SOURCE: Cummins Inc.

Cummins Inc.

October 28, 2014 07:30 ET

Cummins Reports Strong Results for the Third Quarter of 2014

Third Quarter Revenues of $4.9 Billion, EBIT of 14.0 Percent of Sales; Full Year Revenue Expected to Grow Between 10 and 12 Percent and EBIT to Be in the Range of 13.0 to 13.5 Percent of Sales

COLUMBUS, IN--(Marketwired - October 28, 2014) - Cummins Inc. (NYSE: CMI) today reported results for the third quarter of 2014.

Third quarter revenue of $4.9 billion increased 15 percent from the same quarter in 2013. The increase year-over-year was driven by stronger demand in on-highway markets and distributor acquisitions in North America, additional content growth for the Components business in Europe and China and higher engine sales to commercial marine customers.

Revenues in North America increased 19 percent and international sales increased 10 percent compared to the third quarter a year ago. Within international markets, stronger demand in Western Europe and China offset weaker sales in Brazil.

Earnings before interest and taxes (EBIT) were $684 million for the third quarter or 14.0 percent of sales. This compares to $536 million or 12.6 percent of sales a year ago.

Net income attributable to Cummins in the third quarter was $423 million ($2.32 per diluted share), compared to $355 million ($1.90 per diluted share) in the third quarter of 2013. The tax rate in the third quarter of 2014 was 34.4 percent and included a non-cash discrete tax expense of $19 million ($0.10 per diluted share).

"We delivered strong earnings and cash flow in the third quarter despite facing mixed conditions in international markets," said Chairman and CEO Tom Linebarger. "Earnings improved in all four of our businesses compared to a year ago. During the third quarter we increased the quarterly dividend by 25 percent and repurchased 1.2 million shares putting us well on track to return 50 percent of annual operating cash flow to shareholders. Although results in our Power Generation business improved in the third quarter, global demand for power generation equipment remains weak. As a result we are considering certain actions to reduce our cost structure starting in the fourth quarter. The cost of the actions being considered could range from $15 million to $40 million."

Based on the current forecast, Cummins expects full year 2014 revenues to grow between 10 percent and 12 percent, up from its previous forecast of growth of between 8 percent and 11 percent, due to stronger demand in North America. EBIT is expected to be in the range of 13 to 13.5 percent of sales, excluding the impact of cost reduction activities within the Power Generation business that will commence in the fourth quarter.

Other recent highlights:

  • Cummins was recognized with the 2014 Robert W. Campbell Award by the National Safety Council for excellence in health, safety and the environment
  • Standard and Poor's Rating Services upgraded Cummins corporate credit rating to A+
  • The Company was named to Gartner's Supply Chain Top 25 for the third consecutive year, and
  • Cummins 6.7 liter Turbo Diesel was the first diesel engine in a medium-duty vehicle to be certified to meet Low-Emission Vehicle III (LEV III) Standards in the US

Third quarter 2014 detail (all comparisons to same period in 2013)

Engine Segment

  • Sales -- $2.8 billion, up 13 percent
  • Segment EBIT -- $330 million, or 11.7 percent of sales, compared to $272 million or 10.9 percent of sales
  • Increased demand in on-highway markets in North America and in commercial marine markets offset weakness in the Brazilian truck market

Components Segment

  • Sales -- $1.3 billion, up 20 percent
  • Segment EBIT -- $172 million, or 13.4 percent of sales, compared to $132 million or 12.3 percent of sales
  • Higher demand in on-highway markets in North America, Europe and China more than offset weaker demand in Brazil

Power Generation Segment

  • Sales -- $754 million, up 6 percent
  • Segment EBIT -- $60 million, or 8.0 percent of sales, compared to $45 million or 6.3 percent of sales
  • Higher revenues in China, Africa and Middle East offset weaker sales in Mexico and Eastern Europe

Distribution Segment

  • Sales -- $1.3 billion, up 37 percent overall and up 8 percent excluding acquisitions
  • Segment EBIT -- $131 million, or 10.1 percent of sales, compared to $86 million or 9.1 percent of sales
  • Higher revenues were primarily driven by acquisitions and stronger demand in North America, Asia and Africa
  • Current quarter included gains of $18 million, and amortization costs of $7 million related to acquisitions

About Cummins

Cummins Inc., a global power leader, is a corporation of complementary business units that design, manufacture, distribute and service diesel and natural gas engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Headquartered in Columbus, Indiana, (USA) Cummins currently employs approximately 48,000 people worldwide and serves customers in approximately 190 countries and territories through a network of approximately 600 company-owned and independent distributor locations and approximately 6,800 dealer locations. Cummins earned $1.48 billion on sales of $17.3 billion in 2013. Press releases can be found on the Web at www.cummins.com. Follow Cummins on Twitter at @Cummins and on YouTube at Cummins Inc.

