
Impairment of light-duty diesel assets (1) | 133 | 0.75 | — | — | ||||||||||||||
Restructuring actions and other charges (1) | 61 | 0.35 | 21 | (2) | 0.12 | |||||||||||||
Loss contingency (1) | 38 | 0.22 | — | — | ||||||||||||||
Less | ||||||||||||||||||
Federal research tax credit | 25 | 0.15 | — | — | ||||||||||||||
Net income attributable to Cummins Inc. excluding special items | $ | 368 | $ | 2.09 | $ | 465 | $ | 2.56 | ||||||||||
Years ended | ||||||||||||||||||
December 31, 2015 | December 31, 2014 | |||||||||||||||||
In millions | Net Income | Diluted EPS | Net Income | Diluted EPS | ||||||||||||||
Net income attributable to Cummins Inc. | $ | 1,399 | $ | 7.84 | $ | 1,651 | $ | 9.02 | ||||||||||
Add | ||||||||||||||||||
Impairment of light-duty diesel assets (1) | 133 | 0.75 | — | — | ||||||||||||||
Restructuring actions and other charges (1) | 61 | 0.34 | 21 | (2) | 0.11 | |||||||||||||
Loss contingency (1) | 38 | 0.21 | — | — | ||||||||||||||
Net income attributable to Cummins Inc. excluding special items | $ | 1,631 | $ | 9.14 | $ | 1,672 | $ | 9.13 | ||||||||||
(1 | ) | See the respective previous footnotes for additional information. | ||||||||||||||||
(2 | ) | In the fourth quarter of 2014, we recorded a plant closing and initiated other actions totaling $32 million ($21 million after tax). | ||||||||||||||||
12
CUMMINS INC. AND SUBSIDIARIES
FINANCIAL MEASURES THAT SUPPLEMENT GAAP
(Unaudited)
Earnings before interest, income taxes, noncontrolling interests and special items
We define EBIT as earnings before interest expense, income tax expense and noncontrolling interests in income of consolidated subsidiaries (EBIT). We use EBIT to assess and measure the performance of our operating segments and also as a component in measuring our variable compensation programs. This measure is not in accordance with, or an alternative for, GAAP and may not be consistent with measures used by other companies. It should be considered supplemental data. Below is a reconciliation of EBIT to “Net income attributable to Cummins Inc.” for each of the applicable periods:
Three months ended | Years ended | |||||||||||||||
In millions | December 31, 2015 | December 31, 2014 | December 31, 2015 | December 31, 2014 | ||||||||||||
Earnings before interest expense, income taxes and special items | $ | 591 | $ | 661 | $ | 2,451 | $ | 2,530 | ||||||||
Earnings before interest expense, income taxes and special items as a percentage of net sales | 12.4 | % | 13.0 | % | 12.8 | % | 13.2 | % | ||||||||
Less | ||||||||||||||||
Impairment of light-duty diesel assets | 211 | — | 211 | — | ||||||||||||
Restructuring actions and other charges | 90 | — | 90 | — | ||||||||||||
Loss contingency | 60 | — | 60 | — | ||||||||||||
Plant closing and other actions | — | 32 | — | 32 | ||||||||||||
Earnings before interest expense and income taxes | $ | 230 | $ | 629 | $ | 2,090 | $ | 2,498 | ||||||||
EBIT as a percentage of net sales | 4.8 | % | 12.4 | % | 10.9 | % | 13.0 | % | ||||||||
Less | ||||||||||||||||
Interest expense | 18 | 17 | 65 | 64 | ||||||||||||
Income tax expense | 34 | 145 | 555 | 698 | ||||||||||||
Consolidated net income | 178 | 467 | 1,470 | 1,736 | ||||||||||||
