CMI 2015 CURRENT Q2 10-Q DOCUMENT
Table of Contents

 
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 June 28, 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 June 28, 2015, there were 178,650,099 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.
 


Table of Contents

CUMMINS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
 
 
 
Page
 
 
 
Condensed Consolidated Statements of Income for the three and six months ended June 28, 2015 and June 29, 2014
 
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 28, 2015 and June 29, 2014
 
Condensed Consolidated Balance Sheets at June 28, 2015 and December 31, 2014
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 28, 2015 and June 29, 2014
 
Condensed Consolidated Statements of Changes in Equity for the six months ended June 28, 2015 and June 29, 2014
 
 
 
 
 

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Table of Contents

PART I.  FINANCIAL INFORMATION
 
ITEM 1.  Condensed Consolidated Financial Statements
 
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
 
Three months ended
 
Six months ended
In millions, except per share amounts 
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
NET SALES (a)
 
$
5,015

 
$
4,835

 
$
9,724

 
$
9,241

Cost of sales
 
3,683

 
3,630

 
7,197

 
6,937

GROSS MARGIN
 
1,332

 
1,205

 
2,527

 
2,304

 
 
 
 
 
 
 
 
 
OPERATING EXPENSES AND INCOME
 
 

 
 

 
 

 
 

Selling, general and administrative expenses
 
537

 
513

 
1,054

 
998

Research, development and engineering expenses
 
166

 
179

 
361

 
369

Equity, royalty and interest income from investees (Note 4)
 
94

 
105

 
162

 
195

Other operating (expense) income, net
 

 
(6
)
 
(3
)
 
(7
)
OPERATING INCOME
 
723

 
612

 
1,271

 
1,125

 
 
 
 
 
 
 
 
 
Interest income
 
6

 
6

 
11

 
11

Interest expense
 
17

 
15

 
31

 
32

Other income (expense), net
 
(8
)
 
39

 
1

 
49

INCOME BEFORE INCOME TAXES
 
704

 
642

 
1,252

 
1,153

 
 
 
 
 
 
 
 
 
Income tax expense (Note 5)
 
208

 
170

 
352

 
323

CONSOLIDATED NET INCOME
 
496

 
472

 
900

 
830

 
 
 
 
 
 
 
 
 
Less: Net income attributable to noncontrolling interests
 
25

 
26

 
42

 
46

NET INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
471

 
$
446

 
$
858

 
$
784

 
 
 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
 
 

 
 

 
 

 
 

Basic
 
$
2.63

 
$
2.44

 
$
4.77

 
$
4.27

Diluted
 
$
2.62

 
$
2.43

 
$
4.76

 
$
4.26

 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE SHARES OUTSTANDING
 
 

 
 

 
 

 
 

Basic
 
179.2

 
182.8

 
179.9

 
183.5

Dilutive effect of stock compensation awards
 
0.4

 
0.4

 
0.4

 
0.4

Diluted
 
179.6

 
183.2

 
180.3

 
183.9

 
 
 
 
 
 
 
 
 
CASH DIVIDENDS DECLARED PER COMMON SHARE
 
$
0.78

 
$
0.625

 
$
1.56

 
$
1.25

____________________________________
(a) Includes sales to nonconsolidated equity investees of $357 million and $682 million and $546 million and $1,138 million for the three and six month periods ended June 28, 2015 and June 29, 2014, respectively.
 
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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Table of Contents

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
Three months ended
 
Six months ended
In millions 
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
CONSOLIDATED NET INCOME
 
$
496

 
$
472

 
$
900

 
$
830

Other comprehensive income, net of tax (Note 11)
 
 

 
 

 
 

 
 

Change in pension and other postretirement defined benefit plans
 
15

 
10

 
28

 
14

Foreign currency translation adjustments
 
145

 
79

 
(31
)
 
110

Unrealized gain (loss) on marketable securities
 
1

 
(9
)
 

 
(11
)
Unrealized gain on derivatives
 
8

 
3

 
8

 
5

Total other comprehensive income, net of tax
 
169

 
83

 
5

 
118

COMPREHENSIVE INCOME
 
665

 
555

 
905

 
948

Less: Comprehensive income attributable to noncontrolling interests
 
20

 
23

 
40

 
49

COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC.
 
$
645

 
$
532

 
$
865

 
$
899

 
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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Table of Contents

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
In millions, except par value
 
June 28,
2015
 
December 31,
2014
ASSETS
 
 

 
 

Current assets
 
 

 
 

Cash and cash equivalents
 
$
1,760

 
$
2,301

Marketable securities (Note 6)
 
89

 
93

Total cash, cash equivalents and marketable securities
 
1,849

 
2,394

Accounts and notes receivable, net
 
 
 
 
Trade and other
 
3,118

 
2,744

Nonconsolidated equity investees
 
304

 
202

Inventories (Note 7)
 
2,986

 
2,866

Prepaid expenses and other current assets
 
746

 
849

Total current assets
 
9,003

 
9,055

Long-term assets
 
 

 
 

Property, plant and equipment
 
7,151

 
7,123

Accumulated depreciation
 
(3,498
)
 
(3,437
)
Property, plant and equipment, net
 
3,653

 
3,686

Investments and advances related to equity method investees
 
995

 
981

Goodwill
 
473

 
479

Other intangible assets, net
 
339

 
343

Prepaid pensions
 
784

 
637

Other assets
 
631

 
595

Total assets
 
$
15,878

 
$
15,776

 
 
 
 
 
LIABILITIES
 
 

 
 

Current liabilities
 
 

 
 

Accounts payable (principally trade)
 
$
1,974

 
$
1,881

Loans payable
 
70

 
86

Current portion of accrued product warranty (Note 9)
 
405

 
363

Accrued compensation, benefits and retirement costs
 
432

 
508

Deferred revenue
 
402

 
401

Other accrued expenses
 
739

 
759

Current maturities of long-term debt (Note 8)
 
31

 
23

Total current liabilities
 
4,053

 
4,021

Long-term liabilities
 
 

 
 

Long-term debt (Note 8)
 
1,576

 
1,589

Postretirement benefits other than pensions
 
351

 
369

Pensions
 
291

 
289

Other liabilities and deferred revenue
 
1,393

 
1,415

Total liabilities
 
$
7,664

 
$
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
 
$
2,164

 
$
2,139

Retained earnings
 
10,123

 
9,545

Treasury stock, at cost, 43.7 and 40.1 shares
 
(3,350
)
 
(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)
 
(1,071
)
 
(1,078
)
Total Cummins Inc. shareholders’ equity
 
7,854

 
7,749

Noncontrolling interests
 
360

 
344

Total equity
 
$
8,214

 
$
8,093

Total liabilities and equity
 
$
15,878

 
$
15,776


The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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Table of Contents

CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six months ended
In millions
 
June 28,
2015
 
June 29,
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

Consolidated net income
 
$
900

 
$
830

Adjustments to reconcile consolidated net income to net cash provided by operating activities
 
 

 
 

Depreciation and amortization
 
254

 
217

Deferred income taxes
 
(63
)
 
(88
)
Equity in income of investees, net of dividends
 
(68
)
 
(108
)
Pension contributions in excess of expense
 
(122
)
 
(127
)
Other post-retirement benefits payments in excess of expense
 
(15
)
 
(14
)
Stock-based compensation expense
 
17

 
21

Translation and hedging activities
 
27

 
(9
)
Changes in current assets and liabilities, net of acquisitions
 
 
 
 

Accounts and notes receivable
 
(426
)
 
(321
)
Inventories
 
(127
)
 
(223
)
Other current assets
 
18

 
4

Accounts payable
 
97

 
289

Accrued expenses
 
(21
)
 
120

Changes in other liabilities and deferred revenue
 
133

 
116

Other, net
 
(35
)
 
(6
)
Net cash provided by operating activities
 
569

 
701

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Capital expenditures
 
(247
)
 
(245
)
Investments in internal use software
 
(22
)
 
(26
)
Investments in and advances to equity investees
 
(17
)
 
(11
)
Acquisitions of businesses, net of cash acquired
 
(15
)
 
(193
)
Investments in marketable securities—acquisitions (Note 6)
 
(173
)
 
(179
)
Investments in marketable securities—liquidations (Note 6)
 
155

 
179

Cash flows from derivatives not designated as hedges
 
5

 
4

Other, net
 
14

 
8

Net cash used in investing activities
 
(300
)
 
(463
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Proceeds from borrowings
 
12

 
17

Payments on borrowings and capital lease obligations
 
(31
)
 
(39
)
Net payments under short-term credit agreements
 
(10
)
 
(48
)
Distributions to noncontrolling interests
 
(14
)
 
(32
)
Dividend payments on common stock
 
(280
)
 
(229
)
Repurchases of common stock
 
(514
)
 
(430
)
Other, net
 
8

 
5

Net cash used in financing activities
 
(829
)
 
(756
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
 
19

 
38

Net decrease in cash and cash equivalents
 
(541
)
 
(480
)
Cash and cash equivalents at beginning of year
 
2,301

 
2,699

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
1,760

 
$
2,219


 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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Table of Contents

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


 


 
784

 


 


 


 
784

 
46

 
830

Other comprehensive income (loss)


 


 


 


 


 
115

 
115

 
3

 
118

Issuance of shares


 
4

 


 


 


 


 
4

 

 
4

Employee benefits trust activity


 
14

 


 


 
2

 


 
16

 

 
16

Acquisition of shares


 


 


 
(430
)
 


 


 
(430
)
 

 
(430
)
Cash dividends on common stock


 


 
(229
)
 


 


 


 
(229
)
 

 
(229
)
Distributions to noncontrolling interests


 


 


 


 


 


 

 
(32
)
 
(32
)
Stock based awards


 
(5
)
 


 
21

 


 


 
16

 

 
16

Other shareholder transactions


 
1

 


 


 


 


 
1

 
(6
)
 
(5
)
BALANCE AT JUNE 29, 2014
$
556

 
$
1,557

 
$
8,961

 
$
(2,604
)
 
$
(14
)
 
$
(669
)
 
$
7,787

 
$
371

 
$
8,158

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AT DECEMBER 31, 2014
$
556

 
$
1,583

 
$
9,545

 
$
(2,844
)
 
$
(13
)
 
$
(1,078
)
 
$
7,749

 
$
344

 
$
8,093

Net income


 


 
858

 


 


 


 
858

 
42

 
900

Other comprehensive income (loss)


 


 


 


 


 
7

 
7

 
(2
)
 
5

Issuance of shares


 
3

 


 


 


 


 
3

 

 
3

Employee benefits trust activity


 
16

 


 


 
1

 


 
17

 

 
17

Acquisition of shares


 


 


 
(514
)
 


 


 
(514
)
 

 
(514
)
Cash dividends on common stock


 


 
(280
)
 


 


 


 
(280
)
 

 
(280
)
Distributions to noncontrolling interests


 


 


 


 


 


 

 
(25
)
 
(25
)
Stock based awards


 
(4
)
 


 
8

 


 


 
4

 

 
4

Other shareholder transactions


 
10

 


 


 


 


 
10

 
1

 
11

BALANCE AT JUNE 28, 2015
$
556

 
$
1,608

 
$
10,123

 
$
(3,350
)
 
$
(12
)
 
$
(1,071
)
 
$
7,854

 
$
360

 
$
8,214

 
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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Table of Contents

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 second quarters of 2015 and 2014 ended on June 28 and June 29, 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 costs, 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 and six month periods ended June 28, 2015 and June 29, 2014, were as follows:
 
 
Three months ended
 
Six months ended
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
Options excluded
490,085

 
104,262

 
414,982

 
52,846

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 and six 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.
 

