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;
|
|
|
•
|
changes in the engine outsourcing practices of significant customers;
|
|
|
•
|
a major customer experiencing financial distress;
|
|
|
•
|
lower than expected acceptance of new or existing products or services;
|
|
|
•
|
any significant problems in our new engine platforms;
|
|
|
•
|
a further slowdown in infrastructure development and/or continuing depressed commodity prices;
|
|
|
•
|
unpredictability in the adoption, implementation and enforcement of emission standards around the world;
|
|
|
•
|
foreign currency exchange rate changes;
|
|
|
•
|
the actions of, and income from, joint ventures and other investees that we do not directly control;
|
|
|
•
|
the integration of our previously partially-owned United States and Canadian distributors;
|
|
|
•
|
our plan to reposition our portfolio of product offerings through exploring strategic acquisitions and divestitures and related uncertainties of entering such transactions;
|
|
|
•
|
supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers;
|
|
|
•
|
variability in material and commodity costs;
|
|
|
•
|
increasing competition, including increased global competition among our customers in emerging markets;
|
|
|
•
|
exposure to potential security breaches or other disruptions to our information technology systems and data security;
|
|
|
•
|
political, economic and other risks from operations in numerous countries;
|
|
|
•
|
global legal and ethical compliance costs and risks;
|
|
|
•
|
aligning our capacity and production with our demand;
|
|
|
•
|
product liability claims;
|
|
|
•
|
increasingly stringent environmental laws and regulations;
|
|
|
•
|
the price and availability of energy;
|
|
|
•
|
the performance of our pension plan assets and volatility of discount rates;
|
|
|
•
|
changes in accounting standards;
|
|
|
•
|
future bans or limitations on the use of diesel-powered vehicles;
|
|
|
•
|
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 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; and
|
|
|
•
|
other risk factors described in our
2016
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.
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
2016
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 Adopted and Recently Issued Accounting Pronouncements
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, Navistar International Corporation and Fiat Chrysler Automobiles.
We serve our customers through a network of approximately
600
wholly-owned and independent distributor locations and over
7,400
dealer locations in more than
190
countries and territories.
Our reportable operating segments consist of Engine, Distribution, Components and Power Systems. This reporting structure is organized according to the products and markets each segment serves
. The Engine segment produces engines (15 liters and less in size) and associated parts for sale to customers in on-highway and various off-highway markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, agriculture, power generation systems and other off-highway applications. 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 Systems segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas, marine and rail), standby and prime power generator sets, alternators and other power components.
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, 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
12 percent
in the three months ended
July 2, 2017,
as compared to the same period in
2016
, with all operating segments reporting higher revenue. Revenue in the U.S. and Canada
improved
by
13 percent
primarily due to increased demand in the North American on-highway markets
and increased industrial demand (especially in the oil and gas market).
International demand growth (excludes the U.S. and Canada)
improved
revenues by
11 percent
, with sales up in most of our markets (especially in China, India and Russia). The increase in international sales was primarily due to increased demand in industrial markets (especially construction markets in China and mining markets in Europe) and increased demand in all Components businesses (especially on-highway truck demand in China and product sales to meet new emission requirements for trucks in India), partially offset by unfavorable foreign currency impacts of
2 percent
(primarily in the
Chinese renminbi and British pound
).
Worldwide revenues
increased
10 percent
in the six months ended
July 2, 2017,
as compared to the same period in
2016
, with all operating segments reporting higher revenue. International demand growth (excludes the U.S. and Canada) in 2017
improved
revenues by
12 percent
, with sales up in most of our markets, especially in China, India, Russia and the U.K. The increase in international sales was primarily due to increased demand in industrial markets (especially construction markets in China and mining markets in Europe) and increased demand in all Components businesses (especially on-highway truck demand in China and product sales to meet new emission requirements for trucks in India), partially offset by unfavorable foreign currency impacts of
3 percent
(primarily in the
British pound and Chinese renminbi
). Revenue in the U.S. and Canada
improved
by
8 percent
primarily due to increased demand in the North American on-highway markets and increased industrial demand (especially in the construction, oil and gas and argiculture markets).
The following tables contain sales and earnings before interest expense, income tax expense and noncontrolling interests (EBIT) by operating segment for the
three and six months ended July 2, 2017 and July 3, 2016
.
Refer to the section titled “OPERATING SEGMENT RESULTS” for a more detailed discussion of sales and EBIT by operating segment, including the reconciliation of segment EBIT to net income attributable to Cummins Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
Operating Segments
|
|
July 2, 2017
|
|
July 3, 2016
|
|
Percent change
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
2017 vs. 2016
|
In millions
|
|
Sales
|
|
of Total
|
|
EBIT
|
|
Sales
|
|
of Total
|
|
EBIT
|
|
Sales
|
|
EBIT
|
Engine
|
|
$
|
2,307
|
|
|
45
|
%
|
|
$
|
277
|
|
|
$
|
2,002
|
|
|
44
|
%
|
|
$
|
206
|
|
|
15
|
%
|
|
34
|
%
|
Distribution
|
|
1,722
|
|
|
34
|
%
|
|
96
|
|
|
1,544
|
|
|
34
|
%
|
|
87
|
|
|
12
|
%
|
|
10
|
%
|
Components
|
|
1,454
|
|
|
29
|
%
|
|
190
|
|
|
1,279
|
|
|
28
|
%
|
|
190
|
|
|
14
|
%
|
|
—
|
%
|
Power Systems
|
|
1,017
|
|
|
20
|
%
|
|
61
|
|
|
921
|
|
|
21
|
%
|
|
90
|
|
|
10
|
%
|
|
(32
|
)%
|
Intersegment eliminations
|
|
(1,422
|
)
|
|
(28
|
)%
|
|
—
|
|
|
(1,218
|
)
|
|
(27
|
)%
|
|
—
|
|
|
17
|
%
|
|
—
|
|
Non-segment
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
18
|
|
|
—
|
|
|
NM
|
|
Total
|
|
$
|
5,078
|
|
|
100
|
%
|
|
$
|
620
|
|
|
$
|
4,528
|
|
|
100
|
%
|
|
$
|
591
|
|
|
12
|
%
|
|
5
|
%
|
______________________________________
"NM" - not meaningful information
Net income attributable to Cummins was
$424 million
, or
$2.53 per diluted share
, on sales of
$5.1 billion
for the three months ended
July 2, 2017
, versus the comparable prior year period net income attributable to Cummins of
$406 million
, or
$2.40
per diluted share, on sales of
$4.5 billion
. The
increase
in net income and earnings per diluted share was driven by
significantly higher net sales, higher gross margin, the absence of an accrual for a loss contingency recorded in the second quarter of 2016, higher equity, royalty and interest income from investees, partially offset by increased selling, general and administrative expenses, higher research, development and engineering expenses and a higher effective tax rate
. The
increase
in gross margin was primarily due to
higher volumes, improved Distribution segment margins related to the acquisition of North American distributors since December 31, 2015 and lower material costs, partially offset by higher warranty costs ($87 million primarily due to changes in estimates in the Engine and Component segments and campaigns in the Power Systems segment) and increased variable compensation expense of $93 million.
Diluted earnings per share for the three months ended July 2, 2017, benefited $0.01 from fewer weighted average shares outstanding due to purchases under the stock repurchase program.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
Operating Segments
|
|
July 2, 2017
|
|
July 3, 2016
|
|
Percent change
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
2017 vs. 2016
|
In millions
|
|
Sales
|
|
of Total
|
|
EBIT
|
|
Sales
|
|
of Total
|
|
EBIT
|
|
Sales
|
|
EBIT
|
Engine
|
|
$
|
4,330
|
|
|
45
|
%
|
|
$
|
506
|
|
|
$
|
3,978
|
|
|
45
|
%
|
|
$
|
403
|
|
|
9
|
%
|
|
26
|
%
|
Distribution
|
|
3,367
|
|
|
35
|
%
|
|
196
|
|
|
3,007
|
|
|
34
|
%
|
|
174
|
|
|
12
|
%
|
|
13
|
%
|
Components
|
|
2,798
|
|
|
29
|
%
|
|
369
|
|
|
2,516
|
|
|
28
|
%
|
|
353
|
|
|
11
|
%
|
|
5
|
%
|
Power Systems
|
|
1,899
|
|
|
19
|
%
|
|
118
|
|
|
1,729
|
|
|
20
|
%
|
|
136
|
|
|
10
|
%
|
|
(13
|
)%
|
Intersegment eliminations
|
|
(2,727
|
)
|
|
(28
|
)%
|
|
—
|
|
|
(2,411
|
)
|
|
(27
|
)%
|
|
—
|
|
|
13
|
%
|
|
—
|
|
Non-segment
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
NM
|
|
Total
|
|
$
|
9,667
|
|
|
100
|
%
|
|
$
|
1,186
|
|
|
$
|
8,819
|
|
|
100
|
%
|
|
$
|
1,075
|
|
|
10
|
%
|
|
10
|
%
|
______________________________________
"NM" - not meaningful information
Net income attributable to Cummins was $820 million, or $4.88 per diluted share, on sales of $9.7 billion for the six months ended July 2, 2017, versus the comparable prior year period net income attributable to Cummins of $727 million, or $4.26 per diluted share, on sales of $8.8 billion.