Less | ||||||||||||||||
Net income attributable to noncontrolling interests | 17 | 23 | 71 | 85 | ||||||||||||
Net income attributable to Cummins Inc. | $ | 161 | $ | 444 | $ | 1,399 | $ | 1,651 | ||||||||
Net income attributable to Cummins Inc. as a percentage of net sales | 3.4 | % | 8.7 | % | 7.3 | % | 8.6 | % | ||||||||
13
CUMMINS INC. AND SUBSIDIARIES
BUSINESS UNIT SALES DATA
(Unaudited)
Engine Segment Sales by Market and Unit Shipments by Engine Classification
In the first quarter of 2015, our Engine segment reorganized its reporting structure to include the following markets: heavy-duty truck, medium-duty truck and bus, light-duty automotive (pickup and light commercial vehicle), industrial and stationary power. Sales by market for our Engine segment by business (including 2014 and 2013 reorganized balances) were as follows:
2015 | ||||||||||||||||||||
In millions | Q1 | Q2 | Q3 | Q4 | YTD | |||||||||||||||
Heavy-duty truck | $ | 757 | $ | 875 | $ | 784 | $ | 700 | $ | 3,116 | ||||||||||
Medium-duty truck and bus | 608 | 674 | 585 | 640 | 2,507 | |||||||||||||||
Light-duty automotive | 381 | 354 | 339 | 401 | 1,475 | |||||||||||||||
Industrial | 616 | 624 | 617 | 601 | 2,458 | |||||||||||||||
Stationary power | 234 | 270 | 203 | 186 | 893 | |||||||||||||||
Total sales | $ | 2,596 | $ | 2,797 | $ | 2,528 | $ | 2,528 | $ | 10,449 | ||||||||||
2014 | ||||||||||||||||||||
In millions | Q1 | Q2 | Q3 | Q4 | YTD | |||||||||||||||
Heavy-duty truck | $ | 718 | $ | 769 | $ | 801 | $ | 784 | $ | 3,072 | ||||||||||
Medium-duty truck and bus | 575 | 605 | 599 | 652 | 2,431 | |||||||||||||||
Light-duty automotive | 391 | 392 | 396 | 388 | 1,567 | |||||||||||||||
Industrial | 669 | 739 | 768 | 775 | 2,951 | |||||||||||||||
Stationary power | 210 | 239 | 252 | 240 | 941 | |||||||||||||||
Total sales | $ | 2,563 | $ | 2,744 | $ | 2,816 | $ | 2,839 | $ | 10,962 | ||||||||||
2013 | ||||||||||||||||||||
In millions | YTD | |||||||||||||||||||
Heavy-duty truck | $ | 2,618 | ||||||||||||||||||
Medium-duty truck and bus | 2,064 | |||||||||||||||||||
Light-duty automotive | 1,465 | |||||||||||||||||||
Industrial | 2,921 | |||||||||||||||||||
Stationary power | 945 | |||||||||||||||||||
Total sales | $ | 10,013 | ||||||||||||||||||
Unit shipments by engine classification (including unit shipments to Power Generation):
2015 | |||||||||||||||
Units | Q1 | Q2 | Q3 | Q4 | YTD | ||||||||||
Mid-range | 112,400 | 120,000 | 107,400 | 116,600 | 456,400 | ||||||||||
Heavy-duty | 28,700 | 32,800 | 28,600 | 24,300 | 114,400 | ||||||||||
High-horsepower | 3,500 | 3,700 | 3,200 | 3,400 | 13,800 | ||||||||||
Total units | 144,600 | 156,500 | 139,200 | 144,300 | 584,600 | ||||||||||
2014 | |||||||||||||||
Units | Q1 | Q2 | Q3 | Q4 | YTD | ||||||||||
Mid-range | 118,900 | 118,700 | 117,700 | 115,900 | 471,200 | ||||||||||
Heavy-duty | 28,800 | 30,300 | 32,300 | 30,700 | 122,100 | ||||||||||
High-horsepower | 3,400 | 3,900 | 3,900 | 3,600 | 14,800 | ||||||||||
Total units | 151,100 | 152,900 | 153,900 | 150,200 | 608,100 | ||||||||||
14
CUMMINS INC. AND SUBSIDIARIES
BUSINESS UNIT SALES DATA
(Unaudited)
Distribution Segment Sales by Business
