UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 20172020
Commission File Number 1-4949
CUMMINS INC.
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Indiana | | 35-0257090 |
| (State of Incorporation) | | 35-0257090
(IRS Employer Identification No.) |
500 Jackson Street
Box 3005
Columbus, Indiana 47202-3005
(Address of principal executive offices)
Telephone (812) 377-5000
Securities registered pursuant to Section 12(b) of the Act: |
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| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock,stock, $2.50 par value | | CMI | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definition of "large accelerated filer," "accelerated filer"filer," "smaller reporting company," and "smaller reporting"emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): |
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Large accelerated filer | x | | Accelerated filero | ☐ | | Non-accelerated filero(Do not check if a smaller reporting company)
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Smaller reporting company | o☐ | | Emerging growth company | ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒
The aggregate market value of the voting stock held by non-affiliates was approximately $27.2$24.9 billion at July 2, 2017.June 28, 2020. This value includes all shares of the registrant's common stock, except for treasury shares.
As of February 2, 2018,December 31, 2020, there were 165,683,334147,657,584 shares outstanding of $2.50 par value common stock.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement for its 20182021 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission on Schedule 14A within 120 days after the end of 2017,2020, will be incorporated by reference in Part III of this Form 10-K to the extent indicated therein upon such filing.
CUMMINS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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 annual 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:
GOVERNMENT REGULATION
•any adverse results of our internal review into our emissions certification process and compliance with emission standards;
a sustained slowdown or significant downturn in our markets;
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• | changes in the engine outsourcing practices of significant customers;
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• | the development of new technologies that reduce demand for our current products and services;
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• | any significant additional problems in our engine platforms or aftertreatment systems;
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lower than expected acceptance of new or existing products or services;
a slowdown in infrastructure development and/or depressed commodity prices;
•increased scrutiny from regulatory agencies, as well as unpredictability in the adoption, implementation and enforcement of emission standards around the world;
•policy changes in international trade;
•the U.K.'s exit from the European Union (EU);
•changes in taxation;
•global legal and ethical compliance costs and risks;
•increasingly stringent environmental laws and regulations;
•future bans or limitations on the use of diesel-powered products;
BUSINESS CONDITIONS / DISRUPTIONS
•supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers, including suppliers that may be impacted by the COVID-19 pandemic;
•market slowdown due to the impacts from the COVID-19 pandemic, other public health crises, epidemics or pandemics;
•impacts to manufacturing and supply chain abilities from an extended shutdown or disruption of our operations due to the COVID-19 pandemic;
•aligning our capacity and production with our demand, including impacts of COVID-19;
•large truck manufacturers and original equipment manufacturers (OEMs) customers discontinuing outsourcing their engine supply needs or experiencing financial distress, particularly related to the COVID-19 pandemic, bankruptcy or change in control;
•a slowdown in infrastructure development and/or depressed commodity prices;
•failure to realize expected results from our investment in Eaton Cummins Automated Transmission Technologies joint venture;
•the actions of, and income from, joint ventures and other investees that we do not directly control;
changesPRODUCTS AND TECHNOLOGY
•product recalls;
•the development of new technologies that reduce demand for our current products and services;
•lower than expected acceptance of new or existing products or services;
•variability in taxation;material and commodity costs;
•product liability claims;
•our sales mix of products;
•protection and validity of our patent and other intellectual property rights;
GENERAL
•disruptions in global credit and financial markets as the result of the COVID-19 pandemic;
•labor relations or work stoppages;
•reliance on our executive leadership team and other key personnel;
•climate change and global warming;
•our plan to reposition our portfolio of product offerings through exploration of strategic acquisitions and divestitures and related uncertainties of entering such transactions;
•exposure to potential security breaches or other disruptions to our information technology systems and data security;
a major customer experiencing financial distress;•political, economic and other risks from operations in numerous countries;
our plan to reposition our portfolio of product offerings through exploring strategic acquisitions and divestitures and related uncertainties of entering such transactions;•competitor activity;
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• | supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers;
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increasing competition, including increased global competition among our customers in emerging markets;
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• | policy changes in international trade;
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foreign currency exchange rate changes;
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•the performance of our pension plan assets and volatility of discount rates, particularly those related to the sustained slowdown of the global economy due to the COVID-19 pandemic; • | variability in material and commodity costs;
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• | failure to realize expected results from our investment in Eaton Cummins Automated Transmission Technologies joint venture;
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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;
future bans or limitations on the use of diesel-powered vehicles;
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 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 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 Item 1A1A. under the caption "Risk Factors."
Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this annual report and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
PART I
ITEM 1. Business
OVERVIEW
We were founded in 1919 as Cummins Engine Company, a corporation in Columbus, Indiana and one of the first diesel engine manufacturers. In 2001, we changed our name to Cummins Inc. We are a global power leader that designs, manufactures, distributes and services diesel, and natural gas, engineselectric and engine-related component products,hybrid powertrains and powertrain-related components including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated transmissions, and electric power generation systems.systems, batteries, electrified power systems, hydrogen production and fuel cell products. We sell our products to original equipment manufacturers (OEMs), distributors, dealers and other customers worldwide. We serve our customers through a network of approximatelyover 500 wholly-owned, joint venture and independent distributor locations and over 7,5009,000Cummins certified dealer locations in more thanwith service to approximately 190 countries and territories.
The outbreak of the coronavirus disease of 2019 (COVID-19) spread throughout the world and became a global pandemic with the resultant economic impacts evolving into a worldwide recession. The pandemic triggered a significant downturn in our markets globally, which continued to unfavorably impact market conditions throughout 2020 and these challenging market conditions could continue for an extended period of time. In an effort to contain the spread of COVID-19, maintain the well-being of our employees and stakeholders, match the reduced demand from our customers and in accordance with governmental requirements, we closed or partially shut down certain office, manufacturing, distribution and technical center facilities around the world in March 2020. Although most of our manufacturing, distribution and technical center facilities re-opened early in the second quarter of 2020, some operated at reduced capacities, most of our global office buildings remained closed through the remainder of 2020. Despite many of our markets recovering in the second half of 2020, the ongoing spread of the virus prior to widespread vaccination presents several risks to our business, especially in the first half of 2021.
COVID-19 vaccines are currently being administered around the world with the hope that the majority of the population will have access to the vaccine by the middle of 2021. If the distribution and the effectiveness of the vaccine are consistent with current government and health organization estimates, we anticipate the vaccine will mitigate the spread of the virus by the end of 2021 and allow a return to more normal operations in the second half of the year.
OPERATING SEGMENTS
We have fourfive complementary operating segments: Engine, Distribution, Components, Power Systems and Power Systems.New Power. These segments share technology, customers, strategic partners, brand recognition and our distribution network in order to compete more efficiently and effectively in their respective markets. In each of our operating segments, we compete worldwide with a number of other manufacturers and distributors that produce and sell similar products. Our products primarily compete primarily on the basis of performance, price, total cost of ownership, fuel economy, emissions compliance, speed of delivery, quality and customer supportsupport.
We use segment earnings or losses before interest expense, income taxes, depreciation and price. Financial information aboutamortization and noncontrolling interests (EBITDA) as the primary basis for the Chief Operating Decision Maker to evaluate the performance of each of our reportable operating segments. We believe EBITDA is a useful measure of our operating segments, including geographic information, is incorporated by reference fromperformance as it assists investors and debt holders in comparing our performance on a consistent basis without regard to financing methods, capital structure, income taxes or depreciation and amortization methods, which can vary significantly depending upon many factors. See Note 21,22, "OPERATING SEGMENTS," to the Consolidated Financial Statements for additional information and a reconciliation of our segment information to the corresponding amounts in our Consolidated Financial Statements.Statements of Net Income.
Engine Segment
Engine segment sales and earnings before interest and taxes (EBIT)EBITDA as a percentage of consolidated results were:
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| | | Years ended December 31, |
| | | 2020 | | 2019 | | 2018 |
Percent of consolidated net sales(1) | | 32 | % | | 34 | % | | 35 | % |
Percent of consolidated EBITDA(1) | | 41 | % | | 41 | % | | 41 | % |
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(1) Measured before intersegment eliminations | | | | | | |
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| | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 |
Percent of consolidated net sales(1) | | 34 | % | | 35 | % | | 36 | % |
Percent of consolidated EBIT(1) | | 40 | % | | 35 | % | | 30 | % |
(1) Measured before intersegment eliminations
OurThe Engine segment manufactures and markets a broad range of diesel and natural gas poweredgas-powered engines under the Cummins brand name, as well as certain customer brand names, for the heavy-heavy and medium-duty truck, bus, recreational vehicle (RV), light-duty automotive, construction, mining, marine, rail, oil and gas, defense and agricultural markets. We manufacture a wide variety of engine products including:
•Engines with a displacement range of 2.8 to 15 liters and horsepower ranging from 48 to 715 and
•New parts and service, as well as remanufactured parts and engines, primarily through our extensive distribution network.
OurThe Engine segment is organized by engine displacement size and serves these end-user markets:
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• | Heavy-duty truck -We manufacture diesel and natural gas engines that range from 310 to 605•Heavy-duty truck - We manufacture diesel and natural gas engines that range from 310 to 615 horsepower serving global heavy-duty truck customers worldwide, primarily in North America, China Latin America and Australia. |
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• | Medium-duty truck and bus -We manufacture diesel and natural gas engines ranging from 130 to 450 horsepower serving medium-duty truck and bus customers worldwide, with key markets including North America, Latin America, China, Europe and India. Applications include pickup and delivery trucks, vocational truck, school bus, transit bus and shuttle bus. We also provide diesel engines for Class A motor homes (RVs), primarily in North America.
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• | 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 Fiat Chrysler Automobiles (Fiat Chrysler) and Nissan in North America, and LCV markets in Europe, Latin America and China.
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Table of Contents•Medium-duty truck and bus - We manufacture diesel and natural gas engines ranging from 130 to 450 horsepower serving medium-duty truck and bus customers worldwide, with key markets including North America, Europe, Latin America, China, Australia and India. Applications include pick-up, delivery, emergency vehicles, regional haul and vocational trucks and school, transit and shuttle buses. We also provide diesel engines for Class A motor homes (RVs), primarily in North America.
•Light-duty automotive (Pick-up and Light Commercial Vehicle (LCV)) - We manufacture 105 to 400 horsepower diesel engines, including engines for the pick-up truck market for Stellantis N.V. (Chrysler) in North America and LCV markets in China, Russia, Latin America and Korea.
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• | •Off-highway - We manufacture diesel engines that range from 48 to 715 horsepower to 715 horsepower serving key global markets including construction, mining, marine, rail, oil and gas, defense and agriculture and construction equipment and also to the power generation business for standby, mobile and distributed power generation solutions throughout the world. |
The principal customers of our heavy-duty truck engines include truck manufacturers such as PACCAR Inc. (PACCAR), Navistar International Corporation (Navistar) and Daimler Trucks North America (Daimler). The principal customers of our medium-duty truck engines include truck manufacturers such as Daimler, PACCARNavistar and Navistar.PACCAR. The principal customers of our light-duty on-highway engines are Gorkovsky Avtomobilny Zavod, Anhui Jianghuai Automobile Group Co., Ltd., Volkswagen Caminhões e Ônibus and China National Heavy Duty Truck Group. The principal customer of our pick-up on-highway engines is Chrysler. We sell our industrial engines to manufacturers of construction agricultural and marineagricultural equipment, including Hyundai Heavy Industries, Xuzhou Construction Machinery Group, Komatsu, John Deere, JLG Industries, Inc. and Wirtgen. The principal customers of our light-duty on-highway engines are Fiat Chrysler, Nissan and manufacturers of RVs.Guangxi LiuGong Machinery Co., Ltd.
In the markets served by our Engine segment, we compete with independent engine manufacturers as well as OEMs who manufacture engines for their own products. Our primaryour competitors in North America are Daimler, Caterpillar Inc. (CAT), Volvo Powertrain, Ford Motor Company (Ford), PACCAR and Hino Power. Our primary competitors in international markets vary from country to country, with local manufacturers generally predominant in each geographic market.geography. Other independent engine manufacturers in international markets include Weichai Power Co. Ltd., Volvo AB (Volvo), Daimler AG, Volkswagen AG, MAN Nutzfahrzeuge AG (MAN), Scania AB, Fiat Power Systems, Guangxi Yuchai Group, Rolls-Royce Power Systems AG, CAT, Yanmar Co., Ltd.Caterpillar Inc. (CAT) and Deutz AG. Truck OEMs may also elect to produce their own engines and we must provide competitive products to win and keep their business. Truck OEMs that currently produce some or all of their own engines include Daimler, PACCAR, TRATON AG, Volvo Powertrain, Ford Motor Company, Navistar, Hino Power, China First Auto Works, Dongfeng Motor Corporation, CNH Industrial and Isuzu.
Distribution Segment
Distribution segment sales and EBITEBITDA as a percentage of consolidated results were:
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| | | Years ended December 31, |
| | | 2020 | | 2019 | | 2018 |
Percent of consolidated net sales(1) | | 29 | % | | 27 | % | | 26 | % |
Percent of consolidated EBITDA(1) | | 22 | % | | 18 | % | | 16 | % |
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(1) Measured before intersegment eliminations | | | | | | |
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| | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 |
Percent of consolidated net sales(1) | | 27 | % | | 28 | % | | 26 | % |
Percent of consolidated EBIT(1) | | 16 | % | | 20 | % | | 20 | % |
(1) Measured before intersegment eliminations
OurThe Distribution segment consistsis our primary sales, service and support channel. The segment serves our customers and certified dealers through a worldwide network of 28 wholly-owned, and 10 joint venture distributors that service and distributeindependent distribution locations. Wholly-owned locations operate and serve markets in the fulleight geographic regions noted below. Joint venture locations serve markets in South America, Southeast Asia, India, Middle East and Africa, while independent distribution locations serve markets in these and other geographies.
Distribution’s mission encompasses the sales and support of a wide range of our products and services, including power generation systems, high-horsepower engines, heavy-duty and medium-duty engines designed for on- and off-highway use, application engineering services, custom-designed assemblies, retail and wholesale aftermarket parts and in-shop and field-based repair services. Our familiarity with our customers and our markets allows us to end-users at approximately 450 locations in over 90 distribution territories. Our wholly-owned distributors are located in key markets, including North America, Australia, Europe, China, Africa, Russia, Japan, Brazil, Singaporeprovide sales, service and Central America, whilesupport to meet our joint venture distributors are located in key markets, including South America, the Middle East, India, Thailand and Singapore.customers' needs.
Parts;
Engines;
Power generation and
Service.
The Distribution segment is organized intoand managed as eight primary geographic regions:
regions, including North America;
America, Asia Pacific;
Europe;
Pacific, Europe, China, Africa and Middle East;
China;
India;
East, Russia, India and Latin America and
Russia.
Asia Pacific is composed of six smaller regional distributor organizations (South Pacific, Korea, Japan, Philippines, Malaysia and Singapore) which allow us to better manageAmerica. Across these vast geographic territories.
Our distribution network consists of independent, partially-owned and wholly-owned distributors which provide parts and service toregions, our customers. These full-service solutions include maintenance contracts, engineering services and integrated products, where we customize our products to cater to specific needs of end-users. Our distributors also serve and develop dealers, predominantly OEM dealers, in their territories by providing new products, technical support, tools, training, parts and product information.
The distribution segment is responsible for managing the operations of our wholly-owned and partially owned distributors as well as our relationships with independent distributors. Our Distribution segment serves a highly diverse customer base with approximately 38 percent of its 2017 and 2016 sales being generated from new engines and power generation equipment, with its remaining sales generated by parts and service revenue.
Our distributorslocations compete with distributors or dealers that offer similar products. In many cases, these competing distributors or dealers are owned by, or affiliated with the companies that are listed as competitors of ourthe Engine, Components or Power Systems segments. These competitors vary by geographical location.location and application market.
As part of our ongoing work to optimize marketplace coverage, we make regular operational and managerial changes to the number of outlets that provide sales, service and support to our customers. The current count of distribution and dealer locations is the result of recategorization that includes customer facing product and service operations and excludes non-customer facing locations that provide internal operational support. We serve our customers through a network of over 500 wholly-owned, joint venture and independent distributor locations and over 9,000Cummins certified dealer locations with service to approximately 190 countries and territories. Components Segment
Components segment sales and EBITEBITDA as a percentage of consolidated results were:
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| | | Years ended December 31, |
| | | 2020 | | 2019 | | 2018 |
Percent of consolidated net sales(1) | | 24 | % | | 24 | % | | 24 | % |
Percent of consolidated EBITDA(1) | | 32 | % | | 31 | % | | 29 | % |
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(1) Measured before intersegment eliminations | | | | | | |
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| | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 |
Percent of consolidated net sales(1) | | 23 | % | | 21 | % | | 21 | % |
Percent of consolidated EBIT(1) | | 32 | % | | 32 | % | | 34 | % |
(1) Measured before intersegment eliminations
OurThe Components segment supplies products which complement ourthe Engine and Power Systems segments, including aftertreatment systems, turbochargers, transmissions, filtration products, electronics and fuel systems for commercial diesel and natural gas applications. We develop aftertreatment systems, turbochargers, fuel systems, transmissions and electronics to meet increasingly stringent emission and fuel economy standards. We manufacture filtration systems for on- and off-highway heavy-duty and medium-duty equipment, and we are a supplier of filtration products for industrial vehicle applications. In addition, we develop
The Components segment is organized around the following businesses:
•Emission solutions - We are a global leader in designing, manufacturing and integrating aftertreatment technology and solutions for the commercial on and off-highway light-duty, medium-duty, heavy-duty and high-horsepower engine markets. Aftertreatment is the mechanism used to convert engine emissions of criteria pollutants, such as particulate matter, nitrogen oxides (NOx), carbon monoxide and unburned hydrocarbons into harmless emissions. Our products include custom engineering systems and integrated controls, oxidation catalysts, particulate filters, selective catalytic reduction systems and engineered components, including dosers. Our emission solutions business primarily serves markets in North America, Europe, China, India, Brazil, Russia and Australia. We serve both OEM first fit and retrofit customers.
•Turbo technologies - We design, manufacture and market turbochargers for light-duty, medium-duty, heavy-duty and high-horsepower diesel markets with worldwide sales and distribution. We provide critical air handling technologies for engines to help our customers meet increasingly stringentchallenging performance requirements and worldwide emission standardsstandards. We primarily serve markets in North America, Europe, China, India, Brazil, Russia and Australia.
•Filtration - We design, manufacture and sell filters, coolant and chemical products. Our filtration business offers over 8,800 products for first fit and aftermarket applications including air filters, fuel filters, fuel water separators, lube filters, hydraulic filters, coolants, fuel additives and other filtration systems to OEMs, dealers/distributors and end-users. We support a wide customer base in a diverse range of markets including on and off-highway segments such as oil and gas, agriculture, mining, construction, power generation and marine. We produce and sell globally recognized Fleetguard® branded products in over 130 countries including countries in North America, Europe, South America, Asia and Africa. Fleetguard products are available through thousands of distribution points worldwide.
•Electronics and fuel systems which have primarily supplied our Engine segment- We design, develop and our joint venture partners Beijing Foton, Dongfeng, Scaniasupply electronic control modules (ECMs), sensors and Tata.
In the first quarter of 2017, our Components segment reorganized its reporting structure to move the electronics business out of the emission solutions businesssupporting software for on-highway, off-highway and into thepower generation applications. We also design and manufacture new, replacement and remanufactured fuel systems business to enhance operational, administrativefor medium-duty, heavy-duty and product development efficiencies.high-horsepower diesel engine markets. We renamed our fuel systems business to electronicsprimarily serve markets in North America, China, India, Europe and fuel systems.Brazil.
In•Automated transmissions - We develop and supply automated transmissions for the third quarter ofheavy-duty commercial vehicle market. Formed in 2017, we formed the Eaton Cummins Automated Transmission Technologies joint venture (ECJV), which wasis a consolidated 50/50 joint venture between Cummins Inc. and includedEaton Corporation Plc. and serves markets in our Components segment as the automated transmissions business. See Note 18, "ACQUISITIONS", in the Notes to our Consolidated Financial Statements for additional information.North America and China.
Our Components segment is organized around the following businesses:
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• | Emission solutions - We are a global leader in designing, manufacturing and integrating aftertreatment technology and solutions for the commercial on- and off-highway light, medium, heavy-duty and high-horsepower engine markets. Aftertreatment is the mechanism used to convert engine emissions of criteria pollutants, such as particulate matter (PM), nitrogen oxides (NOx), carbon monoxide (CO) and unburned hydrocarbons (HC) into harmless emissions. Our products include custom engineering systems and integrated controls, oxidation catalysts, particulate filters, selective catalytic reduction systems and engineered components, including dosers. Our emission solutions business primarily serves markets in North America, Europe, China, India, Brazil, Russia and Australia. We serve both OEM first fit and retrofit customers.
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• | Turbo technologies - We design, manufacture and market turbochargers for light-duty, mid-range, heavy-duty and high-horsepower diesel markets with worldwide sales and distribution. We provide critical air handling technologies for engines to meet challenging performance requirements and worldwide emission standards. We primarily serve markets in North America, Europe, China and India.
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• | Filtration - We design, manufacture and sell filters, coolant and chemical products. Our filtration business offers over 8,300 products for first fit and aftermarket applications including air filters, fuel filters, fuel water separators, lube filters, hydraulic filters, coolants, fuel additives and other filtration systems to OEMs, dealers/distributors and end users. We support a wide customer base in a diverse range of markets including on- and off-highway segments such as oil and gas, agriculture, mining, construction, power generation, marine and industrial markets. We produce and sell globally recognized Fleetguard® branded products in over 160 countries including countries in North America, Europe, South America, Asia and Africa. Fleetguard products are available through thousands of distribution points worldwide.
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• | Electronics and fuel systems - We design and manufacture new, replacement and remanufactured fuel systems primarily for heavy-duty on-highway diesel engine applications, as well as develop and supply electronic control modules (ECMs), sensors and harnesses for the on-highway, off-highway and power generation applications.We primarily serve markets in North America, China, India and Europe.