Forward-looking disclosure statement

Information provided in this release that is not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our forecasts, guidance, preliminary results, expectations, hopes, beliefs and intentions on strategies regarding the future. These forward looking statements include, without limitation, statements relating to our plans and expectations for our revenues for the full year of 2014. Our actual future results could differ materially from those projected in such forward-looking statements because of a number of factors, including, but not limited to: the adoption and implementation of global emission standards; the price and availability of energy; the pace of infrastructure development; increasing global competition among our customers; general economic, business and financing conditions; governmental action; changes in our customers' business strategies; competitor pricing activity; expense volatility; labor relations; and other risks detailed from time to time in our Securities and Exchange Commission filings, including particularly in the Risk Factors section of our 2013 Annual Report on Form 10-K. 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 press release and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. More detailed information about factors that may affect our performance may be found in our filings with the Securities and Exchange Commission, which are available at http://www.sec.gov or at http://www.cummins.com in the Investor Relations section of our website.

Presentation of Non-GAAP Financial Information
EBIT is a non-GAAP measure used in this release, and is defined and reconciled to what management believes to be the most comparable GAAP measure in a schedule attached to this release. Cummins presents this information as it believes it is useful to understanding the Company's operating performance, and because EBIT is a measure used internally to assess the performance of the operating units.

Webcast information
Cummins management will host a teleconference to discuss these results today at 10 a.m. EST. This teleconference will be webcast and available on the Investor Relations section of the Cummins website at www.cummins.com. Participants wishing to view the visuals available with the audio are encouraged to sign-in a few minutes prior to the start of the teleconference.

The following files are available for download:

 
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (a)
 
  Three months ended
In millions, except per share amounts September 28,
2014
 June 29,
 2014
 September 29,
2013
NET SALES $ 4,890  $ 4,835    $ 4,266  
 Cost of sales (b)  3,606   3,630     3,185  
GROSS MARGIN  1,284   1,205     1,081  
                
OPERATING EXPENSES AND INCOME               
 Selling, general and administrativeexpenses (b)  529   513     464  
 Research, development and engineering expenses  198   179     173  
 Equity, royalty and interest income from investees (Note 1)  99   105     91  
 Other operating income (expense), net  3   (6 )   (11 )
OPERATING INCOME  659   612     524  
                
 Interest income  6   6     6  
 Interest expense  15   15     8  
 Other income, net  19   39     6  
INCOME BEFORE INCOME TAXES  669   642     528  
                
 Income tax expense (Note 2)  230   170     154  
CONSOLIDATED NET INCOME  439   472     374  
                
 Less: Net income attributable to noncontrolling interests  16   26     19  
NET INCOME ATTRIBUTABLE TO CUMMINS INC. $ 423  $ 446    $ 355  
                
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.               
 Basic $ 2.32  $ 2.44    $ 1.91  
 Diluted $ 2.32  $ 2.43    $ 1.90  
                
WEIGHTED AVERAGE SHARES OUTSTANDING               
 Basic  182.2   182.8     186.0  
 Diluted  182.7   183.2     186.5  
                
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.78  $ 0.625    $ 0.625  
           

(a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.
(b) We revised the classification of certain amounts for "Cost of sales" and "Selling, general and administrative expenses." See
 supplemental schedules for additional information.

 
 
  Nine months ended
In millions, except per share amounts September 28,
2014
 September 29,
2013
NET SALES $ 14,131    $ 12,713
 Cost of sales (b)  10,543     9,570
GROSS MARGIN  3,588     3,143
          
OPERATING EXPENSES AND INCOME         
 Selling, general and administrative expenses (b)  1,527     1,344
 Research, development and engineering expenses  567     532
 Equity, royalty and interest income from investees (Note 1)  294     281
 Other operating income (expense), net  (4 )   -
OPERATING INCOME  1,784     1,548
          
 Interest income  17     21
 Interest expense  47     22
 Other income, net  68     25
INCOME BEFORE INCOME TAXES  1,822     1,572
          
 Income tax expense (Note 2)  553     445
CONSOLIDATED NET INCOME  1,269     1,127
          
 Less: Net income attributable to noncontrolling interests  62     76
NET INCOME ATTRIBUTABLE TO CUMMINS INC. $ 1,207    $ 1,051
          
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.         
 Basic $ 6.59    $ 5.61
 Diluted $ 6.58    $ 5.60
          
WEIGHTED AVERAGE SHARES OUTSTANDING         
 Basic  183.1     187.4
 Diluted  183.5     187.8
          
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 2.03    $ 1.625
       

(a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.
(b) We revised the classification of certain amounts for "Cost of sales" and "Selling, general and administrative expenses." See
 supplemental schedules for additional information.