The
increase
in net income and earnings per diluted share was driven by
significantly higher net sales, higher gross margin, higher equity, royalty and interest income from investees, the absence of an accrual for a loss contingency recorded in the second quarter of 2016 and a lower effective tax rate, partially offset by increased selling, general and administrative expenses and higher research, development and engineering expenses
. The
increase
in gross margin was primarily due to
higher volumes, lower material costs, improved Distribution segment margins related to the acquisition of North American distributors since December 31, 2015, favorable pricing and favorable foreign currency fluctuations (primarily the British pound, South African rand and Brazilian real), partially offset by higher warranty costs ($120 million primarily due to changes in estimates in the Engine and Component segments and campaigns in the Power Systems segment) and increased variable compensation expense of $109 million.
Diluted earnings per share for the six months ended July 2, 2017, benefited $0.01 from fewer weighted average shares outstanding, primarily due to purchases under the stock repurchase program.
We generated
$826 million
of operating cash flows for the
six months ended July 2, 2017
, compared to
$738 million
for the comparable period in
2016
. Refer to the section titled "Cash Flows" in the "LIQUIDITY AND CAPITAL RESOURCES" section for a discussion of items impacting cash flows.
During the first half of 2017, we repurchased
$120 million
, or
0.8 million
shares of common stock.
Our debt to capital ratio (total capital defined as debt plus equity) at
July 2, 2017
, was
18.7 percent
, compared to
20.6 percent
at
December 31, 2016
. At
July 2, 2017
, we had
$1.5 billion
in cash and marketable securities on hand and access to our
$1.75 billion
credit facilities, if necessary, to meet currently anticipated investment and funding needs.
In July 2017, our Board of Directors authorized an increase to our quarterly dividend of 5.4 percent from $1.025 per share to $1.08 per share.
We expect our effective tax rate for the full year of
2017
to approximate
26.0 percent
, excluding any one-time tax items.
In April 2017, we entered into an agreement to form a joint venture with Eaton Corporation PLC and we closed the transaction on July 31, 2017. We purchased a
50 percent
interest in the new venture named Eaton Cummins Automated Transmission Technologies for
$600 million
in cash. The joint venture will design, assemble, sell and support medium-duty and heavy-duty automated transmissions for the commercial vehicle market, including new product launches. We will consolidate the results of the joint venture in our Components segment as we have a majority voting interest in the venture by virtue of a tie-breaking vote on the board of directors.
We are still in the process of finalizing the purchase accounting and we do not expect this new venture to have a significant impact on our consolidated results in 2017.
OUTLOOK
Our outlook reflects the following positive trends and challenges to our business that we expect could impact our revenue and earnings potential for the remainder of
2017
.
Positive Trends
|
|
•
|
Demand for pick-up trucks in North America remains strong.
|
|
|
•
|
Market demand in off-highway markets in China and India remains strong.
|
|
|
•
|
Industry production of medium-duty trucks in North America should remain strong.
|
|
|
•
|
North American construction markets may stabilize.
|
|
|
•
|
Market demand may continue to improve in global mining.
|
|
|
•
|
North American heavy-duty truck demand may stabilize.
|
Challenges
|
|
•
|
Power generation markets may remain soft.
|
|
|
•
|
Weak economic conditions in Brazil may continue to negatively impact demand across our businesses.
|
|
|
•
|
Foreign currency could continue to put pressure on our results.
|
|
|
•
|
Marine markets are expected to remain weak.
|
Demand has improved in certain markets and we expect demand will continue to improve over time, as in prior economic cycles. We are well positioned to benefit as market conditions improve.
RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
|
|
Six months ended
|
|
Favorable/
|
|
|
July 2,
2017
|
|
July 3,
2016
|
|
(Unfavorable)
|
|
July 2,
2017
|
|
July 3,
2016
|
|
(Unfavorable)
|
In millions, except per share amounts
|
|
|
Amount
|
|
Percent
|
|
|
|
Amount
|
|
Percent
|
NET SALES
|
$
|
5,078
|
|
|
$
|
4,528
|
|
|
$
|
550
|
|
|
12
|
%
|
|
$
|
9,667
|
|
|
$
|
8,819
|
|
|
$
|
848
|
|
|
10
|
%
|
Cost of sales
|
3,829
|
|
|
3,331
|
|
|
(498
|
)
|
|
(15
|
)%
|
|
7,290
|
|
|
6,566
|
|
|
(724
|
)
|
|
(11
|
)%
|
GROSS MARGIN
|
1,249
|
|
|
1,197
|
|
|
52
|
|
|
4
|
%
|
|
2,377
|
|
|
2,253
|
|
|
124
|
|
|
6
|
%
|
OPERATING EXPENSES AND INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
596
|
|
|
524
|
|
|
(72
|
)
|
|
(14
|
)%
|
|
1,133
|
|
|
1,014
|
|
|
(119
|
)
|
|
(12
|
)%
|
Research, development and engineering expenses
|
174
|
|
|
155
|
|
|
(19
|
)
|
|
(12
|
)%
|
|
332
|
|
|
321
|
|
|
(11
|
)
|
|
(3
|
)%
|
Equity, royalty and interest income from investees
|
98
|
|
|
88
|
|
|
10
|
|
|
11
|
%
|
|
206
|
|
|
160
|
|
|
46
|
|
|
29
|
%
|
Loss contingency
|
—
|
|
|
39
|
|
|
39
|
|
|
100
|
%
|
|
—
|
|
|
39
|
|
|
39
|
|
|
100
|
%
|
Other operating income (expense), net
|
18
|
|
|
—
|
|
|
18
|
|
|
NM
|
|
|
23
|
|
|
(2
|
)
|
|
25
|
|
|
NM
|
|
OPERATING INCOME
|
595
|
|
|
567
|
|
|
28
|
|
|
5
|
%
|
|
1,141
|
|
|
1,037
|
|
|
104
|
|
|
10
|
%
|
Interest income
|
5
|
|
|
6
|
|
|
(1
|
)
|
|
(17
|
)%
|
|
7
|
|
|
12
|
|
|
(5
|
)
|
|
(42
|
)%
|
Interest expense
|
21
|
|
|
16
|
|
|
(5
|
)
|
|
(31
|
)%
|
|
39
|
|
|
35
|
|
|
(4
|
)
|
|
(11
|
)%
|
Other income (expense), net
|
20
|
|
|
18
|
|
|
2
|
|
|
11
|
%
|
|
38
|
|
|
26
|
|
|
12
|
|
|
46
|
%
|
INCOME BEFORE INCOME TAXES
|
599
|
|
|
575
|
|
|
24
|
|
|
4
|
%
|
|
1,147
|
|
|
1,040
|
|
|
107
|
|
|
10
|
%
|
Income tax expense
|
158
|
|
|
148
|
|
|
(10
|
)
|
|
(7
|
)%
|
|
301
|
|
|
280
|
|
|
(21
|
)
|
|
(8
|
)%
|
CONSOLIDATED NET INCOME
|
441
|
|
|
427
|
|
|
14
|
|
|
3
|
%
|
|
846
|
|
|
760
|
|
|
86
|
|
|
11
|
%
|
Less: Net income attributable to noncontrolling interests
|
17
|
|
|
21
|
|
|
4
|
|
|
19
|
%
|
|
26
|
|
|
33
|
|
|
7
|
|
|
21
|
%
|
NET INCOME ATTRIBUTABLE TO CUMMINS INC.
|
$
|
424
|
|
|
$
|
406
|
|
|
$
|
18
|
|
|
4
|
%
|
|
$
|
820
|
|
|
$
|
727
|
|
|
$
|
93
|
|
|
13
|
%
|
Diluted Earnings Per Common Share Attributable to Cummins Inc.
|
$
|
2.53
|
|
|
$
|
2.40
|
|
|
$
|
0.13
|
|
|
5
|
%
|
|
$
|
4.88
|
|
|
$
|
4.26
|
|
|
$
|
0.62
|
|
|
15
|
%
|
______________________________________
"NM" - not meaningful information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
(Unfavorable)
|
|
Six months ended
|
|
Favorable/
(Unfavorable)
|
|
|
July 2,
2017
|
|
July 3,
2016
|
|
|
July 2,
2017
|
|
July 3,
2016
|
|
Percent of sales
|
|
|
|
Percentage Points
|
|
|
|
Percentage Points
|
Gross margin
|
|
24.6
|
%
|
|
26.4
|
%
|
|
(1.8
|
)
|
|
24.6
|
%
|
|
25.5
|
%
|
|
(0.9
|
)
|
Selling, general and administrative expenses
|
|
11.7
|
%
|
|
11.6
|
%
|
|
(0.1
|
)
|
|
11.7
|
%
|
|
11.5
|
%
|
|
(0.2
|
)
|
Research, development and engineering expenses
|
|
3.4
|
%
|
|
3.4
|
%
|
|
—
|
|
|
3.4
|
%
|
|
3.6
|
%
|
|
0.2
|
|
Net Sales
Net sales for the three months ended
July 2, 2017
,
increased
by
$550 million
versus the comparable period in
2016
. The primary drivers were as follows:
|
|
•
|
Engine segment sales
increase
d
15 percent
primarily due to higher demand in North American medium-duty truck and bus, North American heavy-duty truck markets and improved demand in global off-highway markets.
|
|
|
•
|
Distribution segment sales
increase
d
12 percent
primarily due to an increase in organic sales and higher sales related to the acquisition of North American distributors since December 31, 2015.
|
|
|
•
|
Components segment sales
increase
d
14 percent
primarily due to higher demand across all lines of businesses, primarily in China, North America and India.
|
|
|
•
|
Power Systems segment sales
increase
d
10 percent
primarily due to higher demand in industrial markets.
|
These increases were unfavorably impacted by foreign currency fluctuations of approximately
1 percent
, primarily in the
Chinese renminbi and British pound
.
