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:
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a sustained slowdown or significant downturn in our markets;
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a downturn in the North American truck industry;
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a major customer experiencing financial distress;
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changes in the engine outsourcing practices of significant customers;
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any significant problems in our new engine platforms;
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a further slowdown in infrastructure development;
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unpredictability in the adoption, implementation and enforcement of emission standards around the world;
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foreign currency exchange rate changes;
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the actions of, and income from, joint ventures and other investees that we do not directly control;
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the integration of our previously partially-owned United States and Canadian distributors;
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our plan to grow through strategic acquisitions and related uncertainties of entering into such transactions;
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challenges or unexpected costs in completing restructuring and cost reduction initiatives;
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supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers;
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variability in material and commodity costs;
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the development of new technologies;
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competitor pricing activity;
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increasing competition, including increased global competition among our customers in emerging markets;
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exposure to potential security breaches or other disruptions to our information technology systems and data security;
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political, economic and other risks from operations in numerous countries;
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global legal and ethical compliance costs and risks;
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aligning our capacity and production with our demand;
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product liability claims;
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increasingly stringent environmental laws and regulations;
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the price and availability of energy;
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the performance of our pension plan assets and volatility of discount rates;
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changes in actuarial and accounting standards;
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our sales mix of products;
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protection and validity of our patent and other intellectual property rights;
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technological implementation and cost/financial risks in our increasing use of large, multi-year contracts;
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the cyclical nature of some of our markets;
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the outcome of pending and future litigation and governmental proceedings;
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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
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other risk factors described in our Form 10-K, Part I, Item 1A under the caption “Risk Factors.”
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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
2015
Form 10-K and our July 26, 2016, 8-K addressing the segment reorganization. Our MD&A is presented in the following sections:
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Executive Summary and Financial Highlights
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Outlook
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Results of Operations
•
Operating Segment Results
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Liquidity and Capital Resources
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Application of Critical Accounting Estimates
•
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, Fiat Chrysler Automobiles, Volvo AB, Komatsu and MAN Nutzfahrzeuge AG.
We serve our customers through a network of approximately
600
company-owned and independent distributor locations and over
7,200
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 and marine), 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 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
decreased
9 percent
in the three months ended
October 2, 2016,
as compared to the same period in
2015
, primarily due to lower demand in most global on-highway markets, decreased demand in most global power generation markets, lower demand in most distribution markets and unfavorable foreign currency fluctuations, partially offset by sales increases related to the consolidation of North American distributors since December 31, 2014. Revenue in the U.S. and Canada
declined
by
13 percent
primarily due to decreased demand in the North American on-highway markets, partially offset by increased Distribution segment sales related to the consolidation of North American distributors. Continued global economic weakness in the
third
quarter of 2016 negatively impacted our international revenues (excludes the U.S. and Canada), which
declined
by
3 percent
, with sales down in many of our markets, especially in Africa, Korea, Mexico and Middle East. The decline in international sales was primarily due to unfavorable foreign currency impacts of
3 percent
of international sales (primarily in the
British pound and Chinese renminbi
) and lower demand in the power generation markets, especially in Middle East and Asia (excluding China).
Worldwide revenues declined 9 percent in the first nine months of 2016 as compared to the same period in 2015,
primarily due to lower demand in most global on-highway markets, decreased demand in most global power generation markets, unfavorable foreign currency fluctuations and lower demand in most global high-horsepower industrial markets, partially offset by sales increases related to the consolidation of North American distributors since December 31, 2014. Revenue in the U.S. and Canada
declined
by
12 percent
primarily due to decreased demand in the North American on-highway markets and lower demand in the industrial oil and gas, construction and mining markets, partially offset by increased Distribution segment sales related to the consolidation of North American distributors. Continued global economic weakness in 2016 negatively impacted our international revenues (excludes the U.S. and Canada), which
declined
by
5 percent
, with sales down in most of our markets, especially in South America, Mexico, Middle East and the U.K. The decline in international sales was primarily due to declines in most international power generation markets, unfavorable foreign currency impacts of
4 percent
of international sales (primarily in the
Chinese renminbi, British pound, Brazilian real, Indian rupee, Australian dollar and South African rand
), lower demand in the on-highway markets in Brazil and Mexico and decreased demand in international high-horsepower industrial markets led by declines in marine and mining.
The following tables contain sales and earnings before interest expense, income tax expense and noncontrolling interests (EBIT) results by operating segment for the three and
nine months ended October 2, 2016 and September 27, 2015
.
Refer to the section titled “Operating Segment Results” for a more detailed discussion of net sales and EBIT by operating segment, including the reconciliation of segment EBIT to income before income taxes.
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Three months ended
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Operating Segments
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October 2, 2016
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September 27, 2015
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Percent change
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Percent
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Percent
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2016 vs. 2015
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In millions
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Sales
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of Total
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EBIT
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Sales
(1)
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of Total
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EBIT
(1)
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Sales
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EBIT
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Engine
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$
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1,859
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44
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%
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$
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89
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$
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2,102
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45
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%
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$
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217
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(12
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)%
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(59
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)%
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Distribution
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1,504
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36
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%
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96
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1,551
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34
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%
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123
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(3
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)%
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(22
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)%
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Components
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1,143
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27
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%
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148
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1,240
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27
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%
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156
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(8
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)%
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(5
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)%
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Power Systems
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856
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21
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%
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59
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982
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21
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%
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74
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(13
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)%
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(20
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)%
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Intersegment eliminations
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(1,175
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)
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(28
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)%
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—
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(1,255
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)
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(27
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)%
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—
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(6
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)%
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—
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Non-segment
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—
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—
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6
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—
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—
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7
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—
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(14
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)%
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Total
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$
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4,187
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100
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%
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$
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398
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$
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4,620
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100
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%
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$
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577
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(9
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)%
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(31
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)%
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____________________________________
(1)
Sales and EBIT numbers were adjusted for the segment reorganization. See Note
13
, "
OPERATING SEGMENTS
," to the
Condensed Consolidated Financial Statements
for additional information.
Net income attributable to Cummins was
$289 million
, or
$1.72 per diluted share
, on sales of
$4.2 billion
for the three months ended
October 2, 2016
, versus the comparable prior year period net income attributable to Cummins of
$380 million
, or
$2.14
per diluted share, on sales of
$4.6 billion
. The
decrease
in net income and earnings per diluted share was driven by
lower gross margin and an accrual for a loss contingency, partially offset by decreased research, development and engineering expenses, a lower effective tax rate and decreased selling, general and administrative expenses
. The
decrease
in gross margin was primarily due to
lower volume and unfavorable mix, partially offset by lower material and commodity costs
.
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Nine months ended
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Operating Segments
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|
October 2, 2016
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September 27, 2015
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|
Percent change
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Percent
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Percent
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2016 vs. 2015
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In millions
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|
Sales
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of Total
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|
EBIT
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|
Sales
(1)
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|
of Total
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|
EBIT
(1)
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Sales
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EBIT
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Engine
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$
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5,837
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45
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%
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$
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492
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$
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6,572
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46
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%
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$
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695
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(11
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)%
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(29
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)%
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Distribution
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4,511
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35
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%
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|
270
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4,522
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32
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%
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|
324
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—
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%
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(17
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)%
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Components
|
|
3,659
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|
28
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%
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|
501
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3,936
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27
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%
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574
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(7
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)%
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(13
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)%
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Power Systems
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2,585
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|
20
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%
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|
195
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|
3,081
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|
21
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%
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|
302
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|
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(16
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)%
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(35
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)%
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Intersegment eliminations
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(3,586
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)
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(28
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)%
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|
—
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(3,767
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)
|
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(26
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)%
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—
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(5
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)%
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|
—
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|
Non-segment
|
|
—
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|
—
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|
15
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—
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|
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—
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(35
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)
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—
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NM
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Total
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$
|
13,006
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|
100
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%
|
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$
|
1,473
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|
|
$
|
14,344
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|
100
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%
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$
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1,860
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(9
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)%
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(21
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)%
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____________________________________
"NM" - not meaningful information
(1)
Sales and EBIT numbers were adjusted for the segment reorganization. See Note
13
, "
OPERATING SEGMENTS
," to the
Condensed Consolidated Financial Statements
for additional information.
Net income attributable to Cummins was $1.0 billion, or $5.99 per diluted share, on sales of $13.0 billion for the nine months ended October 2, 2016, versus the comparable prior year period net income attributable to Cummins of $1.2 billion, or $6.90 per diluted share, on sales of $14.3 billion.
The
decrease
in net income and earnings per diluted share was driven by
lower gross margin and an accrual for a loss contingency, partially offset by lower research, development and engineering expenses, decreased selling, general and administrative expenses and a lower effective tax rate.
The
decrease
in gross margin was primarily due to
lower volumes, unfavorable mix and unfavorable foreign currency fluctuations (primarily in the Canadian dollar, Australian dollar, Brazilian real and South African rand), partially offset by lower material and commodity costs, lower warranty expense and improved Distribution segment margins related to the acquisition of North American distributors since December 31, 2014
.
Diluted earnings per share for the nine months ended October 2, 2016, benefited $0.18 from fewer weighted average shares outstanding, primarily due to purchases under the stock repurchase programs.
We generated
$1.3 billion
of operating cash flows for the
nine months ended October 2, 2016
, compared to
$1.1 billion
for the same period in
2015
. 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 nine months of 2016, we repurchased
$745 million
, or
7.1 million
shares of common stock, including completion of the accelerated share repurchase agreement finalized in the second quarter of 2016. See Note
2
, "
BASIS OF PRESENTATION
," to the
Condensed Consolidated Financial Statements
for additional information.
Our debt to capital ratio (total capital defined as debt plus equity) at
October 2, 2016
, was
21.2 percent
, compared to
17.5 percent
at
December 31, 2015
. The increase was due to the repurchases of common stock and higher total debt, primarily due to the commercial paper program. At
October 2, 2016
, we had
$1.5 billion
in cash and marketable securities on hand and access to our credit facilities, if necessary, to meet currently anticipated investment and funding needs.
In July 2016, our Board of Directors authorized an increase to our quarterly dividend of 5.1 percent from $0.975 per share to $1.025 per share.
Our global pension plans, including our unfunded and non-qualified plans, were 111 percent funded at December 31, 2015. Our U.S. qualified plan, which represents approximately 57 percent of the worldwide pension obligation, was 119 percent funded and our U.K. plan was 123 percent funded.