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• | Automated transmissions -We develop and supply automated transmissions to the heavy-duty and medium-duty commercial vehicle markets. Formed in 2017, the Eaton Cummins Automated Transmission Technologies joint venture is a consolidated 50/50 joint venture between Cummins Inc. and Eaton Corporation Plc. and primarily serves the North American market.
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Customers of ourthe Components segment generally include ourthe Engine, Distribution and Power Systems segments, joint ventures including Beijing Foton Cummins Engine Co., Ltd., Dongfeng Cummins Emission Solutions Co., Ltd. and Tata Cummins Ltd., truck manufacturers and other OEMs, many of which are also customers of ourthe Engine segment, such as PACCAR, Daimler, Navistar, Volvo, Komatsu, Scania, Fiat Chrysler and other manufacturers that use our components in their product platforms.
OurThe Components segment competes with other manufacturers of aftertreatment systems, filtration, turbochargers, fuel systems and fuel systems.transmissions. Our primary competitors in these markets include Robert Bosch GmbH, Donaldson Company, Inc., Parker HannifinParker-Hannifin Corporation, Mann+Hummel Group, Honeywell International,Garrett Motion, Inc., Borg-Warner Inc., Tenneco Inc., Eberspacher Holding GmbH & Co. KG, Denso Corporation, Allison Transmission and Denso Corporation.Aisin Seiki Co., Ltd.
Power Systems Segment
Power Systems segment sales and EBITEBITDA as a percentage of consolidated results were:
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| | | Years ended December 31, |
| | | 2020 | | 2019 | | 2018 |
Percent of consolidated net sales(1) | | 15 | % | | 15 | % | | 15 | % |
Percent of consolidated EBITDA(1) | | 11 | % | | 14 | % | | 17 | % |
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(1) Measured before intersegment eliminations | | | | | | |
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| | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 |
Percent of consolidated net sales(1) | | 16 | % | | 16 | % | | 17 | % |
Percent of consolidated EBIT(1) | | 12 | % | | 13 | % | | 16 | % |
(1) Measured before intersegment eliminations
In the first quarter of 2017, our Power Systems segment reorganized its product lines to better reflect how the segment is managed. OurThe Power Systems segment is organized around the following product lines:
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• | •Power generation - We design, manufacture, sell and support standby and prime power generators ranging from 2 kilowatts to 3.5 megawatts, as well as controls, paralleling systems and transfer switches, for applications such as consumer, commercial, industrial, data centers, health care, global rental business, telecommunications and waste water treatment plants. We also provide turnkey solutions for distributed generation and energy management applications using natural gas, diesel or biogas as a fuel. •Industrial - We design, manufacture, sell and support diesel and natural gas high-speed, 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. •We design, manufacture, sell and support back-up and prime power generators ranging from 2 kilowatts to 3.5 megawatts, as well as controls, paralleling systems and transfer switches, for applications such as consumer, 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 serve global rental accounts for diesel and gas generator sets. |
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• | 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, the Middle East, Africa, China, Korea, Japan, Latin America, India, Russia, Southeast Asia, South Pacific and Mexico.
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• | 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 and AVK and Markon brands and range in output from 3 kilovolt-amperes (kVA) to 12,000 kVA. |
This segment continuously explores emerging technologies and provides integrated power generation products. We use our own research and development capabilities as well as those of our business partnerships to develop cost-effective and environmentally sound power solutions.
Our customer base for our Power Systems offerings is highly diversified, with customer groups varying based on their power needs. India, China, the United Kingdom (U.K.), Western Europe, Latin America and the Middle East are our largest geographic markets outside of North America.
In the markets served by ourthe Power Systems segment, we compete with a variety of independent engine manufacturers and generator set assemblers as well as OEMs who manufacture engines for their own products. We compete with a variety of engine manufacturers and generator set assemblers acrossproducts around the world. Our primary competitors are CAT, MTU Friedrichshafen GmbH (MTU)(Rolls Royce Power Systems Group) and Kohler/SDMO (Kohler Group), but we also compete with GE Jenbacher, FG Wilson (CAT group), Tognum (MTU group),INNIO, Generac, Mitsubishi Heavy Industries (MHI) and numerous regional generator set assemblers. Our alternator business competes globally with Leroy Somer (NIDEC), Marathon Electric and Meccalte, among others.
New Power Segment
The New Power segment designs, manufactures, sells and supports hydrogen production solutions as well as electrified power systems ranging from fully electric to hybrid along with innovative components and subsystems, including battery and fuel cell technologies.
In the third quarter of 2019, we formed a joint venture with L'Air Liquide, S.A. via the purchase of Hydrogenics Corporation, which was consolidated and included in the New Power segment. See Note 20 "ACQUISITIONS," to the Consolidated Financial Statements for additional information.
We anticipate our customer base for New Power offerings will be highly diversified, representing multiple end markets with a broad range of application requirements. We established relationships with Gillig for the urban bus market in North America, Blue Bird for the school bus market in North America, Alstom Transport in Europe for PEM fuel cell powered regional commuter trains and L'Air Liquide S.A. for on-site hydrogen production. We will continue to pursue additional relationships in markets as they adopt hydrogen and electric solutions.
In the markets served by the New Power segment, we compete with electric start-ups, powertrain component manufacturers, vertically integrated OEMs and entities providing hydrogen production solutions. Our primary competitors include Proterra, Inc., Daimler, PACCAR, Volvo, Navistar, TRATON AG, BYD Company Limited, Dana Incorporated, Akasol AG, Ballard Power Systems, Inc. and Nel ASA.
JOINT VENTURES, ALLIANCES AND NON-WHOLLY-OWNED SUBSIDIARIES
We have entered into a number of joint venture agreements and alliances with business partners around the world. Our joint ventures are either distribution or manufacturing entities. We also own controlling interests in non-wholly-owned manufacturing and distribution subsidiaries.
In the event of a change of control of either party to certain of these joint ventures and other strategic alliances, certain consequences may result including automatic termination and liquidation of the venture, exercise of "put" or "call" rights of ownership by the non-acquired partner, termination or transfer of technology license rights to the non-acquired partner and increases in component transfer prices to the acquired partner. We will continue to evaluate joint venture and partnership opportunities in order to penetrate new markets, develop new products and generate manufacturing and operational efficiencies.
Financial information about our investments in joint ventures and alliances is incorporated by reference from Note 3, "INVESTMENTS IN EQUITY INVESTEES," to the Consolidated Financial Statements.
Our equity income from these investees was as follows:
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| | Years ended December 31, |
| In millions | 2017 | | 2016 | | 2015 |
| Distribution entities | | | | | | | | | | | |
| Komatsu Cummins Chile, Ltda. | $ | 30 |
| | 10 | % | | $ | 34 |
| | 13 | % | | $ | 31 |
| | 11 | % |
| North American distributors | — |
| | — | % | | 21 |
| | 8 | % | | 33 |
| | 12 | % |
| All other distributors | (1 | ) | | — | % | | — |
| | — | % | | 3 |
| | 1 | % |
| Manufacturing entities | | | | | | | | | | | |
| Beijing Foton Cummins Engine Co., Ltd. | 94 |
| | 30 | % | | 52 |
| | 20 | % | | 62 |
| | 23 | % |
| Dongfeng Cummins Engine Company, Ltd. | 73 |
| | 24 | % | | 46 |
| | 18 | % | | 51 |
| | 19 | % |
| Chongqing Cummins Engine Company, Ltd. | 41 |
| | 13 | % | | 38 |
| | 15 | % | | 41 |
| | 15 | % |
| Dongfeng Cummins Emission Solutions Co., Ltd. | 13 |
| | 4 | % | | 9 |
| | 3 | % | | 6 |
| | 2 | % |
| Shanghai Fleetguard Filter Co., Ltd. | 12 |
| | 4 | % | | 10 |
| | 4 | % | | 10 |
| | 4 | % |
| Cummins Westport, Inc. | 9 |
| (1) | 3 | % | | 11 |
| | 4 | % | | 18 |
| | 7 | % |
| All other manufacturers | 37 |
| (1) | 12 | % | | 39 |
| | 15 | % | | 18 |
| | 6 | % |
Cummins share of net income(2) | $ | 308 |
| | 100 | % | | $ | 260 |
| | 100 | % | | $ | 273 |
| | 100 | % |
(1)U.S. tax legislation passed in December 2017 decreased our equity earnings at certain equity investees, including a $7 million unfavorable impact to Cummins Westport, Inc. due to the remeasurement of deferred taxes and a $32 million unfavorable impact to "All other manufacturers" due to withholding tax adjustments on foreign earnings. See Note 2, "INCOME TAXES," to our Consolidated Financial Statements for additional information.
(2) This total represents our share of net income of our equity investees and is exclusive of royalties and interest income from our equity investees. To see how this amount reconciles to "Equity, royalty and interest income from investees" in the Consolidated Statements of Income, see Note 3, "INVESTMENTS IN EQUITY INVESTEES," to our Consolidated Financial Statements for additional information.
Distribution Entities
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• | Komatsu Cummins Chile, Ltda. - Komatsu Cummins Chile, Ltda. is a joint venture with Komatsu America Corporation. The joint venture is a distributor that offers the full range of our products and services to customers and end-users in Chile and Peru.
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• | North American Distributors - During 2016, we acquired the remaining interest in the final unconsolidated North American distributor joint venture.
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See further discussion of our distribution network under the Distribution segment section above. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| In millions | | 2020 | | 2019 | | 2018 |
| Manufacturing entities | | | | | | | | | | | | |
| Beijing Foton Cummins Engine Co., Ltd. | | $ | 113 | | | 30 | % | | $ | 60 | | | 22 | % | | $ | 72 | | | 21 | % |
| Dongfeng Cummins Engine Company, Ltd. | | 63 | | | 17 | % | | 52 | | | 19 | % | | 58 | | | 17 | % |
| Chongqing Cummins Engine Company, Ltd. | | 35 | | | 9 | % | | 41 | | | 15 | % | | 51 | | | 15 | % |
| All other manufacturers | | 134 | | (1)(2) | 35 | % | | 88 | | | 33 | % | | 129 | |
| 39 | % |
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| Distribution entities | | | | | | | | | | | | |
| Komatsu Cummins Chile, Ltda. | | 31 | | | 8 | % | | 28 | | | 10 | % | | 26 | | | 8 | % |
| All other distributors | | 2 | | | 1 | % | | 2 | | | 1 | % | | — | | | — | % |
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Cummins share of net income(3) | | $ | 378 | | | 100 | % | | $ | 271 | | | 100 | % | | $ | 336 | | | 100 | % |
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(1) Includes $37 million in favorable adjustments related to tax changes within India's 2020-2021 Union Budget of India (India Tax Law Change) passed in March 2020. See NOTE 4, "INCOME TAXES," to our Consolidated Financial Statements for additional information on India Tax Law Change. |
(2) Includes impairment charges of $13 million and loss on sale of business of $8 million for a joint venture in the Power Systems segment. |
(3) This total represents our share of net income of our equity investees and is exclusive of royalties and interest income from our equity investees. To see how this amount reconciles to "Equity, royalty and interest income from investees" in the Consolidated Statements of Net Income, see Note 3, "INVESTMENTS IN EQUITY INVESTEES," to our Consolidated Financial Statements for additional information. |
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Manufacturing Entities
Our manufacturing joint ventures have generally been formed with customers and generally are primarily intended to allow us to increase our market penetration in geographic regions, reduce capital spending, streamline our supply chain management and develop technologies. Our largest manufacturing joint ventures are based in China and are included in the list below. Our engine manufacturing joint ventures are supplied by our Components segment in the same manner as it supplies our wholly-owned Engine segment and Power Systems segment manufacturing facilities. Our Components segment joint ventures and wholly ownedwholly-owned entities provide electronics, fuel systems, filtration, aftertreatment systems, turbocharger products and automated transmissions that are used with our engines as well as some competitors' products. The results and investments in our joint ventures in which we have 50 percent or less ownership interest (except for Eaton Cummins Automated Transmission Technologies joint venture which is consolidated due to our majority voting interest) discussed below are included in “Equity, royalty and interest income from investees” and “Investments and advances related to equity method investees” in our Consolidated Statements of Net Income and Consolidated Balance Sheets, respectively.
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• | Beijing Foton Cummins Engine Co., Ltd. - Beijing Foton Cummins Engine Co., Ltd. is a joint venture in China with Beiqi Foton Motor Co., Ltd., a commercial vehicle manufacturer, which consists of two distinct lines of business, a light-duty business and a heavy-duty business. The light-duty business produces our families of ISF 2.8 liter to 4.5 liter high performance light-duty diesel engines in Beijing. These engines are used in light-duty commercial trucks, pickup trucks, buses, multipurpose and sport utility vehicles with main markets in China, Brazil and Russia. Certain types of marine, small construction equipment and industrial applications are also served by these engine families. The heavy-duty business produces ISG 10.5 liter and ISG 11.8 liter families of our high performance heavy-duty diesel engines in Beijing. These engines are used in heavy-duty commercial trucks in China and will be used by Cummins either directly sourced from China and/or locally assembled in other markets. Certain types of construction equipment and industrial applications are also served by these engine families.Beijing Foton Cummins Engine Co., Ltd. - Beijing Foton Cummins Engine Co., Ltd. is a joint venture in China with Beiqi Foton Motor Co., Ltd., a commercial vehicle manufacturer, which has two distinct lines of business - a light-duty business and a heavy-duty business. The light-duty business produces our families of ISF 2.8 liter to 4.5 liter high performance light-duty diesel engines in Beijing. These engines are used in light-duty and medium-duty commercial trucks, pick-up trucks, buses, multipurpose and sport utility vehicles with main markets in China, Brazil and Russia. Certain types of small
construction equipment and industrial applications are also served by these engine families. The heavy-duty business produces the X11, X12 and X13, ranging from 10.5 liter to 12.9 liter, high performance heavy-duty diesel engines in Beijing. Certain types of construction equipment and industrial applications are also served by these engine families. •Dongfeng Cummins Engine Company, Ltd. - Dongfeng Cummins Engine Company, Ltd. (DCEC) is a joint venture in China with Dongfeng Automotive Co. Ltd., a subsidiary of Dongfeng Motor Corporation and one of the largest medium-duty and heavy-duty truck manufacturers in China. DCEC produces 3.9 liter to 14 liter diesel engines with a power range from 80 to 680 horsepower and natural gas engines. On-highway engines are used in multiple applications in light-duty and medium-duty trucks, special purpose vehicles, buses and heavy-duty trucks with a main market in China. Off-highway engines are used in a variety of construction, power generation, marine and agriculture markets in China. •Chongqing Cummins Engine Company, Ltd. - Chongqing Cummins Engine Company, Ltd. is a joint venture in China with Chongqing Machinery and Electric Co. Ltd. This joint venture manufactures several models of our heavy-duty and high-horsepower diesel engines primarily serving the industrial and stationary power markets in China. Distribution Entity Komatsu Cummins Chile, Ltda. - Komatsu Cummins Chile, Ltda. is a joint venture with Komatsu America Corporation. The joint venture is a distributor that offers the full range of our products and services to customers and end-users in Chile and Peru. See further discussion of our distribution network under the Distribution segment section above. |
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• | Dongfeng Cummins Engine Company, Ltd. - Dongfeng Cummins Engine Company, Ltd. (DCEC) is a joint venture in China with Dongfeng Automotive Co. Ltd., a subsidiary of Dongfeng Motor Corporation, one of the largest medium-duty and heavy-duty truck manufacturers in China. DCEC produces Cummins 3.9 to 13-liter mechanical engines, full-electric diesel engines, with a power range from 80 to 680 horsepower, and natural gas engines.
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• | Chongqing Cummins Engine Company, Ltd. - Chongqing Cummins Engine Company, Ltd. is a joint venture in China with Chongqing Machinery and Electric Co. Ltd. This joint venture manufactures several models of our heavy-duty and high-horsepower diesel engines, primarily serving the industrial and stationary power markets in China.
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• | Dongfeng Cummins Emission Solutions Co., Ltd. -Dongfeng Cummins Emission Solutions Co. Ltd. is a joint venture in China with Dongfeng Industrial Company, a subsidiary of Dongfeng Motor Group Company Limited, a manufacturer of numerous on-highway vehicles. This joint venture produces, purchases and sells advanced diesel engine aftertreatment solutions to support the full line of Dongfeng's commercial vehicles.
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• | Shanghai Fleetguard Filter Co., Ltd. -Shanghai Fleetguard Filter Co. Ltd. is a joint venture in China with Dongfeng Motor Co., Ltd., a manufacturer of numerous on-highway vehicles. This joint venture produces and sells filters and filter parts to support the full line of Dongfeng's commercial vehicles.
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• | Cummins Westport, Inc. -Cummins Westport Inc. is a joint venture in Canada with Westport Innovations Inc. to market and sell automotive spark-ignited natural gas engines worldwide and to participate in joint technology projects on low-emission technologies.
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Non-Wholly-Owned SubsidiarySubsidiaries
We have a majority voting interest in Eaton Cummins Automated Transmission Technologies (ECJV) by virtue of a tie-breaking vote on the joint venture’s board of directors. ECJV develops and supplies automated transmissions for the heavy-duty commercial vehicle market.
We have a controlling interest in Cummins India Ltd. (CIL), which is a publicly listed company on various stock exchanges in India. CIL produces mid-range,medium-duty, heavy-duty and high-horsepower diesel engines, generators for the Indian and export markets and natural gas spark-ignited engines for power generation, automotive and industrial applications. CIL also has distribution and power generation operations.
In the third quarter of 2017,2019, we formed the Eaton Cummins Automated Transmission Technologiesa joint venture with L'Air Liquide S.A. via the purchase of Hydrogenics Corporation, which was consolidated and included in our Components segment as the automated transmissions business. New Power segment. The Hydrogen Company, a wholly-owned subsidiary of L'Air Liquide S.A., maintains a 19 percent noncontrolling interest in Hydrogenics Corporation. See Note 18,20, "ACQUISITIONS", to the Consolidated Financial Statementsfor additional information.
SUPPLY
The performance of the end-to-end supply chain, extending through to our suppliers, is foundational to our ability to meet customers' expectations and support long-term growth. We are committed to having a robust strategy for how we select and manage our suppliers to enable a market focused supply chain. This requires us to continuously evaluate and upgrade our supply base, as necessary, to ensure we are meeting the needs of our customers.
We use a combination of proactive and reactive methodologies to enhance our understanding of supply base risks which guide the development of risk monitoring and sourcing strategies. Ourcategory strategy process (a process designed to create the most value for the company) that reviewssupports the review of our long-term needs and guides decisions on what we make internally and what we purchase externally. For the items we decide to purchase externally, the strategies also identify the suppliers we should partner with long-term to provide the best technology, the lowest total cost and highest supply chain performance. We design and/or manufacture our strategic components used in or with our engines and power generation units including cylinder blocks and heads, turbochargers, connecting rods, camshafts, crankshafts, filters, alternators, electronic and emissions controls, and fuel systems. We source externally purchased material and manufactured components from leading global suppliers. Many keyNew Power products. Key suppliers are managed through long-term supply and cost sharing agreements that assure capacity, delivery, qualityand cost requirements are met over an extended period. Approximately
20 percent of the direct material in our product designs are single sourced to external suppliers. We have an established sourcing strategy and supplier management process to evaluate and mitigate risk. These processes are leading us to determine our need for dual sourcing and increase our use of dual and parallel sources to minimize risk and increase supply chain responsiveness. Our current target for dual and parallel sourcing is approximately 90 percent of our direct material spend. As of December 31, 2017, our analysis indicates that we have approximately 80 percent of direct material spend with dual or parallel sources or 89 percent of our target.
Other important elements of our sourcing strategy include:
• working with suppliers to measure and improve their environmental footprint;
• selecting and managing suppliers to comply with our supplier code of conduct; and
• assuring our suppliers comply with Cummins'our prohibited and restricted materials policy.
PATENTS AND TRADEMARKS
We own or control a significant number of patents and trademarks relating to the products we manufacture. These patents and trademarks were granted and registered over a period of years. Although these patents and trademarks are generally considered beneficial to our operations, we do not believe any patent, group of patents or trademark (other than our leading brand house trademarks) is significant to our business.
SEASONALITY
While individual product lines may experience modest seasonal variation in production, there is no material effect on the demand for the majority of our products on a quarterly basis with the exceptionsexception that our Power Systems segment normally experiences seasonal declines in the first quarter due to general declines in construction spending during this period and our Distribution segment normally experiences seasonal declines in its first quarter business activity due to holiday periods in Asia and Australia.period.
LARGEST CUSTOMERS
We have thousands of customers around the world and have developed long-standing business relationships with many of them. PACCAR is our largest customer, accounting for 1415 percent of our consolidated net sales in 2017, 132020, 17 percent in 20162019 and 15 percent in 2015.2018. We have long-term supply agreements with PACCAR for our heavy-duty ISX 15 liter and ISX 11.9 litermedium-duty engines and our mid-range ISL 9 liter engine.aftertreatment systems. While a significant number of our sales to PACCAR are under long-term supply agreements, these agreements provide for particular engine requirements for specific vehicle models and not a specific volume of engines.engines or aftertreatment systems. PACCAR is our only customer accounting for more than 10 percent of our net sales in 2017.2020. The loss of this customer or a significant decline in the production level of PACCAR vehicles that use our engines would have an adverse effect on our results of operations and financial condition. We have been an engine supplier to PACCAR for 7376 years. A summary of principal customers for each operating segment is included in our segment discussion.