Net sales for the six months ended
July 2, 2017
,
increased
$848 million
versus the comparable period in
2016
. The primary drivers were as follows:
|
|
•
|
Distribution segment sales
increase
d
12 percent
primarily due to an increase in organic sales and higher sales related to the acquisition of North American distributors since December 31, 2015.
|
|
|
•
|
Engine segment sales
increase
d
9 percent
primarily due to higher demand in off-highway markets, North American medium-duty truck and bus and North American heavy-duty truck markets.
|
|
|
•
|
Components segment sales
increase
d
11 percent
primarily due to higher demand across all lines of businesses, primarily in China and India.
|
|
|
•
|
Power Systems segment sales
increase
d
10 percent
primarily due to higher demand in industrial markets, especially global mining, North American oil and gas markets and North American rail markets.
|
These increases were unfavorably impacted by foreign currency fluctuations of approximately
1 percent
, primarily in the
British pound and Chinese renminbi
.
Sales to international markets (excluding the U.S. and Canada), based on location of customers, for the three and six months months ended
July 2, 2017
, were
42 percent
and
42 percent
of total net sales, respectively, compared with
42 percent
and
41 percent
of total net sales for the comparable periods in 2016. A more detailed discussion of sales by segment is presented in the “OPERATING SEGMENT RESULTS” section.
Gross Margin
Gross margin
increase
d
$52 million
for the three months ended
July 2, 2017
, versus the comparable period in
2016
and
decreased
1.8
points as a percentage of sales. The
increase
in gross margin dollars was primarily due to
higher volumes, improved Distribution segment margins related to the acquisition of North American distributors since December 31, 2015 and lower material costs, partially offset by higher warranty costs ($87 million primarily due to changes in estimates in the Engine and Component segments and campaigns in the Power Systems segment) and increased variable compensation expense of $93 million.
Gross margin
increase
d
$124 million
for the six months ended
July 2, 2017
, versus the comparable period in
2016
and
decreased
0.9
points as a percentage of sales. The
increase
in gross margin dollars was primarily due to
higher volumes, lower material costs, improved Distribution segment margins related to the acquisition of North American distributors since December 31, 2015, favorable pricing and favorable foreign currency fluctuations (primarily the British pound, South African rand and Brazilian real), partially offset by higher warranty costs ($120 million primarily due to changes in estimates in the Engine and Component segments and campaigns in the Power Systems segment) and increased variable compensation expense of $109 million.
The provision for base warranties issued, excluding campaigns, as a percent of sales for the three and six months ended July 2, 2017, was 1.8 percent and 1.9 percent, respectively, compared to 1.8 percent and 1.9 percent for the comparable periods in 2016.
A detailed discussion of margin by segment is presented in the “OPERATING SEGMENT RESULTS” section.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
increased
$72 million
for the three months ended
July 2, 2017
, versus the comparable period in
2016
, primarily due to higher variable compensation expenses ($49 million) and higher consulting expenses ($10 million). Compensation and related expenses include salaries, fringe benefits and variable compensation. Overall, selling, general and administrative expenses, as a percentage of sales,
increased
to
11.7 percent
in the
three months ended July 2, 2017
, from
11.6 percent
in the comparable period in
2016
.
Selling, general and administrative expenses increased $119 million for the six months ended July 2, 2017, versus the comparable period in 2016
, primarily due to higher variable compensation expenses ($64 million) and higher consulting expenses ($30 million).
Overall, selling, general and administrative expenses, as a percentage of sales,
increased
to
11.7 percent
in the
six months ended July 2, 2017
, from
11.5 percent
in the comparable period in
2016
.
Research, Development and Engineering Expenses
Research, development and engineering expenses
increased
$19 million
for the three months ended
July 2, 2017
, versus the comparable period in
2016
, primarily due to increased variable compensation expenses ($13 million) and lower expense recovery from customers ($5 million). Overall, research, development and engineering expenses remained flat as a percentage of sales, versus the comparable period in 2016 .
Research, development and engineering expenses increased $11 million for the six months ended July 2, 2017, versus the comparable period in 2016
, primarily due to increased variable compensation expense ($13 million), partially offset by higher
expense recovery from customers ($2 million). Overall, research, development and engineering expenses, as a percentage of sales,
decreased
to
3.4 percent
in the
six months ended July 2, 2017
, from
3.6 percent
in the comparable period in
2016
.
Research activities continue to focus on development of new products to meet future emission standards around the world and improvements in fuel economy performance of diesel and natural gas powered engines.
Equity, Royalty and Interest Income from Investees
Equity, royalty and interest income from investees
increase
d
$10 million
for the
three months ended July 2, 2017
, versus the comparable period in
2016
, primarily due to higher earnings at Dongfeng Cummins Engine Company, Ltd.
Equity, royalty and interest income from investees
increase
d
$46 million
for the
six months ended July 2, 2017
, versus the comparable period in
2016
, primarily due to higher earnings at Dongfeng Cummins Engine Company, Ltd. and Beijing Foton Cummins Engine Co., Ltd.
Other Operating Income (Expense), Net
Other operating income (expense), net
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
In millions
|
|
July 2,
2017
|
|
July 3,
2016
|
|
July 2,
2017
|
|
July 3,
2016
|
Royalty income, net
|
|
$
|
11
|
|
|
$
|
6
|
|
|
$
|
20
|
|
|
$
|
13
|
|
Amortization of intangible assets
|
|
(1
|
)
|
|
(2
|
)
|
|
(3
|
)
|
|
(5
|
)
|
Loss on write off of assets
|
|
(1
|
)
|
|
(4
|
)
|
|
(2
|
)
|
|
(9
|
)
|
Other, net
|
|
9
|
|
|
—
|
|
|
8
|
|
|
(1
|
)
|
Total other operating income (expense), net
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
(2
|
)
|
Interest Income
Interest income for the three months ended
July 2, 2017,
remained relatively flat versus the comparable period in 2016. Interest income for the six months ended
July 2, 2017,
decreased
$5 million
versus the comparable period in 2016, primarily due to lower short-term investments.
Interest Expense
Interest expense for the three months ended
July 2, 2017,
increased
$5 million
versus the comparable period in 2016, primarily due to hedge ineffectiveness on our interest rate swap. Interest expense for the six months ended
July 2, 2017,
increased
$4 million
versus the comparable period in 2016, primarily due to hedge ineffectiveness on our interest rate swap.
Other Income (Expense), Net
Other income (expense), net
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
In millions
|
|
July 2,
2017
|
|
July 3,
2016
|
|
July 2,
2017
|
|
July 3,
2016
|
Change in cash surrender value of corporate owned life insurance
|
|
$
|
16
|
|
|
$
|
15
|
|
|
$
|
29
|
|
|
$
|
23
|
|
Dividend income
|
|
2
|
|
|
1
|
|
|
3
|
|
|
2
|
|
Foreign currency gain (loss), net
|
|
1
|
|
|
(8
|
)
|
|
3
|
|
|
(11
|
)
|
Bank charges
|
|
(2
|
)
|
|
(1
|
)
|
|
(5
|
)
|
|
(4
|
)
|
Other, net
|
|
3
|
|
|
11
|
|
|
8
|
|
|
16
|
|
Total other income (expense), net
|
|
$
|
20
|
|
|
$
|
18
|
|
|
$
|
38
|
|
|
$
|
26
|
|
Income Tax Expense
Our effective tax rate for the year is expected to approximate
26.0 percent
, excluding any one-time items that may arise. 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 and the research tax credit.
Our effective tax rate for the
three and six months ended July 2, 2017
, was
26.4 percent
and
26.2 percent
, respectively, and contained only immaterial discrete items.
Our effective tax rate for the
three and six months ended July 3, 2016
, was
25.7 percent
and
26.9 percent
, respectively, and contained only immaterial discrete items.
The changes in the effective tax rate for the three and six months ended July 2, 2017, versus the comparable periods in 2016, were primarily due to differences 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 July 2, 2017
,
decreased
$4 million
versus the comparable period in 2016, primarily due to the acquisition of the remaining interest in Wuxi Cummins Turbo Technologies Co. Ltd, in the fourth quarter of 2016.
Noncontrolling interests in income of consolidated subsidiaries for the
six months ended July 2, 2017
,
decrease
d
$7 million
versus the comparable period in 2016, primarily due to the acquisition of the remaining interest in Wuxi Cummins Turbo Technologies Co. Ltd, in the fourth quarter of 2016.
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 July 2, 2017
,
increase
d
$18 million
and
$0.13
per share, respectively versus the comparable period in
2016
, primarily due to
significantly higher net sales, higher gross margin, the absence of an accrual for a loss contingency recorded in the second quarter of 2016, higher equity, royalty and interest income from investees, partially offset by increased selling, general and administrative expenses, higher research, development and engineering expenses and a higher effective tax rate
.
Diluted earnings per share for the three months ended July 2, 2017, benefited $0.01 from fewer weighted average shares outstanding due to purchases under the stock repurchase program.