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Table of Contents

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
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
Service cost
 
$
20

 
$
17

 
$
6

 
$
6

 
$

 
$

Interest cost
 
26

 
27

 
14

 
17

 
4

 
5

Expected return on plan assets
 
(48
)
 
(44
)
 
(22
)
 
(21
)
 

 

Recognized net actuarial loss
 
12

 
7

 
8

 
6

 
1

 

Net periodic benefit cost
 
$
10

 
$
7

 
$
6

 
$
8

 
$
5

 
$
5

 
 
Pension
 
 
 
 
 
 
U.S. Plans
 
U.K. Plans
 
Other Postretirement Benefits
 
 
Six months ended
In millions
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
Service cost
 
$
40

 
$
34

 
$
13

 
$
12

 
$

 
$

Interest cost
 
51

 
53

 
28

 
33

 
8

 
9

Expected return on plan assets
 
(95
)
 
(88
)
 
(45
)
 
(43
)
 

 

Recognized net actuarial loss
 
23

 
15

 
17

 
13

 
2

 

Net periodic benefit cost
 
$
19

 
$
14

 
$
13

 
$
15

 
$
10

 
$
9

 

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
 
Six months ended
In millions
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
Distribution Entities
 
 
 
 
 
 
 
 
North American distributors
 
$
8

 
$
30

 
$
18

 
$
62

Komatsu Cummins Chile, Ltda.
 
8

 
8

 
15

 
14

All other distributors
 

 
1

 
1

 
2

Manufacturing Entities
 
 
 
 
 
 

 
 

Beijing Foton Cummins Engine Co., Ltd
 
22

 
1

 
29

 
1

Dongfeng Cummins Engine Company, Ltd.
 
15

 
22

 
29

 
36

Chongqing Cummins Engine Company, Ltd.
 
11

 
15

 
23

 
26

All other manufacturers
 
21

 
19

 
28

 
34

Cummins share of net income
 
85

 
96

 
143

 
175

Royalty and interest income
 
9

 
9

 
19

 
20

Equity, royalty and interest income from investees
 
$
94

 
$
105

 
$
162

 
$
195



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Table of Contents

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 anticipate the 2015 effective tax rate will 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 and six month periods ended June 28, 2015, was 29.5 percent and 28.1 percent, respectively. The tax rate for the six month period ended June 28, 2015, 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 and six month periods ended June 29, 2014, was 26.5 percent and 28 percent, respectively. The tax rate for the three months ended June 29, 2014, included a $2 million discrete tax benefit for the release of reserves for uncertain tax positions related to multiple state audit settlements. Additionally, the tax rate for the six month period included a $12 million discrete tax expense attributable primarily to state deferred tax adjustments, as well as a $6 million discrete net tax benefit resulting from a $70 million dividend paid from China earnings generated prior to 2012.
The increase in the effective tax rate for the three months ended June 28, 2015, versus the comparable period in 2014 was primarily due to unfavorable changes in the jurisdictional mix of pre-tax income.

NOTE 6. MARKETABLE SECURITIES
 
A summary of marketable securities, all of which are classified as current, was as follows:
 
 
 
June 28, 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
 
$
64

 
$

 
$
64

 
$
75

 
$
1

 
$
76

Equity mutual funds
 
9

 

 
9

 
9

 

 
9

Bank debentures
 
13

 

 
13

 
6

 

 
6

Government debt securities
 
3

 

 
3

 
2

 

 
2

Total marketable securities
 
$
89

 
$

 
$
89

 
$
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 half 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
 
Six months ended
In millions
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
Proceeds from sales and maturities of marketable securities
 
$
84

 
$
71

 
$
155

 
$
179

Gross realized gains from the sale of available-for-sale securities
 

 
12

 
1

 
13


At June 28, 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
 
$
66

1 - 5 years
 
11

5 - 10 years
 
3

Total
 
$
80


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NOTE 7. INVENTORIES
 
Inventories are stated at the lower of cost or market. Inventories included the following:
 
In millions
 
June 28,
2015
 
December 31,
2014
Finished products
 
$
1,888

 
$
1,859

Work-in-process and raw materials
 
1,216

 
1,129

Inventories at FIFO cost
 
3,104

 
2,988

Excess of FIFO over LIFO
 
(118
)
 
(122
)
Total inventories
 
$
2,986

 
$
2,866


NOTE 8. DEBT
A summary of long-term debt was as follows:
 
In millions
 
June 28,
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
 
47

 
31

Unamortized discount
 
(47
)
 
(47
)
Fair value adjustments due to hedge on indebtedness
 
53

 
65

Capital leases
 
78

 
87

Total long-term debt
 
1,607

 
1,612

Less: Current maturities of long-term debt
 
(31
)
 
(23
)
Long-term debt
 
$
1,576

 
$
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
 
$
16

 
$
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
 
June 28,
2015
 
December 31,
2014
Fair value of total debt(1)
 
$
1,884

 
$
1,993

Carrying value of total debt
 
1,677

 
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:

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Table of Contents

 
In millions 
 
June 28,
2015
 
June 29,
2014
Balance, beginning of year
 
$
1,283

 
$
1,129

Provision for warranties issued
 
233

 
206

Deferred revenue on extended warranty contracts sold
 
131

 
118

Payments
 
(191
)
 
(211
)
Amortization of deferred revenue on extended warranty contracts
 
(88
)
 
(71
)
Changes in estimates for pre-existing warranties
 
19

 
12

Foreign currency translation
 
(3
)
 
2

Balance, end of period
 
$
1,384

 
$
1,185

 
Warranty related deferred revenue, supplier recovery receivables and the long-term portion of the warranty liability on our June 28, 2015, balance sheet were as follows:
In millions
 
June 28,
2015
 
Balance Sheet Location
Deferred revenue related to extended coverage programs
 
 

 
 
Current portion
 
$
177

 
Deferred revenue
Long-term portion
 
472

 
Other liabilities and deferred revenue
Total
 
$
649

 
 
 
 
 
 
 
Receivables related to estimated supplier recoveries
 
 

 
 
Current portion
 
$
6

 
Trade and other receivables
Long-term portion
 
4

 
Other assets
Total
 
$
10

 
 
 
 
 
 
 
Long-term portion of warranty liability
 
$
330

 
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.
 

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Table of Contents

U.S. Distributor Commitments
Our distribution agreements with partially-owned distributors generally have a renewable three-year term and are restricted to specified territories. Our distributors develop and maintain a network of dealers with which we have no direct relationship. Our distributors are permitted to sell other, noncompetitive products only with our consent. We license all of our distributors to use our name and logo in connection with the sale and service of our products, with no right to assign or sublicense the trademarks, except to authorized dealers, without our consent. Products are sold to the distributors at standard domestic or international distributor net prices, as applicable. Net prices are wholesale prices we establish to permit our distributors an adequate margin on their sales. Subject to local laws, we can generally refuse to renew these agreements upon expiration or terminate them upon written notice for inadequate sales, change in principal ownership and certain other reasons. Distributors also have the right to terminate the agreements upon 60-day notice without cause, or 30-day notice for cause. Upon termination or failure to renew, we are required to purchase the distributor’s current inventory, signage and special tools and may, at our option purchase other assets of the distributor, but are under no obligation to do so.

Other Guarantees and Commitments
In addition to the matters discussed above, from time to time we enter into other guarantee arrangements, including guarantees of non-U.S. distributor financings, residual value guarantees on equipment under operating leases and other miscellaneous guarantees of third-party obligations. As of June 28, 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 June 28, 2015, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $67 million, of which $31 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 June 28, 2015, the total commitments under these contracts were $67 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 $69 million at June 28, 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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Table of Contents

NOTE 11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
Following are the changes in accumulated other comprehensive income (loss) by component for the three and six months ended:
 
 
Three months ended
In millions
 
Change in
pensions and
other
postretirement
defined benefit
plans
 
Foreign
currency
translation
adjustment
 
Unrealized gain
(loss) on
marketable
securities
 
Unrealized gain
(loss) on
derivatives
 
Total
attributable to
Cummins Inc.
 
Noncontrolling
interests
 
Total
Balance at March 30, 2014
 
$
(607
)
 
$
(155
)
 
$
6

 
$
1

 
$
(755
)
 
 

 
 

Other comprehensive income before reclassifications
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Before tax amount
 

 
83

 

 
7

 
90

 
$

 
$
90

Tax (expense) benefit
 

 
(4
)
 

 
(2
)
 
(6
)
 

 
(6
)
After tax amount
 

 
79

 

 
5

 
84

 

 
84

Amounts reclassified from accumulated other comprehensive income(1)(2)
 
10

 

 
(6
)
 
(2
)
 
2

 
(3
)
 
(1
)
Net current period other comprehensive income (loss)
 
10

 
79

 
(6
)
 
3

 
86

 
$
(3
)
 
$
83

Balance at June 29, 2014
 
$
(597
)
 
$
(76
)
 
$

 
$
4

 
$
(669
)
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 29, 2015
 
$
(656
)
 
$
(587
)
 
$
(1
)
 
$
(1
)
 
$
(1,245
)
 
 

 
 

Other comprehensive income before reclassifications
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Before tax amount
 

 
153

 

 
9

 
162

 
$
(6
)
 
$
156

Tax (expense) benefit
 

 
(1
)
 

 
(2
)
 
(3
)
 

 
(3
)
After tax amount
 

 
152

 

 
7

 
159

 
(6
)
 
153

Amounts reclassified from accumulated other comprehensive income(1)(2)
 
15

 

 

 

 
15

 
1

 
16

Net current period other comprehensive income (loss)
 
15

 
152

 

 
7

 
174

 
$
(5
)
 
$
169

Balance at June 28, 2015
 
$
(641
)
 
$
(435
)
 
$
(1
)
 
$
6

 
$
(1,071
)
 
 

 
 

____________________________________
(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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Table of Contents

 
 
Six months ended
In millions
 
Change in
pensions and
other
postretirement
defined benefit
plans
 
Foreign
currency
translation
adjustment
 
Unrealized gain
(loss) on
marketable
securities
 
Unrealized gain
(loss) on
derivatives
 
Total
attributable to
Cummins Inc.
 
Noncontrolling
interests
 
Total
Balance at December 31, 2013
 
$
(611
)
 
$
(179
)
 
$
7

 
$
(1
)
 
$
(784
)
 
 

 
 

Other comprehensive income before reclassifications
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Before tax amount
 
(7
)
 
107

 
(1
)
 
10

 
109

 
$
7

 
$
116

Tax (expense) benefit
 
1

 
(4
)
 

 
(3
)
 
(6
)
 

 
(6
)
After tax amount
 
(6
)
 
103

 
(1
)
 
7

 
103

 
7

 
110

Amounts reclassified from accumulated other comprehensive income(1)(2)
 
20

 

 
(6
)
 
(2
)
 
12

 
(4
)
 
8

Net current period other comprehensive income (loss)
 
14

 
103

 
(7
)
 
5

 
115

 
$
3

 
$
118

Balance at June 29, 2014
 
$
(597
)
 
$
(76
)
 
$

 
$
4

 
$
(669
)
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
 
$
(669
)
 
$
(406
)
 
$
(1
)
 
$
(2
)
 
$
(1,078
)
 
 

 
 

Other comprehensive income before reclassifications
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Before tax amount
 
(3
)
 
(51
)
 
1

 
10

 
(43
)
 
$
(2
)
 
$
(45
)
Tax (expense) benefit
 
1

 
22

 

 
(2
)
 
21

 

 
21

After tax amount
 
(2
)
 
(29
)
 
1

 
8

 
(22
)
 
(2
)
 
(24
)
Amounts reclassified from accumulated other comprehensive income(1)(2)
 
30

 

 
(1
)
 

 
29

 

 
29

Net current period other comprehensive income (loss)
 
28

 
(29
)
 

 
8

 
7

 
$
(2
)
 
$
5

Balance at June 28, 2015
 
$
(641
)
 
$
(435
)
 
$
(1
)
 
$
6

 
$
(1,071
)
 
 

 
 

____________________________________
(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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Table of Contents

Following are the items reclassified out of accumulated other comprehensive income (loss) and the related tax effects:
In millions
 