We expect to contribute
$146 million
to our U.S. and U.K. pension plans and
$44 million
to our German pension plans in
2016
. In addition, we expect our
2016
net periodic pension cost to approximate
$42 million
. See Note
3
, "
PENSION AND OTHER POSTRETIREMENT BENEFITS
," to the
Condensed Consolidated Financial Statements
for additional information.
In the third quarter of 2016, we recorded an additional accrual of
$99 million
for an existing loss contingency. For the nine months ended October 2, 2016, we accrued a total of
$138 million
related to this matter. See Note
10
, "
COMMITMENTS AND CONTINGENCIES
," to the
Condensed Consolidated Financial Statements
for additional information.
We expect our effective tax rate for the full year of
2016
to approximate
25.5 percent
, excluding any one-time tax items.
In October 2016, we completed the acquisition of the remaining interest in the final previously unconsolidated North American distributor for
$97 million
and will recognize a gain of
$13 million
in the fourth quarter on the fair value adjustment resulting from the acquisition.
OUTLOOK
Our outlook reflects the following trends for the remainder of
2016
:
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•
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We expect demand for pick-up trucks in North America to remain strong.
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•
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We intend to realize annualized savings from the 2015 restructuring actions of approximately $160 million.
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Our outlook reflects the following challenges to our business that may reduce our revenue and earnings potential for the remainder of
2016
:
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•
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We expect industry production of heavy-duty trucks in North America to decline.
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•
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We expect power generation markets to remain weak.
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•
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We expect industry production of medium-duty trucks in North America to decline.
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•
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We expect North American construction markets to weaken.
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•
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We believe weak economic conditions in Brazil will continue to negatively impact demand across our businesses.
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•
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Foreign currency volatility could continue to put pressure on our revenues and earnings.
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•
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We expect market demand to remain weak in the oil and gas and commercial marine markets as the result of low crude oil prices.
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•
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We expect demand for equipment in global mining markets to remain weak.
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•
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We could close or restructure additional manufacturing facilities as we evaluate the appropriate size and structure of our manufacturing capacity, which could result in additional charges.
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RESULTS OF OPERATIONS
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|
Three months ended
|
|
Favorable/
|
|
Nine months ended
|
|
Favorable/
|
|
|
October 2,
2016
|
|
September 27,
2015
|
|
(Unfavorable)
|
|
October 2,
2016
|
|
September 27,
2015
|
|
(Unfavorable)
|
In millions (except per share amounts)
|
|
|
Amount
|
|
Percent
|
|
|
|
Amount
|
|
Percent
|
NET SALES
|
$
|
4,187
|
|
|
$
|
4,620
|
|
|
$
|
(433
|
)
|
|
(9
|
)%
|
|
$
|
13,006
|
|
|
$
|
14,344
|
|
|
$
|
(1,338
|
)
|
|
(9
|
)%
|
Cost of sales
|
3,108
|
|
|
3,412
|
|
|
304
|
|
|
9
|
%
|
|
9,674
|
|
|
10,609
|
|
|
935
|
|
|
9
|
%
|
GROSS MARGIN
|
1,079
|
|
|
1,208
|
|
|
(129
|
)
|
|
(11
|
)%
|
|
3,332
|
|
|
3,735
|
|
|
(403
|
)
|
|
(11
|
)%
|
OPERATING EXPENSES AND INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
513
|
|
|
530
|
|
|
17
|
|
|
3
|
%
|
|
1,527
|
|
|
1,584
|
|
|
57
|
|
|
4
|
%
|
Research, development and engineering expenses
|
157
|
|
|
197
|
|
|
40
|
|
|
20
|
%
|
|
478
|
|
|
558
|
|
|
80
|
|
|
14
|
%
|
Equity, royalty and interest income from investees
|
74
|
|
|
78
|
|
|
(4
|
)
|
|
(5
|
)%
|
|
234
|
|
|
240
|
|
|
(6
|
)
|
|
(3
|
)%
|
Loss contingency
|
99
|
|
|
—
|
|
|
(99
|
)
|
|
NM
|
|
|
138
|
|
|
—
|
|
|
(138
|
)
|
|
NM
|
|
Other operating expense, net
|
—
|
|
|
(2
|
)
|
|
2
|
|
|
100
|
%
|
|
(2
|
)
|
|
(5
|
)
|
|
3
|
|
|
60
|
%
|
OPERATING INCOME
|
384
|
|
|
557
|
|
|
(173
|
)
|
|
(31
|
)%
|
|
1,421
|
|
|
1,828
|
|
|
(407
|
)
|
|
(22
|
)%
|
Interest income
|
6
|
|
|
9
|
|
|
(3
|
)
|
|
(33
|
)%
|
|
18
|
|
|
20
|
|
|
(2
|
)
|
|
(10
|
)%
|
Interest expense
|
16
|
|
|
16
|
|
|
—
|
|
|
—
|
%
|
|
51
|
|
|
47
|
|
|
(4
|
)
|
|
(9
|
)%
|
Other income, net
|
8
|
|
|
11
|
|
|
(3
|
)
|
|
(27
|
)%
|
|
34
|
|
|
12
|
|
|
22
|
|
|
NM
|
|
INCOME BEFORE INCOME TAXES
|
382
|
|
|
561
|
|
|
(179
|
)
|
|
(32
|
)%
|
|
1,422
|
|
|
1,813
|
|
|
(391
|
)
|
|
(22
|
)%
|
Income tax expense
|
82
|
|
|
169
|
|
|
87
|
|
|
51
|
%
|
|
362
|
|
|
521
|
|
|
159
|
|
|
31
|
%
|
CONSOLIDATED NET INCOME
|
300
|
|
|
392
|
|
|
(92
|
)
|
|
(23
|
)%
|
|
1,060
|
|
|
1,292
|
|
|
(232
|
)
|
|
(18
|
)%
|
Less: Net income attributable to noncontrolling interests
|
11
|
|
|
12
|
|
|
1
|
|
|
8
|
%
|
|
44
|
|
|
54
|
|
|
10
|
|
|
19
|
%
|
NET INCOME ATTRIBUTABLE TO CUMMINS INC.
|
$
|
289
|
|
|
$
|
380
|
|
|
$
|
(91
|
)
|
|
(24
|
)%
|
|
$
|
1,016
|
|
|
$
|
1,238
|
|
|
$
|
(222
|
)
|
|
(18
|
)%
|
Diluted Earnings Per Common Share Attributable to Cummins Inc.
|
$
|
1.72
|
|
|
$
|
2.14
|
|
|
$
|
(0.42
|
)
|
|
(20
|
)%
|
|
$
|
5.99
|
|
|
$
|
6.90
|
|
|
$
|
(0.91
|
)
|
|
(13
|
)%
|
"NM" - not meaningful information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
(Unfavorable)
|
|
Nine months ended
|
|
Favorable/
(Unfavorable)
|
|
|
October 2,
2016
|
|
September 27,
2015
|
|
|
October 2,
2016
|
|
September 27,
2015
|
|
Percent of sales
|
|
|
|
Percentage Points
|
|
|
|
Percentage Points
|
Gross margin
|
|
25.8
|
%
|
|
26.1
|
%
|
|
(0.3
|
)
|
|
25.6
|
%
|
|
26.0
|
%
|
|
(0.4
|
)
|
Selling, general and administrative expenses
|
|
12.3
|
%
|
|
11.5
|
%
|
|
(0.8
|
)
|
|
11.7
|
%
|
|
11.0
|
%
|
|
(0.7
|
)
|
Research, development and engineering expenses
|
|
3.7
|
%
|
|
4.3
|
%
|
|
0.6
|
|
|
3.7
|
%
|
|
3.9
|
%
|
|
0.2
|
|
Net Sales
Net sales for the three months ended
October 2, 2016
,
decreased
by
$433 million
versus the comparable period in
2015
. The primary drivers were as follows:
|
|
•
|
Engine segment sales
decrease
d
12 percent
primarily due to lower demand in North American on-highway markets and lower demand in most North American off-highway markets, partially offset by increased sales in the light-duty automotive market.
|
|
|
•
|
Power Systems segment sales
decrease
d
13 percent
primarily due to lower demand in all reporting structures and decreased sales in most regions with the largest declines in Asia (excluding China), Middle East, North America and Africa.
|
|
|
•
|
Components segment sales
decrease
d
8 percent
primarily due to lower demand in most lines of businesses, primarily in North American on-highway markets, partially offset by higher demand in China.
|
|
|
•
|
Foreign currency fluctuations unfavorably impacted sales by approximately
2 percent
primarily in the
British pound and Chinese renminbi
.
|
|
|
•
|
Distribution segment sales
decrease
d
3 percent
, primarily due to a decline in organic sales in engine markets, partially offset by higher sales related to the acquisition of North American distributors since December 31, 2014.
|
Net sales for the nine months ended
October 2, 2016
,
decrease
d by
$1.3 billion
versus the comparable period in
2015
. The primary drivers were as follows:
|
|
•
|
Engine segment sales
decrease
d
11 percent
primarily due to lower demand in North American on-highway markets and lower demand in most global off-highway markets, partially offset by increased sales in the light-duty automotive market.
|
|
|
•
|
Power Systems segment sales
decrease
d
16 percent
primarily due to lower demand in all reporting structures and decreased sales in most regions with the largest declines in North America, China, Asia, Middle East, Africa, Western Europe and Mexico, partially offset by increased sales in Russia.
|
|
|
•
|
Components segment sales
decrease
d
7 percent
primarily due to lower demand in all lines of business, mostly in North American on-highway markets, partially offset by higher demand in China.
|
|
|
•
|
Foreign currency fluctuations unfavorably impacted sales by approximately
2 percent
primarily in the
Chinese renminbi, British pound, Brazilian real, Indian rupee, Canadian dollar, Australian dollar and South African rand
.
|
Sales to international markets, based on location of customers, for both the three and nine months ended October 2, 2016, were 41 percent of total net sales compared with 38 percent and 39 percent of total net sales, respectively, for the comparable periods in 2015. A more detailed discussion of sales by segment is presented in the “OPERATING SEGMENT RESULTS” section.
Gross Margin
Gross margin
decrease
d
$129 million
for the three months ended
October 2, 2016
, versus the comparable period in
2015
, and
decreased
0.3 point
s as a percentage of sales. The
decrease
in gross margin dollars was primarily due to
lower volume and unfavorable mix, partially offset by lower material and commodity costs
.