Net income and diluted earnings per share attributable to Cummins Inc. for the
six months ended July 2, 2017
,
increase
d
$93 million
and
$0.62
per share, respectively versus the comparable period in
2016
, primarily due to
significantly higher net sales, higher gross margin, higher equity, royalty and interest income from investees, the absence of an accrual for a loss contingency recorded in the second quarter of 2016 and a lower effective tax rate, partially offset by increased selling, general and administrative expenses and higher research, development and engineering expenses
.
Diluted earnings per share for the six months ended July 2, 2017, benefited $0.01 from fewer weighted average shares outstanding, primarily due to purchases under the stock repurchase program.
Comprehensive Income - Foreign Currency Translation Adjustment
The foreign currency translation adjustment was a net gain of
$102 million
and
$182 million
, respectively, for the three and six months ended
July 2, 2017,
compared to a net loss of
$213 million
and
$270 million
for the three and six months ended
July 3, 2016,
and was driven by the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
July 2, 2017
|
|
July 3, 2016
|
In millions
|
|
Translation adjustment
|
|
Primary currency driver vs. U.S. dollar
|
|
Translation adjustment
|
|
Primary currency driver vs. U.S. dollar
|
Wholly-owned subsidiaries
|
|
$
|
90
|
|
|
British pound, Chinese renminbi
|
|
$
|
(193
|
)
|
|
British pound, Chinese renminbi offset by Brazilian real
|
Equity method investments
|
|
11
|
|
|
Chinese renminbi
|
|
(14
|
)
|
|
Chinese renminbi, Indiana rupee offset by Japanese yen
|
Consolidated subsidiaries with a noncontrolling interest
|
|
1
|
|
|
Indian rupee
|
|
(6
|
)
|
|
Indian rupee, Chinese renminbi
|
Total
|
|
$
|
102
|
|
|
|
|
$
|
(213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
July 2, 2017
|
|
July 3, 2016
|
In millions
|
|
Translation adjustment
|
|
Primary currency driver vs. U.S. dollar
|
|
Translation adjustment
|
|
Primary currency driver vs. U.S. dollar
|
Wholly-owned subsidiaries
|
|
$
|
147
|
|
|
British pound, Indian rupee, Chinese renminbi
|
|
$
|
(255
|
)
|
|
British pound, Chinese renminbi offset by Brazilian real
|
Equity method investments
|
|
21
|
|
|
Chinese renminbi, Indian rupee
|
|
(9
|
)
|
|
Chinese renminbi, Indian rupee offset by Japanese yen, Mexican peso
|
Consolidated subsidiaries with a noncontrolling interest
|
|
14
|
|
|
Indian rupee
|
|
(6
|
)
|
|
Indian rupee, Chinese renminbi
|
Total
|
|
$
|
182
|
|
|
|
|
$
|
(270
|
)
|
|
|
.
OPERATING SEGMENT RESULTS
Our reportable operating segments consist of the Engine, Distribution, Components and Power Systems segments. This reporting structure is organized according to the products and markets each segment serves. We use segment EBIT 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. See Note
12
, "
OPERATING SEGMENTS
," to the
Condensed Consolidated Financial Statements
for additional information.
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/
|
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
In millions
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
External sales
(1)
|
|
$
|
1,711
|
|
|
$
|
1,504
|
|
|
$
|
207
|
|
|
14
|
%
|
|
$
|
3,168
|
|
|
$
|
2,993
|
|
|
$
|
175
|
|
|
6
|
%
|
Intersegment sales
(1)
|
|
596
|
|
|
498
|
|
|
98
|
|
|
20
|
%
|
|
1,162
|
|
|
985
|
|
|
177
|
|
|
18
|
%
|
Total sales
|
|
2,307
|
|
|
2,002
|
|
|
305
|
|
|
15
|
%
|
|
4,330
|
|
|
3,978
|
|
|
352
|
|
|
9
|
%
|
Depreciation and amortization
|
|
46
|
|
|
41
|
|
|
(5
|
)
|
|
(12
|
)%
|
|
90
|
|
|
80
|
|
|
(10
|
)
|
|
(13
|
)%
|
Research, development and engineering expenses
|
|
63
|
|
|
53
|
|
|
(10
|
)
|
|
(19
|
)%
|
|
117
|
|
|
110
|
|
|
(7
|
)
|
|
(6
|
)%
|
Equity, royalty and interest income from investees
|
|
56
|
|
|
46
|
|
|
10
|
|
|
22
|
%
|
|
128
|
|
|
82
|
|
|
46
|
|
|
56
|
%
|
Loss contingency
|
|
—
|
|
|
39
|
|
|
39
|
|
|
100
|
%
|
|
—
|
|
|
39
|
|
|
39
|
|
|
100
|
%
|
Interest income
|
|
2
|
|
|
3
|
|
|
(1
|
)
|
|
(33
|
)%
|
|
3
|
|
|
5
|
|
|
(2
|
)
|
|
(40
|
)%
|
Segment EBIT
|
|
277
|
|
|
206
|
|
|
71
|
|
|
34
|
%
|
|
506
|
|
|
403
|
|
|
103
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Points
|
|
|
|
|
|
|
|
Percentage Points
|
Segment EBIT as a percentage of total sales
|
|
12.0
|
%
|
|
10.3
|
%
|
|
|
|
|
1.7
|
|
|
11.7
|
%
|
|
10.1
|
%
|
|
|
|
|
1.6
|
|
____________________________________
(1)
Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.
Sales for our Engine segment by market were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
|
|
Six months ended
|
|
Favorable/
|
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
In millions
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
Heavy-duty truck
|
|
$
|
714
|
|
|
$
|
622
|
|
|
$
|
92
|
|
|
15
|
%
|
|
$
|
1,334
|
|
|
$
|
1,253
|
|
|
$
|
81
|
|
|
6
|
%
|
Medium-duty truck and bus
|
|
701
|
|
|
600
|
|
|
101
|
|
|
17
|
%
|
|
1,245
|
|
|
1,149
|
|
|
96
|
|
|
8
|
%
|
Light-duty automotive
|
|
429
|
|
|
394
|
|
|
35
|
|
|
9
|
%
|
|
852
|
|
|
827
|
|
|
25
|
|
|
3
|
%
|
Total on-highway
|
|
1,844
|
|
|
1,616
|
|
|
228
|
|
|
14
|
%
|
|
3,431
|
|
|
3,229
|
|
|
202
|
|
|
6
|
%
|
Off-highway
|
|
463
|
|
|
386
|
|
|
77
|
|
|
20
|
%
|
|
899
|
|
|
749
|
|
|
150
|
|
|
20
|
%
|
Total sales
|
|
$
|
2,307
|
|
|
$
|
2,002
|
|
|
$
|
305
|
|
|
15
|
%
|
|
$
|
4,330
|
|
|
$
|
3,978
|
|
|
$
|
352
|
|
|
9
|
%
|
Unit shipments by engine classification (including unit shipments to Power Systems and off-highway engine units included in their respective classification) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
|
|
Six months ended
|
|
Favorable/
|
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
Heavy-duty
|
|
24,100
|
|
|
20,700
|
|
|
3,400
|
|
|
16
|
%
|
|
43,300
|
|
|
40,400
|
|
|
2,900
|
|
|
7
|
%
|
Medium-duty
|
|
71,600
|
|
|
62,300
|
|
|
9,300
|
|
|
15
|
%
|
|
131,900
|
|
|
117,700
|
|
|
14,200
|
|
|
12
|
%
|
Light-duty
|
|
65,600
|
|
|
57,100
|
|
|
8,500
|
|
|
15
|
%
|
|
128,700
|
|
|
118,800
|
|
|
9,900
|
|
|
8
|
%
|
Total unit shipments
|
|
161,300
|
|
|
140,100
|
|
|
21,200
|
|
|
15
|
%
|
|
303,900
|
|
|
276,900
|
|
|
27,000
|
|
|
10
|
%
|
Sales
Engine segment sales for the
three months ended July 2, 2017
,
increase
d
$305 million
versus the comparable period in
2016
, driven by:
|
|
•
|
Medium-duty truck and bus sales
increase
d
$101 million
primarily due to higher demand in North American medium-duty truck markets with increased engine shipments of 35 percent.
|
|
|
•
|
Heavy-duty truck sales
increase
d
$92 million
primarily due to higher demand in North American heavy-duty truck markets with increased shipments of 19 percent.
|
|
|
•
|
Off-highway sales
increase
d
$77 million
primarily due to improved demand in global industrial markets, especially in international construction markets, with increased unit shipments of 45 percent in China.
|
Total on-highway-related sales for the
three months ended July 2, 2017
, were
80 percent
of total engine segment sales, compared to
81 percent
for the comparable period in
2016
.
Engine segment sales for the six months ended July 2, 2017, increased $352 million versus the comparable period in 2016.
The following were primary drivers:
|
|
•
|
Off-highway sales
increase
d
$150 million
primarily due to improved demand in global industrial markets, especially in international construction markets, with increased unit shipments of 54 percent in China and Australia.
|
|
|
•
|
Medium-duty truck and bus sales
increase
d
$96 million
primarily due to higher demand in North American medium-duty truck markets with increased engine shipments of 12 percent.
|
|
|
•
|
Heavy-duty truck sales
increase
d
$81 million
primarily due to higher demand in North American heavy-duty truck markets.
|
Total on-highway-related sales for the six months ended July 2, 2017, were 79 percent of total engine segment sales, compared to 81 percent for the comparable period in 2016.