Three months ended
 
Six months ended
 
 
(Gain)/Loss Components
 
June 28,
2015
 
June 29,
2014
 
June 28, 2015
 
June 29, 2014
 
Statement of Income Location
 
 
 
 
 
 
 
 
 
 
 
Change in pension and other postretirement defined benefit plans
 
 

 
 
 
 

 
 
 
 
Recognized actuarial loss
 
$
21

 
$
14

 
$
43

 
$
29

 
(1) 
Tax effect
 
(6
)
 
(4
)
 
(13
)
 
(9
)
 
Income tax expense
Net change in pensions and other postretirement defined benefit plans
 
$
15

 
$
10

 
$
30

 
$
20

 
 
 
 
 
 
 
 
 
 
 
 
 
Realized (gain) loss on marketable securities
 
$

 
$
(12
)
 
$
(1
)
 
$
(13
)
 
Other income (expense), net
Tax effect
 
1

 
3

 

 
3

 
Income tax expense
Net realized (gain) loss on marketable securities
 
$
1


$
(9
)
 
$
(1
)

$
(10
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized (gain) loss on derivatives
 
 

 
 
 
 

 
 
 
 
Foreign currency forward contracts
 
$

 
$
(3
)
 
$

 
$
(5
)
 
Net sales
Commodity swap contracts
 

 
1

 

 
3

 
Cost of sales
Total before taxes
 


(2
)
 


(2
)
 
 
Tax effect
 

 

 

 

 
Income tax expense
Net realized (gain) loss on derivatives
 
$


$
(2
)
 
$


$
(2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
16


$
(1
)
 
$
29


$
8

 
 
____________________________________
(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, income taxes and noncontrolling interests) as a primary basis for the CODM to evaluate the performance of each of our operating segments. Segment amounts exclude certain expenses not specifically identifiable to segments.
The accounting policies of our operating segments are the same as those applied in our Condensed Consolidated Financial Statements. We prepared the financial results of our operating segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. We 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, 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.

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Table of Contents

Summarized financial information regarding our reportable operating segments for the three and six month periods is shown in the table below:
In millions
 
Engine
 
Distribution
 
Components
 
Power Generation
 
Non-segment
Items (1)
 
Total
Three months ended June 28, 2015
 
 

 
 
 
 

 
 

 
 

 
 

External sales
 
$
2,058

 
$
1,487

 
$
1,017

 
$
453

 
$

 
$
5,015

Intersegment sales
 
739

 
8

 
380

 
294

 
(1,421
)
 

Total sales
 
2,797

 
1,495

 
1,397

 
747

 
(1,421
)
 
5,015

Depreciation and amortization(2)
 
60

 
25

 
28

 
13

 

 
126

Research, development and engineering expenses
 
91

 
3

 
57

 
15

 

 
166

Equity, royalty and interest income from investees
 
57

 
21

 
8

 
8

 

 
94

Interest income
 
3

 
1

 
1

 
1

 

 
6

Segment EBIT
 
341

 
113

 
223

 
57

 
(13
)
 
721

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 29, 2014
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
2,178

 
$
1,229

 
$
953

 
$
475

 
$

 
$
4,835

Intersegment sales
 
566

 
9

 
327

 
268

 
(1,170
)
 

Total sales
 
2,744

 
1,238

 
1,280

 
743

 
(1,170
)
 
4,835

Depreciation and amortization(2)
 
52

 
20

 
26

 
13

 

 
111

Research, development and engineering expenses
 
105

 
3

 
53

 
18

 

 
179

Equity, royalty and interest income from investees
 
45

 
42

 
9

 
9

 

 
105

Interest income
 
4

 

 
1

 
1

 

 
6

Segment EBIT
 
311

 
126

(3) 
185

 
61

 
(26
)
 
657

 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 28, 2015
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
3,947

 
$
2,956

 
$
1,948

 
$
873

 
$

 
$
9,724

Intersegment sales
 
1,446

 
15

 
748

 
554

 
(2,763
)
 

Total sales
 
5,393

 
2,971

 
2,696

 
1,427

 
(2,763
)
 
9,724

Depreciation and amortization(2)
 
118

 
52

 
54

 
29

 

 
253

Research, development and engineering expenses
 
205

 
6

 
118

 
32

 

 
361

Equity, royalty and interest income from investees
 
87

 
41

 
17

 
17

 

 
162

Interest income
 
5

 
2

 
2

 
2

 

 
11

Segment EBIT
 
594

 
201

 
418

 
106

 
(36
)
 
1,283

 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 29, 2014
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
4,268

 
$
2,171

 
$
1,875

 
$
927

 
$

 
$
9,241

Intersegment sales
 
1,039

 
17

 
635

 
455

 
(2,146
)
 

Total sales
 
5,307

 
2,188

 
2,510

 
1,382

 
(2,146
)
 
9,241

Depreciation and amortization(2)
 
103

 
36

 
52

 
25

 

 
216

Research, development and engineering expenses
 
221

 
5

 
106

 
37

 

 
369

Equity, royalty and interest income from investees
 
77

 
83

 
18

 
17

 

 
195

Interest income
 
6

 
1

 
2

 
2

 

 
11

Segment EBIT
 
580

 
202

(3) 
352

 
86

 
(35
)
 
1,185

____________________________________
(1) Includes inter-segment sales and profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and six months ended June 28, 2015 and June 29, 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 $1 million for the six months ended June 28, 2015 and June 29, 2014, respectively.
(3) Distribution segment EBIT included gains of $14 million and $20 million on the fair value adjustments resulting from the acquisition of the controlling interests in North American distributors for the three and six month periods ended June 29, 2014.

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Table of Contents

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
 
Six months ended
In millions
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
Total EBIT
 
$
721

 
$
657

 
$
1,283

 
$
1,185

Less: Interest expense
 
17

 
15

 
31

 
32

Income before income taxes
 
$
704

 
$
642

 
$
1,252

 
$
1,153


NOTE 13. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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. 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 would have become effective for annual and interim periods beginning January 1, 2017. In July 2015, the FASB approved a one year delay of the effective date of the standard to January 1, 2018, to provide adequate time for implementation, although the final amendment has not yet been published. 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.

NOTE 14. SUBSEQUENT EVENTS
Acquisition of Cummins Central Power, LLC
On June 29, 2015, we acquired the remaining 20.01 percent interest in Cummins Central Power LLC from the former distributor principal. The purchase consideration was $41 million, which included $7 million in cash and an additional $31 million paid to eliminate outstanding debt. The remaining $3 million will be paid in future periods.

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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;

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;


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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 actuarial and accounting standards;

our sales mix of products;

protection and validity of our patent and other intellectual property rights;

technological implementation and cost/financial risks in our increasing use of large, multi-year contracts;

the cyclical nature of some of our markets;

the outcome of pending and future litigation and governmental proceedings;

continued availability of financing, financial instruments and financial resources in the amounts, at the times and on the terms required to support our future business;

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 4 percent in the three months ended June 28, 2015, as compared to the same period in 2014, primarily due to the consolidation of partially-owned North American distributors since December 31, 2013 and higher demand in North American on-highway markets, partially offset by unfavorable foreign currency fluctuations. Revenue in the U.S. and Canada improved by 12 percent primarily due to increased 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 the Power Generation segment. Continued international economic uncertainty in the second 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 in Brazil, Europe and Australia. The decline in international revenue was led by unfavorable foreign currency impacts of 4 percent (primarily in Europe, Brazil, Australia, the U.K. and Canada), lower demand in the Engine segment, especially the on-highway market in Brazil, and declines in international construction and commercial marine demand. These decreases were partially offset by increased international demand for power generation products.
Worldwide revenues increased 5 percent in the first six months of 2015 as compared to the same period in 2014, primarily due to the consolidation of partially-owned North American distributors since December 31, 2013 and higher demand in North American on-highway markets, partially offset by unfavorable foreign currency fluctuations. Revenue in the U.S. and Canada improved by 14 percent primarily due to increased Distribution segment sales related to the consolidation of North American distributors and higher demand in North American on-highway markets, partially offset by lower demand in the Power Generation segment and off-highway mining and construction markets. Continued international economic uncertainty in the first half of 2015 negatively impacted our international revenues, which declined by 6 percent with sales down or relatively flat in many of our markets, especially Europe, Brazil, Australia and Korea. The decline in international revenue was led by unfavorable foreign currency impacts of 3 percent (primarily in Europe, Brazil, Australia, Canada and the U.K.), lower demand in the Engine segment, especially the on-highway market in Brazil, and declines in international construction and commercial marine demand. These decreases were partially offset by increased international demand for power generation products.
The following tables contain sales and earnings before interest expense, income taxes and noncontrolling interests (EBIT) results by operating segment for the three and six month periods ended June 28, 2015 and June 29, 2014Refer 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
 
June 28, 2015
 
June 29, 2014
 
Percent change
 
 
 
 
Percent
 
 
 
 
 
Percent
 
 
 
2015 vs. 2014
In millions
 
Sales
 
of Total
 
EBIT
 
Sales
 
of Total
 
EBIT
 
Sales
 
EBIT
Engine
 
$
2,797

 
55
 %
 
$
341

 
$
2,744

 
57
 %
 
$
311

 
2
%
 
10
 %
Distribution
 
1,495

 
30
 %
 
113

 
1,238

 
26
 %
 
126

 
21
%
 
(10
)%
Components
 
1,397

 
28
 %
 
223

 
1,280

 
26
 %
 
185

 
9
%
 
21
 %
Power Generation
 
747

 
15
 %
 
57

 
743

 
15
 %
 
61

 
1
%
 
(7
)%
Intersegment eliminations
 
(1,421
)
 
(28
)%
 

 
(1,170
)
 
(24
)%
 

 
21
%
 

Non-segment
 

 

 
(13
)
 

 

 
(26
)
 

 
(50
)%
Total
 
$
5,015

 
100
 %
 
$
721

 
$
4,835

 
100
 %
 
$
657

 
4
%
 
10
 %
 
Net income attributable to Cummins was $471 million, or $2.62 per diluted share, on sales of $5.0 billion for the three months ended June 28, 2015, versus the comparable prior year period with net income attributable to Cummins of $446 million, or $2.43 per diluted share, on sales of $4.8 billion. The increase in net income and earnings per share was driven by improved gross margin and lower research, development and engineering expenses, 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 unfavorable foreign currency fluctuations. Diluted earnings per share for the three months ended June 28, 2015, benefited $0.02 from lower shares outstanding due to 2015 purchases under the stock repurchase programs.
 