Gross margin decreased $403 million for the nine months ended October 2, 2016, versus the comparable period in 2015, and decreased 0.4 points as a percentage of sales
. The
decrease
in gross margin dollars was primarily due to
lower volumes, unfavorable mix and unfavorable foreign currency fluctuations (primarily in the Canadian dollar, Australian dollar, Brazilian real and South African rand), partially offset by lower material and commodity costs, lower warranty expense and improved Distribution segment margins related to the acquisition of North American distributors since December 31, 2014
.
The provision for base warranties issued, excluding campaigns, as a percent of sales for the three and nine months ended October 2, 2016, was 1.5 percent and 1.7 percent, respectively, compared to 1.8 percent and 2.0 percent for the comparable periods in 2015.
A more detailed discussion of margin by segment is presented in the “OPERATING SEGMENT RESULTS” section.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
decreased
$17 million
for the three months ended
October 2, 2016
, versus the comparable period in
2015
, primarily due to lower compensation expenses as a result of restructuring actions taken in the fourth quarter of 2015, partially offset by higher consulting expenses. Compensation and related expenses include salaries, fringe benefits and variable compensation. Overall, selling, general and administrative expenses, as a percentage of sales,
increased
to
12.3 percent
in the
three months ended October 2, 2016
, from
11.5 percent
in the comparable period in
2015
.
Selling, general and administrative expenses decreased $57 million for the nine months ended October 2, 2016, versus the comparable period in 2015
, primarily due to lower compensation expenses as a result of restructuring actions taken in the fourth quarter of 2015, and lower consulting expenses. Overall, selling, general and administrative expenses, as a percentage of sales,
increased
to
11.7 percent
in the
nine months ended October 2, 2016
, from
11.0 percent
in the comparable period in
2015
.
Research, Development and Engineering Expenses
Research, development and engineering expenses
decreased
$40 million
for the three months ended
October 2, 2016
, versus the comparable period in
2015
, primarily due to lower consulting expenses, decreased compensation expenses as a result of restructuring actions taken in the fourth quarter of 2015, and increased expense recovery from customers and external parties. Compensation and related expenses include salaries, fringe benefits and variable compensation. Overall, research, development and engineering expenses, as a percentage of sales,
decreased
to
3.7 percent
in the
three months ended October 2, 2016
, from
4.3 percent
in the comparable period in
2015
.
Research, development and engineering expenses decreased $80 million for the nine months ended October 2, 2016, versus the comparable period in 2015
, primarily due to lower consulting expenses and decreased compensation expenses as a result of restructuring actions taken in the fourth quarter of 2015. Overall, research, development and engineering expenses, as a
percentage of sales,
decreased
to
3.7 percent
in the
nine months ended October 2, 2016
, from
3.9 percent
in the comparable period in
2015
.
Research activities continue to focus on development of new products to meet future emission standards around the world and improvements in fuel economy performance.
Equity, Royalty and Interest Income from Investees
Equity, royalty and interest income from investees
decrease
d
$4 million
for the
three months ended October 2, 2016
, versus the comparable period in
2015
, primarily due to the impact of an asset impairment incurred by one of our Power Systems joint ventures ($8 million), partially offset by increased earnings at Chongqing Engine Company, Ltd.
Equity, royalty and interest income from investees
decrease
d
$6 million
for the
nine months ended October 2, 2016
, versus the comparable period in
2015
, primarily due to lower earnings from North American distributors ($9 million), the impact of an asset impairment incurred by one of our Power Systems joint ventures ($8 million) and decreased earnings at Dongfeng Cummins Engine Company, Ltd. ($8 million). These decreases were partially offset by higher earnings at Beijing Foton Cummins Engine Co., Ltd. ($12 million).
Loss Contingency
In the third quarter of 2016, we recorded an additional accrual of
$99 million
for an existing loss contingency. For the nine months ended October 2, 2016, we accrued a total of
$138 million
related to this matter. See Note
10
, "
COMMITMENTS AND CONTINGENCIES
," to the
Condensed Consolidated Financial Statements
for additional information.
Other Operating Expense, Net
Other operating expense, net
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
In millions
|
|
October 2,
2016
|
|
September 27,
2015
|
|
October 2,
2016
|
|
September 27,
2015
|
Loss on write off of assets
|
|
$
|
(5
|
)
|
|
$
|
(3
|
)
|
|
$
|
(14
|
)
|
|
$
|
(3
|
)
|
Amortization of intangible assets
|
|
(2
|
)
|
|
(4
|
)
|
|
(7
|
)
|
|
(15
|
)
|
Royalty income, net
|
|
7
|
|
|
4
|
|
|
20
|
|
|
14
|
|
Other, net
|
|
—
|
|
|
1
|
|
|
(1
|
)
|
|
(1
|
)
|
Total other operating expense, net
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
$
|
(5
|
)
|
Interest Income
Interest income for the three and nine months ended October 2, 2016,
decreased
$3 million
and
$2 million
, respectively, versus the comparable periods in 2015 primarily due to interest earned on a favorable tax settlement in Brazil in 2015.
Interest Expense
Interest expense for the three months ended October 2, 2016, remained flat versus the comparable period in 2015.
Interest expense for the nine months ended October 2, 2016,
increased
$4 million
versus the comparable period in 2015, primarily due to an increase in total weighted average debt outstanding.
Other Income, Net
Other income, net
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
In millions
|
|
October 2,
2016
|
|
September 27,
2015
|
|
October 2,
2016
|
|
September 27,
2015
|
Change in cash surrender value of corporate owned life insurance
|
|
$
|
10
|
|
|
$
|
(11
|
)
|
|
$
|
33
|
|
|
$
|
(9
|
)
|
Dividend income
|
|
1
|
|
|
—
|
|
|
3
|
|
|
2
|
|
Gain on fair value adjustment for consolidated investees
|
|
—
|
|
|
17
|
|
|
—
|
|
|
17
|
|
Foreign currency (loss) gain, net
|
|
—
|
|
|
3
|
|
|
(11
|
)
|
|
(2
|
)
|
Bank charges
|
|
(3
|
)
|
|
(3
|
)
|
|
(7
|
)
|
|
(7
|
)
|
Other, net
|
|
—
|
|
|
5
|
|
|
16
|
|
|
11
|
|
Total other income, net
|
|
$
|
8
|
|
|
$
|
11
|
|
|
$
|
34
|
|
|
$
|
12
|
|
Income Tax Expense
Our effective tax rate for the year is expected to approximate
25.5 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 nine months ended October 2, 2016
, was
21.5 percent
and
25.5 percent
, respectively.
Our effective tax rate for the
three and nine months ended September 27, 2015
, was
30.1 percent
and
28.7 percent
, respectively. The tax rate for the nine months ended September 27, 2015, included an
$18 million
discrete tax benefit to reflect the release of reserves for uncertain tax positions related to a favorable federal audit settlement.
The decrease in the effective tax rate for the three and nine months ended October 2, 2016, versus the comparable periods in 2015 was primarily due to favorable changes in the jurisdictional mix of pre-tax income.
It is reasonably possible that our existing liabilities for uncertain tax benefits may decrease in an amount ranging from
$20 million
to
$26 million
within the next 12 months for U.S. and non-U.S. audits that are in progress.
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 October 2, 2016
, remained relatively flat versus the comparable period in 2015.
Noncontrolling interests in income of consolidated subsidiaries for the
nine months ended October 2, 2016
,
decrease
d
$10 million
primarily due to lower earnings as a result of the consolidation of North American distributors since December 31, 2014 and lower earnings at Cummins India Ltd.
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 October 2, 2016
,
decrease
d
$91 million
and
$0.42
per share, respectively versus the comparable period in
2015
, primarily due to
lower gross margin and an accrual for a loss contingency, partially offset by decreased research, development and engineering expenses, a lower effective tax rate and decreased selling, general and administrative expenses
.
Net income and diluted earnings per share attributable to Cummins Inc. for the
nine months ended October 2, 2016
,
decrease
d
$222 million
and
$0.91
per share, respectively versus the comparable period in
2015
, primarily due to
lower gross margin and an accrual for a loss contingency, partially offset by lower research, development and engineering expenses, decreased selling, general and administrative expenses and a lower effective tax rate.
Diluted earnings per share for the nine months ended October 2, 2016, benefited $0.18 from fewer weighted average shares outstanding, primarily due to purchases under the stock repurchase programs.
Comprehensive Income - Foreign Currency Translation Adjustment
The foreign currency translation adjustment was a net loss of
$29 million
and
$299 million
, respectively, for the three and nine months ended October 2, 2016, compared to a net loss of
$221 million
and
$252 million
for the three and nine months ended September 27, 2015, respectively, and was driven by the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
October 2, 2016
|
|
September 27, 2015
|
In millions
|
|
Translation adjustment
|
|
Primary currency driver vs. U.S. dollar
|
|
Translation adjustment
|
|
Primary currency driver vs. U.S. dollar
|
Wholly owned subsidiaries
|
|
$
|
(33
|
)
|
|
British pound, Brazilian real offset by Indian rupee
|
|
$
|
(189
|
)
|
|
British pound, Brazilian real
|
Equity method investments
|
|
1
|
|
|
Indian rupee, Japanese yen offset by Chinese renminbi
|
|
(19
|
)
|
|
Chinese renminbi, Indian rupee
|
Consolidated subsidiaries with a non-controlling interest
|
|
3
|
|
|
Indian rupee
|
|
(13
|
)
|
|
Indian rupee
|
Total
|
|
$
|
(29
|
)
|
|
|
|
$
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
October 2, 2016
|
|
September 27, 2015
|
In millions
|
|
Translation adjustment
|
|
Primary currency driver vs. U.S. dollar
|
|
Translation adjustment
|
|
Primary currency driver vs. U.S. dollar
|
Wholly owned subsidiaries
|
|
$
|
(288
|
)
|
|
British pound, Chinese renminbi offset by Brazilian real
|
|
$
|
(218
|
)
|
|
Brazilian real, British pound
|
Equity method investments
|
|
(8
|
)
|
|
Chinese renminbi offset by Japanese yen, Mexican peso
(1)
|
|
(19
|
)
|
|
Chinese renminbi, Indian rupee
|
Consolidated subsidiaries with a non-controlling interest
|
|
(3
|
)
|
|
Indian rupee, Chinese renminbi
|
|
(15
|
)
|
|
Indian rupee
|
Total
|
|
$
|
(299
|
)
|
|
|
|
$
|
(252
|
)
|
|
|
____________________________________
(1)
The Mexican peso adjustment related to a reclassification out of other comprehensive income at the time of the sale of an equity investment in the first quarter of 2016.