Segment EBIT
Engine segment EBIT for the
three months ended July 2, 2017
,
increase
d
$71 million
versus the comparable period in
2016
, primarily due to higher gross margin and the absence of a loss contingency recorded in the second quarter of 2016, partially offset by higher selling, general and administrative expenses.
Engine segment EBIT for the six months ended July 2, 2017, increased $103 million versus the comparable period in 2016 primarily due to
higher equity, royalty and interest income from investees, improved gross margin and the absence of a loss contingency recorded in the second quarter of 2016, 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
|
|
|
July 2, 2017 vs. July 3, 2016
|
|
July 2, 2017 vs. July 3, 2016
|
|
|
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
|
|
$
|
44
|
|
|
11
|
%
|
|
(0.7
|
)
|
|
$
|
44
|
|
|
6
|
%
|
|
(0.5
|
)
|
Selling, general and administrative expenses
|
|
(19
|
)
|
|
(13
|
)%
|
|
0.1
|
|
|
(32
|
)
|
|
(12
|
)%
|
|
(0.2
|
)
|
Research, development and engineering expenses
|
|
(10
|
)
|
|
(19
|
)%
|
|
(0.1
|
)
|
|
(7
|
)
|
|
(6
|
)%
|
|
0.1
|
|
Equity, royalty and interest income from investees
|
|
10
|
|
|
22
|
%
|
|
0.1
|
|
|
46
|
|
|
56
|
%
|
|
0.9
|
|
Loss contingency
(1)
|
|
39
|
|
|
NM
|
|
|
NM
|
|
|
39
|
|
|
NM
|
|
|
NM
|
|
____________________________________
"NM" - not meaningful information
(1)
See Note
9
, "
COMMITMENTS AND CONTINGENCIES
," to the
Condensed Consolidated Financial Statements
for additional information.
The
increase
in gross margin dollars for the
three months ended July 2, 2017
, versus the comparable period in
2016
, was primarily due to higher volumes and favorable mix, partially offset by increased warranty costs related to claims for certain 2013 and 2014 engines and higher variable compensation expense. The
increase
s in selling, general and administrative expenses and research, development and engineering expenses were primarily due to higher variable compensation expenses. The
increase
in equity, royalty and interest income from investees was primarily due to higher earnings at Dongfeng Cummins Engine Company, Ltd.
The increase in gross margin dollars for the six months ended July 2, 2017, versus the comparable period in 2016,
was primarily due to higher volumes, favorable mix and improved pricing, partially offset by increased warranty costs related to claims for certain 2013 and 2014 engines and higher variable compensation expense.
The increase in selling, general and administrative expenses was primarily due to
higher variable compensation expense and higher consulting expenses.
The increase in research, development and engineering expenses was primarily due to
higher variable compensation expense. The
increase
in equity, royalty and interest income from investees was primarily due to higher earnings at Dongfeng Cummins Engine Company, Ltd. and Beijing Foton Cummins Engine Co.
Distribution Segment Results
Financial data for the Distribution segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
|
|
Six months ended
|
|
Favorable/
|
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
In millions
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
External sales
|
|
$
|
1,716
|
|
|
$
|
1,538
|
|
|
$
|
178
|
|
|
12
|
%
|
|
$
|
3,353
|
|
|
$
|
2,996
|
|
|
$
|
357
|
|
|
12
|
%
|
Intersegment sales
|
|
6
|
|
|
6
|
|
|
—
|
|
|
—
|
%
|
|
14
|
|
|
11
|
|
|
3
|
|
|
27
|
%
|
Total sales
|
|
1,722
|
|
|
1,544
|
|
|
178
|
|
|
12
|
%
|
|
3,367
|
|
|
3,007
|
|
|
360
|
|
|
12
|
%
|
Depreciation and amortization
|
|
31
|
|
|
29
|
|
|
(2
|
)
|
|
(7
|
)%
|
|
61
|
|
|
57
|
|
|
(4
|
)
|
|
(7
|
)%
|
Research, development and engineering expenses
|
|
4
|
|
|
3
|
|
|
(1
|
)
|
|
(33
|
)%
|
|
8
|
|
|
7
|
|
|
(1
|
)
|
|
(14
|
)%
|
Equity, royalty and interest income from investees
|
|
13
|
|
|
19
|
|
|
(6
|
)
|
|
(32
|
)%
|
|
24
|
|
|
37
|
|
|
(13
|
)
|
|
(35
|
)%
|
Interest income
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
%
|
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
%
|
Segment EBIT
|
|
96
|
|
|
87
|
|
|
9
|
|
|
10
|
%
|
|
196
|
|
|
174
|
|
|
22
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Points
|
|
|
|
|
|
Percentage Points
|
Segment EBIT as a percentage of total sales
|
|
5.6
|
%
|
|
5.6
|
%
|
|
|
|
|
—
|
|
|
5.8
|
%
|
|
5.8
|
%
|
|
|
|
|
—
|
|
In the first quarter of 2017, our Distribution segment reorganized its regions to align with how the segment is managed. All prior year amounts have been reclassified to conform to our new regional structure. Sales for our Distribution segment by region were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
|
|
Six months ended
|
|
Favorable/
|
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
In millions
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
North America
|
|
$
|
1,131
|
|
|
$
|
975
|
|
|
$
|
156
|
|
|
16
|
%
|
|
$
|
2,244
|
|
|
$
|
1,920
|
|
|
$
|
324
|
|
|
17
|
%
|
Asia Pacific
|
|
187
|
|
|
187
|
|
|
—
|
|
|
—
|
%
|
|
357
|
|
|
356
|
|
|
1
|
|
|
—
|
%
|
Europe
|
|
107
|
|
|
111
|
|
|
(4
|
)
|
|
(4
|
)%
|
|
204
|
|
|
212
|
|
|
(8
|
)
|
|
(4
|
)%
|
Africa and Middle East
|
|
86
|
|
|
100
|
|
|
(14
|
)
|
|
(14
|
)%
|
|
181
|
|
|
189
|
|
|
(8
|
)
|
|
(4
|
)%
|
China
|
|
75
|
|
|
55
|
|
|
20
|
|
|
36
|
%
|
|
133
|
|
|
114
|
|
|
19
|
|
|
17
|
%
|
India
|
|
52
|
|
|
46
|
|
|
6
|
|
|
13
|
%
|
|
95
|
|
|
87
|
|
|
8
|
|
|
9
|
%
|
Latin America
|
|
43
|
|
|
38
|
|
|
5
|
|
|
13
|
%
|
|
78
|
|
|
71
|
|
|
7
|
|
|
10
|
%
|
Russia
|
|
41
|
|
|
32
|
|
|
9
|
|
|
28
|
%
|
|
75
|
|
|
58
|
|
|
17
|
|
|
29
|
%
|
Total sales
|
|
$
|
1,722
|
|
|
$
|
1,544
|
|
|
$
|
178
|
|
|
12
|
%
|
|
$
|
3,367
|
|
|
$
|
3,007
|
|
|
$
|
360
|
|
|
12
|
%
|
Sales for our Distribution segment by product line were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
|
|
Six months ended
|
|
Favorable/
|
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
In millions
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
Parts
|
|
$
|
759
|
|
|
$
|
642
|
|
|
$
|
117
|
|
|
18
|
%
|
|
$
|
1,504
|
|
|
$
|
1,290
|
|
|
$
|
214
|
|
|
17
|
%
|
Power generation
|
|
329
|
|
|
326
|
|
|
3
|
|
|
1
|
%
|
|
635
|
|
|
601
|
|
|
34
|
|
|
6
|
%
|
Service
|
|
320
|
|
|
297
|
|
|
23
|
|
|
8
|
%
|
|
639
|
|
|
596
|
|
|
43
|
|
|
7
|
%
|
Engines
|
|
314
|
|
|
279
|
|
|
35
|
|
|
13
|
%
|
|
589
|
|
|
520
|
|
|
69
|
|
|
13
|
%
|
Total sales
|
|
$
|
1,722
|
|
|
$
|
1,544
|
|
|
$
|
178
|
|
|
12
|
%
|
|
$
|
3,367
|
|
|
$
|
3,007
|
|
|
$
|
360
|
|
|
12
|
%
|
Sales
Distribution segment sales for the
three months ended July 2, 2017
,
increase
d
$178 million
versus the comparable period in
2016
, primarily due to an increase in organic sales of $113 million (primarily in North America) and $88 million of sales related to the acquisition of North American distributors since December 31, 2015, partially offset by unfavorable foreign currency fluctuations (primarily in the Chinese renminbi, Canadian dollar and British pound).
Distribution segment sales for the six months ended July 2, 2017, increased $360 million versus the comparable period in 2016
primarily due to an increase in organic sales of $214 million (primarily in North America) and $177 million of segment sales related to the acquisition of North American distributors since December 31, 2015, partially offset by unfavorable foreign currency fluctuations (primarily in the Chinese renminbi and British pound).
Segment EBIT
Distribution segment EBIT for the
three months ended July 2, 2017
,
increase
d
$9 million
versus the comparable period in
2016
, primarily due to higher gross margin, partially offset by higher selling, general and administrative expenses (mainly related to the acquisition of North American distributors since December 31, 2015).