 
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (a)
 
In millions, except par value September 28, 2014  December 31, 2013
ASSETS         
Current assets         
 Cash and cash equivalents $ 2,328    $ 2,699  
 Marketable securities  53     150  
  Total cash, cash equivalents and marketable securities  2,381     2,849  
 Accounts and notes receivable, net  3,059     2,649  
 Inventories  2,833     2,381  
 Prepaid expenses and other current assets  795     760  
   Total current assets  9,068     8,639  
Long-term assets           
 Property, plant and equipment  6,899     6,410  
 Accumulated depreciation  (3,435 )   (3,254 )
  Property, plant and equipment, net  3,464     3,156  
 Investments and advances related to equity method investees  981     931  
 Goodwill  465     461  
 Other intangible assets, net  346     357  
 Prepaid pensions  701     514  
 Other assets  619     670  
    Total assets $ 15,644    $ 14,728  
            
LIABILITIES           
Current liabilities           
 Loans payable $ 78    $ 17  
 Accounts payable (principally trade)  1,930     1,557  
 Current maturities of long-term debt  27     51  
 Current portion of accrued product warranty  351     360  
 Accrued compensation, benefits and retirement costs  507     433  
 Deferred revenue  328     285  
 Taxes payable (including taxes on income)  134     99  
 Other accrued expenses  683     566  
   Total current liabilities  4,038     3,368  
Long-term liabilities           
 Long-term debt  1,584     1,672  
 Pensions  234     232  
 Postretirement benefits other than pensions  333     356  
 Other liabilities and deferred revenue  1,358     1,230  
    Total liabilities  7,547     6,858  
            
EQUITY           
Cummins Inc. shareholders' equity           
 Common stock, $2.50 par value, 500 shares authorized, 222.3 and 222.3 shares issued  2,125     2,099  
 Retained earnings  9,243     8,406  
 Treasury stock, at cost, 39.6 and 35.6 shares  (2,779 )   (2,195 )
 Common stock held by employee benefits trust, at cost, 1.1 and 1.3 shares  (14 )   (16 )
 Accumulated other comprehensive loss           
  Defined benefit postretirement plans  (583 )   (611 )
  Other  (244 )   (173 )
  Total accumulated other comprehensive loss  (827 )   (784 )
   Total Cummins Inc. shareholders' equity  7,748     7,510  
Noncontrolling interests  349     360  
    Total equity  8,097     7,870  
     Total liabilities and equity $ 15,644    $ 14,728  
             

(a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.

 
CUMMINS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (a)
 
  Nine months ended
In millions September 28, 2014  September 29, 2013
CASH FLOWS FROM OPERATING ACTIVITIES         
 Consolidated net income $ 1,269    $ 1,127  
 Adjustments to reconcile consolidated net income to net cash provided by operating activities           
  Depreciation and amortization  330     305  
  Gain on fair value adjustment for consolidated investees  (38 )   (12 )
  Deferred income taxes  (37 )   78  
  Equity in income of investees, net of dividends  (103 )   (98 )
  Pension contributions in excess of expense  (154 )   (96 )
  Other post-retirement benefits payments in excess of expense  (22 )   (20 )
  Stock-based compensation expense  27     29  
  Excess tax benefits on stock-based awards  (5 )   (13 )
  Translation and hedging activities  (19 )   26  
 Changes in current assets and liabilities, net of acquisitions           
  Accounts and notes receivable  (236 )   (216 )
  Inventories  (302 )   (206 )
  Other current assets  (6 )   182  
  Accounts payable  316     252  
  Accrued expenses  162     (146 )
 Changes in other liabilities and deferred revenue  184     147  
 Other, net  22     (6 )
NET CASH PROVIDED BY OPERATING ACTIVITIES  1,388     1,333  
            
CASH FLOWS FROM INVESTING ACTIVITIES           
 Capital expenditures  (409 )   (417 )
 Investments in internal use software  (40 )   (43 )
 Investments in and advances to equity investees  (39 )   (12 )
 Acquisitions of businesses, net of cash acquired  (266 )   (145 )
 Investments in marketable securities-acquisitions  (213 )   (360 )
 Investments in marketable securities-liquidations  316     433  
 Cash flows from derivatives not designated as hedges  -     (15 )
 Other, net  11     14  
Net cash used in investing activities  (640 )   (545 )
            