 
Six months ended
Operating Segments
 
June 28, 2015
 
June 29, 2014
 
Percent change
 
 
 
 
Percent
 
 
 
 
 
Percent
 
 
 
2015 vs. 2014
In millions
 
Sales
 
of Total
 
EBIT
 
Sales
 
of Total
 
EBIT
 
Sales
 
EBIT
Engine
 
$
5,393

 
55
 %
 
$
594

 
$
5,307

 
57
 %
 
$
580

 
2
%
 
2
 %
Distribution
 
2,971

 
30
 %
 
201

 
2,188

 
24
 %
 
202

 
36
%
 
 %
Components
 
2,696

 
28
 %
 
418

 
2,510

 
27
 %
 
352

 
7
%
 
19
 %
Power Generation
 
1,427

 
15
 %
 
106

 
1,382

 
15
 %
 
86

 
3
%
 
23
 %
Intersegment eliminations
 
(2,763
)
 
(28
)%
 

 
(2,146
)
 
(23
)%
 

 
29
%
 

Non-segment
 

 

 
(36
)
 

 

 
(35
)
 

 
3
 %
Total
 
$
9,724

 
100
 %
 
$
1,283

 
$
9,241

 
100
 %
 
$
1,185

 
5
%
 
8
 %
Net income attributable to Cummins was $858 million, or $4.76 per diluted share, on sales of $9.7 billion for the six months ended June 28, 2015, versus the comparable prior year period with net income attributable to Cummins of $784 million, or $4.26 per diluted share, on sales of $9.2 billion. The increase in net income and earnings per share was driven by improved gross margin and lower research, development and engineering expenses, partially offset by higher selling, general and administrative expenses, lower other income (expense) as a result of gains recognized in 2014 from the acquisition of the remaining interest in North American distributors 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 unfavorable foreign currency fluctuations. Diluted earnings per share for the six months ended June 28, 2015, benefited $0.04 from lower shares outstanding, primarily due to purchases under the stock repurchase programs.
We generated $569 million of operating cash flows for the six months ended June 28, 2015, compared to $701 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 $150 million to $190 million on North American distributor acquisitions and the related debt retirements in the third quarter of 2015.
During the first six months of 2015, we repurchased $174 million of common stock under the 2012 Board of Directors Authorized Plan, completing this program in the second quarter of 2015. In July 2014, our Board of Directors authorized the

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acquisition of up to $1 billion of additional common stock upon the completion of the 2012 Plan. We repurchased $340 million under the new authorization in the second quarter of 2015.
Our debt to capital ratio (total capital defined as debt plus equity) at June 28, 2015, was 17.0 percent, compared to 17.3 percent at December 31, 2014. At June 28, 2015, we had $1.8 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
In July 2015, the Board of Directors authorized a dividend increase of 25 percent from $0.78 per share to $0.975 per share on a quarterly basis.
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 costs 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 third quarter, which we expect to increase our Distribution segment sales.
We expect demand in India 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 conditions in Brazil will continue to negatively impact demand across our businesses.
We anticipate end markets in China to remain weak.
Demand in certain European markets could remain weak due to continued political and economic uncertainty.
Foreign currency volatility could continue to put pressure on sales and earnings.
We expect market demand to remain weak 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.

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RESULTS OF OPERATIONS
 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
June 28,
2015
 
June 29,
2014
 
(Unfavorable)
 
June 28,
2015
 
June 29,
2014
 
(Unfavorable)
In millions (except per share amounts)
 
 
Amount
 
Percent
 
 
 
Amount
 
Percent
NET SALES
$
5,015

 
$
4,835

 
$
180

 
4
 %
 
$
9,724

 
$
9,241

 
$
483

 
5
 %
Cost of sales
3,683

 
3,630

 
(53
)
 
(1
)%
 
7,197

 
6,937

 
(260
)
 
(4
)%
GROSS MARGIN
1,332

 
1,205

 
127

 
11
 %
 
2,527

 
2,304

 
223

 
10
 %
OPERATING EXPENSES AND INCOME
 

 
 

 
 

 


 
 

 
 

 
 

 


Selling, general and administrative expenses
537

 
513

 
(24
)
 
(5
)%
 
1,054

 
998

 
(56
)
 
(6
)%
Research, development and engineering expenses
166

 
179

 
13

 
7
 %
 
361

 
369

 
8

 
2
 %
Equity, royalty and interest income from investees
94

 
105

 
(11
)
 
(10
)%
 
162

 
195

 
(33
)
 
(17
)%
Other operating (expense) income, net

 
(6
)
 
6

 
(100
)%
 
(3
)
 
(7
)
 
4

 
(57
)%
OPERATING INCOME
723

 
612

 
111

 
18
 %
 
1,271

 
1,125

 
146

 
13
 %
Interest income
6

 
6

 

 
 %
 
11

 
11

 

 
 %
Interest expense
17

 
15

 
(2
)
 
(13
)%
 
31

 
32

 
1

 
3
 %
Other income (expense), net
(8
)
 
39

 
(47
)
 
NM

 
1

 
49

 
(48
)
 
(98
)%
INCOME BEFORE INCOME TAXES
704

 
642

 
62

 
10
 %
 
1,252

 
1,153

 
99

 
9
 %
Income tax expense
208

 
170

 
(38
)
 
(22
)%
 
352

 
323

 
(29
)
 
(9
)%
CONSOLIDATED NET INCOME
496

 
472

 
24

 
5
 %
 
900

 
830

 
70

 
8
 %
Less: Net income attributable to noncontrolling interests
25

 
26

 
1

 
4
 %
 
42

 
46

 
4

 
9
 %
NET INCOME ATTRIBUTABLE TO CUMMINS INC.
$
471

 
$
446

 
$
25

 
6
 %
 
$
858

 
$
784

 
$
74

 
9
 %
Diluted earnings per common share attributable to Cummins Inc.
$
2.62

 
$
2.43

 
$
0.19

 
8
 %
 
$
4.76

 
$
4.26

 
$
0.50

 
12
 %
"NM" - not meaningful information
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
Favorable/
(Unfavorable)
 
Six months ended
 
Favorable/
(Unfavorable)
 
 
June 28,
2015
 
June 29,
2014
 
 
June 28,
2015
 
June 29,
2014
 
Percent of sales
 
 
 
Percentage Points
 
 
 
Percentage Points
Gross margin
 
26.6
%
 
24.9
%
 
1.7

 
26.0
%
 
24.9
%
 
1.1
Selling, general and administrative expenses
 
10.7
%
 
10.6
%
 
(0.1
)
 
10.8
%
 
10.8
%
 
Research, development and engineering expenses
 
3.3
%
 
3.7
%
 
0.4

 
3.7
%
 
4.0
%
 
0.3

Net Sales
Net sales for the three months ended June 28, 2015, increased versus the comparable period in 2014 primarily due to increased sales in the Distribution segment of 21 percent, principally related to the acquisitions of North American distributors since December 31, 2013, and strength in North American on-highway markets improving sales in both the Engine and Components segments. These increases were partially offset by unfavorable foreign currency fluctuations which impacted sales by approximately 4 percent (primarily in Europe, Brazil, Australia, Canada and the U.K.).
Net sales for the six months ended June 28, 2015, increased versus the comparable period in 2014 primarily due to increased sales in the Distribution segment of 36 percent, principally related to the acquisitions of North American distributors since December 31, 2013, and strength in North American on-highway markets improving sales in both the Engine and Components segments. Theses increase were partially offset by unfavorable foreign currency fluctuations which impacted sales by approximately 3 percent (primarily in Europe, Brazil, Australia, Canada and the U.K.).
Sales to international markets, based on location of customers, for the three and six months ended June 28, 2015, were 40 percent and 39 percent, respectively, of total net sales compared to 44 percent of total net sales, for both of the comparable periods in 2014.
A more detailed discussion of sales by segment is presented in the “OPERATING SEGMENT RESULTS” section.
Gross Margin
Gross margin increased for the three months ended June 28, 2015, versus the comparable period in 2014, and increased as a percentage of sales by 1.7 percentage points. The increase in gross margin was primarily due to improved Distribution segment

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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 unfavorable foreign currency fluctuations (primarily in Australia, Brazil and Canada). 
Gross margin increased for the six months ended June 28, 2015, versus the comparable period in 2014, and increased as a percentage of sales by 1.1 percentage points. 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 unfavorable foreign currency fluctuations (primarily in Australia, Canada and Brazil).
The provision for base warranties issued as a percent of sales for the three and six months ended June 28, 2015, was 2.1 percent in both periods, compared to 2.3 percent and 2.1 percent, respectively, for the comparable periods in 2014. A more detailed discussion of margin by segment is presented in the “OPERATING SEGMENT RESULTS” section.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended June 28, 2015, increased versus the comparable period in 2014, primarily due to higher compensation and related expenses of $22 million, partially offset by lower consulting expenses of $7 million. Overall, selling, general and administrative expenses, as a percentage of sales, increased to 10.7 percent in the three months ended June 28, 2015, from 10.6 percent in the comparable period in 2014.
Selling, general and administrative expenses for the six months ended June 28, 2015, increased versus the comparable period in 2014, primarily due to higher compensation and related expenses of $57 million, partially offset by lower consulting expenses of $18 million. Overall, selling, general and administrative expenses, as a percentage of sales, was 10.8 percent in the first six months of both 2015 and 2014. Compensation and related expenses include salaries, fringe benefits and variable compensation.
Research, Development and Engineering Expenses
Research, development and engineering expenses for the three months ended June 28, 2015, decreased versus the comparable period in 2014, primarily due to higher expense recovery of $9 million and lower variable compensation expenses of $3 million. Overall, research, development and engineering expenses, as a percentage of sales, decreased to 3.3 percent in the three months ended June 28, 2015, from 3.7 percent in the comparable period in 2014.
Research, development and engineering expenses for the six months ended June 28, 2015, decreased versus the comparable period in 2014, primarily due to higher expense recovery of $11 million and lower variable compensation expenses of $5 million. Overall, research, development and engineering expenses, as a percentage of sales, decreased to 3.7 percent in the first six months of 2015, from 4.0 percent in the comparable period in 2014. Research activities continue to focus on development of new products to meet future emission standards around the world and improvements in fuel economy performance.
Equity, Royalty and Interest Income From Investees
Equity, royalty and interest income from investees decreased for the three and six months ended June 28, 2015, versus the comparable period in 2014, primarily due to the consolidation of the partially-owned North American distributors ($22 million and $44 million, respectively) since December 31, 2013 and lower earnings at Dongfeng Cummins Engine Company, Ltd. ($7 million each period). These decreases were partially offset by higher equity earnings at Beijing Foton Cummins Engine Co., Ltd. ($21 million and $28 million, respectively) as the joint venture continues to increase market share with the new heavy-duty engine platform introduced in 2014. As we continue executing our plan to acquire partially-owned distributors, we expect equity earnings for our North American distributors to continue to decrease as the earnings will be included in our consolidated results.
 
 
 
 
 
 
Other Operating (Expense) Income, net
Other operating income (expense) was as follows:
 
 
Three months ended
 
Six months ended
In millions
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
Amortization of intangible assets
 
$
(5
)
 
$
(4
)
 
$
(11
)
 
$
(7
)
Royalty income, net
 
5

 
6

 
10

 
8

Other, net
 

 
(8
)
 
(2
)
 
(8
)
Total other operating income (expense), net
 
$

 
$
(6
)
 
$
(3
)
 
$
(7
)

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Table of Contents

Interest Income
Interest income for the three and six months ended June 28, 2015, remained flat versus the comparable period in 2014.
Interest Expense
Interest expense for the three months ended June 28, 2015, increased versus the comparable period in 2014, primarily due to higher short term borrowings. Interest expense for the six months ended June 28, 2015, remained relatively flat versus the comparable period in 2014.
Other Income (Expense), net
Other income (expense) was as follows:
 
 
Three months ended
 
Six months ended
In millions
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
Change in cash surrender value of corporate owned life insurance
 
$
(8
)
 
$
11

 
$
2

 
$
18

Foreign currency (losses) gains, net
 
(3
)
 
2

 
(5
)
 
(3
)
Bank charges
 
(2
)
 
(3
)
 
(4
)
 
(5
)
Gain on fair value adjustment for consolidated investees
 

 
14

 

 
20

Gain on marketable securities, net
 

 
12

 
1

 
13

Dividend income
 
1

 

 
2

 
1

Other, net
 
4

 
3

 
5

 
5

Total other income (expense), net
 
$
(8
)
 
$
39

 
$
1

 
$
49

Income Tax Expense
 
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 anticipate the 2015 effective tax rate will 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 and six month periods ended June 28, 2015, was 29.5 percent and 28.1 percent, respectively. The six month 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 and six month periods ended June 29, 2014, was 26.5 percent and 28 percent, respectively. The tax rate for the three months ended June 29, 2014, included a $2 million discrete tax benefit for the release of reserves for uncertain tax positions related to multiple state audit settlements. Additionally, the tax rate for the six month period included a $12 million discrete tax expense attributable primarily to state deferred tax adjustments, as well as a $6 million discrete net tax benefit resulting from a $70 million dividend paid from China earnings generated prior to 2012.
The increase in the effective tax rate for the three months ended June 28, 2015, versus the comparable period in 2014 was primarily due to unfavorable changes in the jurisdictional mix of pre-tax income.
Noncontrolling Interests
Noncontrolling interests eliminate the income or loss attributable to non-Cummins ownership interests in our consolidated entities. Noncontrolling interests in income of consolidated subsidiaries for the three months ended June 28, 2015, decreased primarily due to lower earnings at Wuxi Cummins Turbo Technologies Co. Ltd.
Noncontrolling interests in income of consolidated subsidiaries for the six months ended June 28, 2015, decreased primarily due to lower earnings at Wuxi Cummins Turbo Technologies Co. Ltd. and a decline from the acquisition of the remaining interest in previously consolidated North American distributors since December 31, 2013, partially offset by higher earnings at Cummins India Ltd.