Distribution segment EBIT for the six months ended July 2, 2017, increased $22 million versus the comparable period in 2016, primarily due to
higher gross margin, partially offset by higher selling, general and administrative expenses (mainly related to the acquisition of North American distributors since December 31, 2015). 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
|
|
|
July 2, 2017 vs. July 3, 2016
|
|
July 2, 2017 vs. July 3, 2016
|
|
|
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
|
|
$
|
35
|
|
|
13
|
%
|
|
0.3
|
|
|
$
|
68
|
|
|
13
|
%
|
|
0.1
|
|
Selling, general and administrative expenses
|
|
(27
|
)
|
|
(14
|
)%
|
|
(0.3
|
)
|
|
(42
|
)
|
|
(11
|
)%
|
|
0.1
|
|
Equity, royalty and interest income from investees
|
|
(6
|
)
|
|
(32
|
)%
|
|
(0.4
|
)
|
|
(13
|
)
|
|
(35
|
)%
|
|
(0.5
|
)
|
The
increase
in gross margin dollars for the
three months ended July 2, 2017
, versus the comparable period in
2016
, was primarily due to higher volumes, the acquisition of North American distributors since December 31, 2015 and improved pricing, partially offset by higher product costs. The
increase
in selling, general and administrative expenses was primarily due to higher variable compensation expense and increased compensation expenses related to the acquisition of North American distributors.
The decrease in equity, royalty and interest income from investees was primarily due to
the acquisition of North American distributors.
The increase in gross margin for the six months ended July 2, 2017, versus the comparable period in 2016,
was primarily due to improved pricing, the acquisition of North American distributors since December 31, 2015 and higher volumes, partially offset by higher product costs.
The increase in selling, general and administrative expenses was primarily due to
higher variable compensation expense, increased compensation expenses related to the acquisition of North American distributors and higher consulting expenses.
The decrease in equity, royalty and interest income from investees was primarily due to
the acquisition of North American distributors.
Components Segment Results
Financial data for the Components segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
|
|
Six months ended
|
|
Favorable/
|
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
In millions
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
External sales
(1)
|
|
$
|
1,064
|
|
|
$
|
933
|
|
|
$
|
131
|
|
|
14
|
%
|
|
$
|
2,044
|
|
|
$
|
1,830
|
|
|
$
|
214
|
|
|
12
|
%
|
Intersegment sales
(1)
|
|
390
|
|
|
346
|
|
|
44
|
|
|
13
|
%
|
|
754
|
|
|
686
|
|
|
68
|
|
|
10
|
%
|
Total sales
|
|
1,454
|
|
|
1,279
|
|
|
175
|
|
|
14
|
%
|
|
2,798
|
|
|
2,516
|
|
|
282
|
|
|
11
|
%
|
Depreciation and amortization
|
|
38
|
|
|
32
|
|
|
(6
|
)
|
|
(19
|
)%
|
|
75
|
|
|
63
|
|
|
(12
|
)
|
|
(19
|
)%
|
Research, development and engineering expenses
|
|
57
|
|
|
51
|
|
|
(6
|
)
|
|
(12
|
)%
|
|
107
|
|
|
107
|
|
|
—
|
|
|
—
|
%
|
Equity, royalty and interest income from investees
|
|
15
|
|
|
12
|
|
|
3
|
|
|
25
|
%
|
|
28
|
|
|
20
|
|
|
8
|
|
|
40
|
%
|
Interest income
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
%
|
|
1
|
|
|
2
|
|
|
(1
|
)
|
|
(50
|
)%
|
Segment EBIT
|
|
190
|
|
|
190
|
|
|
—
|
|
|
—
|
%
|
|
369
|
|
|
353
|
|
|
16
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Points
|
|
|
|
|
|
Percentage Points
|
Segment EBIT as a percentage of total sales
|
|
13.1
|
%
|
|
14.9
|
%
|
|
|
|
|
(1.8
|
)
|
|
13.2
|
%
|
|
14.0
|
%
|
|
|
|
|
(0.8
|
)
|
____________________________________
(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 2017, our Components segment reorganized its reporting structure to move an element of the emission solutions business to the fuel systems business to enhance operational, administrative and product development efficiencies. Prior year sales were reclassified to conform with this change.
Sales for our Components segment by business were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
|
|
Six months ended
|
|
Favorable/
|
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
In millions
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
Emission solutions
|
|
$
|
674
|
|
|
$
|
603
|
|
|
$
|
71
|
|
|
12
|
%
|
|
$
|
1,290
|
|
|
$
|
1,192
|
|
|
$
|
98
|
|
|
8
|
%
|
Turbo technologies
|
|
307
|
|
|
276
|
|
|
31
|
|
|
11
|
%
|
|
594
|
|
|
541
|
|
|
53
|
|
|
10
|
%
|
Filtration
|
|
291
|
|
|
262
|
|
|
29
|
|
|
11
|
%
|
|
568
|
|
|
514
|
|
|
54
|
|
|
11
|
%
|
Fuel systems
|
|
182
|
|
|
138
|
|
|
44
|
|
|
32
|
%
|
|
346
|
|
|
269
|
|
|
77
|
|
|
29
|
%
|
Total sales
|
|
$
|
1,454
|
|
|
$
|
1,279
|
|
|
$
|
175
|
|
|
14
|
%
|
|
$
|
2,798
|
|
|
$
|
2,516
|
|
|
$
|
282
|
|
|
11
|
%
|
Sales
Components segment sales for the
three months ended July 2, 2017
,
increase
d
$175 million
, across all lines of business, versus the comparable period in
2016
. The following were the primary drivers:
|
|
•
|
Emission solutions sales
increase
d
$71 million
primarily due to higher demand to meet new emission requirements in India and on-highway truck demand in China.
|
|
|
•
|
Fuel systems sales
increase
d
$44 million
primarily due to higher demand in China and Mexico.
|
|
|
•
|
Turbo technologies sales
increase
d
$31 million
primarily due to higher demand in North America and China.
|
|
|
•
|
Filtration sales
increase
d
$29 million
primarily due to higher demand in North America and China.
|
These increases were partially offset by unfavorable foreign currency fluctuations (primarily in the Chinese renminbi, British pound and euro).
Components segment sales for the six months ended July 2, 2017, increased $282 million, across all lines of business, versus the comparable period in 2016
. The following were the primary drivers:
|
|
•
|
Emission solutions sales
increase
d
$98 million
primarily due to higher demand in China on-highway truck markets and higher demand to meet new emission requirements in India, partially offset by unfavorable pricing in North America.
|
|
|
•
|
Fuel systems sales
increase
d
$77 million
primarily due to higher demand in China.
|
|
|
•
|
Filtration sales
increase
d
$54 million
primarily due to higher demand in North America and China.
|
|
|
•
|
Turbo technologies sales
increase
d
$53 million
primarily due to higher demand in China and North America.
|
These increases were partially offset by unfavorable foreign currency fluctuations (primarily in the Chinese renminbi, British pound and euro).
Segment EBIT
Components segment EBIT for the
three months ended July 2, 2017
, was
flat
versus the comparable period in
2016
, as higher gross margin and higher equity, royalty and interest income from investees were offset by higher selling, general and administrative expenses and higher research, development and engineering expenses.
Components segment EBIT for the six months ended July 2, 2017, increased $16 million versus the comparable period in 2016 primarily due to
higher gross margin 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
|
|
|
July 2, 2017 vs. July 3, 2016
|
|
July 2, 2017 vs. July 3, 2016
|
|
|
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
|
|
$
|
10
|
|
|
3
|
%
|
|
(2.3
|
)
|
|
$
|
28
|
|
|
5
|
%
|
|
(1.4
|
)
|
Selling, general and administrative expenses
|
|
(18
|
)
|
|
(20
|
)%
|
|
(0.4
|
)
|
|
(34
|
)
|
|
(20
|
)%
|
|
(0.5
|
)
|
Research, development and engineering expenses
|
|
(6
|
)
|
|
(12
|
)%
|
|
0.1
|
|
|
—
|
|
|
—
|
%
|
|
0.5
|
|
Equity, royalty and interest income from investees
|
|
3
|
|
|
25
|
%
|
|
0.1
|
|
|
8
|
|
|
40
|
%
|
|
0.2
|
|
The
increase
in gross margin for the
three months ended July 2, 2017
, versus the comparable period in
2016
, was primarily due to higher volumes and lower material costs, partially offset by higher warranty costs driven by changes in estimates and unfavorable pricing in North America. The
increase
in selling, general and administrative expenses was primarily due to higher variable compensation expense and higher consulting expenses. The
increase
in research, development and engineering expenses was primarily due to lower expense recovery from customers and higher variable compensation expense.
The increase in gross margin for the six months ended July 2, 2017, versus the comparable period in 2016,
was primarily due to higher volumes and lower material costs, partially offset by unfavorable pricing in North America and higher warranty costs driven by changes in estimates.
The increase in selling, general and administrative expenses was primarily due to
higher variable compensation expense and higher consulting expenses.
The increase in equity, royalty and interest income from investees was primarily due to
higher earnings at Dongfeng Cummins Emission Solutions Co., Ltd., Shanghai Fleetguard Filter Co. and Fleetguard Filtration Systems India Pvt.