CASH FLOWS FROM FINANCING ACTIVITIES           
 Proceeds from borrowings  39     987  
 Payments on borrowings and capital lease obligations  (72 )   (62 )
 Net (payments) borrowings under short-term credit agreements  (41 )   34  
 Distributions to noncontrolling interests  (52 )   (53 )
 Dividend payments on common stock  (370 )   (305 )
 Repurchases of common stock  (605 )   (289 )
 Excess tax benefits on stock-based awards  5     13  
 Other, net  (3 )   19  
Net cash (used in) provided by financing activities  (1,099 )   344  
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS  (20 )   (2 )
Net (decrease) increase in cash and cash equivalents  (371 )   1,130  
Cash and cash equivalents at beginning of year  2,699     1,369  
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,328    $ 2,499  
        

(a) Prepared on an unaudited basis in accordance with accounting principles generally accepted in the United States of America.

 
CUMMINS INC. AND SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)
 
    In millions Engine   Components  Power Generation  Distribution   Non-segment
Items
(1)
  Total
    Three months ended September 28, 2014                                
    External sales $ 2,181     $ 946    $ 481    $ 1,282     $ -     $ 4,890  
    Intersegment sales  635      341     273     10      (1,259 )    -  
     Total sales  2,816      1,287     754     1,292      (1,259 )    4,890  
    Depreciation and amortization(2)  50      27     13     22      -      112  
    Research, development and engineering expenses  114      64     18     2      -      198  
    Equity, royalty and interest income from investees  40      9     13     37      -      99  
    Interest income  3      1     1     1      -      6  
    Segment EBIT  330      172     60     131   (3)  (9 )    684  
                                           
    Segment EBIT as a percentage of total sales  11.7 %    13.4 %   8.0 %   10.1 %           14.0 %
                                           
    Three months ended June 29, 2014                                      
    External sales $ 2,178     $ 953    $ 475    $ 1,229     $ -     $ 4,835  
    Intersegment sales  566      327     268     9      (1,170 )    -  
     Total sales  2,744      1,280     743     1,238      (1,170 )    4,835  
    Depreciation and amortization(2)  52      26     13     20      -      111  
    Research, development and engineering expenses  105      53     18     3      -      179  
    Equity, royalty and interest income from investees  45      9     9     42      -      105  
    Interest income  4      1     1     -      -      6  
    Segment EBIT  311      185     61     126   (3)  (26 )    657  
                                           
    Segment EBIT as a percentage of total sales  11.3 %    14.5 %   8.2 %   10.2 %           13.6 %
                                           
    Three months ended September 29, 2013                                      
    External sales $ 2,045     $ 784    $ 499    $ 938     $ -     $ 4,266  
    Intersegment sales  447      288     213     6      (954 )    -  
     Total sales  2,492      1,072     712     944      (954 )    4,266  
    Depreciation and amortization(2)  53      24     13     15      -      105  
    Research, development and engineering expenses  103      51     18     1      -      173  
    Equity, royalty and interest income from investees  31      5     13     42      -      91  
    Interest income  4      1     1     -      -      6  
    Segment EBIT  272      132     45     86      1      536  
                                           
    Segment EBIT as a percentage of total sales  10.9 %    12.3 %   6.3 %   9.1 %           12.6 %
  
  

(1) Includes intersegment sales and profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three months ended September 28, 2014, June 29, 2014 and September 29, 2013. 
(2) Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Income as "Interest expense." 
(3) Distribution segment EBIT for the three months ended September 28, 2014 and June 29, 2014 included gains of $18 million and $14 million on the fair value adjustments resulting from the acquisitions of controlling interests in North American distributors in each period, respectively.       

 
In millions   Engine   Components   Power Generation   Distribution   Non-segment Items(1)   Total
Nine months ended September 28, 2014                                    
External sales   $ 6,449     $ 2,821     $ 1,408     $ 3,453     $ -     $ 14,131  
Intersegment sales    1,674      976      728      27      (3,405 )    -  
 Total sales    8,123      3,797      2,136      3,480      (3,405 )    14,131  
Depreciation and amortization(2)    153      79      38      58      -      328  
Research, development and engineering expenses    335      170      55      7      -      567  
Equity, royalty and interest income from investees    117      27      30      120      -      294  
Interest income    9      3      3      2      -      17  
Segment EBIT    910      524      146      333   (3)  (44 )    1,869  
                                           
Segment EBIT as a percentage of total sales    11.2 %    13.8 %    6.8 %    9.6 %           13.2 %
                                           