OPERATING SEGMENT RESULTS
Our reporting structure is organized according to the products and markets each segment serves. We use segment EBIT as the primary basis for the Chief Operating Decision Maker (CODM) to evaluate the performance of each of our operating segments.
As previously announced, beginning with the second quarter of 2016, we realigned certain of our reportable segments to be consistent with changes to our organizational structure and how the CODM monitors the performance of our segments. We reorganized our business to combine our Power Generation segment and our high-horsepower engine business to create the new Power Systems segment. Our reportable operating segments consist of Engine, Distribution, Components and Power Systems. We began to report results for our new reporting structure in the second quarter of 2016 and also reflected this change for historical periods.
The formation of the Power Systems segment combined two businesses that were already strongly interdependent, which will allow us to streamline business and technical processes to accelerate innovation, grow market share and more efficiently manage our supply chain and manufacturing operations.
We allocate certain common costs and expenses, primarily corporate functions, among segments. These include certain costs and expenses of shared services, such as information technology, human resources, legal, finance and supply chain management. In addition to the reorganization noted above, we reevaluated the allocation of these costs, considering the new segment structure created in April 2016 and adjusted our allocation methodology accordingly. The revised methodology, which is based on a combination of relative segment sales and relative service usage levels, is effective for the periods beginning after January 1, 2016 and resulted in the revision of our segment operating results, including segment EBIT, for all four segments for the first quarter of 2016 with a greater share of costs allocated to the Distribution and Components segments than in previous years. Prior periods were not revised for the new allocation methodology. These changes had no impact on our consolidated results.
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/
|
|
Nine months ended
|
|
Favorable/
|
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
In millions
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
External sales
(1)
|
|
$
|
1,357
|
|
|
$
|
1,627
|
|
|
$
|
(270
|
)
|
|
(17
|
)%
|
|
$
|
4,350
|
|
|
$
|
5,150
|
|
|
$
|
(800
|
)
|
|
(16
|
)%
|
Intersegment sales
(1)
|
|
502
|
|
|
475
|
|
|
27
|
|
|
6
|
%
|
|
1,487
|
|
|
1,422
|
|
|
65
|
|
|
5
|
%
|
Total sales
|
|
1,859
|
|
|
2,102
|
|
|
(243
|
)
|
|
(12
|
)%
|
|
5,837
|
|
|
6,572
|
|
|
(735
|
)
|
|
(11
|
)%
|
Depreciation and amortization
|
|
42
|
|
|
47
|
|
|
5
|
|
|
11
|
%
|
|
121
|
|
|
140
|
|
|
19
|
|
|
14
|
%
|
Research, development and engineering expenses
|
|
56
|
|
|
73
|
|
|
17
|
|
|
23
|
%
|
|
166
|
|
|
195
|
|
|
29
|
|
|
15
|
%
|
Equity, royalty and interest income from investees
|
|
38
|
|
|
33
|
|
|
5
|
|
|
15
|
%
|
|
120
|
|
|
107
|
|
|
13
|
|
|
12
|
%
|
Loss contingency
|
|
99
|
|
|
—
|
|
|
(99
|
)
|
|
NM
|
|
|
138
|
|
|
—
|
|
|
(138
|
)
|
|
NM
|
|
Interest income
|
|
3
|
|
|
6
|
|
|
(3
|
)
|
|
(50
|
)%
|
|
8
|
|
|
10
|
|
|
(2
|
)
|
|
(20
|
)%
|
Segment EBIT
|
|
89
|
|
|
217
|
|
|
(128
|
)
|
|
(59
|
)%
|
|
492
|
|
|
695
|
|
|
(203
|
)
|
|
(29
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Points
|
|
|
|
|
|
|
|
Percentage Points
|
Segment EBIT as a percentage of total sales
|
|
4.8
|
%
|
|
10.3
|
%
|
|
|
|
|
(5.5
|
)
|
|
8.4
|
%
|
|
10.6
|
%
|
|
|
|
|
(2.2
|
)
|
____________________________________
"NM" - not meaningful information
(1)
Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.
In the second quarter of 2016, in conjunction with the reorganization of our segments, our Engine segment reorganized its reporting structure as follows:
|
|
•
|
Heavy-duty truck -
We manufacture diesel engines that range from 310 to 600 horsepower serving global heavy-duty truck customers worldwide, primarily in North America.
|
|
|
•
|
Medium-duty truck and bus -
We manufacture diesel engines ranging from 200 to 450 horsepower serving medium-duty truck and bus customers worldwide, with key markets including North America, Latin America, Europe and Mexico. We also provide diesel and natural gas engines for school buses, transit buses and shuttle buses worldwide,
|
with key markets including North America, Europe, Latin America and Asia, and diesel engines for Class A motor homes (RVs), primarily in North America.
|
|
•
|
Light-duty automotive (Pickup and Light Commercial Vehicle (LCV)) -
We manufacture 105 to 385 horsepower diesel engines, including engines for the pickup truck market for Chrysler and Nissan in North America, and LCV markets in Europe, Latin America and Asia.
|
|
|
•
|
Off-highway -
We provide diesel engines that range from 60 to 755 horsepower to key global markets including construction, mining, rail, defense, agriculture, marine, and oil and gas equipment and also to the power generation business for standby, mobile and distributed power generation solutions throughout the world.
|
Sales for our Engine segment by market were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
|
|
Nine months ended
|
|
Favorable/
|
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
In millions
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
Heavy-duty truck
|
|
$
|
625
|
|
|
$
|
784
|
|
|
$
|
(159
|
)
|
|
(20
|
)%
|
|
$
|
1,878
|
|
|
$
|
2,416
|
|
|
$
|
(538
|
)
|
|
(22
|
)%
|
Medium-duty truck and bus
|
|
517
|
|
|
585
|
|
|
(68
|
)
|
|
(12
|
)%
|
|
1,666
|
|
|
1,867
|
|
|
(201
|
)
|
|
(11
|
)%
|
Light-duty automotive
|
|
345
|
|
|
339
|
|
|
6
|
|
|
2
|
%
|
|
1,172
|
|
|
1,074
|
|
|
98
|
|
|
9
|
%
|
Total on-highway
|
|
1,487
|
|
|
1,708
|
|
|
(221
|
)
|
|
(13
|
)%
|
|
4,716
|
|
|
5,357
|
|
|
(641
|
)
|
|
(12
|
)%
|
Off-highway
|
|
372
|
|
|
394
|
|
|
(22
|
)
|
|
(6
|
)%
|
|
1,121
|
|
|
1,215
|
|
|
(94
|
)
|
|
(8
|
)%
|
Total sales
|
|
$
|
1,859
|
|
|
$
|
2,102
|
|
|
$
|
(243
|
)
|
|
(12
|
)%
|
|
$
|
5,837
|
|
|
$
|
6,572
|
|
|
$
|
(735
|
)
|
|
(11
|
)%
|
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/
|
|
Nine months ended
|
|
Favorable/
|
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
Heavy-duty
|
|
20,100
|
|
|
28,600
|
|
|
(8,500
|
)
|
|
(30
|
)%
|
|
60,500
|
|
|
90,100
|
|
|
(29,600
|
)
|
|
(33
|
)%
|
Medium-duty
|
|
53,400
|
|
|
59,600
|
|
|
(6,200
|
)
|
|
(10
|
)%
|
|
171,100
|
|
|
187,400
|
|
|
(16,300
|
)
|
|
(9
|
)%
|
Light-duty
|
|
49,800
|
|
|
47,800
|
|
|
2,000
|
|
|
4
|
%
|
|
168,600
|
|
|
152,400
|
|
|
16,200
|
|
|
11
|
%
|
Total unit shipments
|
|
123,300
|
|
|
136,000
|
|
|
(12,700
|
)
|
|
(9
|
)%
|
|
400,200
|
|
|
429,900
|
|
|
(29,700
|
)
|
|
(7
|
)%
|
Sales
Engine segment sales for the
three months ended October 2, 2016
,
decrease
d
$243 million
versus the comparable period in
2015
. The following were the primary drivers:
|
|
•
|
Heavy-duty truck engine sales
decrease
d
$159 million
primarily due to lower demand in the North American heavy-duty truck market with decreased engine shipments of 36 percent.
|
|
|
•
|
Medium-duty truck and bus sales
decrease
d
$68 million
primarily due to lower demand in global medium-duty truck markets with decreased engine shipments of 18 percent, primarily in North America, Western Europe and Latin America (excluding Brazil).
|
|
|
•
|
Off-highway sales
decrease
d
$22 million
primarily due to decreased engine shipments to most industrial markets in North America, partially offset by increased unit shipments of 22 percent in international construction markets.
|
The decreases above were partially offset by an
increase
in light-duty automotive sales of
$6 million
primarily due to new sales for the Nissan pick-up truck platform launched in the second half of 2015.
Total on-highway-related sales for the
three months ended October 2, 2016
, were
80 percent
of total engine segment sales, compared to
81 percent
for the comparable period in
2015
.
Engine segment sales for the nine months ended October 2, 2016, decreased $735 million versus the comparable period in 2015.
The following were the primary drivers:
|
|
•
|
Heavy-duty truck engine sales
decrease
d
$538 million
primarily due to lower demand in the North American heavy-duty truck market with decreased engine shipments of 39 percent.
|
|
|
•
|
Medium-duty truck and bus sales
decrease
d
$201 million
primarily due to lower demand in most global medium-duty truck markets with decreased engine shipments of 18 percent, primarily in North America, Brazil and Mexico.
|
|
|
•
|
Off-highway sales
decrease
d
$94 million
primarily due to decreased engine shipments in most North American industrial markets, partially offset by increased unit shipments of 21 percent in international construction markets.
|
The decreases above were partially offset by an
increase
in light-duty automotive sales of
$98 million
primarily due to new sales for the Nissan pick-up truck platform launched in the second half of 2015.
Total on-highway-related sales for the nine months ended October 2, 2016, were 81 percent of total engine segment sales, compared to 82 percent for the comparable period in 2015.