Power Systems Segment Results
Financial data for the Power Systems segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
|
|
Six months ended
|
|
Favorable/
|
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
In millions
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
External sales
(1)
|
|
$
|
587
|
|
|
$
|
553
|
|
|
$
|
34
|
|
|
6
|
%
|
|
$
|
1,102
|
|
|
$
|
1,000
|
|
|
$
|
102
|
|
|
10
|
%
|
Intersegment sales
(1)
|
|
430
|
|
|
368
|
|
|
62
|
|
|
17
|
%
|
|
797
|
|
|
729
|
|
|
68
|
|
|
9
|
%
|
Total sales
|
|
1,017
|
|
|
921
|
|
|
96
|
|
|
10
|
%
|
|
1,899
|
|
|
1,729
|
|
|
170
|
|
|
10
|
%
|
Depreciation and amortization
|
|
29
|
|
|
29
|
|
|
—
|
|
|
—
|
%
|
|
57
|
|
|
58
|
|
|
1
|
|
|
2
|
%
|
Research, development and engineering expenses
|
|
50
|
|
|
48
|
|
|
(2
|
)
|
|
(4
|
)%
|
|
100
|
|
|
97
|
|
|
(3
|
)
|
|
(3
|
)%
|
Equity, royalty and interest income from investees
|
|
14
|
|
|
11
|
|
|
3
|
|
|
27
|
%
|
|
26
|
|
|
21
|
|
|
5
|
|
|
24
|
%
|
Interest income
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
%
|
|
1
|
|
|
3
|
|
|
(2
|
)
|
|
(67
|
)%
|
Segment EBIT
|
|
61
|
|
|
90
|
|
|
(29
|
)
|
|
(32
|
)%
|
|
118
|
|
|
136
|
|
|
(18
|
)
|
|
(13
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Points
|
|
|
|
|
|
Percentage Points
|
Segment EBIT as a percentage of total sales
|
|
6.0
|
%
|
|
9.8
|
%
|
|
|
|
|
(3.8
|
)
|
|
6.2
|
%
|
|
7.9
|
%
|
|
|
|
|
(1.7
|
)
|
____________________________________
(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 2017, our Power Systems segment reorganized its product lines to better reflect how the segment is managed. Prior year sales were reclassified to reflect these changes.
Sales for our Power Systems segment by product line were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
|
|
Six months ended
|
|
Favorable/
|
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
In millions
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
Power generation
|
|
$
|
570
|
|
|
$
|
602
|
|
|
$
|
(32
|
)
|
|
(5
|
)%
|
|
$
|
1,096
|
|
|
$
|
1,120
|
|
|
$
|
(24
|
)
|
|
(2
|
)%
|
Industrial
|
|
353
|
|
|
236
|
|
|
117
|
|
|
50
|
%
|
|
628
|
|
|
451
|
|
|
177
|
|
|
39
|
%
|
Generator technologies
|
|
94
|
|
|
83
|
|
|
11
|
|
|
13
|
%
|
|
175
|
|
|
158
|
|
|
17
|
|
|
11
|
%
|
Total sales
|
|
$
|
1,017
|
|
|
$
|
921
|
|
|
$
|
96
|
|
|
10
|
%
|
|
$
|
1,899
|
|
|
$
|
1,729
|
|
|
$
|
170
|
|
|
10
|
%
|
High-horsepower unit shipments by engine classification were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
|
|
Six months ended
|
|
Favorable/
|
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
|
July 2,
|
|
July 3,
|
|
(Unfavorable)
|
Units
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
|
2017
|
|
2016
|
|
Amount
|
|
Percent
|
Power generation
|
|
2,100
|
|
|
2,200
|
|
|
(100
|
)
|
|
(5
|
)%
|
|
4,000
|
|
|
4,000
|
|
|
—
|
|
|
—
|
%
|
Industrial
|
|
1,700
|
|
|
1,100
|
|
|
600
|
|
|
55
|
%
|
|
3,000
|
|
|
2,100
|
|
|
900
|
|
|
43
|
%
|
Total engine shipments
|
|
3,800
|
|
|
3,300
|
|
|
500
|
|
|
15
|
%
|
|
7,000
|
|
|
6,100
|
|
|
900
|
|
|
15
|
%
|
Sales
Power Systems segment sales for the
three months ended July 2, 2017
,
increase
d
$96 million
versus the comparable period in
2016
primarily due to
increase
d industrial sales of
$117 million
principally due to higher demand in international mining markets and North American oil and gas markets.
These increases were partially offset by the following:
|
|
•
|
Power generation sales
decrease
d
$32 million
primarily due to lower demand in the Middle East, China and Africa, partially offset by higher demand in Western Europe.
|
|
|
•
|
Foreign currency fluctuations negatively impacted sales, primarily due to the British pound.
|
Power Systems segment sales for the
six months ended July 2, 2017
,
increase
d
$170 million
versus the comparable period in
2016
. The following were the primary drivers:
|
|
•
|
Industrial sales
increase
d
$177 million
primarily due to higher demand in global mining markets, North American oil and gas markets and North American rail markets.
|
|
|
•
|
Generator technologies sales
increase
d
$17 million
primarily due to higher demand in Western Europe and China.
|
These increases were partially offset by the following:
|
|
•
|
Power generation sales
decrease
d
$24 million
primarily due to lower demand in the Middle East, Brazil and Other Asia/Australia, partially offset by higher demand in Western Europe.
|
|
|
•
|
Foreign currency fluctuations negatively impacted sales, primarily due to the British pound.
|
Segment EBIT
Power Systems segment EBIT for the
three months ended July 2, 2017
,
decrease
d
$29 million
versus the comparable period in
2016
, primarily due to lower gross margin and higher selling, general and administrative expenses, partially offset by higher equity, royalty and interest income from investees and favorable foreign currency fluctuations (primarily due to the British pound).
Power Systems segment EBIT for the six months ended July 2, 2017, decreased $18 million versus the comparable period in 2016 primarily due to
higher selling, general and administrative expenses and higher research, development and engineering expenses, partially offset by higher equity, royalty and interest income from investees. 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
|
|
|
July 2, 2017 vs. July 3, 2016
|
|
July 2, 2017 vs. July 3, 2016
|
|
|
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
|
|
$
|
(15
|
)
|
|
(7
|
)%
|
|
(3.7
|
)
|
|
$
|
—
|
|
|
—
|
%
|
|
(2.1
|
)
|
Selling, general and administrative expenses
|
|
(8
|
)
|
|
(8
|
)%
|
|
0.3
|
|
|
(11
|
)
|
|
(6
|
)%
|
|
0.4
|
|
Research, development and engineering expenses
|
|
(2
|
)
|
|
(4
|
)%
|
|
0.3
|
|
|
(3
|
)
|
|
(3
|
)%
|
|
0.3
|
|
Equity, royalty and interest income from investees
|
|
3
|
|
|
27
|
%
|
|
0.2
|
|
|
5
|
|
|
24
|
%
|
|
0.2
|
|
The
decrease
in gross margin for the
three months ended July 2, 2017
, versus the comparable period in
2016
, was primarily due to higher warranty cost related to a campaign accrual, unfavorable mix and increased material costs, partially offset by increased volumes and favorable foreign currency fluctuations (primarily in the British pound). The
increase
in selling, general and administrative expenses was primarily due to higher variable compensation expense and higher consulting expenses. The
increase
in equity, royalty and interest income from investees was primarily due to higher earnings at Chongqing Cummins Engine Co.
Gross margin was flat for the six months ended July 2, 2017, versus the comparable period in 2016, primarily due to
higher warranty cost related to a campaign accrual,
unfavorable mix and higher material costs, offset by increased volumes and favorable foreign currency fluctuations (primarily in the British pound).
The increase in selling, general and administrative expenses was primarily due to
higher variable compensation expense and higher consulting expenses.
The increase in equity, royalty and interest income from investees was primarily due to
higher earnings at Chongqing Cummins Engine Co.
Reconciliation of Segment EBIT to Net Income Attributable to Cummins Inc.
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
|
|
July 2,
2017
|
|
July 3,
2016
|
|
July 2,
2017
|
|
July 3,
2016
|
TOTAL SEGMENT EBIT
|
|
$
|
624
|
|
|
$
|
573
|
|
|
$
|
1,189
|
|
|
$
|
1,066
|
|
Non-segment EBIT
(1)
|
|
(4
|
)
|
|
18
|
|
|
(3
|
)
|
|
9
|
|
TOTAL EBIT
|
|
620
|
|
|
591
|
|
|
1,186
|
|
|
1,075
|
|
Less: Interest expense
|
|
21
|
|
|
16
|
|
|
39
|
|
|
35
|
|
INCOME BEFORE INCOME TAXES
|
|
599
|
|
|
575
|
|
|
1,147
|
|
|
1,040
|
|
Less: Income tax expense
|
|
158
|
|
|
148
|
|
|
301
|
|
|
280
|
|
CONSOLIDATED NET INCOME
|
|
441
|
|
|
427
|
|
|
846
|
|
|
760
|
|
Less: Net income attributable to noncontrolling interest
|
|
17
|
|
|
21
|
|
|
26
|
|
|
33
|
|
NET INCOME ATTRIBUTABLE TO CUMMINS INC.
|
|
$
|
424
|
|
|
$
|
406
|
|
|
$
|
820
|
|
|
$
|
727
|
|
____________________________________
(1)
Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and six months ended July 2, 2017 and July 3, 2016.