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Table of Contents

Net Income Attributable to Cummins Inc. and Diluted Earnings Per Share Attributable to Cummins Inc.
Net income and diluted earnings per share attributable to Cummins Inc. for the three months ended June 28, 2015, increased versus the comparable period in 2014, primarily due to higher gross margin and lower research, development and engineering expenses, partially offset by lower other income (expense) as a result from gains recognized in 2014 from the acquisition of the remaining interest in North American distributors, higher selling, general and administrative expenses, lower equity, royalty and interest income from investees and a higher effective tax rate. Diluted earnings per share for the three months ended June 28, 2015, benefited $0.02 from lower shares outstanding due to 2015 purchases under the stock repurchase programs.
Net income and diluted earnings per share attributable to Cummins for the six months ended June 28, 2015, increased versus the comparable period in 2014, primarily due to higher gross margin and lower research, development and engineering expenses, partially offset by higher selling, general and administrative expenses, lower other income (expense) as a result from gains recognized in 2014 from the acquisition of the remaining interest in North American distributors and lower equity, royalty and interest income from investees. Diluted earnings per share for the six months ended June 28, 2015, benefited $0.04 from lower shares outstanding, primarily due to purchases under the stock repurchase programs.

OPERATING SEGMENT RESULTS
 
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. We use segment EBIT as the primary basis for the chief operating decision-maker to evaluate the performance of each operating segment.
 
Following is a discussion of results for each of our operating segments.

Engine Segment Results
 
Financial data for the Engine segment was as follows:
 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
June 28,
 
June 29,
 
(Unfavorable)
 
June 28,
 
June 29,
 
(Unfavorable)
In millions
 
2015
 
2014
 
Amount
 
Percent
 
2015
 
2014
 
Amount
 
Percent
External sales (1)
 
$
2,058

 
$
2,178

 
$
(120
)
 
(6
)%
 
$
3,947

 
$
4,268

 
$
(321
)
 
(8
)%
Intersegment sales (1)
 
739

 
566

 
173

 
31
 %
 
1,446

 
1,039

 
407

 
39
 %
Total sales
 
2,797

 
2,744

 
53

 
2
 %
 
5,393

 
5,307

 
86

 
2
 %
Depreciation and amortization
 
60

 
52

 
(8
)
 
(15
)%
 
118

 
103

 
(15
)
 
(15
)%
Research, development and engineering expenses
 
91

 
105

 
14

 
13
 %
 
205

 
221

 
16

 
7
 %
Equity, royalty and interest income from investees
 
57

 
45

 
12

 
27
 %
 
87

 
77

 
10

 
13
 %
Interest income
 
3

 
4

 
(1
)
 
(25
)%
 
5

 
6

 
(1
)
 
(17
)%
Segment EBIT
 
341

 
311

 
30

 
10
 %
 
594

 
580

 
14

 
2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
Percentage Points
 
 

 
 

 
Percentage Points
Segment EBIT as a percentage of total sales
 
12.2
%
 
11.3
%
 
 

 
0.9

 
11.0
%
 
10.9
%
 
 

 
0.1

____________________________________
(1) Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.
In the first quarter of 2015, our Engine segment reorganized its reporting structure to include the following markets:
Heavy-duty truck - We manufacture diesel engines that range from 310 to 600 horsepower serving global heavy-duty truck customers worldwide and fire trucks, primarily in North America.
Medium-duty truck and bus - We manufacture medium-duty diesel engines ranging from 200 to 450 horsepower serving medium-duty truck and bus customers worldwide, with key markets including North America, Latin America, Europe and Mexico. We also provide diesel or natural gas engines for school buses, transit buses and shuttle buses worldwide, with key markets including North America, Europe, Latin America and Asia. We also provide diesel engines for Class A motor homes (RVs), primarily in North America.
Light-duty automotive (Pickup and Light Commercial Vehicle (LCV)) - We manufacture 320 to 385 horsepower diesel engines for Chrysler's heavy-duty chassis cab and pickup trucks. We also manufacture 105 to 300 horsepower diesel engines for LCV's worldwide, with key markets in Europe, Latin America and Asia.

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Table of Contents

Industrial - We provide mid-range, heavy-duty and high-horsepower engines that range from 49 to 5,100 horsepower for a wide variety of equipment in the construction, agricultural, mining, rail, government, oil and gas, and commercial and recreational marine applications throughout the world. Across these markets we have major customers in North America, Europe, Middle East, Africa, China, Korea, Japan, Latin America, India, Russia, Southeast Asia, South Pacific and Mexico.
Stationary power - We provide mid-range, heavy-duty and high-horsepower engines, that range from 60 to 4,300 horsepower, to our power generation business for standby, mobile and distributed power generation solutions throughout the world.
Engine segment net sales by market (including 2014 reorganized balances) were as follows:
 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
June 28,
 
June 29,
 
(Unfavorable)
 
June 28,
 
June 29,
 
(Unfavorable)
In millions
 
2015
 
2014
 
Amount
 
Percent
 
2015
 
2014
 
Amount
 
Percent
Heavy-duty truck
 
$
875

 
$
769

 
$
106

 
14
 %
 
$
1,632

 
$
1,487

 
$
145

 
10
 %
Medium-duty truck and bus
 
674

 
605

 
69

 
11
 %
 
1,282

 
1,180

 
102

 
9
 %
Light-duty automotive
 
354

 
392

 
(38
)
 
(10
)%
 
735

 
783

 
(48
)
 
(6
)%
Total on-highway
 
1,903

 
1,766

 
137

 
8
 %
 
3,649

 
3,450

 
199

 
6
 %
Industrial
 
624

 
739

 
(115
)
 
(16
)%
 
1,240

 
1,408

 
(168
)
 
(12
)%
Stationary power
 
270

 
239

 
31

 
13
 %
 
504

 
449

 
55

 
12
 %
Total sales
 
$
2,797

 
$
2,744

 
$
53

 
2
 %
 
$
5,393

 
$
5,307

 
$
86

 
2
 %
Unit shipments by engine classification (including unit shipments to Power Generation) were as follows:
 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
June 28,
 
June 29,
 
(Unfavorable)
 
June 28,
 
June 29,
 
(Unfavorable)
 
 
2015
 
2014
 
Amount
 
Percent
 
2015
 
2014
 
Amount
 
Percent
Mid-range
 
120,000

 
118,700

 
1,300

 
1
 %
 
232,400

 
237,600

 
(5,200
)
 
(2
)%
Heavy-duty
 
32,800

 
30,300

 
2,500

 
8
 %
 
61,500

 
59,100

 
2,400

 
4
 %
High-horsepower
 
3,700

 
3,900

 
(200
)
 
(5
)%
 
7,200

 
7,300

 
(100
)
 
(1
)%
Total unit shipments
 
156,500

 
152,900

 
3,600

 
2
 %
 
301,100

 
304,000

 
(2,900
)
 
(1
)%

Sales
Engine segment sales for the three months ended June 28, 2015, increased versus the comparable period in 2014. The following were the primary drivers by market:
Heavy-duty truck engine sales increased due to improved demand in the North American heavy-duty truck market with increased engine shipments of 17 percent, partially offset by weaker demand in China.
Medium-duty truck and bus sales increased due to higher demand in the North American medium-duty truck market with increased engine shipments of 18 percent, primarily due to market share gains and higher global bus demand with improved engine shipments of 24 percent. These increases were partially offset by weaker medium-duty truck demand in Brazil.
The increases above were partially offset by the following:
Industrial engine sales decreased primarily due to lower international demand in construction markets with decreased engine shipments of 25 percent, primarily in Europe, as well as reduced demand in international commercial marine markets with decreased engine shipments of 11 percent and reduced demand in international mining markets with decreased engine shipments of 9 percent.
Foreign currency fluctuations unfavorably impacted sales results (primarily in Brazil and Europe).
Total on-highway-related sales for the three months ended June 28, 2015, were 68 percent of total engine segment sales, compared to 64 percent for the comparable period in 2014.
Engine segment sales for the six months ended June 28, 2015, increased versus the comparable period in 2014. The following were the primary drivers by market:

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Table of Contents

Heavy-duty truck engine sales increased due to improved demand in the North American heavy-duty truck market with increased engine shipments of 13 percent, partially offset by weaker demand in China and Korea.
Medium-duty truck and bus sales increased due to higher demand in the North American medium-duty truck market with increased engine shipments of 16 percent, primarily due to market share gains and higher global bus demand with improved engine shipments of 16 percent. These increases were partially offset by weaker medium-duty truck demand in Brazil.
The increases above were partially offset by the following:
Industrial engine sales decreased due to lower international demand in construction markets with decreased engine shipments of 28 percent, primarily in Europe, China and Korea, as well as reduced demand in international commercial marine markets with decreased engine shipments of 10 percent.
Foreign currency fluctuations unfavorably impacted sales results (primarily in Brazil and Europe).
Total on-highway-related sales for the six months ended June 28, 2015, were 68 percent of total engine segment sales, compared to 65 percent for the comparable period in 2014.
Segment EBIT
Engine segment EBIT for the three months ended June 28, 2015, increased versus the comparable period in 2014 primarily due to favorable foreign currency fluctuations (primarily in the U.K. and Europe), lower research, development and engineering expenses, higher equity, royalty and interest income from investees and higher gross margin, partially offset by higher selling, general and administrative expenses.
Engine segment EBIT for the six months ended June 28, 2015, increased versus the comparable period in 2014 primarily due to favorable foreign currency fluctuations (primarily in Europe and the U.K.), lower research, development and engineering expenses and higher equity, royalty and interest income from investees, partially offset by higher selling, general and administrative expenses. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
 
 
Three months ended
 
Six months ended
 
 
June 28, 2015 vs. June 29, 2014
 
June 28, 2015 vs. June 29, 2014
 
 
Favorable/(Unfavorable) Change
 
Favorable/(Unfavorable) Change
In millions
 
Amount
 
Percent
 
Percentage point
change as a percent
of total sales
 
Amount
 
Percent
 
Percentage point
change as a percent
of total sales
Gross margin
 
$
7

 
1
 %
 
(0.1
)
 
$

 
 %
 
(0.3
)
Selling, general and administrative expenses
 
(2
)
 
(1
)%
 
0.1

 
(5
)
 
(1
)%
 

Research, development and engineering expenses
 
14

 
13
 %
 
0.5

 
16

 
7
 %
 
0.4

Equity, royalty and interest income from investees
 
12

 
27
 %
 
0.4

 
10

 
13
 %
 
0.1


The increase in gross margin for the three months ended June 28, 2015, versus the comparable period in 2014, was primarily due to lower commodity costs, higher volumes and favorable foreign currency fluctuations, partially offset by increased manufacturing costs in preparation for our light-duty diesel production starting in the second half of 2015 and unfavorable mix. The increase in selling, general and administrative expenses was primarily due to higher compensation expenses, partially offset by lower consulting expenses. The decrease in research, development and engineering expenses was primarily due to higher expense recovery, lower consulting expenses and lower variable compensation accruals. The increase in equity, royalty and interest income from investees was primarily due to increased earnings at Beijing Foton Cummins Engine Co., Ltd., partially offset by decreased earnings at Dongfeng Cummins Engine Co., Ltd.
Gross margin remained flat for the six months ended June 28, 2015, versus the comparable period in 2014. Higher warranty costs and increased manufacturing costs in preparation for our light-duty diesel production starting in the second half of 2015 were offset by higher volumes, lower material and commodity costs and favorable foreign currency fluctuations. The increase in selling, general and administrative expenses was primarily due to higher compensation expenses, partially offset by lower consulting expenses. The decrease in research, development and engineering expenses was primarily due to higher expense recovery, lower consulting expenses and lower variable compensation expenses. The increase in equity, royalty and interest income from investees was primarily due to increased earnings at Beijing Foton Cummins Engine Co., Ltd., partially offset by a charge of approximately $12 million recorded by an equity investee in the first quarter of 2015. The charge wrote down the investee's underlying assets to estimated fair value as the result of an impairment review triggered by the start-up investee's volumes not growing as anticipated from the inception of the venture.