Nine months ended September 29, 2013                                          
External sales   $ 6,139     $ 2,292     $ 1,621     $ 2,661     $ -     $ 12,713  
Intersegment sales    1,312      915      651      15      (2,893 )    -  
 Total sales    7,451      3,207      2,272      2,676      (2,893 )    12,713  
Depreciation and amortization(2)    156      71      37      40      -      304  
Research, development and engineering expenses    310      165      53      4      -      532  
Equity, royalty and interest income from investees    106      21      30      124      -      281  
Interest income    13      2      5      1      -      21  
Segment EBIT    806      387      172      281   (3)  (52 )    1,594  
                                           
Segment EBIT as a percentage of total sales    10.8 %    12.1 %    7.6 %    10.5 %           12.5 %
  
  

(1) Includes intersegment sales and profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the nine months ended September 28, 2014 and September 29, 2013. 
(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 $2 million and $8 million for the nine months ended September 28, 2014 and September 29, 2013, respectively. 
(3) Distribution segment EBIT for the nine months ended September 28, 2014 and September 29, 2013 included gains of $38 million and $12 million on the fair value adjustments resulting from the acquisitions of controlling interests in North American distributors in each period, respectively.

A reconciliation of our segment information to the corresponding amounts in the Condensed Consolidated Statements of Income is shown in the table below:

    Three months ended   Nine months ended
In millions   September 28,
2014
  June 29,
 2014
  September 29,
2013
  September 28,
2014
  September 29,
2013
Total EBIT   $ 684   $ 657   $ 536   $ 1,869   $ 1,594
Less: Interest expense    15    15    8    47    22
 Income before income taxes   $ 669   $ 642   $ 528   $ 1,822   $ 1,572
 
CUMMINS INC. AND SUBSIDIARIES
SELECTED FOOTNOTE DATA
(Unaudited)
 

NOTE 1. EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES

Equity, royalty and interest income from investees included in our Condensed Consolidated Statements of Income for the reporting periods was as follows:

         
    Three months ended   Nine months ended
In millions   September 28, 2014   June 29, 2014   September 29, 2013   September 28, 2014   September 29, 2013
Distribution Entities                              
North American distributors   $ 27     $ 30     $ 34     $ 89     $ 98  
Komatsu Cummins Chile, Ltda.    8      8      6      22      17  
All other distributors    -      1      1      2      1  
Manufacturing Entities                                   
Dongfeng Cummins Engine Company, Ltd.    15      22      13      51      45  
Chongqing Cummins Engine Company, Ltd.    13      15      15      39      44  
Beijing Foton Cummins Engine Co., Ltd. (Light-duty)    10      8      4      24      14  
Shanghai Fleetguard Filter Co., Ltd.    3      3      4      9      11  
Tata Cummins, Ltd.    2      2      1      6      4  
Cummins Westport, Inc.    2      -      2      3      5  
Beijing Foton Cummins Engine Co., Ltd. (Heavy-duty)    (5 )    (7 )    (4 )    (18 )    (14 )
All other manufacturers    13      14      7      36      29  
 Cummins share of net income    88      96      83      263      254  
Royalty and interest income    11      9      8      31      27  
  Equity, royalty and interest income from investees   $ 99     $ 105     $ 91     $ 294     $ 281  
                       

NOTE 2. 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, 2013 and has not yet been renewed by Congress. 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 rates for the three and nine month periods ended September 28, 2014, were 34.4 percent and 30.4 percent, respectively. The tax rate for the three months ended September 28, 2014, included a $19 million discrete tax expense to reflect the reduction in value of state tax credits as a result of a favorable state tax rate change that will lower future taxes. Additionally, the tax rate for the nine month period included a second quarter $2 million discrete tax benefit for the release of reserves for uncertain tax positions related to multiple state audit settlements, a first quarter $12 million discrete tax expense attributable primarily to state deferred tax adjustments, as well as a first quarter $6 million discrete net tax benefit resulting from a $70 million dividend paid from China earnings generated prior to 2012.

Our effective tax rate for the three month period ended June 29, 2014, was 26.5 percent. The tax rate included a $2 million discrete tax benefit for the release of reserves for uncertain tax positions related to multiple state audit settlements. 

Our effective tax rates for the three and nine month periods ended September 29, 2013, were 29.2 percent and 28.3 percent, respectively. These tax rates include a $7 million discrete net tax expense for the third quarter tax adjustments: $4 million expense attributable to prior year tax return true-up adjustments, $1 million benefit related to release of prior year tax reserves and a discrete tax charge for $4 million related to a third quarter enactment of U.K. tax law changes. In addition, the nine month tax rate includes a discrete tax benefit in the first quarter of 2013 of $28 million attributable to the reinstatement of the research credit back to 2012, as well as a discrete tax expense in the first quarter of 2013 of $17 million, which primarily relates to the write-off of a deferred tax asset deemed unrecoverable.