In addition to our agreement with PACCAR, we have long-term heavy-duty and medium-duty engine and aftertreatment system supply agreements with Daimler and Navistar and a long-term mid-range supply agreement with Daimler. We also have an agreement with Fiat Chrysler to supply engines for its Ram trucks. Collectively, our net sales to these four customers, including PACCAR, were 3332 percent of our consolidated net sales in 2017, 332020, 37 percent in 20162019 and 3635 percent in 2015.2018. Excluding PACCAR, net sales to any single
customer were less than 7 percent of our consolidated net sales in 2017,2020, less than 79 percent in 20162019 and less than 9 percent in 2015.2018. These agreements contain standard purchase and sale agreement terms covering engine, aftertreatment and engine parts pricing, quality and delivery commitments, as well as engineering product support obligations. The basic nature of our agreements with OEM customers is that they are long-term price and operations agreements that help assure the availability of our products to each customer through the duration of the respective agreements. Agreements with most OEMs contain bilateral termination provisions giving either party the right to terminate in the event of a material breach, change of control or insolvency or bankruptcy of the other party.
BACKLOG
We have supply agreements with some truck and off-highway equipment OEMs, however most of our business is transacted through open purchase orders. These open orders are historically subject to month-to-month releases and are subject to cancellation on reasonable notice without cancellation charges and therefore are not considered firm. At December 31, 2017,2020, we did not have any significant backlogs.
RESEARCH AND DEVELOPMENT
In 2017,2020, we continued to invest in future critical technologies and products. We will continue to make investments to develop new products and improve our current technologies to meet the future emission requirements around the world and improve fuel economy.economy performance of diesel and natural gas-powered engines and related components as well as development activities around fully electric, hybrid and hydrogen power solutions and hydrogen production.
Our research and development program isprograms are focused on product improvements, product extensions, innovations and cost reductions for our customers. Research and development expenditures include salaries, contractor fees, building costs, utilities, testing, technical IT, administrative expenses and allocation of corporate costs and are expensed, net of contract reimbursements, when incurred. From time to time, we enter into agreements with customers and government agencies to fund a portion of the research and development costs of a particular project. WeWhen not associated with a sales contract, we generally account for these reimbursements as an offset to the related research and development expenditure. Research and development expenses, net of contract reimbursements, were $734$903 million in 2017, $6162020, $998 million in 20162019 and $718$894 million in 2015.2018. Contract reimbursements were $137$86 million, $90 million and $120 million in 2017, $131 million in 20162020, 2019 and $98 million in 2015.2018, respectively.
For 2017, 2016 and 2015, approximately $10 million, $77 million and $90 million, or 1 percent, 13 percent and 13 percent, respectively, of our research and development expenditures were directly related to compliance with 2017 U.S. Environmental Protection Agency (EPA) emission standards.
ENVIRONMENTAL SUSTAINABILITY
We adoptedare committed to making people's lives better by powering a more prosperous world. That prosperity includes strong communities, robust business and environmental sustainability.
The highest level of accountability for our comprehensiveclimate-related risks and opportunities is with the Safety, Environment and Technology (SET) Committee of the Board of Directors (the Board). The Action Committee for Environmental Sustainability meets monthly and reports to the Chairman and to the SET Committee at least annually.
In late 2019, we introduced PLANET 2050, a sustainability strategy focused on three priority areas: addressing climate change and air emissions, using natural resources in the most sustainable way and improving communities. The strategy includes eight specific goals to achieve by 2030, including science-based carbon dioxide reduction targets for newly sold products and facilities, as well as aspirational targets for 2050. We are currently evaluating how the new goals will be integrated into business planning and will report on progress beginning in 2022.
Our Sustainability Progress Report for 2019/2020 reports on environmental sustainability goals and commitments from our 2014 plan as well as other key environmental and climate metrics and targets. The 2014 plan goals were as follows:
•partnering with customers to improve the fuel efficiency of our products in 2014 after examininguse, targeting an annual run-rate reduction of 3.5 million metric tons of carbon dioxide;
•achieving a 32 percent energy intensity reduction from company facilities by the end of 2020 (using a baseline year of 2010) and increasing the portion of electricity we use derived from renewable sources;
•reducing direct water use by 50 percent adjusted for hours worked and achieving water neutrality at 15 sites by the end of 2020;
•increasing our entire environmental footprint, focusing onrecycling rate from 88 percent to 95 percent and achieving zero disposal at 30 sites by the key areasend of water, waste, energy2020 and greenhouse gases (GHG). As
•utilizing the conceptmost efficient methods and scopemodes to move goods across our network to reduce carbon dioxide per kilogram of environmental sustainability has matured and broadened, leaders havegoods moved from initially working on environmental impacts within our direct controlby 10 percent by the end of 2020.
Our progress through the end of 2020 will be summarized in our operationsSustainability Progress Report to an expanded view of fuel and raw materials that reaches across the entire product life-cycle from design to manufacture to end of life. Our environmental sustainability planbe published later in 2021. This report is the way we carry out our priorities, goals and initiatives in our action areas, including reducing our carbon footprint, using fewer natural resources and partnering to solve complex problems.not incorporated by reference into this filing.
Our
The most recent Sustainability Progress Report for 2016/2017 including goal progress and prior reports, as well as a Data Book of more detailed environmental data in accordance with the Global Reporting Initiative's Standard core compliance designation, are available on our website at www.cummins.com, although suchwww.cummins.com. Our annual submission to the Carbon Disclosure Project (CDP) for climate change and water are also available on the website. The climate submission provides information on our scenario planning exercise for climate and other risks as requested by CDP. We also published our first report in accordance with the Sustainability Accounting Standards Board in 2020. These reports and data book are not incorporated into this Form 10-K. We currently have the following environmental sustainability goals and commitments:
a new product vision statement — "powering the future through product innovation that makes people's lives better and reduces our environmental footprint;"
partnering with customers to improve the fuel efficiency of our products in use, targeting an annual run-rate reduction of 3.5 million metric tons of carbon dioxide and saving 350 million gallons of fuel10-K by 2020;
achieving a 32 percent energy intensity reduction from company facilities by 2020 (using a baseline year of 2010) and increasing the portion of electricity we use derived from renewable sources;
reducing direct water use by 50 percent adjusted for hours worked and achieving water neutrality at 15 sites by 2020;
increasing our recycling rate from 88 percent to 95 percent and achieving zero disposal at 30 sites by 2020; and
utilizing the most efficient methods and modes to move goods across our network to reduce carbon dioxide per kilogram of goods moved by 10 percent by 2020.reference.
We continue to articulate our positions on key public policy issues and on a wide range of environmental issues. We are actively engaged with regulatory, industry and other stakeholder groups around the world as GHGgreenhouse gases (GHG) and fuel efficiency standards become more prevalent globally. We were named in the Top 25number 24 in Newsweek's 2017 Green Ranking of U.S. companies, while also being named "Best in Industry" in the "Machinery" category for U.S.Most Responsible Companies ranking, number 50 among Barron's Top 100 Most Sustainable Companies as well as named to the Dow Jones North American Sustainability Index for the twelfthfifteenth consecutive year in 2017 and rated AAA by MSCI ESG Research, included in the “Disclosure Leadership Index” of the Carbon Disclosure Project’s climate report in 2015.2020.
ENVIRONMENTAL COMPLIANCE
Product Certification and Compliance
We strive to have robust certification and compliance processes, adhering to all emissions regulations worldwide, including prohibiting the use of defeat devices in all of our products. We are transparent with all governing bodies in these processes, from disclosure of the design and operation of the emission control system, to test processes and results, and later to any necessary reporting and corrective action processes if required.
We work collaboratively and proactively with emission regulators globally to ensure emission standards are clear, appropriately stringent and enforceable, in an effort to ensure our products deliver on our commitments to our customers and the environment in real world use every day.
Our engines are subject to extensive statutory and regulatory requirements that directly or indirectly impose standards governing emissionemissions and noise. Over the past several years we have substantially increased our global environmental compliance presence and expertise to understand and meet emerging product environmental regulations around the world. Our ability to comply with these and future emission standards is an essential element in maintaining our leadership position in regulated markets. We have made, and will continue to make, significant capital and research expenditures to comply with these standards. Our failure
We strive to complybe a leader in developing and implementing technologies that provide customers with the highest performing products while minimizing the impact on the environment, and we have a long history of working with governments and regulators to achieve these goals. We remain committed to ensuring our products meet all current and future emission standards and delivering value to our customers.
Formed in 2019, the Product Compliance and Regulatory Affairs team leads both engine emissions certification and compliance and regulatory affairs initiatives. This organization is led by the Vice President - Product Compliance and Regulatory Affairs who reports directly to the Chief Executive Officer, and the new Vice President joins the Cummins Executive Team and Cummins Leadership Team. The focus of this organization is to strengthen our ability to design great products that help our customers win while ensuring compliance with increasingly challenging global emission regulations. The organization also works to enhance our collaboration with
the agencies setting the direction and regulations of emissions to best ensure we are meeting every expectation today while planning for future changes.
Following conversations with the U.S. Environmental Protection Agency (EPA) and California Air Resources Board (CARB) regarding certification for the engines in the 2019 RAM 2500 and 3500 trucks, we made the decision to review our certification process and compliance with emission standards. This review is being conducted with external advisers to ensure the certification and all of our processes for our pick-up truck applications are consistent with our internal policies, engineering standards and applicable laws. In addition, we voluntarily disclosed our formal internal review to the regulators and to other government agencies, the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), and worked cooperatively with them to ensure a complete and thorough review. We fully cooperated with the DOJ's and the SEC's information requests and inquiries and, based on recent communications with these standards could result in adverse effects on our future financial results.agencies, we do not expect further inquiries. See Note 14, "COMMITMENTS AND CONTINGENCIES," to the Consolidated Financial Statements for additional information.
EU and EPA Engine Certifications
Our engines are certified globally through various categories within on-highway and off-highway applications. Regulations in these categories typically control nitrous oxides (NOx), particulate matter (PM) and GHG. The current on-highway NOx and PM emission standards came into effect in India on April 1, 2020, (BS VI), China on July 1, 2019, (NS VI), the European Union (EU)EU on January 1, 2013, (Euro VI) and on January 1, 2010, for the EPA. To meet the more stringent heavy-duty on-highway emission standards, we used an evolution of our proven selective catalytic reduction (SCR) and exhaust gas recirculation (EGR) technology solutions and refined them for the EU and EPA certified engines to maintain power and torque with substantial fuel economy improvement and maintenance intervals comparable with our previous compliant engines. We offer a complete lineup of on-highway engines to meet the near-zero emission standards. Mid-rangethese regulations, mid-range and heavy-duty engines for India, China, EU and EPA require NOx aftertreatment. NOx reduction is achieved by an integrated technology solution comprised of the XPI High Pressure Common Rail fuel system, SCR technology (in some cases), next-generation cooled EGR, advanced electronic controls, proven air handling and the Cummins Diesel Particulate Filter (DPF). The Ministry of Road Transport and Highways, Ministry of Ecology and Environment, EU, EPA and California Air Resources Board (CARB)CARB have certified that our engines meet the current emission requirements. Emission standards in international markets, including Japan, Mexico, Australia, Brazil Russia, India and ChinaRussia are becoming more stringent. We believe that our experience in meeting the EU and EPA emission standards leaves us well positioned to take advantage of opportunities in these markets as the need for emission control capability grows.
In 2013, we certified to EPA's first ever GHG regulations for on-highway medium-medium and heavy-duty engines. Additionally, the EPA 2013 regulations added the requirement of on-board diagnostics, which were introduced on the ISX15ISX 15 in 2010, across the full on-highway product line while maintaining the same near-zero emission levels of NOx and particulate matterPM required in 2010. On-board diagnostics provide enhanced service capability with standardized diagnostic trouble codes, service tool interface, in-cab warning lamp and service information availability. The new GHG and fuel-efficiency regulations were required for all heavy-duty diesel and natural gas engines beginning in January 2014. Our GHG certification was the first engine certificate issued by the EPA and uses the same proven base engine with the XPI fuel system, variable geometry turbocharger (VGTTM) and Cummins aftertreatment system with DPF and SCR technology. Application of these engines and aftertreatment technologies continues in our products that comply with the 20172021 GHG regulations.
The currentOur off-highway emission standards for EPA and EU came into effect between the 2013 - 2015 time frame for all power categories. These engines were designed for Tier 4 / Stage 4V standards and were based on our extensive on-highway experience developing SCR, high pressure fuel systems, DPF and VGTTM. Our products offer low fuel consumption, high torque rise and power output, extended maintenance intervals, reliable and durable operation and a long life to overhaul period, all while
meeting the most stringent emission standards in the industrial market. Our off-highway products power multiple applications including construction, mining, marine, agriculture, rail, defense and oil and gas and servesserve a global customer base. The current EPA Tier 4 off-highway emission standards came into effect between 2013-2015 for all engine power categories. The current EU Stage V off-highway emission standards became effective in 2019 for certain engine power categories and were completely effective January 2021 for all remaining categories.
Other Environmental Statutes and Regulations
Expenditures for environmental control activities and environmental remediation projects at our facilities in the U.S. have not been a substantial portion of our annual expenses and are not expected to be material in 2018.2021. We believe we are in compliance in all material respects with laws and regulations applicable to our plants and operations.
In the U.S., pursuant to notices received from federal and state agencies and/or defendant parties in site environmental contribution actions, we have been identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended or similar state laws, at fewer than 20 waste disposal sites.
Based upon our experiences at similar sites we believe that our aggregate future remediation costs will not be material. We have established accruals that we believe are adequate for our expected future liability with respect to these sites. In addition, we have several other sites where we are working with governmental authorities on remediation projects. The costs for these remediation projects are not expected to be material.
EMPLOYEES
HUMAN CAPITAL RESOURCES
At December 31, 2017,2020, we employed approximately 58,60057,825 persons worldwide. Approximately 20,83020,279 of our employees worldwide are represented by various unions under collective bargaining agreements that expire between 2021 and 2025.
Throughout our company’s 100-year history, we always recognized that people drive the strength of our business and our ability to effectively serve our clients and sustain our competitive position. We are focused on harmonizing our approach to talent to provide seamless opportunities and better experiences to our employees around the world. The disruptive events of 2020 gave even greater importance for us to complete the strategic work in Human Resources that calls for our company to “Inspire and Encourage All Employees to Reach Their Full Potential.” This strategy has key focus areas: creating a diverse and inclusive work environment; engaging employees and their families in improving wellness; developing self-aware and effective leaders; and extending our talent management philosophies in performance management, compensation management, competency building, and access to development opportunities to all employees.
Leadership and Talent Management
Managing our human capital resources is a key focus of the company. In 2020, the Board recast our Compensation Committee as the Talent Management and Compensation Committee to reflect the Board’s commitment to overseeing and providing guidance to our leadership team in this important work.
We strive to create a leadership culture that begins with authentic leaders who create an outstanding place to work by encouraging all employees to achieve their full potential. We encourage leaders to connect our people and their work to our mission, vision, values, brand promise and strategies of the company, motivating and giving them a higher sense of purpose. We have developed leadership and employee development programs for employees ranging from the manufacturing floor and technicians through middle management and executive development. When an individual joins Cummins, we are committed to providing both that employee and their manager with the tools and resources to manage their career and navigate in a large global organization. Through our Talent Management strategy our goal is to ensure all employees have access to the development and career opportunities that a global company enables.
Competitive Pay and Benefits
To attract and retain the best employees, we focus on providing competitive pay and benefits. Our programs target the market for competitiveness and sustainability while ensuring that we honor our core values. We provide benefit programs with the goal of improving physical, mental and financial wellness of our employees throughout their lifetime. Some examples include base and variable pay, medical, paid time off, retirement saving plans and employee stock purchase plans.
When designing our base pay compensation ranges, we do market analysis to be sure ranges are current and our employees are advancing their earning potential. We also do annual compensation studies to assess market movement, pay equity and living wages. For example, in 2018, we conducted a living wage analysis globally to ensure our employees were making a living wage in the countries they live and 2022.work. We incorporated this living wage assessment into our annual compensation structure to ensure that current and new hires never fall below this threshold. In the U.S. for example, the living wage in 2019 was $15 per hour, although most positions pay more than that. We continually review wages globally to ensure we are fair, equitable, competitive and can attract and retain the best talent.
We also provide diverse benefit programs that are aligned with our values and focused on supporting employees and their families based on their unique needs, some of which are: tiered health care cost so that more junior employees pay less for their premiums; paid parental leave for primary and secondary caregivers; advanced medical services from clinicians to support complex health care needs and employee assistance programs with diverse providers that can meet a range of employee needs from race related trauma to financial planning to transgender transition support.
Employee Safety and Wellness
Cummins is committed to being world-class in health and safety. We strive to ensure a workplace with zero incidents. We are committed to removing conditions that cause personal injury or occupational illness and we make decisions and promote behaviors that protect others from risk of injury. We publicly disclose metrics on our rate of recordable injuries, our rate of lost workdays due to injury and the rate of injuries involving contractors.
Our response to the COVID-19 global pandemic illustrated our commitment to safety. To support both our customers and communities, we made keeping employees safe our top priority. Most of our employees who can work from home have been doing so since the outbreak of the pandemic and we have provided them with the tools and support to do so. This allowed us to focus resources
and investments on our engineering and production facilities. In those facilities, we have taken many steps to protect the health and safety of our people, including:
•Mandatory health screenings at our plants and facilities;
•Personal protective equipment for frontline employees;
•Masks required inside open plants and facilities;
•Redesigned exits, entrances and production lines to encourage social distancing;
•Enhanced cleaning protocols before, during and after shifts;
•Expanded healthcare and leave programs to support employees and their families; and
•Manufacturing our own face masks to provide to our employees free of charge.
Diversity, Equity and Inclusion
Diversity, equity and inclusion at all levels of the company are critical to our ability to innovate, to win in the marketplace and to create sustainable success. Having diverse, equitable and inclusive workplaces allows us to attract and retain the best employees to deliver results for our shareholders. This is exemplified by the composition of the Board of which 4 of 12 directors are female and 4 of 12 directors are ethnically diverse. In addition, 50 percent of our executive team is female and 40 percent of our leadership team is female. We disclose publicly the percentage of women in supervisory roles and the overall workforce. We also launched several initiatives to increase representation of minorities in the workplace. We have created a Global Inclusion Leadership Council to oversee more than 100 employee resource groups around the world to provide opportunities to employees from all backgrounds for leadership training, cross cultural learning and professional development. In 2020, we launched Cummins Advocating for Racial Equity (CARE), which seeks to drive a sustainable impact in dismantling institutional racism and creating systemic equity.
For more information on the topics above and our management of our human capital resources, please go to sustainability.cummins.com. Information from our sustainability report and sustainability webpage is not incorporated by reference into this filing.
AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy statements and other information electronically with the Securities and Exchange Commission (SEC). You may read and copy any document we file with the SEC at the SEC's public reference room at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room.SEC. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including Cummins) fileCummins files electronically with the SEC. The SEC's internet site is www.sec.gov.
Our internet site is www.cummins.com. You can access our Investors and Media webpage through our internet site, by clicking on the heading "About" followed by the "Investor Overview""Cummins Inc. Investor website" link. We make available, free of charge, on or through our Investors and Media webpage, our proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934 or the Securities Act of 1933, as amended, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.
We also have a Corporate Governance webpage. You can access our Governance Documents webpage through our internet site, www.cummins.com, by clicking on the heading "About" followed by "Corporate Governance" and then the "Governance"Cummins Governance Documents" link. Code of Conduct, Committee Charters and other governance documents are included at this site. Our Code of Conduct applies to all employees, regardless of their position or the country in which they work. It also applies to the employees of any entity owned or controlled by us. We will post any amendments to the Code of Conduct and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange LLC (NYSE), on our internet site. The information on our internet site is not incorporated by reference into this report.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE REGISTRANT
Following are the names and ages of our executive officers, their positions with us at January 31, 20182021 and summaries of their backgrounds and business experience:
|
| | | | | | | | | | | | | |
| Name and Age | | Present Cummins Inc. position and
year appointed to position
| | Principal position during the past
five years other than Cummins Inc.
position currently held
|
N. Thomas Linebarger (55)(58) | | Chairman of the Board of Directors and Chief Executive Officer (2012) | | |
| | | | | | | | | | | | | | |
Richard J. FreelandLivingston L. Satterthwaite (60) | | Director, President and Chief Operating Officer (2014)(2019) | | Vice President and President— EngineDistribution Business (2010-2014)(2015-2019) |
Sherry A. Aaholm (55)(58) | | Vice President—Chief Information Officer (2013) | | Executive Vice President,
Information Technology, FedEx
Services (2006-2013)
|
Peter W. Anderson (51)(54) | | Vice President—Global Supply Chain and Manufacturing (2017) | | Principal/Partner, Partner—Ernst & Young LLP (2006-2017) |
Sharon R. Barner (60)(63) | | Vice President—General Counsel (2012)and Corporate Secretary (2020) | | Vice President—General Counsel (2012-2020) |
Steven M. Chapman (63) | | Group Vice President—China and Russia (2009) | | |
Christopher C. Clulow (46)(49) | | Vice President - President—Corporate Controller (2017) | | Controller, Controller—Components Segment (2015-2017)
Executive Director—Heavy, Medium and Light Duty Finance (2011-2015) |
Jill E. Cook (54)(57) | | Vice President—Chief Human Resources Officer (2003) | | |
| Amy R. Davis (51) | | Vice President and President—New Power Segment (2020) | | Vice President—Cummins Filtration (2018-2020)
General Manager—Filtration Business (2015-2018) |
Tracy A. Embree (44)(47) | | Vice President and President— Distribution Business (2019) | | Vice President and President— Components Group (2015) | | Vice President and President— Turbo Technologies (2012-2014)(2015-2019) |
Thaddeus B. Ewald (50)(53) | | Vice President—Corporate Strategy and Business Development (2010) | | |
| Walter J. Fier (56) | | Vice President—Chief Technical Officer (2019) | | Vice President—Engineering, Engine Business (2015-2019) |
Donald G. Jackson (48)(51) | | Vice President—Treasury and Tax (2020) | | Vice President—Treasurer (2015) | | Executive Director—Assistant Treasurer (2013-2015)
Vice President—Americas Finance, Hewlett-Packard Co. (2010-2013)(2015-2020) |
| Melina M. Kennedy (51) | | Vice President—Product Compliance and Regulatory Affairs (2019) | | Executive Director—Pick-up Truck, Engine Business (2018-2019)
Executive Director—Rail & Defense (2017-2018)
General Manager—Rail & Defense (2014-2017) |
Norbert Nusterer (49)(52) | | Vice President and President—Power Systems (2016) | | Vice President—New and ReCon Parts (2011-2016) |
Mark J. Osowick (50)(53) | | Vice President—Human Resources Operations (2014) | | Executive Director—Human Resources, Components Segment & India ABO (2010-2014) |
Srikanth Padmanabhan (53)(56) | | Vice President and President—Engine Business (2016) | | Vice President—Engine Business (2014-2016) Vice President and General Manager—Cummins Emission Solutions (2008-2014)
|
Marya M. Rose (55)(58) | | Vice President—Chief Administrative Officer (2011) | | |
Jennifer Rumsey (44)(47) | | Vice President and President—Components Group (2019) | | Vice President—Chief Technical Officer (2015) | | Vice President—Engineering, Engine Business (2014-2015)
Vice President—Heavy, Medium and Light Duty Engineering (2013-2014)
Executive Director—HD Engineering (2010-2013)
|
|
| | | | |
Livingston L. Satterthwaite (57) | | Vice President and President—Distribution Business (2015) | | Vice President and President—Power Generation (2008-2015) |
Mark A. Smith (50)(53) | | Vice President—Chief Financial Officer (2019) | | Vice President—Financial Operations (2016) | | (2016-2019)
Vice President—Investor Relations and Business Planning and Analysis (2014-2016) Executive Director—Investor Relations (2011-2014)
|
Patrick J. Ward (54)Nathan R. Stoner (43) | | Vice President—Chief Financial Officer (2008)China ABO (2020) | | General Manager—Partnerships and EBU China Joint Venture Business (2018-2020)
General Manager—Power Systems Business, China (2016-2018)
Executive Director—Corporate Business Development (2013-2016) |
| | | | |
| | | | |
Our Chairman and Chief Executive Officer (CEO) is elected annually by ourthe Board of Directors and holds office until the meeting of the Board of Directors at which his election is next considered. Other officers are appointed by the Chairman and Chief Executive Officer,CEO, are ratified by ourthe Board of Directors and hold office for such period as the Chairman and Chief Executive OfficerCEO or the Board of Directors may prescribe.