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Table of Contents

Distribution Segment Results
 
Financial data for the Distribution segment was as follows:
 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
June 28,
 
June 29,
 
(Unfavorable)
 
June 28,
 
June 29,
 
(Unfavorable)
In millions
 
2015
 
2014
 
Amount
 
Percent
 
2015
 
2014
 
Amount
 
Percent
External sales
 
$
1,487

 
$
1,229

 
$
258

 
21
 %
 
$
2,956

 
$
2,171

 
$
785

 
36
 %
Intersegment sales
 
8

 
9

 
(1
)
 
(11
)%
 
15

 
17

 
(2
)
 
(12
)%
Total sales
 
1,495

 
1,238

 
257

 
21
 %
 
2,971

 
2,188

 
783

 
36
 %
Depreciation and amortization
 
25

 
20

 
(5
)
 
(25
)%
 
52

 
36

 
(16
)
 
(44
)%
Research, development and engineering expenses
 
3

 
3

 

 
 %
 
6

 
5

 
(1
)
 
(20
)%
Equity, royalty and interest income from investees
 
21

 
42

 
(21
)
 
(50
)%
 
41

 
83

 
(42
)
 
(51
)%
Interest income
 
1

 

 
1

 
NM

 
2

 
1

 
1

 
100
 %
Segment EBIT (1)
 
113

 
126

 
(13
)
 
(10
)%
 
201

 
202

 
(1
)
 
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage Points
 
 
 
 
 
Percentage Points
Segment EBIT as a percentage of total sales (2)
 
7.6
%
 
10.2
%
 
 

 
(2.6
)
 
6.8
%
 
9.2
%
 
 

 
(2.4
)
"NM" - not meaningful information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
____________________________________
(1) Segment EBIT for the three and six months ended June 29, 2014, included $14 million and $20 million gains on the fair value adjustments resulting from the acquisitions of the remaining interests in North American distributors, respectively.
(2) Prior North American distributor acquisitions increased Distribution segment EBIT, however it is dilutive to segment EBIT as a percentage of sales.

Sales for our Distribution segment by region were as follows:
 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
June 28,
 
June 29,
 
(Unfavorable)
 
June 28,
 
June 29,
 
(Unfavorable)
In millions
 
2015
 
2014
 
Amount
 
Percent
 
2015
 
2014
 
Amount
 
Percent
North & Central America
 
$
930

 
$
641

 
$
289

 
45
 %
 
$
1,909

 
$
1,085

 
$
824

 
76
 %
Europe, CIS and China
 
197

 
220

 
(23
)
 
(10
)%
 
353

 
414

 
(61
)
 
(15
)%
Asia Pacific
 
187

 
201

 
(14
)
 
(7
)%
 
364

 
363

 
1

 
 %
Africa
 
55

 
46

 
9

 
20
 %
 
105

 
87

 
18

 
21
 %
Middle East
 
53

 
50

 
3

 
6
 %
 
97

 
91

 
6

 
7
 %
India
 
42

 
40

 
2

 
5
 %
 
79

 
74

 
5

 
7
 %
South America
 
31

 
40

 
(9
)
 
(23
)%
 
64

 
74

 
(10
)
 
(14
)%
Total sales
 
$
1,495

 
$
1,238

 
$
257

 
21
 %
 
$
2,971

 
$
2,188

 
$
783

 
36
 %
Sales for our Distribution segment by product were as follows:
 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
June 28,
 
June 29,
 
(Unfavorable)
 
June 28,
 
June 29,
 
(Unfavorable)
In millions
 
2015
 
2014
 
Amount
 
Percent
 
2015
 
2014
 
Amount
 
Percent
Parts and filtration
 
$
598

 
$
461

 
$
137

 
30
 %
 
$
1,171

 
$
843

 
$
328

 
39
%
Engines
 
318

 
249

 
69

 
28
 %
 
639

 
423

 
216

 
51
%
Power generation
 
272

 
278

 
(6
)
 
(2
)%
 
570

 
471

 
99

 
21
%
Service
 
307

 
250

 
57

 
23
 %
 
591

 
451

 
140

 
31
%
Total sales
 
$
1,495

 
$
1,238

 
$
257

 
21
 %
 
$
2,971

 
$
2,188

 
$
783

 
36
%

Sales
Distribution segment sales for the three months ended June 28, 2015, increased versus the comparable period in 2014, primarily due to $315 million of segment sales related to the consolidation of partially-owned North American distributors since December 31, 2013, $11 million of segment sales related to the acquisition of international distributors and $36 million of organic sales growth primarily in Africa and Eastern Europe, partially offset by unfavorable foreign currency fluctuations (primarily in Australia, Canada and Europe) and decreased sales in Asia Pacific, China, Western Europe and Russia.


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Table of Contents

Distribution segment sales for the six months ended June 28, 2015, increased versus the comparable period in 2014, primarily due to $853 million of segment sales related to the consolidation of partially-owned North American distributors since December 31, 2013, $21 million of segment sales related to the acquisition of international distributors and $86 million of organic sales growth primarily in Africa and Asia Pacific, partially offset by unfavorable foreign currency fluctuations (primarily in Australia, Canada and Europe) and decreased sales in China, Europe, Russia and South America.

Segment EBIT
Distribution segment EBIT for the three months ended June 28, 2015, decreased versus the comparable period in 2014, primarily due to higher selling, general and administrative expenses mostly related to the consolidation of partially-owned North American distributors, unfavorable foreign currency fluctuations (primarily in Australia and Canada) and lower equity, royalty and interest income from investees, partially offset by the acquisitions of North American distributors. We expect a reduction in equity, royalty and interest income from investees to continue as a result of these acquisitions. EBIT as a percentage of sales for the three months ended June 28, 2015, was 7.6 percent compared to 10.2 percent for the comparable period in 2014. The decrease was due to the dilutive effect of the 2014 acquisitions and unfavorable foreign currency fluctuations.

Distribution segment EBIT for the six months ended June 28, 2015, decreased versus the comparable period in 2014, primarily due to unfavorable foreign currency fluctuations (primarily in Australia and Canada), higher selling, general and administrative expenses mostly related to the consolidation of partially-owned North American distributors, lower equity, royalty and interest income from investees and increased amortization of intangible assets related to the acquisitions of North American distributors. The decreases were partially offset by the acquisitions of North American distributors. We expect a reduction in equity, royalty and interest income from investees to continue as a result of these acquisitions. EBIT as a percentage of sales for the six months ended June 28, 2015, was 6.8 percent compared to 9.2 percent for the comparable period in 2014. The decrease was due to the dilutive effect of the 2014 acquisitions and unfavorable foreign currency flucutations. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
 
 
Three months ended
 
Six months ended
 
 
June 28, 2015 vs. June 29, 2014
 
June 28, 2015 vs. June 29, 2014
 
 
Favorable/(Unfavorable) Change
 
Favorable/(Unfavorable) Change
In millions
 
Amount
 
Percent
 
Percentage point
change as a percent
of total sales
 
Amount
 
Percent
 
Percentage point
change as a percent
of total sales
Gross margin
 
$
47

 
22
 %
 
0.2

 
$
114

 
30
 %
 
(0.7
)
Selling, general and administrative expenses
 
(24
)
 
(17
)%
 
0.4

 
(52
)
 
(19
)%
 
1.6

Equity, royalty and interest income from investees
 
(21
)
 
(50
)%
 
(2.0
)
 
(42
)
 
(51
)%
 
(2.4
)

Components Segment Results
Financial data for the Components segment was as follows:
 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
June 28,
 
June 29,
 
(Unfavorable)
 
June 28,
 
June 29,
 
(Unfavorable)
In millions
 
2015
 
2014
 
Amount
 
Percent
 
2015
 
2014
 
Amount
 
Percent
External sales (1)
 
$
1,017

 
$
953

 
$
64

 
7
 %
 
$
1,948

 
$
1,875

 
$
73

 
4
 %
Intersegment sales (1)
 
380

 
327

 
53

 
16
 %
 
748

 
635

 
113

 
18
 %
Total sales
 
1,397

 
1,280

 
117

 
9
 %
 
2,696

 
2,510

 
186

 
7
 %
Depreciation and amortization
 
28

 
26

 
(2
)
 
(8
)%
 
54

 
52

 
(2
)
 
(4
)%
Research, development and engineering expenses
 
57

 
53

 
(4
)
 
(8
)%
 
118

 
106

 
(12
)
 
(11
)%
Equity, royalty and interest income from investees
 
8

 
9

 
(1
)
 
(11
)%
 
17

 
18

 
(1
)
 
(6
)%
Interest income
 
1

 
1

 

 
 %
 
2

 
2

 

 
 %
Segment EBIT
 
223

 
185

 
38

 
21
 %
 
418

 
352

 
66

 
19
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage Points
 
 
 
 
 
Percentage Points
Segment EBIT as a percentage of total sales
 
16.0
%
 
14.5
%
 
 

 
1.5

 
15.5
%
 
14.0
%
 
 

 
1.5

____________________________________
(1) Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.
Sales for our Components segment by business were as follows:

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Table of Contents

 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
June 28,
 
June 29,
 
(Unfavorable)
 
June 28,
 
June 29,
 
(Unfavorable)
In millions
 
2015
 
2014
 
Amount
 
Percent
 
2015
 
2014
 
Amount
 
Percent
Emission solutions
 
$
679

 
$
582

 
$
97

 
17
 %
 
$
1,292

 
$
1,125

 
$
167

 
15
 %
Turbo technologies
 
307

 
307

 

 
 %
 
608

 
620

 
(12
)
 
(2
)%
Filtration
 
266

 
275

 
(9
)
 
(3
)%
 
521

 
540

 
(19
)
 
(4
)%
Fuel systems
 
145

 
116

 
29

 
25
 %
 
275

 
225

 
50

 
22
 %
Total sales
 
$
1,397

 
$
1,280

 
$
117

 
9
 %
 
$
2,696

 
$
2,510

 
$
186

 
7
 %
Sales
Components segment sales for the three months ended June 28, 2015, increased versus the comparable period in 2014. The following were the primary drivers by business:
Emission solutions sales increased primarily due to improved demand in the North American on-highway markets, partially offset by unfavorable foreign currency fluctuations (primarily in Europe and Brazil).
Fuel systems sales increased primarily due to the new Beijing Foton ISG engine that entered production in the second quarter of 2014 in China and improved demand in North American on-highway markets.
Components segment sales for the six months ended June 28, 2015, increased versus the comparable period in 2014. The following were the primary drivers by business:
Emission solutions sales increased primarily due to improved demand in the North American on-highway markets, partially offset by unfavorable foreign currency fluctuations (primarily in Europe and Brazil) and lower demand in Brazil.
Fuel systems sales increased due to the new Beijing Foton ISG engine that entered production in the second quarter of 2014 in China, improved demand in North American on-highway markets and increased aftermarket demand.
Segment EBIT 
Components segment EBIT for the three and six months ended June 28, 2015, increased versus the comparable periods in 2014, primarily due to higher gross margin, partially offset by unfavorable foreign currency fluctuations (primarily in Europe and Brazil) and higher research, development and engineering expenses. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
 
 
Three months ended
 
Six months ended
 
 
June 28, 2015 vs. June 29, 2014
 
June 28, 2015 vs. June 29, 2014
 
 
Favorable/(Unfavorable) Change
 
Favorable/(Unfavorable) Change
In millions
 
Amount
 
Percent
 
Percentage point
change as a percent
of total sales
 
Amount
 
Percent
 
Percentage point
change as a percent
of total sales
Gross margin
 
$
48

 
16
 %
 
1.5

 
$
84

 
14
 %
 
1.5

Selling, general and administrative expenses
 
(2
)
 
(3
)%
 
0.4

 
(4
)
 
(3
)%
 
0.3

Research, development and engineering expenses
 
(4
)
 
(8
)%
 

 
(12
)
 
(11
)%
 
(0.2
)
Equity, royalty and interest income from investees
 
(1
)
 
(11
)%
 
(0.1
)
 
(1
)
 
(6
)%
 
(0.1
)

The increase in gross margin for the three and six months ended June 28, 2015, versus the comparable periods in 2014, was primarily due to higher volumes, mainly in the emission solutions business, and lower material costs, partially offset by unfavorable foreign currency fluctuations (primarily in Europe and Brazil). The increase in selling, general and administrative expenses was primarily due to higher compensation expenses, partially offset by lower consulting expenses. The increase in research, development and engineering expenses was primarily due to higher consulting and compensation expenses and lower expense recovery.