2015 | ||||||||||||||||||||
In millions | Q1 | Q2 | Q3 | Q4 | YTD | |||||||||||||||
Parts and filtration | $ | 573 | $ | 598 | $ | 604 | $ | 648 | $ | 2,423 | ||||||||||
Engines | 321 | 318 | 323 | 332 | 1,294 | |||||||||||||||
Power generation | 298 | 272 | 323 | 397 | 1,290 | |||||||||||||||
Service | 284 | 307 | 301 | 330 | 1,222 | |||||||||||||||
Total sales | $ | 1,476 | $ | 1,495 | $ | 1,551 | $ | 1,707 | $ | 6,229 | ||||||||||
2014 | ||||||||||||||||||||
In millions | Q1 | Q2 | Q3 | Q4 | YTD | |||||||||||||||
Parts and filtration | $ | 382 | $ | 461 | $ | 491 | $ | 590 | $ | 1,924 | ||||||||||
Engines | 174 | 249 | 270 | 368 | 1,061 | |||||||||||||||
Power generation | 193 | 278 | 279 | 413 | 1,163 | |||||||||||||||
Service | 201 | 250 | 252 | 323 | 1,026 | |||||||||||||||
Total sales | $ | 950 | $ | 1,238 | $ | 1,292 | $ | 1,694 | $ | 5,174 | ||||||||||
Component Segment Sales by Business
2015 | ||||||||||||||||||||
In millions | Q1 | Q2 | Q3 | Q4 | YTD | |||||||||||||||
Emission solutions | $ | 613 | $ | 679 | $ | 607 | $ | 600 | $ | 2,499 | ||||||||||
Turbo technologies | 301 | 307 | 266 | 267 | 1,141 | |||||||||||||||
Filtration | 255 | 266 | 240 | 249 | 1,010 | |||||||||||||||
Fuel systems | 130 | 145 | 127 | 120 | 522 | |||||||||||||||
Total sales | $ | 1,299 | $ | 1,397 | $ | 1,240 | $ | 1,236 | $ | 5,172 | ||||||||||
2014 | ||||||||||||||||||||
In millions | Q1 | Q2 | Q3 | Q4 | YTD | |||||||||||||||
Emission solutions | $ | 543 | $ | 582 | $ | 598 | $ | 620 | $ | 2,343 | ||||||||||
Turbo technologies | 313 | 307 | 297 | 305 | 1,222 | |||||||||||||||
Filtration | 265 | 275 | 268 | 267 | 1,075 | |||||||||||||||
Fuel systems | 109 | 116 | 124 | 129 | 478 | |||||||||||||||
Total sales | $ | 1,230 | $ | 1,280 | $ | 1,287 | $ | 1,321 | $ | 5,118 | ||||||||||
15
CUMMINS INC. AND SUBSIDIARIES
BUSINESS UNIT SALES DATA
(Unaudited)
Power Generation Segment Sales by Business
In the first quarter of 2015, our Power Generation segment reorganized its reporting structure to include the following businesses: power systems, alternators and power solutions. Sales for our Power Generation segment by business (including 2014 and 2013 reorganized balances) were as follows:
2015 | ||||||||||||||||||||
In millions | Q1 | Q2 | Q3 | Q4 | YTD | |||||||||||||||
Power systems | $ | 543 | $ | 611 | $ | 551 | $ | 533 | $ | 2,238 | ||||||||||
Alternators | 98 | 92 | 86 | 82 | 358 | |||||||||||||||
Power solutions | 39 | 44 | 22 | 39 | 144 | |||||||||||||||
Total sales | $ | 680 | $ | 747 | $ | 659 | $ | 654 | $ | 2,740 | ||||||||||
2014 | ||||||||||||||||||||
In millions | Q1 | Q2 | Q3 | Q4 | YTD | |||||||||||||||
Power systems | $ | 510 | $ | 586 | $ | 598 | $ | 606 | $ | 2,300 | ||||||||||
Alternators | 105 | 126 | 115 | 103 | 449 | |||||||||||||||
Power solutions | 24 | 31 | 41 | 51 | 147 | |||||||||||||||
Total sales | $ | 639 | $ | 743 | $ | 754 | $ | 760 | $ | 2,896 | ||||||||||
2013 | ||||||||||||||||||||
In millions | YTD | |||||||||||||||||||
Power systems | $ | 2,381 | ||||||||||||||||||
Alternators | 496 | |||||||||||||||||||
Power solutions | 154 | |||||||||||||||||||
Total sales | $ | 3,031 | ||||||||||||||||||
16