ITEM 1A. Risk Factors
Set forth below and elsewhere in this Annual Report on Form 10-K are some of the principal risks and uncertainties that could cause our actual business results to differ materially from any forward-looking statements contained in this Report and could individually, or in combination, have a material adverse effect on our results of operations, financial position orand cash flows. These risk factors should be considered in addition to our cautionary comments concerning forward-looking statements in this Report, including statements related to markets for our products and trends in our business that involve a number of risks and uncertainties. Our separate section above, "CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION," should be considered in addition to the following statements.
A sustained slowdown or significant downturn inGOVERNMENT REGULATION
We are conducting a formal internal review of our markets could materiallyemission certification process and adversely affectcompliance with emission standards with respect to our pick-up truck applications and are working with the EPA and CARB to address their questions about these applications. The results of operations, financial conditionthis formal review and regulatory processes, or cash flows.
Manythe discovery of our on- and off-highway markets are cyclical in nature and experience volatility in demand throughout these cycles. Although in 2017 we experienced demand growth in most of our North American and Chinese on-highway markets and certain off-highway markets as well as growth in many of our international markets, if the North American or Chinese markets suffer a significant downturn or if a slower pace of economic growth and weaker demand in our other significant international markets were to occur, depending upon the length, duration and severity of the slowdown, our results of operations, financial condition or cash flows would likely be materially adversely affected.
Our truck manufacturers and OEM customers may discontinue outsourcing their engine supply needs.
Several of our engine customers, including PACCAR, Volvo , Navistar, Fiat Chrysler, Daimler and Dongfeng, are truck manufacturers or OEMs that manufacture engines for some of their own vehicles. Despite their own engine manufacturing abilities, these customers have historically chosen to outsource certain types of engine production to us due to the quality of our engine products, our emission compliance capabilities, our systems integration, their customers' preferences, their desire for cost reductions, their desire for eliminating production risks and their desire to maintain company focus. However, there can be no assurance that these customers will continue to outsource, or outsource as much of, their engine production in the future. In fact, several of these customers have expressed their intention to significantly increase their own engine production and to decrease engine purchases from us. In addition, increased levels of OEM vertical integration could result from a number of factors, such as shifts in our customers' business strategies, acquisition by a customer of another engine manufacturer, the inability of third-party suppliers to meet product specifications and the emergence of low-cost production opportunities in foreign countries. Any significant reduction in the level of engine production outsourcing from our truck manufacturer or OEM customersany noncompliance issues, could have a material adverse effectimpact on our results of operations.operations and cash flows.
The developmentWe previously announced that we are conducting a formal internal review of new technologies may materially reduce the demand for our current productsemissions certification process and services.
We are investing in new products and technologies, including electrified powertrains, for planned introduction into certain existing and new markets. Given the early stages of development of some of these new products and technologies, there can be no guarantee of the future market acceptance and investment returnscompliance with emission standards with respect to these planned products. The increased adoptionall of electrified powertrains in some market segments could result in lower demandour pick-up truck applications, following conversations with the EPA and CARB regarding certification of our engines for current diesel or natural gas enginesmodel year 2019 RAM 2500 and components3500 trucks. During conversations with the EPA and over time,CARB about the effectiveness of our pick-up truck applications, the regulators raised concerns that certain aspects of our emissions systems may reduce the demand for related parts and service revenues from diesel or natural gas powertrains. Furthermore, it is possible that we may not be successful in developing segment-leading electrified powertrains and someeffectiveness of our existing customers could choose to develop their own electrified or alternate fuel powertrains, or source from other manufacturers,emissions control systems and any of these factors could materially adversely impact our results of operations, financial condition and cash flows.
The discovery of any significant additional problems with our engine platforms or aftertreatment systems in North America could further materially adversely impact our results of operations, financial condition or cash flows.
During 2017, the CARB and U.S. EPA selected certain of our pre-2013 model year engine systems for additional emissions testing. Some of these engine systems failed CARB and EPA's teststhereby act as defeat devices. As a result, of degradation of an aftertreatment component. We have not been issued an official notice fromour internal review focuses, in part, on the CARB or EPA regarding these particular engine systems.regulators’ concerns. We are working closely with the agenciesregulators to enhance our emissions systems to improve the effectiveness of all of our pick-up truck applications and will meet with them beginning in the first quarter of 2018, to develop a resolution of these matters. We are developing and testing a variety of solutions tofully address the technical issues, which could includeregulators’ requirements. Based on discussions with the regulators, we have developed a combination ofnew calibration changes, service practicesfor the engines in model year 2019 RAM 2500 and hardware changes.
In addition, we continue3500 trucks that has been included in all engines shipped since September 2019. During our discussions, the regulators have asked us to evaluate other engine systems for model years 2010 through 2015 that could potentially be subject to similar aftertreatment component degradation issues. At the close of 2017, we had not yet determined the impact tolook at other model years or engine systems orand other engines. We will continue to work together closely with the percentagerelevant regulators to develop and implement recommendations for improvement as part of our ongoing commitment to compliance.
Due to the continuing nature of the engine system populations that could be affected.
Since there are many unresolved variables with respect to these degradation issues,unknown facts and circumstances, we are not yet able to estimate the financial impact of these matters. It is possible that theythe consequences of any remediation plans resulting from our formal review and these regulatory processes could have a material adverse impact on our results of operations and cash flows in the periods in which these degradationemissions certification issues are resolved and a solution is determined.addressed.
Our products are subject to recall for performance or safety-related issues.
Our products may be subject to recall for performance or safety-related issues. Product recalls subject us to harm toextensive statutory and regulatory requirements that can significantly increase our reputation, losscosts and, along with increased scrutiny from regulatory agencies and unpredictability in the adoption, implementation and enforcement of currentincreasingly stringent and future customers, reduced revenue and product recall costs. Product recall costs are incurred when we decide, either voluntarily or involuntarily, to recall a product through a formal campaign to solicitfragmented emission standards by multiple jurisdictions around the return of specific products due to a known or suspected performance issue. Any significant product recallsworld, could have a material adverse effectimpact on our results of operations, financial condition and cash flows. See Note 12, "COMMITMENTS AND CONTINGENCIES" to the Consolidated Financial Statements for additional information.
Lower-than-anticipated market acceptance of our new or existing products or services, including reductions in demand for diesel engines, could materially adversely impact our results of operations, financial condition or cash flows.
Although we conduct market research before launching new or refreshed engines and introducing new services, many factors both within and outside our control affect the success of new or existing products and services in the marketplace. Offering engines and services that customers desire and value can mitigate the risks of increasing price competition and declining demand, but products and services that are perceived to be less than desirable (whether in terms of price, quality, overall value, fuel efficiency or other attributes) can exacerbate these risks. With increased consumer interconnectedness through the internet, social media and other media, mere allegations relating to poor quality, safety, fuel efficiency, corporate responsibility or other key attributes can negatively impact our reputation or market acceptance of our products or services, even if such allegations prove to be inaccurate or unfounded.
A slowdown in infrastructure development and/or depressed commodity prices could adversely affect our business.
Infrastructure development and strong commodity prices have been significant drivers of our historical growth, but as the pace of investment in infrastructure slowed in recent years (especially in China and Brazil), commodity prices were significantly lower and demand for our products in off-highway markets was weak. Weakness in commodities, such as oil, gas and coal, adversely impacted mining industry participants’ demand for vehicles and equipment that contain our engines and other products over the past several years. Although many of our off-highway markets began to recover in 2017, additional deterioration, or renewed weakness, in infrastructure and commodities markets could adversely affect our customers’ demand for vehicles and equipment and could adversely affect our business.
Unpredictability in the adoption, implementation and enforcement of increasingly stringent emission standards by multiple jurisdictions around the world could adversely affect our business.
Our engines are subject to extensive statutory and regulatory requirements governing emissionemissions and noise, including standards imposed by the EPA, the EU, state regulatory agencies (such as the CARB) and other regulatory agencies around the world. WeRegulatory agencies are making certification and compliance with emissions and noise standards more stringent and subjecting diesel engine products to an increasing level of scrutiny. The discovery of noncompliance issues could have made,a material adverse impact on our results of operations, financial condition and will be required to continue to make, significant capital and research expenditures to ensure our engines comply with these emission standards. cash flows.
Developing engines and components to meet numerousmore stringent and changing government regulatory requirements, with different implementation timelines and emission requirements, makes developing engines efficiently for multiple markets complicated and could result in substantial additional costs that may be difficult to recover in certain markets. In some cases, we are required to develop new products to comply with new regulations, particularly those relating to air emissions. While we have met previous deadlines, our ability to comply with other existing and future regulatory standards will be essential for us to maintain our competitive advantageposition in the engine marketsapplications and industries we serve. The successful development and introduction of new and enhanced products in order to comply with new regulatory requirements are subject to other risks, such as delays in product development, cost over-runs and unanticipated technical and manufacturing difficulties.
In addition to these risks, the nature and timing of government implementation and enforcement of increasingly stringent emission standards in emergingour worldwide markets are unpredictable and subject to change. Any delays in implementation or enforcement could result in the products we developed or modified to comply with these standards becoming unnecessary or becoming necessary later than expected thereby, in some cases, negatinga loss of our competitive advantage. This in turn can delay, diminish or eliminateadvantage and could have a material adverse impact on our results of operations, financial condition and cash flows.
We operate our business on a global basis and policy changes affecting international trade could adversely impact the expected return on capitaldemand for our products and research expendituresour competitive position.
We manufacture, sell and service products globally and rely upon a global supply chain to deliver the raw materials, components, systems and parts that we have investedneed to manufacture and service our products. Changes in suchgovernment policies on foreign trade and investment can affect the demand for our products and mayservices, cause non-U.S. customers to shift preferences toward domestically manufactured or branded products and impact the competitive position of our products or prevent us from being able to sell products in certain countries. Our business benefits from free trade agreements, such as the new United States-Mexico-Canada Agreement and the U.S. trade relationship with China, Brazil and France and efforts to withdraw from, or substantially modify such agreements or arrangements, in addition to the implementation of more restrictive trade policies, such as more detailed inspections, higher tariffs (including, but not limited to, additional tariffs on the import of steel or aluminum), import or export licensing requirements, exchange controls or new barriers to entry, could adversely affectimpact our perceived competitive advantage in being an early, advanced developer of compliant engines.
We derive significant earnings from investees that we do not directly control,production costs, customer demand and our relationships with more than 50 percentcustomers and suppliers. Any of these earnings from our China-based investees.
For 2017, we recognized $357 million of equity, royalty and interest income from investees, compared to $301 million in 2016. More than half of our equity, royalty and interest income from investees is from three of our 50 percent owned joint ventures in
China - Beijing Foton Cummins Engine Co., Ltd., Dongfeng Cummins Engine Company, Ltd. and Chongqing Cummins Engine Company, Ltd. As a result, although a significant percentage of our net income is derived from these unconsolidated entities, we do not unilaterally control their management or their operations, which puts a substantial portion of our net income at risk from the actions or inactions of these entities. A significant reduction in the level of contribution by these entities to our net income would likelyconsequences could have a material adverse effect on our results of operations, financial condition and cash flows.
The U.K.’s exit from the European Union (EU) could materially and adversely impact our results of operations, financial condition and cash flows.
On January 31, 2020, the U.K. exited from the EU (BREXIT). Additionally, the results of the U.K.’s BREXIT caused, and may continue to cause, volatility in global stock markets, currency exchange rate fluctuations and global economic uncertainty. Although it is unknown what the terms of the U.K.’s future relationship with the EU will be, it is possible that there will be higher tariffs or greater restrictions on imports and exports between the U.K. and the EU and increased regulatory complexities. The effects of BREXIT will depend on any agreements the U.K. makes to retain access to EU markets either during a transitional period or on a permanent basis. These measures could potentially disrupt our supply chain, including delays of imports and exports, limited access to human capital within some of the target markets and jurisdictions in which we operate and adverse changes to tax benefits or liabilities in these or other jurisdictions. In addition, BREXIT could lead to legal uncertainty and potentially divergent national laws and regulations, including with respect to emissions and similar certifications granted to us by the EU, as the U.K. determines which EU laws to replace or replicate. Any of these effects of BREXIT, among others, could have a material adverse impact on our results of operations, financial condition and cash flows.
Unanticipated changes in our effective tax rate, the adoption of new tax legislation changes in our provisional estimates or exposure to additional income tax liabilities could adversely affect our profitability.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (Tax Legislation). The estimated effects based upon current interpretation of the Tax Legislation have been incorporated into our financial results. As additional data is prepared and analyzed and as additional clarification and implementation guidance is issued on the new tax law, it may be necessary to adjust the provisional amounts. Any adjustments could have a material impact on provisional amounts. In addition, there is a risk that states or foreign jurisdictions may amend their tax laws in response to the Tax Legislation, which could have a material impact on our future results.
We are subject to income taxes in the U.S. and numerous international jurisdictions. Our income tax provision and cash tax liability in the future could be adversely affected by changes in earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and the discovery of new information in the course of our tax return preparation process. The carrying value of deferred tax assets, which are predominantly in the U.S., is dependent on our ability to generate future taxable income in the U.S. We are also subject to ongoing tax audits. These audits can involve complex issues, which may require an extended period of time to resolve and can be highly judgmental. Tax authorities may disagree with certain tax reporting positions taken by us and, as a result, assess additional taxes against us. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. The amounts ultimately paid upon resolution of these or subsequent tax audits could be materially different from the amounts previously included in our income tax provision and, therefore, could have a material impact on our tax provision.
WeOur global operations are exposedsubject to laws and may be adversely affected by, potential security breaches or other disruptionsregulations that impose significant compliance costs and create reputational and legal risk.
Due to our information technology systems and data security.
We rely on the capacity, reliability and securityinternational scope of our information technology systemsoperations, we are subject to a complex system of commercial and trade regulations around the world. Recent years have seen an increase in the development and enforcement of laws regarding trade compliance and anti-corruption, such as the U.S. Foreign Corrupt Practices Act and similar laws from other countries, as well as new regulatory requirements regarding data security infrastructureprivacy, such as the European Union General Data Protection Regulation. Our numerous foreign subsidiaries, affiliates and joint venture partners are governed by laws, rules and business practices that differ from those of the U.S. The activities of these entities may not comply with U.S. laws or business practices or our Code of Business Conduct. Violations of these laws may result in connection with various aspects ofsevere criminal or civil sanctions, could disrupt our business activities. We also rely on our ability to expand and continually update these systems and related infrastructureresult in response to the changing needs of our business. As we implement new systems, they may not perform as expected. We also face the challenge of supporting our older systems and implementing necessary upgrades. In addition, some of these systems are managed by third party service providers and are not under our direct control. If we experience a problem with an important information technology system, including during system upgrades and/or new system implementations, the resulting disruptions could have an adverse effect on our reputation, business and reputation. As customers adoptresults of operations, financial condition and relycash flows. We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing laws might be administered or interpreted.
Our operations are subject to increasingly stringent environmental laws and regulations.
Our plants and operations are subject to increasingly stringent environmental laws and regulations in all of the countries in which we operate, including laws and regulations governing air emission, discharges to water and the generation, handling, storage,
transportation, treatment and disposal of waste materials. While we believe that we are in compliance in all material respects with these environmental laws and regulations, there can be no assurance that we will not be adversely impacted by costs, liabilities or claims with respect to existing or subsequently acquired operations, under either present laws and regulations or those that may be adopted or imposed in the future. We are also subject to laws requiring the cleanup of contaminated property. If a release of hazardous substances occurs at or from any of our current or former properties or at a landfill or another location where we have disposed of hazardous materials, we may be held liable for the contamination and the amount of such liability could be material.
Future bans or limitations on the cloud-based digital technologies and services we offer, any disruptionuse of the confidentiality, integritydiesel-powered vehicles or availability of those servicesother applications could have ana material adverse effectimpact on our business over the long term.
In an effort to limit greenhouse gas emissions and reputation.combat climate change, multiple countries and cities have announced that they plan to implement a ban on the use in their countries or cities of diesel-powered products in the near or distant future. These countries include China, India and Germany. In addition, California government officials have called for the state to phase out sales of diesel-powered certain vehicles by 2035. To the extent that these types of bans are actually implemented in the future on a broad basis, or in one or more of our key markets, our diesel business over the long-term could experience material adverse impacts.
The data handled by our information technology systems isBUSINESS CONDITIONS / DISRUPTIONS
We are vulnerable to security threats. Our operations routinely involvesupply shortages from single-sourced suppliers, including suppliers that may be impacted by the COVID-19 pandemic, and any delay in receiving storing, processing and transmitting sensitive information pertaining to our business, customers, dealers, suppliers, employees and other sensitive matters. Information technology security threats, such as security breaches, computer malware and other "cyber attacks," which are increasing in both frequency and sophistication, could result in unauthorized disclosures of information and create financial liability, subject us to legal or regulatory sanctions, or damage our reputation with customers, dealers, suppliers and other stakeholders. We continuously seek to maintain a robust program of information security and controls, but the impact of a material information technology eventcritical supplies could have a material adverse effect on our competitive position, reputation, results of operations, financial condition and cash flow.flows.
We single source a significant number of parts and raw materials critical to our business operations. Any delay in our suppliers' deliveries may adversely affect our operations at multiple manufacturing locations, forcing us to seek alternative supply sources to avoid serious disruptions. Delays may be caused by factors affecting our suppliers (including the COVID-19 pandemic, capacity constraints, port congestion, labor disputes, economic downturns, availability of credit or impaired financial condition), suppliers' allocations to other purchasers, weather emergencies, natural disasters, acts of government or acts of war or terrorism. In particular, if the COVID-19 pandemic continues and results in extended periods of travel, commercial and other restrictions, we could continue to incur global supply disruptions. Any extended delay in receiving critical supplies could impair our ability to deliver products to our customers and have a material adverse effect on our results of operations, financial condition and cash flows.
A sustained market slowdown due to the impacts from the COVID-19 pandemic, other public health crises, epidemics or pandemics or otherwise, could have a material and adverse effect on our results of operations, financial condition and cash flows.
The COVID-19 pandemic triggered a significant downturn in our markets globally and these challenging market conditions could continue for an extended period of time.Most global economies slowed and there is still much uncertainty as to when these global markets will fully recover. If any or all of these major markets were to endure a sustained slowdown or recession due to the impacts of the COVID-19 pandemic, other public health crises, epidemics or pandemics or otherwise decline, it could have a material adverse effect on our results of operations, financial condition and cash flows.
Our manufacturing and supply chain abilities may be materially and adversely impacted by an extended shutdown or disruption of our operations due to the COVID-19 pandemic which could materially and adversely affect our results of operations, financial condition and cash flows.
FinancialThe outbreak of COVID-19 spread throughout the world and became a global pandemic with the resultant economic impacts evolving into a worldwide recession. The pandemic triggered a significant downturn in our markets globally, which continued to unfavorably impact market conditions throughout 2020 and these challenging market conditions could continue for an extended period of time. In an effort to contain the spread of COVID-19, maintain the well-being of our employees and stakeholders, match the reduced demand from our customers and in accordance with governmental requirements, we closed or partially shut down certain office, manufacturing, distribution and technical center facilities around the world in March 2020. Although most of our manufacturing, distribution and technical center facilities re-opened early in the second quarter of 2020, some operated at reduced capacities, most of our global office buildings remained closed through the remainder of 2020. Despite many of our markets recovering in the second half of 2020, the ongoing spread of the virus prior to widespread vaccination presents several risks to our business, especially in the first half of 2021. While the impacts of the pandemic and the resulting global recession are expected to be temporary, the duration of the production and supply chain disruptions, and related financial impacts, cannot be estimated at this time. Should the reduced manufacturing and distribution capacities continue for an extended period of time or worsen, the impact on our production and supply chain could have a material adverse effect on our results of operations, financial condition and cash flows.