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Power Generation Segment Results
Financial data for the Power Generation segment was as follows:
 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
June 28,
 
June 29,
 
(Unfavorable)
 
June 28,
 
June 29,
 
(Unfavorable)
In millions
 
2015
 
2014
 
Amount
 
Percent
 
2015
 
2014
 
Amount
 
Percent
External sales (1)
 
$
453

 
$
475

 
$
(22
)
 
(5
)%
 
$
873

 
$
927

 
$
(54
)
 
(6
)%
Intersegment sales (1)
 
294

 
268

 
26

 
10
 %
 
554

 
455

 
99

 
22
 %
Total sales
 
747

 
743

 
4

 
1
 %
 
1,427

 
1,382

 
45

 
3
 %
Depreciation and amortization
 
13

 
13

 

 
 %
 
29

 
25

 
(4
)
 
(16
)%
Research, development and engineering expenses
 
15

 
18

 
3

 
17
 %
 
32

 
37

 
5

 
14
 %
Equity, royalty and interest income from investees
 
8

 
9

 
(1
)
 
(11
)%
 
17

 
17

 

 
 %
Interest income
 
1

 
1

 

 
 %
 
2

 
2

 

 
 %
Segment EBIT
 
57

 
61

 
(4
)
 
(7
)%
 
106

 
86

 
20

 
23
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage Points
 
 
 
 
 
Percentage Points
Segment EBIT as a percentage of total sales
 
7.6
%
 
8.2
%
 
 

 
(0.6
)
 
7.4
%
 
6.2
%
 
 

 
1.2

____________________________________
(1) Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.
In the first quarter of 2015, our Power Generation segment reorganized its reporting structure to include the following businesses:
Power systems - We manufacture generators for commercial and consumer applications ranging from 2 kilowatts to 3.5 megawatts, as well as paralleling systems and transfer switches for applications such as data centers, health care facilities and waste water treatment plants.
Alternators - We design, manufacture, sell and service A/C generator/alternator products internally as well as to other generator set assemblers.  Our products are sold under the Stamford, AVK and Markon brands and range in output from 3 kilovolt-amperes (kVA) to 12,000 kVA.
Power solutions - We provide natural gas fuel-based turnkey solutions for distributed generation and energy management applications using natural or biogas as a fuel. The business also serves a global rental account for diesel and gas generator sets.
Sales for our Power Generation segment by business (including 2014 reorganized balances) were as follows:
 
 
Three months ended
 
Favorable/
 
Six months ended
 
Favorable/
 
 
June 28,
 
June 29,
 
(Unfavorable)
 
June 28,
 
June 29,
 
(Unfavorable)
In millions
 
2015
 
2014
 
Amount
 
Percent
 
2015
 
2014
 
Amount
 
Percent
Power systems
 
611

 
586

 
25

 
4
 %
 
1,154

 
1,096

 
58

 
5
 %
Alternators
 
92

 
126

 
(34
)
 
(27
)%
 
190

 
231

 
(41
)
 
(18
)%
Power solutions
 
44

 
31

 
13

 
42
 %
 
83

 
55

 
28

 
51
 %
Total sales
 
$
747

 
$
743

 
$
4

 
1
 %
 
$
1,427

 
$
1,382

 
$
45

 
3
 %
Sales
Power Generation segment sales for the three months ended June 28, 2015, increased versus the comparable period in 2014. The following were the primary drivers by business:
Power systems sales increased primarily due to higher demand in the Middle East, Africa and Asia, partially offset by lower demand in North America.
Power solutions sales increased primarily due to higher demand in the U.K., partially offset by lower demand in North America, Russia, China and Africa.
The increases above were partially offset by the following:
Alternator sales decreased primarily due to lower demand in Western Europe and China.
Foreign currency fluctuations unfavorably impacted sales results (primarily in Europe and Brazil).

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Power Generation segment sales for the six months ended June 28, 2015, increased versus the comparable period in 2014. The following were the primary drivers by business:
Power systems sales increased primarily due to higher demand in China, the Middle East and Asia, partially offset by lower demand in North America and Russia.
Power solutions sales increased primarily due to higher demand in the U.K., partially offset by lower demand in North America, Russia and Latin America.
The increases above were partially offset by the following:
Alternator sales decreased primarily due to lower demand in Western Europe and China.
Foreign currency fluctuations unfavorably impacted sales results (primarily in Europe and Brazil).
Segment EBIT
Power Generation segment EBIT for the three months ended June 28, 2015, decreased versus the comparable period in 2014, primarily due to lower gross margin and unfavorable foreign currency fluctuations (primarily in Europe), partially offset by lower selling, general and administrative expenses and lower research, development and engineering expenses.
Power Generation segment EBIT for the six months ended June 28, 2015, increased versus the comparable period in 2014, due to higher gross margin, lower selling, general and administrative expenses and lower research, development and engineering expenses. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
 
 
Three months ended
 
Six months ended
 
 
June 28, 2015 vs. June 29, 2014
 
June 28, 2015 vs. June 29, 2014
 
 
Favorable/(Unfavorable) Change
 
Favorable/(Unfavorable) Change
In millions
 
Amount
 
Percent
 
Percentage point
change as a percent
of total sales
 
Amount
 
Percent
 
Percentage point
change as a percent
of total sales
Gross margin
 
$
(8
)
 
(6
)%
 
(1.1
)
 
$
9

 
4
%
 
Selling, general and administrative expenses
 
4

 
5
 %
 
0.6

 
5

 
3
%
 
0.7
Research, development and engineering expenses
 
3

 
17
 %
 
0.4

 
5

 
14
%
 
0.5
Equity, royalty and interest income from investees
 
(1
)
 
(11
)%
 
(0.1
)
 

 
%
 

The decrease in gross margin for the three months ended June 28, 2015, versus the comparable period in 2014, was primarily due to unfavorable foreign currency fluctuations and lower pricing, partially offset by higher volumes. The decrease in selling, general and administrative expenses was primarily due to lower consulting expenses and lower compensation expenses as the result of operating actions taken in December of 2014. The decrease in research, development and engineering expenses was primarily due to lower compensation expenses as the result of operating actions taken in December of 2014.

The increase in gross margin for the six months ended June 28, 2015, versus the comparable period in 2014, was primarily due to higher volumes and as the result of operating actions taken in December of 2014. The decrease in selling, general and administrative expenses was primarily due to lower consulting expenses and lower compensation expenses as the result of operating actions taken in December of 2014, partially offset by lower expense recovery. The decrease in research, development and engineering expenses was primarily due to lower compensation expenses as the result of operating actions taken in December of 2014.


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Table of Contents

Reconciliation of Segment EBIT to Income Before Income Taxes
 
The table below reconciles the segment information to the corresponding amounts in the Condensed Consolidated Statements of Income:
 
 
Three months ended
 
Six months ended
In millions
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
Total segment EBIT
 
$
734

 
$
683

 
$
1,319

 
$
1,220

Non-segment EBIT (1)
 
(13
)
 
(26
)
 
(36
)
 
(35
)
Total EBIT
 
721

 
657

 
1,283

 
1,185

Less: Interest expense
 
17

 
15

 
31

 
32

Income before income taxes
 
$
704

 
$
642

 
$
1,252

 
$
1,153

____________________________________
(1) Includes intersegment sales and profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and six months ended June 28, 2015 and June 29, 2014.


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LIQUIDITY AND CAPITAL RESOURCES
Key Working Capital and Balance Sheet Data
We fund our working capital with cash from operations and short-term borrowings when necessary. Various assets and liabilities, including short-term debt, can fluctuate significantly from month to month depending on short-term liquidity needs. As a result, working capital is a prime focus of management attention. Working capital and balance sheet measures are provided in the following table:
In millions
 
June 28,
2015
 
December 31,
2014
Working capital (1)
 
$
4,950

 
$
5,034

Current ratio
 
2.22

 
2.25

Accounts and notes receivable, net
 
$
3,422

 
$
2,946

Days’ sales in receivables
 
60

 
53

Inventories
 
$
2,986

 
$
2,866

Inventory turnover
 
4.8

 
5.3

Accounts payable (principally trade)
 
$
1,974

 
$
1,881

Days' payable outstanding
 
50

 
44

Total debt
 
$
1,677

 
$
1,698

Total debt as a percent of total capital (2)
 
17.0
%
 
17.3
%
____________________________________
(1) Working capital includes cash and cash equivalents.
(2) Total capital is defined as total debt plus equity.
Cash Flows
Cash and cash equivalents decreased $541 million during the six months ended June 28, 2015, compared to a $480 million decrease in cash and cash equivalents during the comparable period in 2014. Cash and cash equivalents were impacted as follows:
 
 
Six months ended
 
 
In millions
 
June 28,
2015
 
June 29,
2014
 
Change
Net cash provided by operating activities
 
$
569

 
$
701

 
$
(132
)
Net cash used in investing activities
 
(300
)
 
(463
)
 
163

Net cash used in financing activities
 
(829
)
 
(756
)
 
(73
)
Effect of exchange rate changes on cash and cash equivalents
 
19

 
38

 
(19
)
Net decrease in cash and cash equivalents
 
$
(541
)
 
$
(480
)
 
$
(61
)
 
Net cash provided by operating activities decreased for the six months ended June 28, 2015, versus the comparable period in 2014, primarily due to unfavorable working capital fluctuations, partially offset by higher consolidated net income. During the first six months of 2015, the higher working capital requirements resulted in a cash outflow of $459 million compared to a cash outflow of $131 million in the prior period in 2014
Net cash used in investing activities decreased for the six months ended June 28, 2015, versus the comparable period in 2014, primarily due to lower cash investment for the acquisitions of businesses of $178 million.
Net cash used in financing activities increased for the six months ended June 28, 2015, versus the comparable period in 2014, primarily due to higher repurchases of common stock of $84 million and higher dividend payments of $51 million, partially offset by lower payments under short-term credit agreements of $38 million and lower distributions to noncontrolling interests of $18 million.
Sources of Liquidity 
We generate significant ongoing cash flow, which has been used, in part, to fund working capital, common stock repurchases, capital expenditures, dividends on our common stock, acquisitions, projected pension obligations and debt service. Cash provided by operations is our principal source of liquidity with $569 million provided by operations for the six months ended June 28, 2015


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Table of Contents

As of June 28, 2015, our other sources of liquidity included:
 
cash and cash equivalents of $1.8 billion, of which approximately 48 percent is located in the U.S. and 52 percent is located outside the U.S., primarily in the U.K., China and Singapore,
a revolving credit facility with $1.7 billion available, net of letters of credit,
international and other domestic credit facilities with $277 million available and
marketable securities of $89 million, of which 54 percent is located in India, 31 percent is located in the U.S. and 15 percent is located in Brazil, the majority of which could be liquidated into cash within a few days.
Cash, Cash Equivalents and Marketable Securities
A significant portion of our cash flows is generated outside the U.S. As of June 28, 2015, the total of cash, cash equivalents and marketable securities held by foreign subsidiaries was $1.0 billion, the majority of which was located in the U.K., China, Singapore and India. The geographic location of our cash and marketable securities aligns well with our business growth strategy. We manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. As a result, we do not anticipate any local liquidity restrictions to preclude us from funding our targeted expansion or operating needs with local resources.