Segment EBIT
Engine segment EBIT for the
three months ended October 2, 2016
,
decrease
d
$128 million
versus the comparable period in
2015
primarily due to an additional accrual for a loss contingency and lower gross margin, partially offset by lower research, development and engineering expenses and lower selling, general and administrative expenses.
Engine segment EBIT for the nine months ended October 2, 2016, decreased $203 million versus the comparable period in 2015 primarily due to
lower gross margin and an additional accrual for a loss contingency, partially offset by lower selling, general and administrative expenses, lower research, development and engineering expenses and 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
|
|
Nine months ended
|
|
|
October 2, 2016 vs. September 27, 2015
|
|
October 2, 2016 vs. September 27, 2015
|
|
|
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
|
|
$
|
(67
|
)
|
|
(16
|
)%
|
|
(1.1
|
)
|
|
$
|
(175
|
)
|
|
(14
|
)%
|
|
(0.6
|
)
|
Selling, general and administrative expenses
|
|
14
|
|
|
9
|
%
|
|
(0.2
|
)
|
|
64
|
|
|
13
|
%
|
|
0.1
|
|
Research, development and engineering expenses
|
|
17
|
|
|
23
|
%
|
|
0.5
|
|
|
29
|
|
|
15
|
%
|
|
0.2
|
|
Equity, royalty and interest income from investees
|
|
5
|
|
|
15
|
%
|
|
0.4
|
|
|
13
|
|
|
12
|
%
|
|
0.5
|
|
Loss contingency
(1)
|
|
(99
|
)
|
|
NM
|
|
|
NM
|
|
|
(138
|
)
|
|
NM
|
|
|
NM
|
|
______________________________________
"NM" - not meaningful information
(1)
See Note
10
, "
COMMITMENTS AND CONTINGENCIES
," to the
Condensed Consolidated Financial Statements
for additional information.
The
decrease
in gross margin dollars for the
three months ended October 2, 2016
, versus the comparable period in
2015
, was primarily due to lower volumes and unfavorable mix, partially offset by lower material and commodity costs and favorable product coverage. The
decrease
in selling, general and administrative expenses was primarily due to lower compensation expenses as the result of restructuring actions taken in the fourth quarter of 2015, and lower consulting expenses. The
decrease
in research, development and engineering expenses was primarily due to lower compensation expenses as the result of restructuring actions taken in the fourth quarter of 2015.
The decrease in gross margin for the nine months ended October 2, 2016, versus the comparable period in 2015,
was primarily due to lower volumes and unfavorable mix, partially offset by favorable product coverage and lower material and commodity costs.
The decrease in selling, general and administrative expenses was primarily due to
lower compensation expenses as the result of restructuring actions taken in the fourth quarter of 2015, and lower consulting expenses.
The decrease in research, development and engineering expenses was primarily due to
lower compensation expenses as a result of restructuring actions taken in the fourth quarter of 2015, and higher expense recovery from customers and external parties, partially offset by increased engine testing costs.
The increase in equity, royalty and interest income from investees was primarily due to
increased earnings at Beijing Foton Cummins Engine Co., Ltd., partially offset by decreased earnings at Dongfeng Cummins Engine Company, Ltd. and Cummins Westport, Inc.
Distribution Segment Results
Financial data for the Distribution segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
|
|
Nine months ended
|
|
Favorable/
|
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
In millions
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
External sales
|
|
$
|
1,497
|
|
|
$
|
1,543
|
|
|
$
|
(46
|
)
|
|
(3
|
)%
|
|
$
|
4,493
|
|
|
$
|
4,499
|
|
|
$
|
(6
|
)
|
|
—
|
%
|
Intersegment sales
|
|
7
|
|
|
8
|
|
|
(1
|
)
|
|
(13
|
)%
|
|
18
|
|
|
23
|
|
|
(5
|
)
|
|
(22
|
)%
|
Total sales
|
|
1,504
|
|
|
1,551
|
|
|
(47
|
)
|
|
(3
|
)%
|
|
4,511
|
|
|
4,522
|
|
|
(11
|
)
|
|
—
|
%
|
Depreciation and amortization
|
|
28
|
|
|
26
|
|
|
(2
|
)
|
|
(8
|
)%
|
|
86
|
|
|
78
|
|
|
(8
|
)
|
|
(10
|
)%
|
Research, development and engineering expenses
|
|
3
|
|
|
2
|
|
|
(1
|
)
|
|
(50
|
)%
|
|
10
|
|
|
8
|
|
|
(2
|
)
|
|
(25
|
)%
|
Equity, royalty and interest income from investees
|
|
19
|
|
|
19
|
|
|
—
|
|
|
—
|
%
|
|
56
|
|
|
60
|
|
|
(4
|
)
|
|
(7
|
)%
|
Interest income
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
%
|
|
3
|
|
|
3
|
|
|
—
|
|
|
—
|
%
|
Segment EBIT
|
|
96
|
|
|
123
|
|
|
(27
|
)
|
|
(22
|
)%
|
|
270
|
|
|
324
|
|
|
(54
|
)
|
|
(17
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Points
|
|
|
|
|
|
Percentage Points
|
Segment EBIT as a percentage of total sales
|
|
6.4
|
%
|
|
7.9
|
%
|
|
|
|
|
(1.5
|
)
|
|
6.0
|
%
|
|
7.2
|
%
|
|
|
|
|
(1.2
|
)
|
Sales for our Distribution segment by region were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
|
|
Nine months ended
|
|
Favorable/
|
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
In millions
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
North & Central America
|
|
$
|
988
|
|
|
$
|
992
|
|
|
$
|
(4
|
)
|
|
—
|
%
|
|
$
|
2,928
|
|
|
$
|
2,901
|
|
|
$
|
27
|
|
|
1
|
%
|
Europe, CIS and China
|
|
185
|
|
|
190
|
|
|
(5
|
)
|
|
(3
|
)%
|
|
569
|
|
|
543
|
|
|
26
|
|
|
5
|
%
|
Asia Pacific
|
|
175
|
|
|
186
|
|
|
(11
|
)
|
|
(6
|
)%
|
|
531
|
|
|
550
|
|
|
(19
|
)
|
|
(3
|
)%
|
Africa
|
|
47
|
|
|
64
|
|
|
(17
|
)
|
|
(27
|
)%
|
|
154
|
|
|
169
|
|
|
(15
|
)
|
|
(9
|
)%
|
India
|
|
44
|
|
|
42
|
|
|
2
|
|
|
5
|
%
|
|
131
|
|
|
121
|
|
|
10
|
|
|
8
|
%
|
Middle East
|
|
38
|
|
|
48
|
|
|
(10
|
)
|
|
(21
|
)%
|
|
120
|
|
|
145
|
|
|
(25
|
)
|
|
(17
|
)%
|
South America
|
|
27
|
|
|
29
|
|
|
(2
|
)
|
|
(7
|
)%
|
|
78
|
|
|
93
|
|
|
(15
|
)
|
|
(16
|
)%
|
Total sales
|
|
$
|
1,504
|
|
|
$
|
1,551
|
|
|
$
|
(47
|
)
|
|
(3
|
)%
|
|
$
|
4,511
|
|
|
$
|
4,522
|
|
|
$
|
(11
|
)
|
|
—
|
%
|
Sales for our Distribution segment by product line were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
|
|
Nine months ended
|
|
Favorable/
|
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
In millions
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
Parts
(1)
|
|
$
|
643
|
|
|
$
|
604
|
|
|
$
|
39
|
|
|
6
|
%
|
|
$
|
1,933
|
|
|
$
|
1,775
|
|
|
$
|
158
|
|
|
9
|
%
|
Service
|
|
299
|
|
|
301
|
|
|
(2
|
)
|
|
(1
|
)%
|
|
895
|
|
|
892
|
|
|
3
|
|
|
—
|
%
|
Power generation
|
|
291
|
|
|
323
|
|
|
(32
|
)
|
|
(10
|
)%
|
|
892
|
|
|
893
|
|
|
(1
|
)
|
|
—
|
%
|
Engines
|
|
271
|
|
|
323
|
|
|
(52
|
)
|
|
(16
|
)%
|
|
791
|
|
|
962
|
|
|
(171
|
)
|
|
(18
|
)%
|
Total sales
|
|
$
|
1,504
|
|
|
$
|
1,551
|
|
|
$
|
(47
|
)
|
|
(3
|
)%
|
|
$
|
4,511
|
|
|
$
|
4,522
|
|
|
$
|
(11
|
)
|
|
—
|
%
|
____________________________________
(1 )
In conjunction with our segment realignment, we also changed "Parts and filtration" to "Parts."
Sales
Distribution segment sales for the
three months ended October 2, 2016
,
decrease
d
$47 million
versus the comparable period in
2015
, primarily due to a decline in organic sales of $75 million (primarily engine markets) and unfavorable foreign currency fluctuations (primarily in the Canadian dollar, Chinese renminbi, South African rand and British pound), partially offset by $42 million of sales related to the acquisition of North American distributors since December 31, 2014.
Distribution segment sales for the nine months ended October 2, 2016, decreased $11 million versus the comparable period in 2015
, primarily due to a decline in organic sales of $188 million (primarily engine markets) and unfavorable foreign currency fluctuations (primarily in the Canadian dollar, Australian dollar, South African rand, Indian rupee, Chinese renminbi and
Brazilian real), partially offset by $265 million of segment sales related to the acquisition of North American distributors since December 31, 2014.
Segment EBIT
Distribution segment EBIT for the
three months ended October 2, 2016
,
decrease
d
$27 million
versus the comparable period in
2015
, primarily due to higher selling, general and administrative expenses (mainly related to the acquisition of North American distributors since December 31, 2014) and unfavorable foreign currency fluctuations (primarily in the Canadian dollar and Australian dollar), partially offset by higher gross margin.