We face the challenge of accurately aligning our capacity with our demand.
Our markets are cyclical in nature and we face periods when demand fluctuates significantly higher or lower than our normal operating levels, including COVID-19 related shut-downs. Accurately forecasting our expected volumes and appropriately adjusting
our capacity are important factors in determining our results of operations and cash flows. We manage our capacity by adjusting our manufacturing workforce, capital expenditures and purchases from suppliers. In periods of weak demand we may face under-utilized capacity and un-recovered overhead costs, while in periods of strong demand we may experience unplanned costs and could fail to meet customer demand. We cannot guarantee that we will be able to adequately adjust our manufacturing capacity in response to significant changes in customer demand, which could harm our business. In addition, the COVID-19 pandemic and related reductions in demand forced certain of our customer’s facilities around the world to close or partially shut down operations, inhibiting our ability to forecast demand and caused related closures and partial shut-downs of certain of our manufacturing facilities. If we do not accurately align our manufacturing capabilities with demand it could have a material adverse effect on our results of operations, financial condition and cash flows.
Our truck manufacturers and OEM customers discontinuing outsourcing their engine supply needs, financial distress, particularly related to the COVID-19 pandemic or bankruptcy, or a change-in-control of one of our large truck OEM customers could materially adverselyhave a material adverse impact on our results of operations.operations, financial condition and cash flows.
We recognize significant sales of engines and components to a few large on-highway truck OEM customers in North America which have been an integral part of our positive business results for several years. IfMany are truck manufacturers or OEMs that manufacture engines for some of their own vehicles. Despite their own engine manufacturing abilities, these customers have historically chosen to outsource certain types of engine production to us due to the quality of our engine products, our emission compliance capabilities, our systems integration, their customers' preferences, their desire for cost reductions, their desire for eliminating production risks and their desire to maintain company focus. However, there can be no assurance that these customers will continue to outsource, or outsource as much of, their engine production in the future. In addition, increased levels of OEM vertical integration could result from a number of factors, such as shifts in our customers' business strategies, acquisition by a customer of another engine manufacturer, the inability of third-party suppliers to meet product specifications and the emergence of low-cost production opportunities in foreign countries. Any significant reduction in the level of engine production outsourcing from our truck manufacturer or OEM customers, financial distress of one of our large truck OEM customers experiences financial distress,due to the COVID-19 pandemic or bankruptcy or a change-in-control, such circumstance could likely lead to significant reductions in our revenues and earnings,sales volumes, commercial disputes, receivable collection issues, and other negative consequences that could have a material adverse impact on our results of operations.operations, financial condition and cash flows.
Infrastructure development and strong commodity prices have been significant drivers of our historical growth, but as the pace of investment in infrastructure slowed in recent years (especially in China and Brazil), commodity prices were significantly lower and demand for our products in off-highway markets was weak. Weakness in commodity prices, including any negative impacts on commodity prices such as oil, gas and coal, adversely impacted mining industry participants’ demand for vehicles and equipment that contain our engines and other products over the past several years. Continued deterioration in infrastructure and commodities markets, including the impacts from COVID-19, could adversely affect our customers’ demand for vehicles and equipment and, as a result, could adversely affect our business.
We may fail to realize all of the expected enhanced revenue, earnings and cash flow from our investment in the Eaton Cummins Automated Transmission Technologies joint venture.
A significant component of our investment in the Eaton Cummins Automated Transmission Technologies joint venture related to the expected growth in automated transmission products in North America and China. While we believe we will ultimately achieve these objectives, it is possible that we will be unable to achieve our original expectations within our anticipated time frame or in the anticipated amounts. As part of the purchase accounting associated with the formation of the joint venture, significant goodwill and intangible asset balances were recorded on the consolidated balance sheet. If cash flows from the joint venture fall short of our anticipated amounts, these assets could be subject to non-cash impairment charges, negatively impacting our earnings.
We derive significant earnings from investees that we do not directly control, with more than 50 percent of these earnings from our China-based investees.
For 2020, we recognized $452 million of equity, royalty and interest income from investees, compared to $330 million in 2019. Approximately half of our equity, royalty and interest income from investees is from four of our 50 percent owned joint ventures in China - Beijing Foton Cummins Engine Co., Ltd., Dongfeng Cummins Engine Company, Ltd., Chongqing Cummins Engine Company, Ltd. and Dongfeng Cummins Emission Solutions Co. Ltd. Although a significant percentage of our net income is derived from these unconsolidated entities, we do not unilaterally control their management or their operations, which puts a substantial portion of our net income at risk from the actions or inactions of these entities. A significant reduction in the level of contribution by these entities to our net income would likely have a material adverse effect on our results of operations and cash flows.
Our products are subject to recall for performance or safety-related issues.
Our products are subject to recall for performance or safety-related issues. Product recalls subject us to reputational risk, loss of current and future customers, reduced revenue and product recall costs. Product recall costs are incurred when we decide, either voluntarily or involuntarily, to recall a product through a formal campaign to solicit the return of specific products due to known or suspected performance or safety issues. Any significant product recalls could have material adverse effects on our results of operations, financial condition and cash flows. See Note 12, "PRODUCT WARRANTY LIABILITY" to the Consolidated Financial Statements for additional information.
The development of new technologies may materially reduce the demand for our current products and services.
We are investing in new products and technologies, including electrified powertrains, hydrogen production and fuel cells, for planned introduction into certain new and existing markets. Given the early stages of development of some of these new products and technologies, there can be no guarantee of the future market acceptance and investment returns with respect to our planned products, which will face competition from an array of other technologies and manufacturers. The increased adoption of electrified powertrains in some market segments could result in lower demand for current diesel or natural gas engines and components and, over time, reduce the demand for related parts and service revenues from diesel or natural gas powertrains. Furthermore, it is possible that we may not be successful in developing segment-leading electrified or alternate fuel powertrains and some of our existing customers could choose to develop their own, or source from other manufacturers, and any of these factors could have a material adverse impact on our results of operations, financial condition and cash flows.
Lower-than-anticipated market acceptance of our new or existing products or services could have a material adverse impact on our results of operations, financial condition and cash flows.
Although we conduct market research before launching new or refreshed engines and introducing new services, many factors both within and outside our control affect the success of new or existing products and services in the marketplace. Offering engines and services that customers desire and value can mitigate the risks of increasing competition and declining demand, but products and services that are perceived to be less than desirable (whether in terms of price, quality, overall value, fuel efficiency or other attributes) can exacerbate these risks. With increased consumer interconnectedness through the internet, social media and other media, mere allegations relating to poor quality, safety, fuel efficiency, corporate responsibility or other key attributes can negatively impact our reputation or market acceptance of our products or services, even if such allegations prove to be inaccurate or unfounded.
Our products are exposed to variability in material and commodity costs.
Our businesses establish prices with our customers in accordance with contractual time frames; however, the timing of material and commodity market price increases may prevent us from passing these additional costs on to our customers through timely pricing actions. Additionally, higher material and commodity costs around the world may offset our efforts to reduce our cost structure. While we customarily enter into financial transactions and contractual pricing adjustment provisions with our customers that attempt to address some of these risks (notably with respect to copper, platinum and palladium), there can be no assurance that commodity price fluctuations will not adversely affect our results of operations and cash flows. In addition, while the use of commodity price hedging instruments and contractual pricing adjustments may provide us with some protection from adverse fluctuations in commodity prices, by utilizing these instruments, we potentially forego the benefits that might result from favorable fluctuations in price. As a result, higher material and commodity costs, as well as hedging these commodity costs during periods of decreasing prices, could result in declining margins.
Our business is exposed to potential product liability claims.
We face an inherent business risk of exposure to product liability claims in the event that our products' failure to perform to specification results, or is alleged to result, in property damage, bodily injury and/or death. At any given time, we are subject to various and multiple product liability claims, any one of which, if decided adversely to us, may have a material adverse effect on our reported results of operation in the period in which our liability with respect to any such claim is recognized. While we maintain insurance coverage with respect to certain product liability claims, we may not be able to obtain such insurance on acceptable terms in the future, if at all, and any such insurance may not provide adequate coverage against product liability claims. In addition, product liability claims can be expensive to defend and can divert the attention of management and other personnel for significant periods of time, regardless of the ultimate outcome. Furthermore, even if we are successful in defending against a claim relating to our products, claims of this nature could cause our customers to lose confidence in our products and us.
GENERAL
The COVID-19 pandemic created disruptions and turmoil in global credit and financial markets and ongoing impacts could have a material adverse effect on our results of operations, financial condition and cash flows.
The COVID-19 pandemic created disruptions and turmoil in the global credit and financial markets and made it more difficult and costly for us to access capital on favorable terms to meet our liquidity needs. The disruptions to the global credit and financial markets could also have material negative impacts on business operations and financial positions of our customers and suppliers, which may negatively impact our orders, sales and supply chain. If the impacts of the COVID-19 pandemic on global credit and financial markets continue, or worsen, it could negatively impact our business, along with the financial condition of our customers and suppliers, and it could have a material adverse impact on our results of operations, financial condition and cash flows.
We may be adversely impacted by work stoppages and other labor matters.
At December 31, 2020, we employed approximately 57,825 persons worldwide. Approximately 20,279 of our employees worldwide were represented by various unions under collective bargaining agreements that expire between 2021 and 2025. While we have no reason to believe that we will be materially impacted by work stoppages or other labor matters, there can be no assurance that future issues with our labor unions will be resolved favorably or that we will not encounter future strikes, work stoppages, or other types of conflicts with labor unions or our employees. Any of these consequences may have an adverse effect on us or may limit our flexibility in dealing with our workforce. In addition, many of our customers and suppliers have unionized work forces. Work stoppages or slowdowns experienced by us, our customers or suppliers, including any work stoppages or slowdowns related to the COVID-19 pandemic, could result in slowdowns or closures that would have a material adverse effect on our results of operations, financial condition and cash flow.
We rely on our executive leadership team and other key personnel as a critical part of our human capital resources.
We depend on the skills, institutional knowledge, working relationships, and continued services and contributions of key personnel, including our executive leadership team as a critical part of our human capital resources. In addition, our ability to achieve our operating and strategic goals depends on our ability to identify, hire, train and retain qualified individuals. We compete with other companies both within and outside of our industry for talented personnel and we may lose key personnel or fail to attract, train and retain other talented personnel. Any such loss or failure could have material adverse effects on our results of operations, financial condition and cash flows.
In particular, our continued success will depend in part on our ability to retain the talents and dedication of key employees. If key employees terminate their employment or become ill as a result of the COVID-19 pandemic or otherwise, our business activities may be adversely affected and our management team’s attention may be diverted. In addition, we may not be able to locate suitable replacements for any key employees who leave.
We may be adversely impacted by the effects of climate change and may incur increased costs and experience other impacts due to new or more stringent greenhouse gas regulations designed to address climate change.
The scientific consensus indicates that emissions of greenhouse gases (GHG) continue to alter the composition of Earth’s atmosphere in ways that are affecting, and are expected to continue to affect, the global climate. The potential impacts of climate change on our customers, product offerings, operations, facilities and suppliers are accelerating and uncertain, as they will be particular to local and customer-specific circumstances. These potential impacts may include, among other items, physical long-term changes in freshwater availability and the frequency and severity of weather events as well as customer product changes either through preference or regulation.
Concerns regarding climate change may lead to additional international, national, regional and local legislative and regulatory responses. Various stakeholders, including legislators and regulators, shareholders and non-governmental organizations, are continuing to look for ways to reduce GHG emissions. We could face risks to our brand reputation, investor confidence and market share due to an inability to innovate and develop new products that decrease GHG emissions. Increased input costs, such as fuel and electricity, and compliance-related costs could also impact customer operations and demand for our products. As the impact of any future GHG legislative or regulatory requirements on our global businesses and products is dependent on the timing, scope and design of the mandates or standards, we are currently unable to predict its potential impact which could have a material adverse effect on our results of operations, financial condition and cash flows. The regulation of GHG emissions could also increase our operating costs through higher utility, transportation and materials costs.
Our plan to reposition our portfolio of product offerings through exploringexploration of strategic acquisitions and divestitures may expose us to additional costs and risks.
Part of our strategic plan is to improve our revenue growth, gross margins and earnings by exploring the repositioning of our portfolio of product line offerings through the pursuit of potential strategic acquisitions and/or divestitures to provide future strategic, financial and operational benefits and improve shareholder value. There can be no assurance that we will be able to identify suitable candidates or consummate these transactions on favorable terms. The successful identification and completion of any strategic transaction depends on a number of factors that are not entirely within our control, including the availability of suitable candidates and our ability to negotiate terms acceptable to all parties involved, conclude satisfactory agreements and obtain all necessary regulatory approvals. Accordingly, we may not be able to successfully negotiate and complete specific transactions. The exploration, negotiation and consummation of strategic transactions may involve significant expenditures by us, which may adversely affect our results of operations at the time such expenses are incurred, and may divert management’s attention from our existing business. Strategic transactions also may have adverse effects on our existing business relationships with suppliers and customers.
If required, the financing for strategic acquisitions could result in an increase in our indebtedness, dilute the interests of our shareholders or both. Any acquisition may not be accretive to us for a significant period of time following the completion of such acquisition. Also, our ability to effectively integrate any potential acquisition into our existing business and culture may not be successful, which could jeopardize future financial and operational performance for the combined businesses. In addition, if an acquisition results in any additional goodwill or increase in other intangible assets on our balance sheet and subsequently becomes impaired, we would be required to record a non-cash impairment charge, which could result in a material adverse effect on our financial condition and results of operations.condition.
Similarly, any strategic divestiture of a product line or business may reduce our revenue and earnings, reduce the diversity of our business, result in substantial costs and expenses and cause disruption to our employees, customers, vendors and communities in which we operate.
WeOur information technology systems and our products are vulnerableexposed to supply shortages from single-sourced suppliers.
During 2017, we single sourced approximately 20 percent of the total types of parts in our product designs, compared to approximately 56 percent in 2016. Any delay in our suppliers' deliveriespotential security breaches or other disruptions which may adversely affectimpact our operations at multiple manufacturing locations, forcing us to seek alternative supply sources to avoid serious disruptions. Delays may be caused by factors affecting our suppliers, including capacity constraints, labor disputes, economic downturns, availabilitycompetitive position, reputation, results of credit, the impairedoperations, financial condition and cash flows.
We rely on the capacity, reliability and security of a particular supplier, suppliers' allocations to other purchasers, weather emergencies, natural disasters or actsour information technology systems and data security infrastructure in connection with various aspects of war or terrorism. Any extended delay in receiving critical supplies could impairour business activities. We also rely on our ability to deliver productsexpand and continually update these systems and related infrastructure in response to the changing needs of our business. As we implement new systems, they may not perform as expected. We face the challenge of supporting our older systems and implementing necessary upgrades. In addition, some of these systems are managed by third-party service providers and are not under our direct control. If we experience a problem with an important information technology system, including during system upgrades and/or new system implementations, the resulting disruptions could have an adverse effect on our business and reputation. As customers adopt and rely on cloud-based digital technologies and services we offer, any disruption of the confidentiality, integrity or availability of those services could have an adverse effect on our business and reputation.
The data handled by our information technology systems is vulnerable to security threats. Our operations routinely involve receiving, storing, processing and transmitting sensitive information pertaining to our business, customers, dealers, suppliers, employees and other sensitive matters. While we continually work to safeguard our systems and mitigate potential risks, there is no assurance that these actions will be sufficient to prevent information technology security threats, such as security breaches, computer malware, computer viruses and other "cyber attacks," which are increasing in both frequency and sophistication, along with power outages or hardware failures. These threats could result in unauthorized public disclosures of information, create financial liability, subject us to legal or regulatory sanctions, disrupt our ability to conduct our business, result in the loss of intellectual property or damage our reputation with customers, dealers, suppliers and other stakeholders. As a result of the COVID-19 pandemic and resulting government actions to restrict movement, a large percentage of our salaried employees are working remotely. This remote working environment may pose a heightened risk for security breaches or other disruptions of our information technology systems.
In addition, our products, including our engines, contain interconnected and increasingly complex systems that control various processes and these systems are potentially subject to "cyber attacks" and disruption. The impact of a significant information technology event on either of our information technology systems or our products could have a material adverse effect on our competitive position, reputation, results of operations.operations, financial condition and cash flows.
We are exposed to political, economic and other risks that arise from operating a multinational business.
Our business is subject to the political, economic and other risks that are inherent in operating in numerous countries. These risks include:
•public health crises, including the spread of a contagious disease, such as COVID-19, and other catastrophic events;
•the difficulty of enforcing agreements and collecting receivables through foreign legal systems;
•trade protection measures and import or export licensing requirements;
•the imposition of taxes on foreign income and tax rates in certain foreign countries that exceed those in the U.S.;
•the imposition of tariffs, exchange controls or other restrictions;
•difficulty in staffing and managing widespread operations and the application of foreign labor regulations;
•required compliance with a variety of foreign laws and regulations; and
•changes in general economic and political conditions in countries where we operate, particularly in emerging markets.
As we continue to operate our business globally, our success will depend, in part, on our ability to anticipate and effectively manage these and other related risks. There can be no assurance that the consequences of these and other factors relating to our multinational operations will not have a material adverse effect upon us.
We face significant competition in the marketsregions we serve.
The markets in which we operate are highly competitive. We compete worldwide with a number of other manufacturers and distributors that produce and sell similar products. We primarily compete in the market with diesel engines and related diesel products; however, new technologies continue to be developed for gasoline, natural gas, electrification and other technologies and we will continue to face new competition from these expanding technologies. Our products primarily compete on the basis of performance, price, performance,total cost of ownership, fuel economy, emissions compliance, speed of delivery, quality and customer support. We also face competitors in some emerging marketsregions who have established local practices and long standing relationships with participants in these markets. There can be no assurance that our products will be able to compete successfully with the products of other companies and in other markets.
Increasing global competition among our customers may affect our existing customer relationships and restrict our ability to benefit from some of our customers' growth.
As our customers in emerging markets continue to grow in size and scope, they are increasingly seeking to export their products to other countries. This has meant greater demand for our advanced engine technologies to help these customers meet the more stringent emissions requirements of developed markets, as well as greater demand for access to our distribution systems for purposes of equipment servicing. As these emerging market customers enter into, and begin to compete in more developed markets, they may increasingly begin to compete with our existing customers in these markets. Our further aid to emerging market customers could adversely affect our relationships with developed market customers. In addition, to the extent the competition does not correspond to overall growth in demand, we may see little or no benefit from this type of expansion by our emerging market customers.
Policy changes affecting international trade could adversely impact the demand for our products and our competitive position.
Changes in government policies on foreign trade and investment can affect the demand for our products and services, impact the competitive position of our products or prevent us from being able to sell products in certain countries. Our business benefits from free trade agreements, such as the North American Free Trade Agreement, and efforts to withdraw from, or substantially modify such agreements, in addition to the implementation of more restrictive trade policies, such as more detailed inspections, higher tariffs, import or export licensing requirements, exchange controls or new barriers to entry, could have a material adverse effect on our results of operations, financial condition or cash flows.
Additionally, the results of the United Kingdom’s referendum on EU membership,advising for the exit from the EU, has caused and may continue to cause significant volatility in global stock markets, currency exchange rate fluctuations and global economic uncertainty. Although it is unknown what the terms of the United Kingdom’s future relationship with the EU will be, it is possible that there will be greater restrictions on imports and exports between the United Kingdom and EU and increased regulatory complexities. Any of these factors could adversely impact customer demand, our relationships with customers and suppliers and our results of operations.
We are subject to foreign currency exchange rate and other related risks.
We conduct operations in many areas of the world involving transactions denominated in a variety of currencies. We are subject to foreign currency exchange rate risk to the extent that our costs are denominated in currencies other than those in which we earn revenues. In addition, since our financial statements are denominated in U.S. dollars, changes in foreign currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on our results of operations. Although the U.S. dollar weakened in 2017, theoperations, financial condition and cash flows. The U.S. dollar strengthened in recent years through 2016 and resultedresulting in material unfavorable impacts on our revenues in those years. If the U.S. dollar returns tocontinues strengthening against other currencies, we will experience additional volatility in our financial statements.
While we customarily enter into financial transactions that attempt to address these risks and many of our supply agreements with customers include foreign currency exchange rate adjustment provisions, there can be no assurance that foreign currency exchange rate fluctuations will not adversely affect our future results of operations.operations and cash flows. In addition, while the use of currency hedging instruments may provide us with some protection from adverse fluctuations in foreign currency exchange rates, by utilizing these instruments we potentially forego the benefits that might result from favorable fluctuations in foreign currency exchange rates.
We also face risks arising from the imposition of foreign exchange controls and currency devaluations. Foreign exchange controls may limit our ability to convert foreign currencies into U.S. dollars or to remit dividends and other payments by our foreign subsidiaries or businesses located in or conducted within a country imposing controls. Currency devaluations result in a diminished value of funds denominated in the currency of the country instituting the devaluation. See Management's Discussion and Analysis for additional information.
Our products are exposedSignificant declines in future financial and stock market conditions, particularly those related to variability in materialthe global recession due to the COVID-19 pandemic, could diminish our pension plan asset performance and commodity costs.
Our businesses establish prices with our customers in accordance with contractual time frames; however, the timing of material and commodity market price increases may prevent us from passing these additional costs on to our customers through timely pricing actions. Additionally, higher material and commodity costs around the world may offset our efforts to reduce our cost structure. While we customarily enter into financial transactions and contractual pricing adjustment provisions with our customers that attempt to address some of these risks (notably with respect to copper, platinum and palladium), there can be no assurance that commodity price fluctuations will not adversely affectimpact our results of operations. In addition, whileoperations, financial condition and cash flow.