If we distribute our foreign cash balances to the U.S. or to other foreign subsidiaries, we could be required to accrue and pay U.S. taxes. For example, we would be required to accrue and pay additional U.S. taxes if we repatriated cash from certain foreign subsidiaries whose earnings we have asserted are permanently reinvested outside of the U.S. Foreign earnings for which we assert permanent reinvestment outside the U.S. consist primarily of earnings of our China and U.K. domiciled subsidiaries. At present, we do not foresee a need to repatriate any earnings from these subsidiaries for which we have asserted permanent reinvestment. However, to help fund cash needs of the U.S. or other international subsidiaries as they arise, we repatriate available cash from certain foreign subsidiaries whose earnings are not permanently reinvested when it is cost effective to do so. Earnings generated after 2011 from our China operations are considered permanently reinvested, while earnings generated prior to 2012, for which U.S. deferred tax liabilities have been recorded, are expected to be repatriated in future years.
Debt Facilities and Other Sources of Liquidity
We have a $1.7 billion revolving credit facility, the proceeds of which can be used for general corporate purposes. This facility expires on November 9, 2018.
We have a current shelf registration filed with the Securities and Exchange Commission under which we may offer, from time to time, debt securities, common stock, preferred and preference stock, depositary shares, warrants, stock purchase contracts and stock purchase units.
The maturity schedule of our existing long-term debt does not require significant cash outflows in the intermediate term. Required annual principal payments range from $11 million to $39 million over the next five years.
Uses of Cash
Capital Expenditures
Capital expenditures for the six months ended June 28, 2015, were $247 million compared to $245 million in the comparable period in 2014Despite the challenging international economies, we continue to invest in new product lines and targeted capacity expansions. We plan to spend between $700 million and $800 million in 2015 as we continue with product launches and facility improvements. Approximately 50 percent of our capital expenditures are expected to be invested outside of the U.S. in 2015.
 

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Share Repurchases

In July 2014, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon the completion of the 2012 Plan. In 2015, we made the following purchases under the respective purchase programs:
In millions (except per share amounts)
For each quarter ended
 
Shares
Purchased
 
Average Cost
Per Share
 
Total Cost of
Repurchases
 
Remaining
Authorized
Capacity
(1)
December 2012, $1 billion repurchase program
 
 

 
 

 
 

 
 

March 29
 
1.0

 
$
138.15

 
$
137

 
$
37

June 28
 
0.3

 
136.68

 
37

 

Subtotal
 
1.3

 
137.83

 
174

 

 
 
 
 
 
 
 
 
 
July 2014, $1 billion repurchase program
 
 

 
 

 
 

 
 

June 28
 
2.4

 
140.04

 
340

 
660

Total
 
3.7

 
139.29

 
$
514

 


____________________________________
(1) The remaining authorized capacities under the 2012 and 2014 Plans were calculated based on the cost to purchase the shares, but excludes commission expenses in accordance with the authorized Plans.
We may continue to repurchase outstanding shares from time to time during 2015 to offset the dilutive impact of employee stock based compensation plans and to enhance shareholder value.

Dividends
In July 2015, the Board of Directors authorized a dividend increase of 25 percent from $0.78 per share to $0.975 per share on a quarterly basis. We paid dividends of $280 million during the six months ended June 28, 2015.
Acquisitions
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 $150 million to $190 million on North American distributor acquisitions and the related debt retirements in the third quarter of 2015.
Pensions
The funded status of our pension plans is dependent upon a variety of variables and assumptions including return on invested assets, market interest rates and levels of voluntary contributions to the plans. In the first six months of 2015, the investment return on our U.S. pension trust was flat while our U.K. pension trust return was 1.0 percent. Approximately 78 percent of our pension plan assets are held in highly liquid investments such as fixed income and equity securities. The remaining 22 percent of our plan assets are held in less liquid, but market valued investments, including real estate, private equity and insurance contracts.
We sponsor funded and unfunded domestic and foreign defined benefit pension and other postretirement plans. Contributions to these plans were as follows:
 
 
 
Six months ended
In millions
 
June 28,
2015
 
June 29,
2014
Defined benefit pension and other postretirement plans
 
 

 
 

Voluntary contribution
 
$
72

 
$
75

Mandatory contribution
 
82

 
81

Defined benefit pension contributions
 
154

 
156

Other postretirement plans
 
25

 
23

Total defined benefit plans
 
$
179

 
$
179

 
 
 
 
 
Defined contribution pension plans
 
$
42

 
$
41


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Table of Contents

We anticipate making additional defined benefit pension contributions and other postretirement benefit payments during the remainder of 2015 of $21 million and $15 million, respectively. The $175 million of pension contributions for the full year include voluntary contributions of approximately $82 million. These contributions and payments may be made from trusts or company funds either to increase pension assets or to make direct benefit payments to plan participants. Claims and premiums for other postretirement benefits are expected to approximate $40 million in 2015. We expect our 2015 net periodic pension cost to approximate $63 million.

Credit Ratings
Our ratings and outlook from each of the credit rating agencies as of the date of filing are shown in the table below.
Credit Rating Agency (1)
 
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
____________________________________
(1) Credit ratings are not recommendations to buy, are subject to change and each rating should be evaluated independently of any other rating. In addition, we undertake no obligation to update disclosures concerning our credit ratings, whether as a result of new information, future events or otherwise. 
Management's Assessment of Liquidity
Our financial condition and liquidity remain strong. Our solid balance sheet and credit ratings enable ready access to credit and the capital markets. We assess our liquidity in terms of our ability to generate adequate cash to fund our operating, investing and financing activities. We believe our liquidity provides us with the financial flexibility needed to fund working capital, capital expenditures, common stock repurchases, dividend payments, acquisitions of our North American distributors, projected pension obligations and debt service obligations. We continue to generate cash from operations in the U.S. and maintain access to $1.7 billion of our revolving credit facility.


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Table of Contents

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
A summary of our significant accounting policies is included in Note 1, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” of the Notes to the Consolidated Financial Statements of our 2014 Form 10-K which discusses accounting policies that we have selected from acceptable alternatives.
Our Condensed Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles that often require management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts presented and disclosed in the financial statements. Management reviews these estimates and assumptions based on historical experience, changes in business conditions and other relevant factors they believe to be reasonable under the circumstances. In any given reporting period, our actual results may differ from the estimates and assumptions used in preparing our Condensed Consolidated Financial Statements.
Critical accounting estimates are defined as follows: the estimate requires management to make assumptions about matters that were highly uncertain at the time the estimate was made; different estimates reasonably could have been used; or if changes in the estimate are reasonably likely to occur from period to period and the change would have a material impact on our financial condition or results of operations. Our senior management has discussed the development and selection of our accounting policies, related accounting estimates and the disclosures set forth below with the Audit Committee of our Board of Directors. Our critical accounting estimates disclosed in the 10-K address the estimation of liabilities for warranty programs, accounting for income taxes and pension benefits.
A discussion of our critical accounting estimates may be found in the “Management’s Discussion and Analysis” section of our 2014 Form 10-K under the caption “APPLICATION OF CRITICAL ACCOUNTING ESTIMATES.” Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in different policies or estimates being reported in the first six months of 2015.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 13, "RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS," in the Notes to Condensed Consolidated Financial Statements.  

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk
 
A discussion of quantitative and qualitative disclosures about market risk may be found in Item 7A of our 2014 Form 10-K. There have been no material changes in this information since the filing of our 2014 Form 10-K.
 
ITEM 4.  Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
 
Changes in Internal Control over Financial Reporting
 
There has been no change in our internal control over financial reporting during the quarter ended June 28, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 

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Table of Contents

PART II.  OTHER INFORMATION
 
ITEM 1.  Legal Proceedings
 
We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We also have been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are material individually or in the aggregate. While we believe we have also established adequate accruals for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition or cash flows.

We conduct significant business operations in Brazil that are subject to the Brazilian federal, state and local labor, social security, tax and customs laws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding the application of these laws to particular circumstances.

ITEM 1A.  Risk Factors

In addition to other information set forth in this report, you should consider other risk factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2014, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K or the "CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION" in this Quarterly report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently judge to be immaterial also may materially adversely affect our business, financial condition or operating results.

ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
The following information is provided pursuant to Item 703 of Regulation S-K:
 
 
 
Issuer Purchases of Equity Securities
Period
 
(a) Total
Number of
Shares
Purchased(1)
 
(b) Average
Price Paid
per Share
 
(c) Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans or Programs
 
(d) Maximum
Number of Shares
that May Yet Be
Purchased Under the
Plans or Programs(2)
March 30 - May 3, 2015
 
188,281

 
$
134.93

 
185,359

 
84,796

May 4 - May 31, 2015
 
1,990,477

 
141.00

 
1,987,926

 
83,272

June 1 - June 28, 2015
 
524,016

 
136.60

 
523,842

 
82,805

Total
 
2,702,774

 
139.73

 
2,697,127

 
 

____________________________________
(1) Shares purchased represent shares under our Key Employee Stock Investment Plan established in 1969 (there is no maximum repurchase limitation in this plan) and our Board of Directors authorized share repurchase programs.
(2) These values reflect the sum of shares held in loan status under our Key Employee Stock Investment Plan. The repurchase programs authorized by the Board of Directors do not limit the number of shares that may be purchased and was excluded from this column.
During the three months ended June 28, 2015, we repurchased $37 million of common stock under the 2012 Board of Directors Authorized Plan, completing this program. In July 2014, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon the completion of the 2012 Plan. We repurchased $340 million under the new authorization.
 

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During the three months ended June 28, 2015, we repurchased 5,647 shares from employees in connection with the Key Employee Stock Investment Plan which allows certain employees, other than officers, to purchase shares of common stock on an installment basis up to an established credit limit. Loans are issued for five-year terms at a fixed interest rate established at the date of purchase and may be refinanced after its initial five-year period for an additional five-year period. Participants must hold shares for a minimum of six months from date of purchase and after shares are sold must wait six months before another share purchase may be made. We hold participants’ shares as security for the loans and would, in effect repurchase shares if the participant defaulted in repayment of the loan. There is no maximum amount of shares that we may purchase under this plan.
 
ITEM 3.  Defaults Upon Senior Securities
 
Not applicable.
 
ITEM 4.  Mine Safety Disclosures
 
Not applicable.
 
ITEM 5.  Other Information
 
Not applicable.
 
ITEM 6. Exhibits
 
See Exhibit Index at the end of this Quarterly Report on Form 10-Q.


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Cummins Inc.
 
 
 
Date:
July 29, 2015
 
 
 
 
 
 
 
 
 
 
By:
/s/ PATRICK J. WARD
 
By:
/s/ MARSHA L. HUNT
 
 
Patrick J. Ward
 
 
Marsha L. Hunt
 
 
Vice President and Chief Financial Officer
 
 
Vice President-Corporate Controller
 
 
(Principal Financial Officer)
 
 
(Principal Accounting Officer)



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CUMMINS INC.
EXHIBIT INDEX
 
Exhibit No.
 
Description of Exhibit
12
 
Calculation of Ratio of Earnings to Fixed Charges.
31(a)
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b)
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
 
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
 
XBRL Instance Document.
101.SCH
 
XBRL Taxonomy Extension Schema Document.
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.


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