Distribution segment EBIT for the nine months ended October 2, 2016, decreased $54 million versus the comparable period in 2015, primarily due to
higher selling, general and administrative expenses (mainly related to the acquisition of North American distributors since December 31, 2014) and unfavorable foreign currency fluctuations (primarily in the Australian dollar, Canadian dollar and Nigerian naira), partially offset by higher gross margin. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
October 2, 2016 vs. September 27, 2015
|
|
October 2, 2016 vs. September 27, 2015
|
|
|
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
|
|
$
|
4
|
|
|
2
|
%
|
|
0.8
|
|
|
$
|
25
|
|
|
3
|
%
|
|
0.6
|
|
Selling, general and administrative expenses
|
|
(9
|
)
|
|
(5
|
)%
|
|
(1.0
|
)
|
|
(50
|
)
|
|
(10
|
)%
|
|
(1.1
|
)
|
Equity, royalty and interest income from investees
|
|
—
|
|
|
—
|
%
|
|
0.1
|
|
|
(4
|
)
|
|
(7
|
)%
|
|
(0.1
|
)
|
The
increase
in gross margin dollars for the
three months ended October 2, 2016
, versus the comparable period in
2015
, was primarily due to the acquisition of North American distributors since December 31, 2014 and improved pricing, partially offset by lower volumes and unfavorable foreign currency fluctuations (primarily in the Canadian dollar, Australian dollar and South African rand). The
increase
in selling, general and administrative expenses was primarily due to higher compensation expenses related to the acquisition of North American distributors and higher consulting expenses.
The increase in gross margin for the nine months ended October 2, 2016, versus the comparable period in 2015,
was primarily due to the acquisition of North American distributors since December 31, 2014 and improved pricing, partially offset by unfavorable foreign currency fluctuations (primarily in the Canadian dollar, Australian dollar and South African rand) and lower volumes.
The increase in selling, general and administrative expenses was primarily due to
higher compensation expenses related to the acquisition of North American distributors and higher consulting expenses.
Components Segment Results
Financial data for the Components segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
|
|
Nine months ended
|
|
Favorable/
|
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
In millions
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
External sales
(1)
|
|
$
|
824
|
|
|
$
|
891
|
|
|
$
|
(67
|
)
|
|
(8
|
)%
|
|
$
|
2,654
|
|
|
$
|
2,839
|
|
|
$
|
(185
|
)
|
|
(7
|
)%
|
Intersegment sales
(1)
|
|
319
|
|
|
349
|
|
|
(30
|
)
|
|
(9
|
)%
|
|
1,005
|
|
|
1,097
|
|
|
(92
|
)
|
|
(8
|
)%
|
Total sales
|
|
1,143
|
|
|
1,240
|
|
|
(97
|
)
|
|
(8
|
)%
|
|
3,659
|
|
|
3,936
|
|
|
(277
|
)
|
|
(7
|
)%
|
Depreciation and amortization
|
|
32
|
|
|
28
|
|
|
(4
|
)
|
|
(14
|
)%
|
|
95
|
|
|
82
|
|
|
(13
|
)
|
|
(16
|
)%
|
Research, development and engineering expenses
|
|
54
|
|
|
65
|
|
|
11
|
|
|
17
|
%
|
|
161
|
|
|
183
|
|
|
22
|
|
|
12
|
%
|
Equity, royalty and interest income from investees
|
|
9
|
|
|
9
|
|
|
—
|
|
|
—
|
%
|
|
29
|
|
|
26
|
|
|
3
|
|
|
12
|
%
|
Interest income
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
%
|
|
3
|
|
|
3
|
|
|
—
|
|
|
—
|
%
|
Segment EBIT
|
|
148
|
|
|
156
|
|
|
(8
|
)
|
|
(5
|
)%
|
|
501
|
|
|
574
|
|
|
(73
|
)
|
|
(13
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Points
|
|
|
|
|
|
Percentage Points
|
Segment EBIT as a percentage of total sales
|
|
12.9
|
%
|
|
12.6
|
%
|
|
|
|
|
0.3
|
|
|
13.7
|
%
|
|
14.6
|
%
|
|
|
|
|
(0.9
|
)
|
____________________________________
(1)
Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.
Sales for our Components segment by business were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
|
|
Nine months ended
|
|
Favorable/
|
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
In millions
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
Emission solutions
|
|
$
|
540
|
|
|
$
|
607
|
|
|
$
|
(67
|
)
|
|
(11
|
)%
|
|
$
|
1,771
|
|
|
$
|
1,899
|
|
|
$
|
(128
|
)
|
|
(7
|
)%
|
Filtration
|
|
244
|
|
|
240
|
|
|
4
|
|
|
2
|
%
|
|
758
|
|
|
761
|
|
|
(3
|
)
|
|
—
|
%
|
Turbo technologies
|
|
241
|
|
|
266
|
|
|
(25
|
)
|
|
(9
|
)%
|
|
782
|
|
|
874
|
|
|
(92
|
)
|
|
(11
|
)%
|
Fuel systems
|
|
118
|
|
|
127
|
|
|
(9
|
)
|
|
(7
|
)%
|
|
348
|
|
|
402
|
|
|
(54
|
)
|
|
(13
|
)%
|
Total sales
|
|
$
|
1,143
|
|
|
$
|
1,240
|
|
|
$
|
(97
|
)
|
|
(8
|
)%
|
|
$
|
3,659
|
|
|
$
|
3,936
|
|
|
$
|
(277
|
)
|
|
(7
|
)%
|
Sales
Components segment sales for the
three months ended October 2, 2016
,
decrease
d
$97 million
, across most lines of business, versus the comparable period in
2015
. The following were the primary drivers:
|
|
•
|
Emission solutions sales
decrease
d
$67 million
primarily due to lower demand in North American on-highway markets, partially offset by higher demand in China.
|
|
|
•
|
Turbo technologies sales
decrease
d
$25 million
primarily due to lower demand in North American on-highway markets.
|
|
|
•
|
Foreign currency fluctuations unfavorably impacted sales results primarily in the Chinese renminbi and British pound.
|
|
|
•
|
Fuel systems sales
decrease
d
$9 million
primarily due to lower demand in North American on-highway markets, partially offset by higher demand in China.
|
Components segment sales for the nine months ended October 2, 2016, decreased $277 million, across all lines of business, versus the comparable period in 2015
. The following were the primary drivers:
|
|
•
|
Emission solutions sales
decrease
d
$128 million
primarily due to lower demand in North American on-highway markets, partially offset by higher demand in China and Western Europe.
|
|
|
•
|
Turbo technologies sales
decrease
d
$92 million
primarily due to lower demand in North American on-highway markets.
|
|
|
•
|
Foreign currency fluctuations unfavorably impacted sales results primarily in the Chinese renminbi, British pound and Brazilian real.
|
|
|
•
|
Fuel systems sales
decrease
d
$54 million
primarily due to lower demand in North American on-highway markets, partially offset by higher demand in China.
|
Segment EBIT
Components segment EBIT for the
three months ended October 2, 2016
,
decrease
d
$8 million
versus the comparable period in
2015
, primarily due to lower gross margin and higher selling, general and administrative expenses, partially offset by lower research, development and engineering expenses.
Components segment EBIT for the nine months ended October 2, 2016, decreased $73 million versus the comparable period in 2015 primarily due to
lower gross margin, higher selling, general and administrative expenses and unfavorable foreign currency fluctuations (primarily in the Brazilian real and Chinese renminbi), partially offset by lower research, development and engineering expenses. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
October 2, 2016 vs. September 27, 2015
|
|
October 2, 2016 vs. September 27, 2015
|
|
|
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
|
|
$
|
(13
|
)
|
|
(4
|
)%
|
|
0.8
|
|
|
$
|
(72
|
)
|
|
(8
|
)%
|
|
(0.1
|
)
|
Selling, general and administrative expenses
|
|
(6
|
)
|
|
(7
|
)%
|
|
(1.1
|
)
|
|
(21
|
)
|
|
(9
|
)%
|
|
(1.1
|
)
|
Research, development and engineering expenses
|
|
11
|
|
|
17
|
%
|
|
0.5
|
|
|
22
|
|
|
12
|
%
|
|
0.2
|
|
Equity, royalty and interest income from investees
|
|
—
|
|
|
—
|
%
|
|
0.1
|
|
|
3
|
|
|
12
|
%
|
|
0.1
|
|
The
decrease
in gross margin for the
three months ended October 2, 2016
, versus the comparable period in
2015
, was primarily due to lower volumes and unfavorable pricing, partially offset by lower material costs. The
increase
in selling, general and administrative expenses was primarily due to higher consulting and compensation expenses as a result of absorbing a greater share of corporate costs under our new methodology, partially offset by savings from restructuring actions taken in the fourth quarter of 2015. The
decrease
in research, development and engineering expenses was primarily due to lower consulting expenses, higher expense recovery from customers and external parties and lower compensation expenses from restructuring actions taken in the fourth quarter of 2015.
The decrease in gross margin for the nine months ended October 2, 2016, versus the comparable period in 2015,
was primarily due to lower volumes, unfavorable pricing, unfavorable mix and unfavorable foreign currency fluctuations (primarily in the Brazilian real and Chinese renminbi), partially offset by lower material costs.
The increase in selling, general and administrative expenses was primarily due to
higher consulting and compensation expenses as a result of absorbing a greater share of corporate costs under our new methodology, partially offset by savings from restructuring actions taken in the fourth quarter of 2015.
The decrease in research, development and engineering expenses was primarily due to
lower consulting expenses, higher expense recovery from customers and external parties and lower compensation expenses from restructuring actions taken in the fourth quarter of 2015.
Power Systems Segment Results
Financial data for the Power Systems segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
|
|
Nine months ended
|
|
Favorable/
|
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
In millions
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
External sales
(1)
|
|
$
|
509
|
|
|
$
|
559
|
|
|
$
|
(50
|
)
|
|
(9
|
)%
|
|
$
|
1,509
|
|
|
$
|
1,856
|
|
|
$
|
(347
|
)
|
|
(19
|
)%
|
Intersegment sales
(1)
|
|
347
|
|
|
423
|
|
|
(76
|
)
|
|
(18
|
)%
|
|
1,076
|
|
|
1,225
|
|
|
(149
|
)
|
|
(12
|
)%
|
Total sales
|
|
856
|
|
|
982
|
|
|
(126
|
)
|
|
(13
|
)%
|
|
2,585
|
|
|
3,081
|
|
|
(496
|
)
|
|
(16
|
)%
|
Depreciation and amortization
|
|
29
|
|
|
27
|
|
|
(2
|
)
|
|
(7
|
)%
|
|
87
|
|
|
81
|
|
|
(6
|
)
|
|
(7
|
)%
|
Research, development and engineering expenses
|
|
44
|
|
|
57
|
|
|
13
|
|
|
23
|
%
|
|
141
|
|
|
172
|
|
|
31
|
|
|
18
|
%
|
Equity, royalty and interest income from investees
|
|
8
|
|
|
17
|
|
|
(9
|
)
|
|
(53
|
)%
|
|
29
|
|
|
47
|
|
|
(18
|
)
|
|
(38
|
)%
|
Interest income
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
%
|
|
4
|
|
|
4
|
|
|
—
|
|
|
—
|
%
|
Segment EBIT
|
|
59
|
|
|
74
|
|
|
(15
|
)
|
|
(20
|
)%
|
|
195
|
|
|
302
|
|
|
(107
|
)
|
|
(35
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Points
|
|
|
|
|
|
Percentage Points
|
Segment EBIT as a percentage of total sales
|
|
6.9
|
%
|
|
7.5
|
%
|
|
|
|
|
(0.6
|
)
|
|
7.5
|
%
|
|
9.8
|
%
|
|
|
|
|
(2.3
|
)
|
____________________________________
(1)
Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.