We sponsor both funded and unfunded domestic and foreign defined benefit pension and other retirement plans. Our pension cost and the required contributions to our pension plans are directly affected by the value of plan assets, the projected and actual rates of return on plan assets and the actuarial assumptions we use to measure our defined benefit pension plan obligations, including the discount rate at which future projected and accumulated pension obligations are discounted to a present value. We could experience increased pension cost due to a combination of commodity price hedging instrumentsfactors, including the decreased investment performance of pension plan assets, decreases in the discount rate and contractual pricing adjustments may provide us with some protection from adverse fluctuationschanges in commodity prices, by utilizing these instruments we potentially foregoour assumptions relating to the benefits that might result from favorable fluctuationsexpected return on plan assets.
Significant declines in price. As a result, highercurrent and future financial and stock market conditions related to the COVID-19 pandemic could cause material and commodity costs, as well as hedging these commodity costs during periods of decreasing prices,losses in our pension plan assets, which could result in declining margins.
We may fail to realize all of the expected enhanced revenue, earnings,increased pension cost in future years and cash flow fromadversely impact our investment in the Eaton Cummins Automated Transmission Technologies joint venture.
Our ability to realize all of the expected enhanced revenue, earnings, and cash flow from our recent investment in the Eaton Cummins Automated Transmission Technologies joint venture will depend, in substantial part, on our ability to successfully launch the automated transmission products in North America and achieve our projected market penetration. While we believe
we will ultimately achieve these objectives, it is possible that we will be unable to achieve all of the goals within our anticipated time frame or in the anticipated amounts. If we are not able to successfully complete our automated transmission strategy, the anticipated enhanced revenue, earnings, and cash flows resulting from this joint venture may not be realized fully or may take longer to realize than expected.
As part of the purchase accounting associated with the formation of the joint venture, significant goodwill and intangible asset balances were recorded on the consolidated balance sheet. If cash flows from the joint venture fall short of our anticipated amounts, these assets could be subject to impairment charges, negatively impacting our earnings.
We are exposed to political, economic and other risks that arise from operating a multinational business.
Our business is subject to the political, economic and other risks that are inherent in operating in numerous countries. These risks include:
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• | the difficulty of enforcing agreements and collecting receivables through foreign legal systems;
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• | trade protection measures and import or export licensing requirements;
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• | the imposition of taxes on foreign income and tax rates in certain foreign countries that exceed those in the U.S.;
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• | the imposition of tariffs, exchange controls or other restrictions;
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• | difficulty in staffing and managing widespread operations and the application of foreign labor regulations;
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• | required compliance with a variety of foreign laws and regulations; and
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• | changes in general economic and political conditions in countries where we operate, particularly in emerging markets.
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As we continue to operate our business globally, our success will depend, in part, on our ability to anticipate and effectively manage these and other related risks. There can be no assurance that the consequences of these and other factors relating to our multinational operations will not have a material adverse effect upon us.
Our global operations are subject to laws and regulations that impose significant compliance costs and create reputational and legal risk.
Due to the international scope of our operations, we are subject to a complex system of commercial and trade regulations around the world. Recent years have seen an increase in the development and enforcement of laws regarding trade compliance and anti-corruption, such as the U.S. Foreign Corrupt Practices Act and similar laws from other countries, as well as new regulatory requirements regarding data privacy, such as the European Union General Data Protection Regulation. Our numerous foreign subsidiaries, affiliates and joint venture partners are governed by laws, rules and business practices that differ from those of the U.S. The activities of these entities may not comply with U.S. laws or business practices or our Code of Business Conduct. Violations of these laws may result in severe criminal or civil sanctions, could disrupt our business, and result in an adverse effect on our reputation, business and results of operations, or financial condition. We cannot predictcondition and cash flow. Depending upon the nature, scope or effectseverity and length of futuremarket declines and government regulatory requirements to which our operations might be subject or the manner in which existing laws might be administered or interpreted.
We face the challenge of accurately aligning our capacity with our demand.
We can experience idle capacity as economies slow or demand for certain products decline. Accurately forecasting our expected volumes and appropriately adjusting our capacity have been, and will continue to be, important factors in determining our results of operations. If we overestimate our demand and overbuild our capacity, we may have significantly underutilized assets and we may experience reduced margins. If we do not accurately align our manufacturing capabilities with demand it could have a material adverse effect on our results of operations.
Our business is exposed to potential product liability claims.
We face an inherent business risk of exposure to product liability claims in the event that our products' failure to perform to specification results, or is alleged to result, in property damage, bodily injury and/or death. At any given time, we are subject to various and multiple product liability claims, any one of which, if decided adversely to us, may have a material adverse effect on our reported results of operation in the period in which our liability with respect to any such claim is recognized. While we maintain insurance coverage with respect to certain product liability claims, we may not be able to obtain such insurance on acceptable terms in the future, if at all, and any such insurance may not provide adequate coverage against product liability claims. In addition, product liability claims can be expensive to defend and can divert the attention of management and other personnel for significant periods of time, regardless of the ultimate outcome. Furthermore, even if we are successful in
defending against a claim relating to our products, claims of this nature could cause our customers to lose confidence in our products and us.
Our operations are subject to increasingly stringent environmental laws and regulations.
Our plants and operations are subject to increasingly stringent environmental laws and regulations in all of the countries in which we operate, including laws and regulations governing air emission, discharges to water and the generation, handling, storage, transportation, treatment and disposal of waste materials. While we believe that we are in compliance in all material respects with these environmental laws and regulations, there can be no assurance that we will not be adversely impacted by costs, liabilities or claims with respect to existing or subsequently acquired operations, under either present laws and regulations or those that may be adopted or imposed in the future. We are also subject to laws requiring the cleanup of contaminated property. If a release of hazardous substances occurs at or from any of our current or former properties or at a landfill or another location where we have disposed of hazardous materials,changes, we may be held liable forlegally obligated to make pension payments in the contaminationU.S. and the amount of such liabilityperhaps other countries and these contributions could be material.
Future bans or limitations on the use of diesel-powered vehicles, in an effort to limit greenhouse gas emissions, could materially adversely affect our business over the long term.
In an effort to limit greenhouse gas emissions, mayors of several large international cities announced that they plan to implement a ban on the use in their cities of diesel-powered vehicles by 2025. These cities include Athens, Madrid, Mexico City and Paris. Similarly, Germany adopted legislation to ban new internal combustion engine vehicles by 2030, and China is considering a ban on the production and sale of diesel-powered vehicles to be adopted in the near future. In addition, California government officials have called for the state to phase out sales of diesel-powered vehicles by 2040. To the extent that these types of bans are actually implemented in the future on a broad basis, or in one or more of our key markets, our business over the long-term could be materially adversely affected.
We are exposed to risks arising from the price and availability of energy.
The level of demand for our products and services is influenced in multiple ways by the price and availability of energy. High energy costs generally drive greater demand for better fuel economy in almost all countries in which we operate. Some of our engine products have been developed with a primary purpose of offering fuel economy improvements, and if energy costs decrease or increase less than expected, demand for these products may likewise decrease. The relative unavailability of electricity in some emerging market countries also influences demand for our electricity generating products, such as our diesel generators. If these countries add energy capacity by expanding their power grids at a rate equal to or faster than the growth in demand for energy, the demand for our generating products could also decrease or increase less than would otherwise be the case.
Significant declines in future financial and stock market conditions could diminish our pension plan asset performance and adversely impact our results of operations, financial condition and cash flow.
We sponsor both funded and unfunded domestic and foreign defined benefit pension and other retirement plans. Our pension cost and the required contributions to our pension plans are directly affected by the value of plan assets, the projected and actual rates of return on plan assets and the actuarial assumptions we use to measure our defined benefit pension plan obligations, including the discount rate at which future projected and accumulated pension obligations are discounted to a present value. We could experience increased pension cost due to a combination of factors, including the decreased investment performance of pension plan assets, decreases in the discount rate and changes in our assumptions relating to the expected return on plan assets.
Significant declines in future financial and stock market conditions could cause material losses in our pension plan assets, which could result in increased pension cost in future years and adversely impact our results of operations, financial condition and cash flow. Depending upon the severity of market declines and government regulatory changes, we may be legally obligated to make pension payments in the U.S. and perhaps other countries and these contributions could be material.
We may be adversely impacted by work stoppages and other labor matters.
At December 31, 2017, we employed approximately 58,600 persons worldwide. Approximately 20,830 of our employees worldwide are represented by various unions under collective bargaining agreements that expire between 2018 and 2022. While we have no reason to believe that we will be materially impacted by work stoppages or other labor matters, there can be no assurance that future issues with our labor unions will be resolved favorably or that we will not encounter future strikes, work stoppages, or other types of conflicts with labor unions or our employees. Any of these consequences may have an adverse effect on us or may limit our flexibility in dealing with our workforce. In addition, many of our customers and suppliers have
unionized work forces. Work stoppages or slowdowns experienced by our customers or suppliers could result in slowdowns or closures that would have a material adverse effect on our results of operations, financial condition and cash flow.
Our financial statements are subject to changes in accounting standards that could adversely impact our profitability or financial position.
Our financial statements are subject to the application of generally accepted accounting principles (GAAP) in the United States of America, which are periodically revised and/or expanded. Accordingly, from time to time, we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the Financial Accounting Standards Board. Recently, accounting standard setters issued new guidance which further interprets or seeks to revise accounting pronouncements related to revenue recognition and lease accounting as well as to issue new standards expanding disclosures. The impact of accounting pronouncements that have been issued but not yet implemented is disclosed in our annual and quarterly reports on Form 10-K and Form 10-Q. An assessment of proposed standards is not provided, as such proposals are subject to change through the exposure process and, therefore, their effects on our financial statements cannot be meaningfully assessed. It is possible that future accounting standards we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material adverse effect on our reported results of operations and financial position.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
Manufacturing Facilities
Our principal manufacturing facilities include our plants used by the following segments in the following locations:
|
| | | | | | | | | | | | | |
| Segment | | U.S. Facilities | | Facilities Outside the U.S. |
| Engine | | Indiana: Columbus | | Brazil: Sao Paulo |
| | New York: Lakewood | | India: Phaltan |
| | North Carolina: Whitakers | | U.K.: Darlington |
Components | | | | |
| Components | | Indiana: Columbus | | Australia: Kilsyth |
| | South Carolina: Charleston | | Brazil: Sao Paulo |
| | Tennessee: Cookeville | | China: Beijing, Shanghai, Wuxi, Wuhan |
| | Wisconsin: Mineral Point, Neillsville | | France: Quimper |
| | | | Germany: Marktheidenfeld |
| | | | India: Pune, Dewas, Pithampur, Phaltan, Rudrapur |
| | | | Mexico: Ciudad Juarez, San Luis Potosi |
| | | | South Africa: Johannesburg
|
| | | | South Korea: Suwon |
| | | | U.K.: Darlington, Huddersfield |
| | | | |
| Power Systems | | Indiana: Elkhart, Seymour | | Brazil: Sao Paulo |
| | Minnesota: Fridley | | China: Wuxi, Wuhan |
| | New Mexico: Clovis | | India: Pune, Ahmendnagar, Ranjangaon, Phaltan |
| | | | Mexico: San Luis Potosi |
| | | | Romania: Craiova |
| | | | U.K.: Daventry Margate, Manston, Stamford |
| | | | Nigeria: Lagos |
| | | | |
| New Power | | Indiana: Columbus | | Canada: Mississauga |
| | | | Belgium: Oevel |
| | | | |
In addition, engines and engine components are manufactured by joint ventures or independent licensees at manufacturing plants in the U.S., China, India, Russia, Japan, Sweden, U.K. and Mexico.
Distribution Facilities
The principal distribution facilities that serve all of our segments are located in the following locations:
| | | | | | | | | | |
| | |
| U.S. Facilities | | Facilities Outside the U.S. |
| | California: Irvine | | Canada:Australia: VancouverScoresby
|
| | Colorado: Henderson | | Belgium: Mechelen |
| | Georgia: Atlanta | | Canada: Montreal, Vancouver |
| | Michigan: New Hudson | | China: Beijing |
Georgia: Atlanta
| | Russia: Moscow
|
Michigan: New Hudson
| | Singapore: Singapore
|
Minnesota: White Bear Lake | | Germany: Gross-Gerau |
| | Tennessee: Memphis | | Holland: Dordrecht |
| | Texas: Dallas | | India: Pune |
| | | | Japan: Tokyo |
| | | | Russia: Moscow |
| | | | South Africa: Johannesburg |
| | | | Nebraska:U.K.: OmahaWellingborough
| | |
Tennessee: Memphis
| | |
Texas: Dallas
| | |
Headquarters and Other Offices
Our Corporate Headquarters are located in Columbus, Indiana. Additional marketing, operational headquarters and supply chain facilities are in the following locations:
Supply Chain Facilities
The principal supply chain facilities that serve all of our segments are as follows:
| | | | | | | | | | |
| | U.S. Facilities | | Facilities Outside the U.S. |
| | Indiana:Columbus Indianapolis | | Belgium: Rumst |
| | KentuckyKentucky:: Walton
| | Brazil: Guarulhos
|
Tennessee: Memphis,Nashville
| | China: Beijing, Shanghai, Wuhan |
Washington, D.C. | | Tennessee: Memphis | | India: Phaltan, Pithampur, Pune |
| |
| | Mexico: San Luis Potosi |
| | Russia: Moscow
|
| | Singapore: Singapore
|
| | South Africa: Johannesburg |
| | U.K.: Staines, Stockton
|
| | United Arab Emirates: Dubai
|
We operate numerous management, research and development, marketing and administrative facilities globally.
ITEM 3. Legal Proceedings
We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; product recalls; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We also have been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are material individually or in the aggregate. While we believe we have also established adequate accruals pursuant to U.S. generally accepted accounting principles for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition or cash flows.
The matters described under "Loss Contingency Charges""Legal Proceedings" in Note 12,14, "COMMITMENTS AND CONTINGENCIES," to the Consolidated Financial Statements are incorporated herein by reference.
We conduct significant business operations in Brazil that are subject to the Brazilian federal, state and local labor, social security, tax and customs laws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding the application of these laws to particular circumstances.
ITEM 4. Mine Safety Disclosures
Not Applicable.
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Our common stock is listed on the NYSE under the symbol "CMI." For information about the quoted market prices of our common stock, information regarding dividend payments and the number of common stock shareholders, see "Selected Quarterly Financial Data" in this report. For other matters related to our common stock and shareholders' equity, see Note 13, "SHAREHOLDERS'15, "CUMMINS INC. SHAREHOLDERS' EQUITY," to the Consolidated Financial Statements.
(b) Use of proceeds—not applicable.
(c) The following information is provided pursuant to Item 703 of Regulation S-K:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Issuer Purchases of Equity Securities |
| Period | | Total Number of Shares Purchased(1) | | Average
Price Paid
per Share | | Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) (2) |
| September 28 - November 1 | | — | | | $ | — | | | — | | | $ | 2,085 | |
| November 2 - November 29 | | — | | | — | | | — | | | 2,085 | |
| November 30 - December 31 | | 414,120 | | | 219.14 | | | 414,120 | | | 1,994 | |
| Total | | 414,120 | | | 219.14 | | | 414,120 | | | |
| | | | | | | | |
(1) Shares purchased represent shares under the Board authorized share repurchase program. |
(2) Shares repurchased under our Key Employee Stock Investment Plan only occur in the event of a participant default, which cannot be predicted, and were excluded from this column. |
|
|
| | | | | | | | | | | | | |
| | | Issuer Purchases of Equity Securities |
| Period | | (a) Total Number of Shares Purchased(1) | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(2) |
| October 2 - November 5 | | 538 |
| | $ | 173.90 |
| | — |
| | 39,622 |
|
| November 6 - December 3 | | 349,637 |
| | 166.01 |
| | 348,837 |
| | 40,522 |
|
| December 4 - December 31 | | 15,584 |
| | 167.66 |
| | 12,020 |
| | 36,058 |
|
| Total | | 365,759 |
| | 166.10 |
| | 360,857 |
| | |
|
(1) Shares purchased represent shares under our Key Employee Stock Investment Plan established in 1969 (there is no maximum repurchase limitation in this plan) and our Board of Directors authorized share repurchase programs.
(2) These values reflect the sum of shares held in loan status under our Key Employee Stock Investment Plan. The repurchase programs authorized byIn December 2019, the Board authorized the acquisition of Directors do not limitup to $2.0 billion of additional common stock upon completion of the number2018 repurchase plan. In October 2018, the Board authorized the acquisition of shares that may be purchasedup to $2.0 billion of additional common stock. During the three months ended December 31, 2020, we repurchased $85 million of common stock under the 2018 authorization, completing this program, and were excluded from this column.repurchased $6 million of common stock under the 2019 authorization. The dollar value remaining available for future purchases under such programs as ofthe 2019 program at December 31, 2017,2020, was $1.0 billion.$1,994 million.
In December 2016, our Board of Directors authorized the acquisition of up to $1 billion of additional common stock upon completion of the 2015 repurchase plan. During the three months ended December 31, 2017, we repurchased $60 million of common stock under the 2015 Board of Directors authorized plan.
During the three months ended December 31, 2017, we repurchased 4,902 shares from employees in connection with theOur Key Employee Stock Investment Plan which allows certain employees, other than officers, to purchase shares of common stock on an installment basis up to an established credit limit. Loans are issued for five-year terms at a fixed interest rate established at the date of purchase and may be refinanced after their initial five-year period for an additional five-year period. Participants must hold shares for a minimum of six months from date of purchase. If the shares are sold before the loan is paid off, the employee must wait six months before another share purchase may be made. We hold participants’ shares as security for the loans and would, in effect, repurchase shares only if the participant defaulted in repayment of the loan. There is no maximum amountShares associated with participants' sales are sold as open-market transactions via a third-party broker as of shares that we may purchase under this plan.May 1, 2020.
Performance Graph (Unaudited)
The following Performance Graph and related information shall not be deemed "soliciting material" or to be "filed" with the SEC, nor shall such information be incorporated by reference into any of our future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
The following graph compares the cumulative total shareholder return on our common stock for the last five years with the cumulative total return on the S&P 500 Index and an index of peer companies selected by us. In 2017 the Board of Directors updated their benchmark criteria forOur peer companies, re-evaluated our peer group based on the updated criteria and updated our group to include current companies that participate in similar end-markets and have similar businesses. Our revised group includes BorgWarner Inc., Caterpillar, Inc., Daimler AG, Deere & Company, Donaldson Company Inc., Eaton Corporation, Emerson Electric Co., Fortive Corporation, W.W. Grainger Inc., Honeywell International, Illinois Tool Works Inc., Navistar, PACCAR, Parker-Hannifin Corporation, Textron Inc. and Volvo AB.AB (Fortive Corporation is excluded from the peer index in the following graph as the company was founded after December 31, 2015). Each of the measures of cumulative total return assumes reinvestment of dividends. The comparisons in this table are required by the SEC and are not intended to forecast or be indicative of possible future performance of our stock.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
AMONG CUMMINS INC., S&P 500 INDEX AND CUSTOM PEER GROUP
ASSUMES $100 INVESTED ON DEC.DECEMBER 31, 20122015
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING DEC.DECEMBER 31, 20172020
ITEM 6. Selected Financial Data
The selected financial information presented below for each of the last five years ended December 31, beginning with 2017,2020, was derived from our Consolidated Financial Statements. This information should be read in conjunction with our Consolidated Financial Statementsand related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In millions, except per share amounts | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| For the years ended December 31, | | | | | | | | | | |
| Net sales | | $ | 19,811 | | | $ | 23,571 | | | $ | 23,771 | | | $ | 20,428 | | | $ | 17,509 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Net income attributable to Cummins Inc.(1) | | 1,789 | | | 2,260 | | | 2,141 | | | 999 | | | 1,394 | |
Earnings per common share attributable to Cummins Inc.(2) | | | | | | | | | | |
| Basic | | $ | 12.07 | | | $ | 14.54 | | | $ | 13.20 | | | $ | 5.99 | | | $ | 8.25 | |
| Diluted | | 12.01 | | | 14.48 | | | 13.15 | | | 5.97 | | | 8.23 | |
| Cash dividends declared per share | | 5.28 | | | 4.90 | | | 4.44 | | | 4.21 | | | 4.00 | |
| | | | | | | | | | |
| | | | | | | | | | |
| At December 31, | | | | | | | | | | |
| | | | | | | | | | |
| Total assets | | 22,624 | | | 19,737 | | | 19,062 | | | 18,075 | | | 15,011 | |
| Long-term debt | | 3,610 | | | 1,576 | | | 1,597 | | | 1,588 | | | 1,568 | |
| | | | | | | | | | |
(1) For the year ended December 31, 2019, net income attributable to Cummins Inc. was reduced by $119 million due to restructuring actions ($90 million after-tax). For the year ended December 31, 2018, net income attributable to Cummins Inc. was reduced by $39 million due to Tax Legislation. For the year ended December 31, 2017, net income attributable to Cummins Inc. was reduced by $777 million due to Tax Legislation. For the year ended December 31, 2016, net income attributable to Cummins Inc. included a $138 million charge for a loss contingency ($74 million net of favorable variable compensation impact after-tax). |
(2) For the year ended December 31, 2019, results for basic and diluted earnings per share were reduced by $0.58 per share and $0.57 per share, respectively, due to restructuring actions. For the year ended December 31, 2018, results for basic and diluted earnings per share were reduced by $0.24 per share due to Tax Legislation. For the year ended December 31, 2017, results for basic and diluted earnings per share were reduced by $4.66 per share and $4.65 per share, respectively, due to Tax Legislation. For the year ended December 31, 2016, results for basic and diluted earnings per share were reduced by $0.44 per share due to a loss contingency charge. |
|
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| In millions, except per share amounts | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| For the years ended December 31, | | | | | | | | | | |
| Net sales | | $ | 20,428 |
| | $ | 17,509 |
| | $ | 19,110 |
| | $ | 19,221 |
| | $ | 17,301 |
|
| U.S. percentage of sales | | 54 | % | | 54 | % | | 56 | % | | 52 | % | | 48 | % |
| Non-U.S. percentage of sales | | 46 | % | | 46 | % | | 44 | % | | 48 | % | | 52 | % |
| Gross margin | | 5,090 |
| | 4,452 |
| | 4,947 |
| | 4,861 |
| | 4,280 |
|
| Research, development and engineering expenses | | 752 |
| | 636 |
| | 735 |
| | 754 |
| | 713 |
|
| Equity, royalty and interest income from investees | | 357 |
| | 301 |
| | 315 |
| | 370 |
| | 361 |
|
| Interest expense | | 81 |
| | 69 |
| | 65 |
| | 64 |
| | 41 |
|
Net income attributable to Cummins Inc.(1) | | 999 |
| | 1,394 |
| | 1,399 |
| | 1,651 |
| | 1,483 |
|
Earnings per common share attributable to Cummins Inc. (2) | | | | | | | | | | |
| Basic | | $ | 5.99 |
| | $ | 8.25 |
| | $ | 7.86 |
| | $ | 9.04 |
| | $ | 7.93 |
|
| Diluted | | 5.97 |
| | 8.23 |
| | 7.84 |
| | 9.02 |
| | 7.91 |
|
| Cash dividends declared per share | | 4.21 |
| | 4.00 |
| | 3.51 |
| | 2.81 |
| | 2.25 |
|
| Net cash provided by operating activities | | $ | 2,277 |
| | $ | 1,935 |
| | $ | 2,059 |
| | $ | 2,266 |
| | $ | 2,089 |
|
| Capital expenditures | | 506 |
| | 531 |
| | 744 |
| | 743 |
| | 676 |
|
| At December 31, | | | | | | | | | | |
| Cash and cash equivalents | | $ | 1,369 |
| | $ | 1,120 |
| | $ | 1,711 |
| | $ | 2,301 |
| | $ | 2,699 |
|
| Total assets | | 18,075 |
| | 15,011 |
| | 15,134 |
| | 15,764 |
| | 14,728 |
|
Long-term debt(3) | | 1,588 |
| | 1,568 |
| | 1,576 |
| | 1,577 |
| | 1,672 |
|
Total equity(4) | | 8,164 |
| | 7,174 |
| | 7,750 |
| | 8,093 |
| | 7,870 |
|
(1) For the year ended December 31, 2017, net income attributable to Cummins Inc. was reduced by $777 million due to tax reform. For the year ended December 31, 2016, net income attributable to Cummins Inc. included a $138 million charge for a loss contingency ($74 million net of favorable variable compensation impact and after-tax). For the year ended December 31, 2015, net income attributable to Cummins Inc. included $211 million for an impairment of light-duty diesel assets ($133 million after-tax), $90 million of restructuring actions and other charges ($61 million after-tax) and a $60 million charge for a loss contingency ($38 million after-tax). For the year ended December 31, 2014, net income attributable to Cummins Inc. included $32 million of restructuring and other charges ($21 million after-tax) for operating actions related to the Power Systems segment.