The increase in the three month effective tax rate from 2013 to 2014 is primarily due to unfavorable changes in the jurisdictional mix of pre-tax income and the 2014 unfavorable discrete tax items.

NOTE 3. ACQUISITION  

Cummins Eastern Canada LP

On August 4, 2014, we acquired the remaining 50 percent interest in Cummins Eastern Canada LP (Eastern Canada) from the former distributor principal. The preliminary purchase consideration was $62 million, which included $22 million in cash and an additional $32 million to eliminate outstanding debt. The remaining $8 million will be paid in future periods. The intangible assets are primarily customer related, the majority of which will be amortized within one year subject to customary purchase price adjustments. The acquisition was accounted for as a business combination and the results of the acquired entity were included in the Distribution operating segment subsequent to the acquisition date. As a result of this transaction, third quarter 2014 Distribution segment results included an $18 million gain, as we were required to re-measure our pre-existing 50 percent ownership interest in Eastern Canada to fair value. The transaction generated $5 million of goodwill based on the preliminary purchase price allocation. Net sales for Eastern Canada were $228 million for the year ended December 31, 2013. This amount is not fully incremental to our consolidated sales as the amount would be reduced by the elimination of sales to the previously unconsolidated entity.

 
CUMMINS INC. AND SUBSIDIARIES
FINANCIAL MEASURES THAT SUPPLEMENT GAAP
 
(unaudited)

Earnings before interest, taxes and noncontrolling interests

We define EBIT as earnings before interest expense, income tax expense and noncontrolling interests in income of consolidated subsidiaries (EBIT). We use EBIT to assess and measure the performance of our operating segments and also as a component in measuring our variable compensation programs. This measure is not in accordance with, or an alternative for, accounting principles generally accepted in the United States of America and may not be consistent with measures used by other companies. It should be considered supplemental data. Below is a reconciliation of EBIT to "Net income attributable to Cummins Inc.," for each of the applicable periods:

         
    Three months ended   Nine months ended
In millions   September 28, 2014   June 29,
 2014
  September 29, 2013   September 28, 2014   September 29, 2013
Earnings before interest expense and income taxes   $ 684     $ 657     $ 536     $ 1,869     $ 1,594  
                                    
EBIT as a percentage of net sales    14.0 %    13.6 %    12.6 %    13.2 %    12.5 %
                                    
Less                                   
 Interest expense    15      15      8      47      22  
 Income tax expense    230      170      154      553      445  
Consolidated net income    439      472      374      1,269      1,127  
                                    
Less                                   
 Net income attributable to noncontrolling interests    16      26      19      62      76  
  Net income attributable to Cummins Inc.   $ 423     $ 446     $ 355     $ 1,207     $ 1,051  
                                    
Net income attributable to Cummins Inc. as a percentage of net sales    8.7 %    9.2 %    8.3 %    8.5 %    8.3 %
                     
 
CUMMINS INC. AND SUBSIDIARIES
SUPPLEMENTAL COST OF SALES AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(Unaudited)
 

Supplemental Information

This Current Report on Form 8-K includes supplemental unaudited historical "Cost of sales" and "Selling, general and administrative expenses" information. We revised the classification of certain amounts for "Cost of sales" and "Selling, general and administrative expenses" for 2014, 2013 and 2012. In connection with the integration of recently acquired North American distributors and anticipating the future acquisition and integration of the entire North American channel, our Distribution segment has developed a framework against which Distribution management intends to measure the performance of the distribution channel. The segment EBIT (defined as earnings before interest expense, taxes and noncontrolling interests) performance measure is unchanged, however, certain activities that were previously classified in "Selling, general and administrative expenses" will be classified as "Cost of sales" to align with the new framework and allow for consistent treatment across the channel. We revised the expense presentation of our Condensed Consolidated Statements of Income for the periods presented below to follow the new cost framework. The net impact of this revision for the six months ended June 29, 2014 and years ended December 31, 2013 and 2012 were $39 million, $103 million and $92 million, respectively. The revision had no impact on reported net income, cash flows or the balance sheet. We will begin to report comparative results under the new framework with the filing of our Quarterly Report for the quarter ending September 28, 2014.