In the second quarter of 2016, in conjunction with the reorganization of our segments, our Power Systems segment reorganized its reporting structure into the following product lines:
|
|
•
|
Power generation -
We design, manufacture, sell and support generators ranging from 2 kilowatts to 3.5 megawatts, as well as paralleling systems and transfer switches, for applications such as residential, commercial, industrial, data centers, health care, telecommunications and waste water treatment plants. We also provide turnkey solutions for distributed generation and energy management applications using natural gas or biogas as a fuel. We also serves global rental accounts for diesel and gas generator sets.
|
|
|
•
|
Industrial -
We design, manufacture, sell and support diesel and natural gas high-horsepower engines up to 5,500 horsepower for a wide variety of equipment in the mining, rail, defense, oil and gas, and commercial marine applications throughout the world. Across these markets, we have major customers in North America, Europe, Middle East, Africa, China, Korea, Japan, Latin America, India, Russia, Southeast Asia, South Pacific and Mexico.
|
|
|
•
|
Generator technologies -
We design, manufacture, sell and support A/C generator/alternator products for internal consumption and for external generator set assemblers. Our products are sold under the Stamford, AVK and Markon brands and range in output from 3 kilovolt-amperes (kVA) to 12,000 kVA.
|
Sales for our Power Systems segment by product line were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
|
|
Nine months ended
|
|
Favorable/
|
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
In millions
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
Power generation
|
|
$
|
545
|
|
|
$
|
621
|
|
|
$
|
(76
|
)
|
|
(12
|
)%
|
|
$
|
1,662
|
|
|
$
|
1,955
|
|
|
$
|
(293
|
)
|
|
(15
|
)%
|
Industrial
|
|
233
|
|
|
275
|
|
|
(42
|
)
|
|
(15
|
)%
|
|
688
|
|
|
850
|
|
|
(162
|
)
|
|
(19
|
)%
|
Generator technologies
|
|
78
|
|
|
86
|
|
|
(8
|
)
|
|
(9
|
)%
|
|
235
|
|
|
276
|
|
|
(41
|
)
|
|
(15
|
)%
|
Total sales
|
|
$
|
856
|
|
|
$
|
982
|
|
|
$
|
(126
|
)
|
|
(13
|
)%
|
|
$
|
2,585
|
|
|
$
|
3,081
|
|
|
$
|
(496
|
)
|
|
(16
|
)%
|
High-horsepower unit shipments by engine classification were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Favorable/
|
|
Nine months ended
|
|
Favorable/
|
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
|
October 2,
|
|
September 27,
|
|
(Unfavorable)
|
Units
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
Power generation
|
|
2,000
|
|
|
2,000
|
|
|
—
|
|
|
—
|
%
|
|
6,000
|
|
|
6,700
|
|
|
(700
|
)
|
|
(10
|
)%
|
Industrial
|
|
1,000
|
|
|
1,200
|
|
|
(200
|
)
|
|
(17
|
)%
|
|
3,100
|
|
|
3,700
|
|
|
(600
|
)
|
|
(16
|
)%
|
Total engine shipments
|
|
3,000
|
|
|
3,200
|
|
|
(200
|
)
|
|
(6
|
)%
|
|
9,100
|
|
|
10,400
|
|
|
(1,300
|
)
|
|
(13
|
)%
|
Sales
Power Systems segment sales for the
three months ended October 2, 2016
,
decrease
d
$126 million
, across all product lines, versus the comparable period in
2015
. The following were the primary drivers:
|
|
•
|
Power generation sales
decrease
d
$76 million
, in most regions, with the largest declines in demand primarily in Middle East, Asia and North America.
|
|
|
•
|
Industrial sales
decrease
d
$42 million
primarily due to lower demand in North America (mainly oil and gas markets, partially offset by rail markets), Asia (mainly mining markets) and China (mainly marine markets).
|
|
|
•
|
Foreign currency fluctuations unfavorably impacted sales results primarily in the British pound and Indian rupee.
|
Power Systems segment sales for the nine months ended October 2, 2016, decreased $496 million, across all product lines, versus the comparable period in 2015
. The following were the primary drivers:
|
|
•
|
Power generation sales
decrease
d
$293 million
, in most regions, with the largest declines in demand primarily in China, Middle East, Asia, Western Europe, Africa, Mexico and Brazil.
|
|
|
•
|
Industrial sales
decrease
d
$162 million
primarily due to lower demand in North America (mainly oil and gas markets, partially offset by rail markets), China (mainly marine and mining markets), Asia (mainly marine and mining markets) and Western Europe (mostly mining markets).
|
|
|
•
|
Foreign currency fluctuations unfavorably impacted sales results primarily in the Indian rupee, British pound, Brazilian real and Chinese renminbi.
|
Segment EBIT
Power Systems segment EBIT for the
three months ended October 2, 2016
,
decrease
d
$15 million
versus the comparable period in
2015
, primarily due to lower gross margin, partially offset by lower selling, general and administrative expenses and favorable foreign currency fluctuations (primarily in the British pound).
Power Systems segment EBIT for the nine months ended October 2, 2016, decreased $107 million versus the comparable period in 2015 primarily due to
lower gross margin, partially offset by lower selling, general and administrative expenses, lower research, development and engineering expenses and favorable foreign currency fluctuations (primarily in the British pound). Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
October 2, 2016 vs. September 27, 2015
|
|
October 2, 2016 vs. September 27, 2015
|
|
|
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
|
|
$
|
(32
|
)
|
|
(14
|
)%
|
|
(0.3
|
)
|
|
$
|
(189
|
)
|
|
(24
|
)%
|
|
(2.4
|
)
|
Selling, general and administrative expenses
|
|
18
|
|
|
15
|
%
|
|
0.3
|
|
|
64
|
|
|
18
|
%
|
|
0.3
|
|
Research, development and engineering expenses
|
|
13
|
|
|
23
|
%
|
|
0.7
|
|
|
31
|
|
|
18
|
%
|
|
0.1
|
|
Equity, royalty and interest income from investees
|
|
(9
|
)
|
|
(53
|
)%
|
|
(0.8
|
)
|
|
(18
|
)
|
|
(38
|
)%
|
|
(0.4
|
)
|
The
decrease
in gross margin for the
three months ended October 2, 2016
, versus the comparable period in
2015
, was primarily due to lower volumes, partially offset by favorable foreign currency fluctuations (primarily in the British pound). The
decrease
in selling, general and administrative expenses was primarily due to lower compensation expenses as the result of restructuring actions taken in the fourth quarter of 2015, and lower consulting expenses. The
decrease
in research, development and engineering expenses was primarily due to lower consulting expenses and lower compensation expenses as the result of restructuring actions taken in the fourth quarter of 2015. The
decrease
in equity, royalty and interest income from investees was primarily due to the impact of an $8 million asset impairment incurred by one of our joint ventures.
The decrease in gross margin for the nine months ended October 2, 2016, versus the comparable period in 2015,
was primarily due to lower volumes, partially offset by favorable foreign currency fluctuations (primarily in the British pound).
The decrease in selling, general and administrative expenses was primarily due to
lower compensation expenses as the result of restructuring actions taken in the fourth quarter of 2015, and lower consulting expenses.
The decrease in research, development and engineering expenses was primarily due to
lower consulting expenses and lower compensation expenses as the result of restructuring actions taken in the fourth quarter of 2015.
The decrease in equity, royalty and interest income from investees was primarily due to
the impact of an $8 million asset impairment incurred by one of our joint ventures.
Reconciliation of Segment EBIT to Income Before Income Taxes
The table below reconciles the segment information to the corresponding amounts in the
Condensed Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
In millions
|
|
October 2,
2016
|
|
September 27,
2015
|
|
October 2,
2016
|
|
September 27,
2015
|
Total EBIT
|
|
$
|
392
|
|
|
$
|
570
|
|
|
$
|
1,458
|
|
|
$
|
1,895
|
|
Non-segment EBIT
(1)
|
|
6
|
|
|
7
|
|
|
15
|
|
|
(35
|
)
|
Total segment EBIT
|
|
398
|
|
|
577
|
|
|
1,473
|
|
|
1,860
|
|
Less: Interest expense
|
|
16
|
|
|
16
|
|
|
51
|
|
|
47
|
|
Income before income taxes
|
|
$
|
382
|
|
|
$
|
561
|
|
|
$
|
1,422
|
|
|
$
|
1,813
|
|
____________________________________
(1)
Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and nine months ended October 2, 2016 and September 27, 2015.
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
|
|
October 2,
2016
|
|
December 31,
2015
|
Working capital
(1)
|
|
$
|
3,486
|
|
|
$
|
4,144
|
|
Current ratio
|
|
1.81
|
|
|
2.09
|
|
Accounts and notes receivable, net
|
|
$
|
2,873
|
|
|
$
|
2,820
|
|
Days’ sales in receivables
|
|
60
|
|
|
55
|
|
Inventories
|
|
$
|
2,820
|
|
|
$
|
2,707
|
|
Inventory turnover
|
|
4.5
|
|
|
4.9
|
|
Accounts payable (principally trade)
|
|
$
|
1,781
|
|
|
$
|
1,706
|
|
Days' payable outstanding
|
|
50
|
|
|
48
|
|
Total debt
|
|
$
|
1,949
|
|
|
$
|
1,639
|
|
Total debt as a percent of total capital
(2)
|
|
21.2
|
%
|
|
17.5
|
%
|
____________________________________
(1)
Working capital includes cash and cash equivalents.