(2)For the year ended December 31, 2017, results for basic and diluted earnings per share were reduced by $4.66 per share and $4.65 per share, respectively, due to tax reform.
(3)In 2015, we adopted new rules related to balance sheet debt issuance costs, which resulted in the reclassification of our December 31, 2014, debt balance, reducing our long-term debt by $12 million. In September 2013, we issued $1 billion of senior unsecured debt.
(4) For the years ended December 31, 2017, 2016, 2015, 2014 and 2013, we recorded non-cash charges (credits) to equity of ($28) million, $65 million, $63 million, $78 million and ($102) million, respectively, to record net actuarial losses (gains) associated with the valuation of our pension plans. These losses (gains) include the effects of market conditions on our pension trust assets and the effects of economic factors on the valuation of the pension liability. For the years ended December 31, 2017, 2016, 2015, 2014 and 2013, we recorded non-cash charges (credits) to equity of ($315) million, $431 million, $290 million, $227 million and $18 million, respectively, to record unrealized losses (gains) associated with the foreign currency translation adjustments.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 Consolidated Financial Statements and the accompanying notes to those financial statements. Our MD&A is presented in the following sections:
Executive Summary•EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS
•RESULTS OF OPERATIONS
•OPERATING SEGMENT RESULTS
•2021 OUTLOOK
•LIQUIDITY AND CAPITAL RESOURCES
•CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
•APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
•RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
The following is the discussion and Financial Highlightsanalysis of changes in the financial condition and results of operations for fiscal year 2020 compared to fiscal year 2019. The discussion and analysis of fiscal year 2018 and changes in the financial condition and results of operations for fiscal year 2019 compared to fiscal year 2018 that are not included in this Form 10-K may be found in Part II, ITEM 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission (SEC) on February 11, 2020.
2018 Outlook
Results of Operations
Operating Segment Results
Liquidity and Capital Resources
Contractual Obligations and Other Commercial Commitments
Application of Critical Accounting Estimates
Recently Adopted and Recently Issued Accounting Pronouncements
EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS
Overview
We are a global power leader that designs, manufactures, distributes and services diesel, and natural gas, engineselectric and engine-related component products,hybrid powertrains and powertrain-related components including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated transmissions, and electric power generation systems.systems, batteries, electrified power systems, hydrogen production and fuel cell products. We sell our products to original equipment manufacturers (OEMs), distributors, dealers and other customers worldwide. We have long-standing relationships with many of the leading manufacturers in the markets we serve, including PACCAR Inc, Navistar International Corporation, Daimler Trucks North America Navistar International Corporation and Fiat Chrysler Automobiles.Stellantis N.V. (Chrysler). We serve our customers through a network of approximatelyover 500 wholly-owned, joint venture and independent distributor locations and over 7,5009,000 Cummins certified dealer locations in more thanwith service to approximately 190 countries and territories.
Our reportable operating segments consist of Engine, Distribution, Components, Power Systems and Power Systems.New Power. 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)smaller) 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, electronics, fuel systems and automated transmissions. The Power Systems segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas, marine and rail), standby and prime power generator sets, alternators and other power components. The New Power segment designs, manufactures, sells and supports hydrogen production solutions as well as electrified power systems ranging from fully electric to hybrid along with innovative components and subsystems, including battery and fuel cell technologies. We continue to serve all our markets as they adopt electrification and alternative power technologies, meeting the needs of our OEM partners and end customers.
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, public health crises, epidemics or pandemics and regulatory matters, including adoption and enforcement of environmental and emission standards, in the countries we serve. As part of our growth strategy, we invest in businesses in certain countries that carry high levels of these risks such as China, Brazil, India, Mexico, Russia and countries in the Middle East and Africa. At the same time, our geographic diversity and broad product and service offerings have helped limit the impact from a drop in demand in any one industry or customer or the economy of any single country on our consolidated results.
COVID-19 Update
The outbreak of COVID-19 spread throughout the world and became a global pandemic with the resultant economic impacts evolving into a worldwide recession. The pandemic triggered a significant downturn in our markets globally, which continued to unfavorably impact market conditions throughout 2020 and these challenging market conditions could continue for an extended period of time. In an effort to contain the spread of COVID-19, maintain the well-being of our employees and stakeholders, match the reduced demand from our customers and in accordance with governmental requirements, we closed or partially shut down certain office, manufacturing, distribution and technical center facilities around the world in March 2020. Although most of our manufacturing, distribution and technical center facilities re-opened early in the second quarter of 2020, some operated at reduced capacities, most of our global office buildings remained closed through the remainder of 2020. Despite many of our markets recovering in the second half of 2020, the ongoing spread of the virus prior to widespread vaccination presents several risks to our business, especially in the first half of 2021.
COVID-19 vaccines are currently being administered around the world with the hope that the majority of the population will have access to the vaccine by the middle of 2021. If the distribution and the effectiveness of the vaccine are consistent with current government and health organization estimates, we anticipate the vaccine will mitigate the spread of the virus by the end of 2021 and allow a return to more normal operations in the second half of the year.
While the impacts of the pandemic and the resulting global recession are expected to be temporary, the duration of the production and supply chain disruptions, and related financial impacts, cannot be estimated at this time. Should the reduced manufacturing and distribution capacities continue for an extended period of time or worsen, the impact on our production and supply chain could have a material adverse effect on our results of operations, financial condition and cash flows. Our Board of Directors (the Board) continues to monitor and evaluate all of these factors along with the continuing impacts of the COVID-19 pandemic on our business and operations.
2020 Results
A summary of our results is as follows:
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| | Years ended December 31, | | | | |
| In millions, except per share amounts | | 2020 | | 2019 | | 2018 | | | | |
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| Net sales | | $ | 19,811 | | | $ | 23,571 | | | $ | 23,771 | | | | | |
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| Net income attributable to Cummins Inc. | | 1,789 | | | 2,260 | | | 2,141 | | | | | |
| Earnings per common share attributable to Cummins Inc. | | | | | | | | | | |
| Basic | | $ | 12.07 | | | $ | 14.54 | | | $ | 13.20 | | | | | |
| Diluted | | 12.01 | | | 14.48 | | | 13.15 | | | | | |
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Worldwide revenues improved 17decreased 16 percent in 20172020 compared to 2016, with2019, as we experienced lower demand in all major operating segments reporting higher revenue. Revenueand most geographic regions due to the economic impacts of COVID-19 and the anticipated 2020 down cycle in most of our markets. Net sales in the U.S. and Canada improveddeclined by 1521 percent primarily due to increasedCOVID-19 impacts resulting in decreased demand in the North American on-highway markets, increased industrialwhich also negatively impacted our emission solutions, automated transmissions and turbo technologies businesses, reduced sales in all distribution product lines, decreased demand for power generation equipment and lower demand in off-highway markets (especially in oil and gas, construction and mining markets) and organic growth and higher sales related to the acquisition of a North American distributor in the fourth quarter of 2016.construction). International demand growth (excludes the U.S. and Canada) declined by 7 percent compared to 2019, with lower sales in 2017 improved revenues by 19 percent, with sales up in most of our markets,
especially in China, Russia, India and the U.K.all geographic regions except China. The increasedecrease in international sales was primarilyprincipally due to increasedCOVID-19 impacts resulting in lower demand for industrial products (primarily international mining markets), decreased demand for power generation equipment, lower volumes in on-highway markets (mainly medium-duty truck markets), reduced demand in the truck market in China, new emission regulations in Indiaall distribution product lines and increasedunfavorable foreign currency impacts of 2 percent of international sales (primarily the
Brazilian real and Indian rupee), partially offset by higher demand in industrial markets (especially construction marketsour emission solutions business in China and mining marketsIndia and our electronics and fuel systems business in Europe).China.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (Tax Legislation). Among other things, the Tax Legislation changed the U.S. statutory rate to 21 percent effective January 1, 2018. The impact of the Tax Legislation resulted in a net incremental charge to our Consolidated Statements of Income of $777 million. The components of the 2017 charge were as follows:
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| In millions | Impact of Tax Legislation(1) |
| Increase in income tax expense | $ | 781 |
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| Decrease in equity, royalty and other income from investees | 39 |
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Increase in income attributable to noncontrolling interests(2) | (43 | ) |
| Net impact of Tax Legislation | $ | 777 |
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(1) See Note 2, "INCOME TAXES," Note 3, "INVESTMENTS IN EQUITY INVESTEES" and Note 16,
"NONCONTROLLING INTERESTS," to our Consolidated Financial Statements for additional information.
(2) Noncontrolling interest was reduced for withholding taxes on foreign earnings which reduced the income eliminated for non-
Cummins ownership interest attributable to Cummins India, Ltd.
The $781 million increase in tax expense is composed of three elements - the remeasurement of deferred taxes, a one-time transitional tax on unrepatriated earnings and withholding taxes on foreign earnings.
The following table contains sales and EBITDA (defined as earnings or losses before interest expense, income tax expensetaxes, depreciation and amortization and noncontrolling interests (EBIT) resultsinterests) by operating segment for the years ended December 31, 20172020 and 2016.2019. See Note 22, "OPERATING SEGMENTS," to the section titled "Operating Segment Results" Consolidated Financial Statements for a more detailed discussion of net salesadditional information and EBIT by operating segment including thea reconciliation of our segment EBITinformation to net income attributable to Cummins, Inc.
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| | | Operating Segments
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| | | 2017 | | 2016 | | Percent change |
| | | | | Percent of Total | | | | | | Percent of Total | | | | 2017 vs. 2016 |
| In millions | | Sales | | EBIT | | Sales | | EBIT | | Sales | | EBIT |
| Engine | | $ | 8,953 |
| | 44 | % | | $ | 959 |
| | $ | 7,804 |
| | 45 | % | | $ | 686 |
| (1) | 15 | % | | 40 | % |
| Distribution | | 7,058 |
| | 34 | % | | 384 |
| | 6,181 |
| | 35 | % | | 392 |
| | 14 | % | | (2 | )% |
| Components | | 5,889 |
| | 29 | % | | 754 |
| | 4,836 |
| | 28 | % | | 641 |
| | 22 | % | | 18 | % |
| Power Systems | | 4,058 |
| | 20 | % | | 294 |
| | 3,517 |
| | 20 | % | | 263 |
| | 15 | % | | 12 | % |
| Intersegment eliminations | | (5,530 | ) | | (27 | )% | | — |
| | (4,829 | ) | | (28 | )% | | — |
| | 15 | % | | — |
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| Non-segment | | — |
| | — |
| | 55 |
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| | — |
| | 17 |
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| | NM |
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| Total | | $ | 20,428 |
| | 100 | % | | $ | 2,446 |
| | $ | 17,509 |
| | 100 | % | | $ | 1,999 |
| | 17 | % | | 22 | % |
"NM" - not meaningful information
(1) the corresponding amounts in our The year ended December 31, 2016, included $138 million for loss contingency charges.Consolidated Statements of Net IncomeSee the "Results of Operations" section for additional information..
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| | Operating Segments |
| | | 2020 | | 2019 | | Percent change |
| | | | | Percent
of Total | | | | | | Percent
of Total | | | | 2020 vs. 2019 |
| In millions | | Sales | | EBITDA | | Sales | | EBITDA | | Sales | | EBITDA |
| Engine | | $ | 8,022 | | | 41 | % | | $ | 1,235 | | | $ | 10,056 | | | 43 | % | | $ | 1,454 | | | (20) | % | | (15) | % |
| Distribution | | 7,136 | | | 36 | % | | 665 | | | 8,071 | | | 34 | % | | 656 | | | (12) | % | | 1 | % |
| Components | | 6,024 | | | 31 | % | | 961 | | | 6,914 | | | 29 | % | | 1,097 | | | (13) | % | | (12) | % |
| Power Systems | | 3,631 | | | 18 | % | | 343 | | | 4,460 | | | 19 | % | | 512 | | | (19) | % | | (33) | % |
| New Power | | 72 | | | — | % | | (172) | | | 38 | | | — | % | | (149) | | | 89 | % | | (15) | % |
| Intersegment eliminations | | (5,074) | | | (26) | % | | 76 | | | (5,968) | | | (25) | % | | 42 | | | (15) | % | | 81 | % |
| Total | | $ | 19,811 | | | 100 | % | | $ | 3,108 | | | $ | 23,571 | | | 100 | % | | $ | 3,612 | | | (16) | % | | (14) | % |
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Net income attributable to Cummins Inc. for 20172020 was $999 million,$1.8 billion, or $5.97$12.01 per diluted share, on sales of $20.4$19.8 billion, compared to 20162019 net income attributable to Cummins Inc. of $1.4$2.3 billion, or $8.23$14.48 per diluted share, on sales of $17.5$23.6 billion. The decrease in net income attributable to Cummins Inc. and earnings per diluted share was driven by lower net sales, decreased gross margin, a $777 million reduction forhigher effective tax adjustments related torate and unfavorable foreign currency fluctuations (primarily the Tax Legislation, increased selling, general and administrative expenses and higher research, development and engineering expenses,Brazilian real), partially offset by higher net salesprior restructuring actions, temporary salary reductions and gross margin,reduced variable compensation resulting in lower charges for a loss contingency and higheroverall compensation expenses, increased equity, royalty and interest income from investees.investees primarily in China (due to stronger demand for construction equipment and trucks) and favorable adjustments related to India Tax Law Changes in March 2020. The increasedecrease in gross margin and gross margin percentage was primarilymainly due to higherlower volumes, improved leveragepartially offset by prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and lower material costs, partially offset by higher warranty costs ($264 million primarily due to campaigns in the Engine, Components and Power Systems segments and changes in estimates in the Engine and Components segments) and increased variable compensation expense of $150 million.costs. Diluted earnings per common share for 2017 was negatively impacted $4.65 per share due to the Tax Legislation, partially offset by a benefit of $0.042020 benefited $0.24 per share from fewer weighted-average shares outstanding, primarily due to purchases under the stock repurchase program. See Income Tax Expense section for additional information on the new Tax Legislation.
Net income and diluted earnings per share attributable to Cummins, Inc., excluding special items were as follows:
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| | | | Years ended December 31, |
| | | | 2017 | | 2016 | | 2015 |
| In millions | | Net Income | | Diluted EPS | | Net Income | | Diluted EPS | | Net Income | | Diluted EPS |
| Net income attributable to Cummins Inc. | | $ | 999 |
| | $ | 5.97 |
| | $ | 1,394 |
| | $ | 8.23 |
| | $ | 1,399 |
| | $ | 7.84 |
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| Add | | | | | | | | | | | | |
Impact of Tax Legislation(1)
| | 777 |
| | 4.65 |
| | — |
| | — |
| | — |
| | — |
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Impairment of light-duty diesel assets, net of tax(2) | | — |
| | — |
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| | 133 |
| | 0.75 |
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Restructuring actions and other charges, net of tax(3) | | — |
| | — |
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| | 61 |
| | 0.34 |
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Net income attributable to Cummins Inc. excluding special items(4) | | $ | 1,776 |
| | $ | 10.62 |
| | $ | 1,394 |
| | $ | 8.23 |
| | $ | 1,593 |
| | $ | 8.93 |
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(1) See Note 2, "INCOME TAXES," to our Consolidated Financial Statements for additional information.
(2) See Note 19, "IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETS," to our Consolidated Financial Statements for additional information.
(3) See Note 20, "RESTRUCTURING ACTIONS AND OTHER CHARGES," to our Consolidated Financial Statements for additional information.
(4) These measures are not in accordance with, or an alternative for, accounting principles generally accepted in the United States of America (GAAP) and
may not be consistent with measures used by other companies. It should be considered supplemental data.
We generated $2.3$2.7 billion of operating cash flows in 2017,2020, compared to $1.9$3.2 billion in 2016.2019. See the section titled "Cash Flows" in the "LIQUIDITY AND CAPITAL RESOURCES" section for a discussion of items impacting cash flows.
During 2017 we repurchased $451 million, or 2.9 million shares of common stock. See Note 13, "SHAREHOLDERS' EQUITY," to the Consolidated Financial Statements for additional information.
On July 31, 2017, we formed a joint venture with Eaton Corporation PLC by purchasing a 50 percent interest in the new venture named Eaton Cummins Automated Transmission Technologies (ECJV) for $600 million in cash. In addition, each partner contributed $20 million for working capital. The joint venture will design, assemble, sell and support medium-duty and heavy-duty automated transmissions for the commercial vehicle market, including new product launches. We consolidated the results of the joint venture in our Components segment as we have a majority voting interest in the venture by virtue of a tie-breaking vote on the joint venture's board of directors. See Note 18 "ACQUISITIONS," to the Consolidated Financial Statements for additional information.
On September 5, 2017, we entered into a 364-day credit facility that allows us to borrow up to $1 billion of additional unsecured funds at any time through September 2018. Revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings, letters of credit and general corporate purposes.
Our debt to capital ratio (total capital defined as debt plus equity) at December 31, 2017,2020, was 19.731.7 percent, compared to 20.621.9 percent at December 31, 2016.2019. The increase was primarily due to a $1,797 million higher total debt balance as the result of our August 2020 debt issuance. At December 31, 2017,2020, we had $1.6$3.9 billion in cash and marketable securities on hand and access to our $3.5 billion credit facilities, if necessary, to meet currently anticipated working capital, investment and funding needs. As
In the first half of 2020, we entered into additional interest rate lock agreements to reduce the variability of the datecash flows of filing this Annual Reportthe interest payments on Form 10-K,a total of $500 million of fixed rate debt forecast to be issued in 2023 to replace our credit ratings were as follows:senior notes at maturity.
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| | Long-Term | | Short-Term | | |
Credit Rating Agency | | Senior Debt Rating | | Debt Rating | | Outlook |
Standard & Poor’s Rating Services | | A+ | | A1 | | Stable |
Moody’s Investors Service, Inc. | | A2 | | P1 | | Stable |
In 2020, we repurchased $641 million or 3.9 million shares of common stock. See Note 15, "CUMMINS INC. SHAREHOLDERS' EQUITY" to the Consolidated Financial Statements for additional information.In June and July 2017,of 2020, we settled our BoardFebruary 2014 interest rate swaps, which previously converted our $500 million debt issue, due in 2023, from fixed rate to floating rate based on a LIBOR spread. We will amortize the $24 million gain realized upon settlement over the remaining three-year term of Directorsthe related debt.
On August 19, 2020, we entered into an amended and restated 364-day credit agreement that allows us to borrow up to $1.5 billion of unsecured funds at any time prior to August 18, 2021. This credit agreement amended and restated the prior $1.5 billion-day credit facility that matured on August 19, 2020.
On August 24, 2020, we issued $2 billion aggregate principal amount of senior unsecured notes consisting of $500 million aggregate principal amount of 0.75% senior unsecured notes due in 2025, $850 million aggregate principal amount of 1.50% senior unsecured notes due in 2030 and $650 million aggregate principal amount of 2.60% senior unsecured notes due in 2050. We received net proceeds of $1.98 billion.
In October 2020, the Board authorized an increase to our quarterly dividend of 5.43 percent from $1.025$1.311 per share to $1.08$1.35 per share.