LIQUIDITY AND CAPITAL RESOURCES
Key Working Capital and Balance Sheet Data
We fund our working capital with cash from operations and short-term borrowings, including commercial paper, 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:
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
|
July 2,
2017
|
|
December 31,
2016
|
Working capital
(1)
|
|
$
|
3,708
|
|
|
$
|
3,382
|
|
Current ratio
|
|
1.76
|
|
|
1.78
|
|
Accounts and notes receivable, net
|
|
$
|
3,553
|
|
|
$
|
3,025
|
|
Days’ sales in receivables
|
|
62
|
|
|
61
|
|
Inventories
|
|
$
|
2,982
|
|
|
$
|
2,675
|
|
Inventory turnover
|
|
4.9
|
|
|
4.7
|
|
Accounts payable (principally trade)
|
|
$
|
2,300
|
|
|
$
|
1,854
|
|
Days' payable outstanding
|
|
52
|
|
|
51
|
|
Total debt
|
|
$
|
1,797
|
|
|
$
|
1,856
|
|
Total debt as a percent of total capital
|
|
18.7
|
%
|
|
20.6
|
%
|
____________________________________
(1)
Working capital includes cash and cash equivalents.
Cash Flows
Cash and cash equivalents were impacted as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
In millions
|
|
July 2,
2017
|
|
July 3,
2016
|
|
Change
|
Net cash provided by operating activities
|
|
$
|
826
|
|
|
$
|
738
|
|
|
$
|
88
|
|
Net cash used in investing activities
|
|
(160
|
)
|
|
(391
|
)
|
|
231
|
|
Net cash used in financing activities
|
|
(544
|
)
|
|
(896
|
)
|
|
352
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
51
|
|
|
(117
|
)
|
|
168
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
173
|
|
|
$
|
(666
|
)
|
|
$
|
839
|
|
Net cash
provided by
operating activities
increase
d
$88 million
for the
six months ended July 2, 2017
, versus the comparable period in
2016
, primarily due to higher consolidated net income, the absence of restructuring payments and lower working capital levels, partially offset by higher equity in income of investees and the absence of loss contingency charges. During the first
six
months of
2017
, the
lower
working capital requirements resulted in a cash
outflow
of
$196 million
compared to a cash
outflow
of
$230 million
in the comparable period in
2016
.
Net cash
used in
investing activities
decrease
d
$231 million
for the
six months ended July 2, 2017
, versus the comparable period in
2016
, primarily due to lower net investments in marketable securities of $235 million.
Net cash
used in
financing activities
decrease
d
$352 million
for the
six months ended July 2, 2017
, versus the comparable period in
2016
, primarily due to lower repurchases of common stock of $575 million and lower payments on borrowings and capital lease obligations of $104 million, partially offset by lower net borrowings of commercial paper of $278 million and lower proceeds from borrowings of $107 million.
The effect of exchange rate changes on cash and cash equivalents for the
six months ended July 2, 2017
, versus the comparable period in
2016
, increased
$168 million
primarily due to the British pound, which increased cash and cash equivalents by $150 million.
Sources of Liquidity
We generate significant ongoing cash flow. Cash provided by operations is our principal source of liquidity with
$826 million
provided in the
six months ended July 2, 2017
.
At
July 2, 2017
, our other sources of liquidity included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2, 2017
|
In millions
|
|
Total
|
|
U.S.
|
|
International
|
|
Primary location of international balances
|
Cash and cash equivalents
|
|
$
|
1,293
|
|
|
$
|
245
|
|
|
$
|
1,048
|
|
|
U.K., Singapore, China, Canada,
Australia
|
Marketable securities
(1)
|
|
174
|
|
|
41
|
|
|
133
|
|
|
India
|
Total
|
|
$
|
1,467
|
|
|
$
|
286
|
|
|
$
|
1,181
|
|
|
|
Available credit capacity
|
|
|
|
|
|
|
|
|
Revolving credit facility
(2)
|
|
$
|
1,616
|
|
|
|
|
|
|
|
International and other uncommitted domestic credit facilities
(3)
|
|
$
|
170
|
|
|
|
|
|
|
|
____________________________________
(1)
The majority of marketable securities could be liquidated into cash within a few days.
(2)
The revolving credit facility is maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At July 2, 2017, we had
$134 million
of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facility to
$1.62 billion
.
(3)
The available capacity is net of letters of credit.
Cash, Cash Equivalents and Marketable Securities
A significant portion of our cash flows is generated outside the U.S.
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 operating needs with local resources.
Debt Facilities and Other Sources of Liquidity
We can issue up to $1.75 billion of unsecured short-term promissory notes ("commercial paper") pursuant to a commercial paper program. The program facilitates the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper program for general corporate purposes and acquisitions.
We have a
$1.75 billion
revolving credit facility, the proceeds of which can be used for general corporate purposes. This facility expires on November 13, 2020. The revolving credit facility is maintained primarily to provide backup liquidity for our commercial paper borrowings, letters of credit and general corporate purposes. The total combined borrowing capacity under the revolving credit facility and commercial paper program should not exceed $1.75 billion.
As a well-known seasoned issuer, we filed an automatic shelf registration for an undetermined amount of debt and equity securities with the Securities and Exchange Commission on February 16, 2016. Under this shelf registration 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.
Uses of Cash
Share Repurchases
In December 2016, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon completion of the 2015 repurchase plan.
In the first six months of
2017
, we made the following purchases under the 2015 stock repurchase program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions, except per share amounts
|
|
Shares
Purchased
|
|
Average Cost
Per Share
|
|
Total Cost of
Repurchases
|
|
Remaining
Authorized
Capacity
(1)
|
April 2
|
|
0.3
|
|
|
$
|
151.32
|
|
|
$
|
51
|
|
|
$
|
445
|
|
July 2
|
|
0.5
|
|
|
153.95
|
|
|
69
|
|
|
376
|
|
Total
|
|
0.8
|
|
|
$
|
152.82
|
|
|
$
|
120
|
|
|
|
____________________________________
(1)
The remaining authorized capacity under the 2015 Plan was calculated based on the cost to purchase the shares but excludes commission expenses in accordance with the authorized Plan.
We may continue to repurchase outstanding shares from time to time
during 2017
to enhance shareholder value and to offset the dilutive impact of employee stock based compensation plans.
Dividends
In July 2017, our Board of Directors authorized an increase to our quarterly dividend of 5.4 percent from $1.025 per share to $1.08 per share.
We paid dividends of
$343 million
during the
six months ended July 2, 2017
.
Agreement to Form a Joint Venture
In April 2017, we entered into an agreement to form a joint venture with Eaton Corporation PLC and we closed the transaction on July 31, 2017. We purchased a
50 percent
interest in the new venture named Eaton Cummins Automated Transmission Technologies for
$600 million
, which we funded with a combination of cash and short-term debt.
We are still in the process of finalizing the purchase accounting and we do not expect this new venture to have a significant impact on our consolidated results in 2017.
Capital Expenditures
Capital expenditures, including spending on internal use software, for the
six months ended July 2, 2017
, were
$222 million
compared to
$216 million
in the comparable period in
2016
.
We continue to invest in new product lines and targeted capacity expansions. We plan to spend between $500 million and $530 million in 2017 on capital expenditures 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 2017.
Pensions
Our global pension plans, including our unfunded and non-qualified plans, were 110 percent funded at December 31, 2016. Our U.S. qualified plans, which represent approximately 56 percent of the worldwide pension obligation, were 118 percent funded and our U.K. plans were 121 percent funded.
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
2017
,
the investment return on our U.S. pension trust was 7.1 percent while our U.K. pension trust return was 0.8 percent.
Approximately 76 percent of our pension plan assets are held in highly liquid investments such as fixed income and equity securities. The remaining 24 percent of our plan assets are held in less liquid, but market valued investments, including real estate, private equity, venture capital, opportunistic credit and insurance contracts.
We anticipate making additional defined benefit pension contributions during the remainder of
2017
of
$50 million
for our U.S. and U.K. pension plans. Approximately
$133 million
of the estimated
$134 million
of U.S. and U.K. pension contributions for the full year are voluntary. These contributions may be made from trusts or company funds either to increase pension assets or to make direct benefit payments to plan participants. We expect our
2017
net periodic pension cost to approximate
$83 million
.
Current Maturities of Short and Long-Term Debt
We had
$134 million
of commercial paper outstanding at
July 2, 2017,
that matures in less than one year. 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
$4 million
to
$45 million
over the next five years (including the remainder of 2017). See Note
7
"DEBT," to the
Condensed Consolidated Financial Statements
for additional information.
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.
|
|
|
|
|
|
|
|
|
|
Long-Term
|
|
Short-Term
|
|
|
Credit Rating Agency
(1)
|
|
Senior Debt Rating
|
|
Debt Rating
|
|
Outlook
|
Standard & Poor’s Rating Services
|
|
A+
|
|
A1
|
|
Stable
|
Moody’s Investors Service, Inc.
|
|
A2
|
|
P1
|
|
Stable
|
____________________________________
(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 us to have 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 operating cash flow and liquidity provides us with the financial flexibility needed to fund working capital, common stock repurchases, acquisitions, capital expenditures, dividend payments, projected pension obligations and debt service obligations. We continue to generate cash from operations and maintain access to our revolving credit facility as noted above.
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
2016
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 Form 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
2016
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
2017
.
RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 13, "RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS," in the
Notes to Condensed Consolidated Financial Statements
for additional information.
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
2016
Form 10-K. There have been no material changes in this information since the filing of our
2016
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
July 2, 2017
, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.