(2)
The increase in our debt to capital ratio was due to the repurchases of common stock and higher total debt, primarily due to the commercial paper program.
Cash Flows
Cash and cash equivalents were impacted as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
In millions
|
|
October 2,
2016
|
|
September 27,
2015
|
|
Change
|
Net cash provided by operating activities
|
|
$
|
1,310
|
|
|
$
|
1,131
|
|
|
$
|
179
|
|
Net cash used in investing activities
|
|
(590
|
)
|
|
(477
|
)
|
|
(113
|
)
|
Net cash used in financing activities
|
|
(1,041
|
)
|
|
(1,215
|
)
|
|
174
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
(139
|
)
|
|
(52
|
)
|
|
(87
|
)
|
Net decrease in cash and cash equivalents
|
|
$
|
(460
|
)
|
|
$
|
(613
|
)
|
|
$
|
153
|
|
Net cash
provided by
operating activities
increase
d
$179 million
for the
nine months ended October 2, 2016
, versus the comparable period in
2015
, primarily due to lower working capital levels and an increase in deferred income taxes, partially offset by lower consolidated net income, decreases from translation and hedging activities and restructuring payments. During the first
nine
months of
2016
, the
lower
working capital requirements resulted in a cash
outflow
of
$306 million
compared to a cash
outflow
of
$414 million
in the comparable period in
2015
.
Net cash
used in
investing activities
increase
d
$113 million
for the
nine months ended October 2, 2016
, versus the comparable period in
2015
, primarily due to higher net investments in marketable securities of $209 million and decreased cash flows from derivatives not designated as hedges of $81 million, partially offset by lower acquisitions of businesses, net of cash acquired of $101 million and lower capital expenditures of $81 million.
Net cash
used in
financing activities
decrease
d
$174 million
for the
nine months ended October 2, 2016
, versus the comparable period in
2015
, primarily due to higher net borrowings of commercial paper of $273 million, increased proceeds from borrowings of $87 million and higher net borrowings under short term credit agreements of $63 million, partially offset by higher common stock repurchases of $95 million, higher payments on borrowings and capital lease obligations of $92 million and higher dividend payments of $53 million.
The effect of exchange rate changes on cash and cash equivalents for the
nine months ended October 2, 2016
, versus the comparable period in
2015
, decreased
$87 million
primarily due to the British pound, which decreased cash and cash equivalents by $91 million.
Sources of Liquidity
We generate significant ongoing cash flow. Cash provided by operations is our principal source of liquidity with
$1.3 billion
provided in the
nine months ended October 2, 2016
.
At
October 2, 2016
, our other sources of liquidity included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2016
|
In millions
|
|
Total
|
|
U.S.
|
|
International
|
|
Primary location of international balances
|
Cash and cash equivalents
|
|
$
|
1,251
|
|
|
$
|
318
|
|
|
$
|
933
|
|
|
U.K., China, Singapore
|
Marketable securities
(1)
|
|
250
|
|
|
39
|
|
|
211
|
|
|
China, India
|
Total
|
|
$
|
1,501
|
|
|
$
|
357
|
|
|
$
|
1,144
|
|
|
|
Available credit capacity
|
|
|
|
|
|
|
|
|
Revolving credit facility
(2)
|
|
$
|
1,750
|
|
|
|
|
|
|
|
International and other uncommitted domestic credit facilities
(3)
|
|
153
|
|
|
|
|
|
|
|
____________________________________
(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 October 2, 2016, we had
$273 million
of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facility to
$1.48 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.
The geographic location of our cash and marketable securities aligns well with our ongoing investments. 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.
If we distribute our foreign cash balances to the U.S. or to other foreign subsidiaries, we could be required to accrue and pay U.S. taxes, for example, if we repatriated cash from certain foreign subsidiaries whose earnings we have asserted are permanently reinvested outside of the U.S. Foreign earnings for which we assert permanent reinvestment outside the U.S. consist primarily of earnings of our China and U.K. domiciled subsidiaries. At present, we do not foresee a need to repatriate any earnings from these subsidiaries for which we have asserted permanent reinvestment. However, to help fund cash needs of the U.S. or other international subsidiaries as they arise, we repatriate available cash from certain foreign subsidiaries whose earnings are not permanently reinvested when it is cost effective to do so. Earnings generated after 2011 from our China operations are considered permanently reinvested, while earnings generated prior to 2012, for which U.S. deferred tax liabilities have been recorded, are expected to be repatriated in future years.
Debt Facilities and Other Sources of Liquidity
In February 2016, the Board of Directors authorized the issuance of up to $1.75 billion of unsecured short-term promissory notes ("commercial paper") pursuant to a commercial paper program. The program will facilitate 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.
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 November 2015, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon the completion of the 2014 repurchase plan.
In the first nine months of
2016
, we made the following purchases under the respective stock repurchase programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions (except per share amounts)
For each quarter ended
|
|
Shares
Purchased
|
|
Average Cost
Per Share
|
|
Total Cost of
Repurchases
|
|
Cash Paid for Shares Not Received
|
|
Remaining
Authorized
Capacity
(1)
|
July 2014, $1 billion repurchase program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 3
(2)
|
|
2.7
|
|
|
$
|
100.12
|
|
|
$
|
274
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
November 2015, $1 billion repurchase program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 3
(2)
|
|
2.2
|
|
|
$
|
105.50
|
|
|
$
|
229
|
|
|
$
|
100
|
|
|
$
|
671
|
|
July 3
|
|
1.8
|
|
|
109.79
|
|
|
192
|
|
|
(100
|
)
|
|
579
|
|
October 2
|
|
0.4
|
|
|
126.13
|
|
|
50
|
|
|
—
|
|
|
529
|
|
Subtotal
|
|
4.4
|
|
|
109.13
|
|
|
471
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
7.1
|
|
|
$
|
105.63
|
|
|
$
|
745
|
|
|
$
|
—
|
|
|
|
____________________________________
(1)
The remaining authorized capacities under the 2014 and 2015 Plans were calculated based on the cost to purchase the shares but exclude commission expenses in accordance with the authorized Plans.
(2)
Upon completion of the ASR in the second quarter of 2016, the shares purchased and average cost per share were updated based on the final valuation.
In 2016, we entered into an accelerated share repurchase agreement with a third party financial institution to repurchase
$500 million
of our common stock under our previously announced share repurchase plans and received
4.7 million
shares at an average purchase price of
$105.50
per share.
We may continue to repurchase outstanding shares from time to time
during 2016
to enhance shareholder value and to offset the dilutive impact of employee stock based compensation plans.
Dividends
In July 2016, our Board of Directors authorized an increase to our quarterly dividend of 5.1 percent from $0.975 per share to $1.025 per share.
We paid dividends of
$505 million
during the
nine months ended October 2, 2016
.
Capital Expenditures
Capital expenditures and spending on internal use software for the
nine months ended October 2, 2016
, were
$354 million
compared to
$431 million
in the comparable period in
2015
.
Despite the challenging conditions in many of our markets, we continue to invest in new product lines and targeted capacity expansions. We plan to spend between $550 million and $600 million in 2016 as we continue with product launches and facility improvements. Approximately 40 percent of our capital expenditures are expected to be invested outside of the U.S. in 2016.
Pensions
Our global pension plans, including our unfunded and non-qualified plans, were 111 percent funded at December 31, 2015. Our U.S. qualified plan, which represents approximately 57 percent of the worldwide pension obligation, was 119 percent funded and our U.K. plan was 123 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
nine
months of
2016
,
the investment return on our U.S. pension trust was 11.7 percent while our U.K. pension trust return was 22.0 percent.
Approximately 79 percent of our pension plan assets are held in highly liquid investments such as fixed income and equity securities. The remaining 21 percent of our plan assets are held in less liquid, but market valued investments, including real estate, private equity and insurance contracts.
We anticipate making additional defined benefit pension contributions during the remainder of
2016
of
$22 million
for our U.S. and U.K pension plans and
$44 million
(
$27 million
of which will be cash) for our German pension plans. The estimated
$146 million
of U.S. and U.K. pension contributions for the full year include voluntary contributions of approximately
$103 million
. The
$44 million
contribution to the German plans is 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
2016
net periodic pension cost to approximate
$42 million
.
Current Maturities of Short and Long-Term Debt
We had
$273 million
of commercial paper outstanding at
October 2, 2016,
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
$7 million
to
$31 million
over the next five years (including the remainder of 2016).
Restructuring Actions
We executed restructuring actions primarily in the form of professional voluntary and involuntary employee separation programs in the fourth quarter of 2015. We reduced our worldwide workforce by approximately
1,900
employees. We incurred a fourth quarter charge of
$90 million
(
$61 million
after tax) for these headcount reductions, with
$86 million
expected to be settled in cash, of which $60 million remained outstanding at December 31, 2015. In 2016, we paid
$53 million
(with approximately $7 million remaining) of restructuring payments and as of October 2, 2016 substantially all terminations were complete. See Note
12
, "
RESTRUCTURING ACTIONS AND OTHER CHARGES
," 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.
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Long-Term
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Short-Term
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Credit Rating Agency
(1)
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Senior Debt Rating
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Debt Rating
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Outlook
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Standard & Poor’s Rating Services
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A+
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A1
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Stable
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Fitch Ratings
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A
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F1
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Stable
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Moody’s Investors Service, Inc.
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A2
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P1
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Stable
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____________________________________
(1)
Credit ratings are not recommendations to buy, are subject to change and each rating should be evaluated independently of any other rating. In addition, we undertake no obligation to update disclosures concerning our credit ratings, whether as a result of new information, future events or otherwise.
Management's Assessment of Liquidity
Our financial condition and liquidity remain strong. Our solid balance sheet and credit ratings enable ready access to credit and the capital markets. We assess our liquidity in terms of our ability to generate adequate cash to fund our operating, investing and financing activities. We believe our operating cash flow and liquidity provides us with the financial flexibility needed to fund working capital, common stock repurchases, capital expenditures, dividend payments, projected pension obligations and debt service obligations. We continue to generate cash from operations in the U.S. and maintain access to our revolving credit facility.
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
2015
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
2015
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
nine
months of
2016
.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 14, "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
2015
Form 10-K. There have been no material changes in this information since the filing of our
2015
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
October 2, 2016
, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.