         
2014 Revised   Three months ended   Six months ended
In millions   March 30,
 2014
  June 29,
 2014
  June 29,
 2014
NET SALES   $ 4,406     $ 4,835     $ 9,241  
 Cost of sales    3,307      3,630      6,937  
GROSS MARGIN    1,099      1,205      2,304  
OPERATING EXPENSES AND INCOME                     
 Selling, general and administrative expenses    485      513      998  
 Research, development and engineering expenses    190      179      369  
 Equity, royalty and interest income from investees    90      105      195  
 Other operating income (expense), net    (1 )    (6 )    (7 )
OPERATING INCOME    513      612      1,125  
 Interest income    5      6      11  
 Interest expense    17      15      32  
 Other income (expense), net    10      39      49  
INCOME BEFORE INCOME TAXES    511      642      1,153  
 Income tax expense    153      170      323  
CONSOLIDATED NET INCOME    358      472      830  
 Less: Net income attributable to noncontrolling interests    20      26      46  
NET INCOME ATTRIBUTABLE TO CUMMINS INC.   $ 338     $ 446     $ 784  
             
     
         
2013 and 2012 Revised   Three months ended   Years Ended
In millions   March 31,
 2013
  June 30,
 2013
  September 29,
 2013
  December 31,
 2013
  December 31,
 2013
  December 31,
 2012
NET SALES   $ 3,922     $ 4,525     $ 4,266     $ 4,588     $ 17,301     $ 17,334  
 Cost of sales    2,988      3,397      3,185      3,451      13,021      12,918  
GROSS MARGIN    934      1,128      1,081      1,137      4,280      4,416  
OPERATING EXPENSES AND INCOME                                          
 Selling, general and administrative expenses    421      459      464      473      1,817      1,808  
 Research, development and engineering expenses    182      177      173      181      713      728  
 Equity, royalty and interest income from investees    82      108      91      80      361      384  
 Other operating income (expense), net    1      10      (11 )    (10 )    (10 )    (10 )
OPERATING INCOME    414      610      524      553      2,101      2,254  
 Interest income    5      10      6      6      27      25  
 Interest expense    6      8      8      19      41      32  
 Other income (expense), net    18      1      6      7      32      24  
INCOME BEFORE INCOME TAXES    431      613      528      547      2,119      2,271  
 Income tax expense    119      172      154      86      531      533  
CONSOLIDATED NET INCOME    312      441      374      461      1,588      1,738  
Less: Net income attributable to noncontrolling interests    30      27      19      29      105      93  
NET INCOME ATTRIBUTABLE TO CUMMINS INC.   $ 282     $ 414     $ 355     $ 432     $ 1,483     $ 1,645  
                         

The following schedule reflects the change in cost of sales, gross margin, gross margin percentage trend, selling, general and administrative expenses and the impact of the change on the trend for selling, general and administrative expenses and research, development and engineering expenses (SARS).

               
In millions   2012     2013   2014
    FY   Q1   Q2   Q3   Q4   FY   Q1   Q2   Q2 YTD
REPORTED                                                      
NET SALES   $ 17,334     $ 3,922     $ 4,525     $ 4,266     $ 4,588     $ 17,301     $ 4,406     $ 4,835     $ 9,241  
Cost of sales    12,826      2,965      3,372      3,157      3,424      12,918      3,290      3,608      6,898  
 GROSS MARGIN    4,508      957      1,153      1,109      1,164      4,383      1,116      1,227      2,343  
GROSS MARGIN %    26.0 %    24.4 %    25.5 %    26.0 %    25.4 %    25.3 %    25.3 %    25.4 %    25.4 %
                                                                
Selling, general and administrative expenses    1,900      444      484      492      500      1,920      502      535      1,037  
Research, development and engineering expenses    728      182      177      173      181      713      190      179      369  
 Total SARS    2,628      626      661      665      681      2,633      692      714      1,406  
SARS %    15.2 %    16.0 %    14.6 %    15.6 %    14.8 %    15.2 %    15.7 %    14.8 %    15.2 %
                                                                
REVISED                                                               
NET SALES   $ 17,334     $ 3,922     $ 4,525     $ 4,266     $ 4,588     $ 17,301     $ 4,406     $ 4,835     $ 9,241  
Cost of sales    12,918      2,988      3,397      3,185      3,451      13,021      3,307      3,630      6,937  
 GROSS MARGIN    4,416      934      1,128      1,081      1,137      4,280      1,099      1,205      2,304  
GROSS MARGIN %    25.5 %    23.8 %    24.9 %    25.3 %    24.8 %    24.7 %    24.9 %    24.9 %    24.9 %
                                                                
Selling, general and administrative expenses    1,808      421      459      464      473      1,817      485      513      998  
Research, development and engineering expenses    728      182      177      173      181      713      190      179      369  
 Total SARS    2,536      603      636      637      654      2,530      675      692      1,367  
SARS %    14.6 %    15.4 %    14.1 %    14.9 %    14.3 %    14.6 %    15.3 %    14.3 %    14.8 %
                                     
 
CUMMINS INC. AND SUBSIDIARIES
BUSINESS UNIT SALES DATA
(Unaudited)
 

Engine segment net sales by market:

                
2014                              
In millions   Q1   Q2   Q3   Q4   YTD
Heavy-duty truck   $ 722     $ 796     $ 823     $ -     $ 2,341  
Medium-duty truck and bus    601      646      631      -      1,878  
Light-duty automotive and RV    361      336      354      -      1,051  
Industrial    700      757      788      -      2,245  
Stationary power    179      209      220      -      608  
 Total sales   $ 2,563     $ 2,744     $ 2,816     $ -     $ 8,123  
                                    
2013                                   
In millions    Q1    Q2    Q3    Q4    YTD
Heavy-duty truck   $ 654     $ 723     $ 690     $ 638     $ 2,705  
Medium-duty truck and bus    448      595      570      572      2,185  
Light-duty automotive and RV    260      345      330      365      1,300  
Industrial    714      762      709      811      2,996  
Stationary power    227      231      193      176      827  
 Total sales   $ 2,303     $ 2,656     $ 2,492     $ 2,562     $ 10,013  
                      

Unit shipments by engine classification (including unit shipments to Power Generation):

                
2014                              
Units   Q1   Q2   Q3   Q4   YTD
Midrange   118,900     118,700     117,700     -     355,300  
Heavy-duty   28,800     30,300     32,300     -     91,400  
High-horsepower   3,400     3,900     3,900     -     11,200  
 Total units   151,100     152,900     153,900     -     457,900  
                               
2013                              
Units   Q1   Q2   Q3   Q4   YTD
Midrange   94,600     121,900     113,800     115,700     446,000  
Heavy-duty   24,900     28,300     26,500     25,700     105,400  
High-horsepower   4,200     3,600     3,500     3,500     14,800  
 Total units   123,700     153,800     143,800     144,900     566,200  
                 

Component segment sales by business:

                
2014                              
In millions   Q1   Q2   Q3   Q4   YTD
Emission solutions   $ 543     $ 582     $ 598     $ -     $ 1,723  
Turbo technologies    313      307      297      -      917  
Filtration    265      275      268      -      808  
Fuel systems    109      116      124      -      349  
 Total sales   $ 1,230     $ 1,280     $ 1,287     $ -     $ 3,797  
                                    
2013                                   
In millions    Q1    Q2    Q3    Q4    YTD
Emission solutions   $ 400     $ 444     $ 458     $ 489     $ 1,791  
Turbo technologies    266      294      263      292      1,115  
Filtration    255      271      248      254      1,028  
Fuel systems    97      108      103      100      408  
 Total sales   $ 1,018     $ 1,117     $ 1,072     $ 1,135     $ 4,342  
                      

Power Generation segment sales by business:

                
2014                              
In millions   Q1   Q2   Q3   Q4   YTD
Power products   $ 373     $ 445     $ 439     $ -     $ 1,257  
Power systems    137      141      159      -      437  
Alternators    105      126      115      -      346  
Power solutions    24      31      41      -      96  
 Total sales   $ 639     $ 743     $ 754     $ -     $ 2,136  
                                    
2013                                   
In millions    Q1    Q2    Q3    Q4    YTD
Power products   $ 409     $ 474     $ 421     $ 421     $ 1,725  
Power systems    179      187      122      168      656  
Alternators    126      125      126      119      496  
Power solutions    32      28      43      51      154  
 Total sales   $ 746     $ 814     $ 712     $ 759     $ 3,031  

Distribution segment sales by business:

2014                              
In millions   Q1   Q2   Q3   Q4   YTD
Parts and filtration   $ 382     $ 461     $ 491     $ -     $ 1,334  
Power generation    193      278      279      -      750  
Engines    174      249      270      -      693  
Service    201      250      252      -      703  
 Total sales   $ 950     $ 1,238     $ 1,292     $ -     $ 3,480  
                                    
2013                                   
In millions    Q1    Q2    Q3    Q4    YTD
Parts and filtration   $ 322     $ 369     $ 377     $ 397     $ 1,465  
Power generation    163      241      234      293      931  
Engines    152      183      170      208      713  
Service    141      161      163      175      640  
 Total sales   $ 778     $ 954     $ 944     $ 1,073     $ 3,749  
                      

Contact Information