In 2020, the investment gain on our U.S. pension trust was 8.9 percent while our U.K. pension trust gain was 13.7 percent. Our global pension plans, including our unfunded and non-qualified plans, were 116112 percent funded at December 31, 2017.2020. Our U.S. qualified plans,defined benefit plan, which representrepresents approximately 5552 percent of the worldwide pension obligation, were 131was 128 percent funded, and our U.K. plans were 118defined benefit plan was 114 percent funded. We expect to contribute approximately $38$75 million in cash to our global pension plans in 2018.2021. In addition, we expect our 20182021 net periodic pension cost to approximate $79$78 million. See application of critical accounting estimates within MD&A and Note 10, "PENSION13, "PENSIONS AND OTHER POSTRETIREMENT BENEFITS," to the Consolidated Financial Statements, for additional information concerning our pension and other post-retirementpostretirement benefit plans.
As of the date of this filing, our credit ratings and outlooks from the credit rating agencies remain unchanged.
In the first quarter of 2018, we will expand our segment reporting and add an additional segment called Electrified Power. The segment will include Brammo Inc., a low voltage battery designer acquired in 2017, and our internally developed electrification business. We will begin reporting the new segment effective with our first quarter Form 10-Q.
2018 OUTLOOK
Our outlook reflects the following positive trends and challenges to our business that we expect could impact our revenue and earnings potential in 2018:
Positive Trends
North American heavy-duty truck demand is expected to improve.
North American medium-duty truck demand will remain strong.
Demand for pick up trucks in North America will remain strong.
Industry production of medium-duty trucks in North America will remain strong.
Market demand may continue to improve in global mining.
Global construction markets could continue to improve.
Economic conditions in Brazil may begin to improve, which could contribute to improved demand in our end-markets.
Challenges
Market demand in truck markets in China is expected to decline.
Marine markets are expected to remain weak.
In summary, we expect demand to improve or remain strong in many of our most important markets.
RESULTS OF OPERATIONS
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| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2020 vs. 2019 | | 2019 vs. 2018 |
| In millions (except per share amounts) | | 2020 | | 2019 | | 2018 | | Amount | | Percent | | Amount | | Percent |
| NET SALES | | $ | 19,811 | | | $ | 23,571 | | | $ | 23,771 | | | $ | (3,760) | | | (16) | % | | $ | (200) | | | (1) | % |
| Cost of sales | | 14,917 | | | 17,591 | | | 18,034 | | | 2,674 | | | 15 | % | | 443 | | | 2 | % |
| GROSS MARGIN | | 4,894 | | | 5,980 | | | 5,737 | | | (1,086) | | | (18) | % | | 243 | | | 4 | % |
| OPERATING EXPENSES AND INCOME | | | | | | | | | | | | | | |
| Selling, general and administrative expenses | | 2,125 | | | 2,454 | | | 2,437 | | | 329 | | | 13 | % | | (17) | | | (1) | % |
| Research, development and engineering expenses | | 906 | | | 1,001 | | | 902 | | | 95 | | | 9 | % | | (99) | | | (11) | % |
| Equity, royalty and interest income from investees | | 452 | | | 330 | | | 394 | | | 122 | | | 37 | % | | (64) | | | (16) | % |
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| Restructuring actions | | — | | | 119 | | | — | | | 119 | | | 100 | % | | (119) | | | NM |
| Other operating expense, net | | (46) | | | (36) | | | (6) | | | (10) | | | (28) | % | | (30) | | | NM |
| OPERATING INCOME | | 2,269 | | | 2,700 | | | 2,786 | | | (431) | | | (16) | % | | (86) | | | (3) | % |
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| Interest expense | | 100 | | | 109 | | | 114 | | | 9 | | | 8 | % | | 5 | | | 4 | % |
| Other income, net | | 169 | | | 243 | | | 81 | | | (74) | | | (30) | % | | 162 | | | NM |
| INCOME BEFORE INCOME TAXES | | 2,338 | | | 2,834 | | | 2,753 | | | (496) | | | (18) | % | | 81 | | | 3 | % |
| Income tax expense | | 527 | | | 566 | | | 566 | | | 39 | | | 7 | % | | — | | | — | % |
| CONSOLIDATED NET INCOME | | 1,811 | | | 2,268 | | | 2,187 | | | (457) | | | (20) | % | | 81 | | | 4 | % |
| Less: Net income attributable to noncontrolling interests | | 22 | | | 8 | | | 46 | | | (14) | | | NM | | 38 | | | 83 | % |
NET INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 1,789 | | | $ | 2,260 | | | $ | 2,141 | | | $ | (471) | | | (21) | % | | $ | 119 | | | 6 | % |
| Diluted earnings per common share attributable to Cummins Inc. | | $ | 12.01 | | | $ | 14.48 | | | $ | 13.15 | | | $ | (2.47) | | | (17) | % | | $ | 1.33 | | | 10 | % |
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| "NM" - not meaningful information |
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| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2017 vs. 2016 | | 2016 vs. 2015 |
| In millions (except per share amounts) | | 2017 | | 2016 | | 2015 | | Amount | | Percent | | Amount | | Percent |
| NET SALES | | $ | 20,428 |
| | $ | 17,509 |
| | $ | 19,110 |
| | $ | 2,919 |
| | 17 | % | | $ | (1,601 | ) | | (8 | )% |
| Cost of sales | | 15,338 |
| | 13,057 |
| | 14,163 |
| | (2,281 | ) | | (17 | )% | | 1,106 |
| | 8 | % |
| GROSS MARGIN | | 5,090 |
| | 4,452 |
| | 4,947 |
| | 638 |
| | 14 | % | | (495 | ) | | (10 | )% |
| OPERATING EXPENSES AND INCOME | | | | | | | | | | |
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| Selling, general and administrative expenses | | 2,390 |
| | 2,046 |
| | 2,092 |
| | (344 | ) | | (17 | )% | | 46 |
| | 2 | % |
| Research, development and engineering expenses | | 752 |
| | 636 |
| | 735 |
| | (116 | ) | | (18 | )% | | 99 |
| | 13 | % |
| Equity, royalty and interest income from investees | | 357 |
| | 301 |
| | 315 |
| | 56 |
| | 19 | % | | (14 | ) | | (4 | )% |
| Loss contingency charges | | 5 |
| | 138 |
| | 60 |
| | 133 |
| | 96 | % | | (78 | ) | | NM |
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| Impairment of light-duty diesel assets | | — |
| | — |
| | 211 |
| | — |
| | — | % | | 211 |
| | 100 | % |
| Restructuring actions and other charges | | — |
| | — |
| | 90 |
| | — |
| | — | % | | 90 |
| | 100 | % |
| Other operating income (expense), net | | 65 |
| | (5 | ) | | (17 | ) | | 70 |
| | NM |
| | 12 |
| | 71 | % |
| OPERATING INCOME | | 2,365 |
| | 1,928 |
| | 2,057 |
| | 437 |
| | 23 | % | | (129 | ) | | (6 | )% |
| Interest income | | 18 |
| | 23 |
| | 24 |
| | (5 | ) | | (22 | )% | | (1 | ) | | (4 | )% |
| Interest expense | | 81 |
| | 69 |
| | 65 |
| | (12 | ) | | (17 | )% | | (4 | ) | | (6 | )% |
| Other income, net | | 63 |
| | 48 |
| | 9 |
| | 15 |
| | 31 | % | | 39 |
| | NM |
|
| INCOME BEFORE INCOME TAXES | | 2,365 |
| | 1,930 |
| | 2,025 |
| | 435 |
| | 23 | % | | (95 | ) | | (5 | )% |
| Income tax expense | | 1,371 |
| | 474 |
| | 555 |
| | (897 | ) | | NM |
| | 81 |
| | 15 | % |
| CONSOLIDATED NET INCOME | | 994 |
| | 1,456 |
| | 1,470 |
| | (462 | ) | | (32 | )% | | (14 | ) | | (1 | )% |
| Less: Net (loss) income attributable to noncontrolling interests | | (5 | ) | | 62 |
| | 71 |
| | 67 |
| | NM |
| | 9 |
| | 13 | % |
NET INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 999 |
| | $ | 1,394 |
| | $ | 1,399 |
| | $ | (395 | ) | | (28 | )% | | $ | (5 | ) | | — | % |
| Diluted earnings per common share attributable to Cummins Inc. | | $ | 5.97 |
| | $ | 8.23 |
| | $ | 7.84 |
| | $ | (2.26 | ) | | (27 | )% | | $ | 0.39 |
| | 5 | % |
"NM" - not meaningful information
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) Percentage Points |
| Percent of sales | | 2020 | | 2019 | | 2018 | | 2020 vs. 2019 | | 2019 vs. 2018 |
| Gross margin | | 24.7 | % | | 25.4 | % | | 24.1 | % | | (0.7) | | | 1.3 | |
| Selling, general and administrative expenses | | 10.7 | % | | 10.4 | % | | 10.3 | % | | (0.3) | | | (0.1) | |
| Research, development and engineering expenses | | 4.6 | % | | 4.2 | % | | 3.8 | % | | (0.4) | | | (0.4) | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) Percentage Points |
| Percent of sales | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
| Gross margin | | 24.9 | % | | 25.4 | % | | 25.9 | % | | (0.5 | ) | | (0.5 | ) |
| Selling, general and administrative expenses | | 11.7 | % | | 11.7 | % | | 10.9 | % | | — |
| | (0.8 | ) |
| Research, development and engineering expenses | | 3.7 | % | | 3.6 | % | | 3.8 | % | | (0.1 | ) | | 0.2 |
|
20172020 vs. 20162019
Net Sales
Net sales increased $2.9 billion versus 2016,decreased $3,760 million, primarily driven by the following:
•Engine segment sales increased 15decreased 20 percent due to lower volumes in all North American on-highway markets.
•Distribution segment sales decreased 12 percent due to lower demand in all product lines.
•Components segment sales decreased 13 percent largely due to decreased demand in North America and Western Europe, partially offset by higher demand in China.
•Power Systems segment sales decreased 19 percent primarily due to higherreduced industrial demand in most North American on-highwayinternational mining markets and improved demandoil and gas markets in most global construction markets.
Components segment sales increased 22 percent due to higher demand across all businesses, especially the emission solutions business, due to strong on-highway sales in India,China and North America and China.
Distribution segment sales increased 14 percent primarily due to an increase in organic sales and higher sales related to the acquisition of a North American distributor in the fourth quarter of 2016.
Power Systems segment sales increased 15 percent due to higherlower demand in all product lines, especiallypower generation markets in industrial markets, due to higher demand in global miningNorth America, India and North American oilAsia Pacific.
•Unfavorable foreign currency impacts of 1 percent of total sales, mainly the Brazilian real and gas markets.
Sales to international markets (excluding the U.S. and Canada), based on location of customers, were 42 percent of total net sales in 2017,2020, compared with 4238 percent of total net sales in 2016.
2019. A more detailed discussion of sales by segment is presented in the "Operating Segment Results""OPERATING SEGMENT RESULTS" section.
Cost of Sales
The types of expenses included in cost of sales are the following: parts and material consumption, including direct and indirect materials; salaries, wages and benefits; depreciation on production equipment and facilities and amortization of technology intangibles; estimated costs of warranty programs and campaigns; production utilities; production-related purchasing; warehousing, including receiving and inspection; engineering support costs; repairs and maintenance; production and warehousing facility property insurance; rent for production facilities and other production overhead.
Gross Margin
Gross margin increased $638decreased $1,086 million primarily due to higher volumes, improved leverage and lower material costs, partially offset by higher warranty costs ($264 million primarily due to campaigns in the Engine, Components and Power Systems segments and changes in estimates in the Engine and Components segments) and increased variable compensation expense of $150 million. Gross margin decreased 0.50.7 points as a percentage of sales. The decrease in gross margin and gross margin as a percentage of sales were mainly due to increased warranty costslower volumes, partially offset by prior restructuring actions, temporary salary reductions and increasedlower variable compensation expense.
resulting in decreased compensation expenses and lower material costs. The provision for warranties issued excluding campaigns, as a percentage of sales, was 1.82.2 percent in 20172020 and 1.71.9 percent in 2016.2019. A more detailed discussion of margin by segment is presented in the "Operating Segment Results""OPERATING SEGMENT RESULTS" section.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $344decreased $329 million, primarily due to higherprior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses ($257 million), especially variable compensation, and higher consulting expenses ($52 million).reduced travel expenses. Overall, selling, general and administrative expenses, as a percentage of sales, remained flat at 11.7increased to 10.7 percent in 20172020 from 10.4 percent in 2019. The increase in selling, general and 2016.administrative expenses as a percentage of sales was primarily due to sales declining faster than selling, general and administrative expenses, despite lower compensation expenses.
Research, Development and Engineering Expenses
Research, development and engineering expenses increased $116decreased $95 million, primarily due to increased compensation expense ($76 million), especiallyprior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and higherreduced consulting expenses ($20 million).expenses. Overall, research, development and engineering expenses, as a percentage of sales, increased to 3.74.6 percent in 20172020 from 3.64.2 percent in 2016.2019, primarily due to sales declining faster than research, development and engineering expenses decreased, despite lower compensation expenses. Research activities continue to focus on development of new products to meet future emission standards around the world, and improvements in fuel economy performance.performance of diesel and natural gas-powered engines and related components as well as development activities around fully electric, hybrid and hydrogen powertrain solutions.
Equity, Royalty and Interest Income From Investees
Equity, royalty and interest income from investees increased $56$122 million, primarily due to higher earnings at Beijing Foton Cummins Engine Co., Ltd., a $37 million favorable adjustment as the result of tax changes within India's 2020-2021 Union Budget of India (India Tax Law Changes) passed in March 2020 and Dongfeng Cummins Engine Company, Ltd., despite $39$18 million of unfavorable impacts fromtechnology fee revenue recorded in the first quarter of 2020. See NOTE 4, "INCOME TAXES" to the Consolidated Financial Statements for additional information on India Tax Legislation relatedLaw Changes.
Restructuring Actions
In the fourth quarter of 2019, we began executing restructuring actions, primarily in the form of voluntary and involuntary employee separation programs. To the extent these programs involved voluntary separations, a liability was recorded at the time offers to withholding taxes on foreign earningsemployees were accepted. To the extent these programs provided separation benefits in accordance with pre-existing agreements or policies, a liability was recorded once the amount was probable and remeasurementreasonably estimable. We incurred a charge of deferred taxes.$119 million ($90 million after-tax) in the fourth quarter of 2019 for these actions which impacted approximately 2,300 employees. The voluntary actions were completed by December 31, 2019 and the involuntary actions were completed by June 28, 2020. See Note 2, "INCOME TAXES,21, "RESTRUCTURING ACTIONS," to ourthe Consolidated Financial Statements, for additional information.
Loss Contingency Charges
Other Operating Income (Expense),Expense, Net
Other operating income (expense),expense, net was as follows:
|
| | | | | | | | |
| | | Years ended December 31, |
| In millions | | 2017 | | 2016 |
| Royalty income, net | | $ | 50 |
| | $ | 28 |
|
| Gain on sale of assets, net | | 20 |
| | 2 |
|
| Loss on write off of assets | | (4 | ) | | (18 | ) |
| Amortization of intangible assets | | (12 | ) | | (9 | ) |
| Other, net | | 11 |
| | (8 | ) |
| Total other operating income (expense), net | | $ | 65 |
| | $ | (5 | ) |
Interest Income
Interest income decreased $5 million primarily due to lower investment balances in China and Brazil. | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | |
| In millions | | 2020 | | 2019 | |
| Amortization of intangible assets | | $ | (22) | | | $ | (20) | | |
| Loss on write-off of assets | | (20) | | | (22) | | (1) |
| Loss on sale of assets, net | | (10) | | | (2) | | |
| Royalty income, net | | 5 | | | 14 | | |
| Other, net | | 1 | | | (6) | | |
| Total other operating expense, net | | $ | (46) | | | $ | (36) | | |
| | | | | |
| | | | | |
| | | | | |
(1) Includes $19 million of the total $33 million charge related to ending production of the 5 liter ISV engine for the U.S. pick-up truck market. | |
| |
Interest Expense
Interest expense increased $12decreased $9 million, primarilymainly due to higher weighted-average debtlower interest rates on average outstanding and hedge ineffectiveness onshort-term borrowings, partially offset by increased interest expense associated with our interest rate swap.
Other Income, Net
Other income, net was as follows:
| | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | |
| In millions | | 2020 | | 2019 | |
| Non-service pension and OPEB credit | | $ | 65 | | | $ | 71 | | |
| Gain on corporate owned life insurance | | 57 | | | 61 | | |
| Interest income | | 21 | | | 46 | | |
| Gain on marketable securities, net | | 9 | | | 11 | | |
| Rental income | | 9 | | | 8 | | |
| Foreign currency gain, net | | 4 | | | 28 | | (1) |
| Bank charges | | (17) | | | (11) | | |
| | | | | |
| | | | | |
| | | | | |
| Other, net | | 21 | | | 29 | | |
| Total other income, net | | $ | 169 | | | $ | 243 | | |
| | | | | |
| | | | | |
| | | | | |
(1) Includes $35 million in gains from unwinding derivative instruments not designated as hedges as a result of foreign dividends paid. | |
| | | | | |
|
| | | | | | | | |
| | | Years ended December 31, |
| In millions | | 2017 | | 2016 |
| Change in cash surrender value of corporate owned life insurance | | $ | 50 |
| | $ | 18 |
|
| Rental income | | 7 |
| | 5 |
|
| Dividend income | | 5 |
| | 5 |
|
Gain on sale of equity investee (1) | | — |
| | 17 |
|
Gains on fair value adjustment for consolidated investees (2) | | — |
| | 15 |
|
| Foreign currency, net | | (6 | ) | | (12 | ) |
| Bank charges | | (10 | ) | | (9 | ) |
| Other, net | | 17 |
| | 9 |
|
| Total other income, net | | $ | 63 |
| | $ | 48 |
|
(1)Our effective tax rate for 2020 was 22.5 percent compared to 20.0 percent for 2019.
The year ended December 31, 2020, contained $26 million, or $0.17 per share, of unfavorable net discrete tax items, primarily due to $33 million of unfavorable changes in tax reserves and $10 million of withholding tax adjustments, partially offset by $15 million of favorable changes due to the India Tax Law Change. The India Tax Law Change eliminated the dividend distribution tax and replaced it with a lower rate withholding tax as the burden shifted from the dividend payor to the dividend recipient for a net favorable income statement impact of $35 million. See Note 3, "INVESTMENTS IN EQUITY INVESTEES,"NOTE 4, "INCOME TAXES" to the Consolidated Financial Statements for additional information.information on India Tax Law Changes.
(2)The year ended December 31, 2019, contained $34 million See Note 18, "ACQUISITIONS,"of favorable net discrete tax items, primarily due to the Consolidated Financial Statements for additional information.withholding taxes and provision to return adjustments.
Income Tax Expense
Our income tax rates are generally less than the 35 percent U.S. statutory incomeThe change in effective tax rate for the year ended December 31, 2020, versus year ended December 31, 2019, was primarily because of lower taxes on foreign earnings and researchdue to a $60 million swing from favorable to unfavorable net discrete tax credits. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (Tax Legislation). The Tax Legislation changed the U.S. statutory rate to 21 percent effective January 1, 2018. items.
Our effective tax rate for 2017 was 58.0 percent compared2021 is expected to 24.6 percent for 2016. The impacts of the Tax Legislation resulted in additional income tax expense of $781 million to our tax provision (excluding the noncontrolling interest and equity investee adjustments). See Note 2, "INCOME TAXES," to our Consolidated Financial Statements for additional information.
We expect our 2018 effective tax rate to be 23approximate 22.5 percent, excluding any discrete items (including adjustments to provisional estimates) that may arise.
Net Income Attributable to 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 decreased $67increased $14 million primarilyprincipally due to the $43a $19 million impact of Tax Legislation on Cummins India Ltd. regarding withholding taxes on foreign earnings,unfavorable adjustment as the acquisition of the remaining interest in Wuxi Cummins Turbo Technologies Co. Ltd. in the fourth quarter of 2016 and elimination of the net loss of ECJV.
Net Income Attributable to Cummins Inc. and Diluted Earnings Per Common Share Attributable to Cummins Inc.
Net income decreased primarily due to the $777 million impact of Tax Legislation, increased selling, general and administrative expenses and higher research, development and engineering expenses, partially offset by higher net sales and gross margin, lower charges for a loss contingency and higher equity, royalty and interest income from investees. Diluted earnings per share for 2017 was negatively impacted $4.65 per share due to the Tax Legislation, partially offset by a benefit of $0.04 per share from fewer weighted-average shares outstanding, primarily due to purchases under the stock repurchase program. See Note 2, "INCOME TAXES," to our Consolidated Financial Statements for additional information.
2016 vs. 2015
Net Sales
Net sales decreased $1.6 billion versus 2015, primarily driven by the following:
Engine segment sales decreased 10 percent primarily due to lower demand in North American heavy-duty and medium-duty 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 decreased 14 percent primarily due to lower demand in all product lines and decreased sales in most regions with the largest declines in North America, Asia, China, Latin America, the Middle East, Africa and Western Europe.
Components segment sales decreased 6 percent primarily due to lower demand in most lines of business, principally 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, Chinese renminbi, Indian rupee, Brazilian real, South African rand, Canadian dollar and Australian dollar.
Sales to international markets (excluding the U.S. and Canada), based on location of customers, were 42 percent of total net sales in 2016, compared with 39 percent of total net sales in 2015.
A more detailed discussion of sales by segment is presented in the "Operating Segment Results" section.
Gross Margin
Gross margin decreased $495 million and 0.5 points as a percentage of sales, primarily due to lower volumes, unfavorable mix and unfavorable foreign currency fluctuations (primarily in the Brazilian real, South African rand and Canadian dollar), partially offset by lower material and commodity costs, improved Distribution segment margins related to the acquisition of North American distributors since December 31, 2014 and lower warranty expense.
The provision for warranties issued, excluding campaigns, as a percentage of sales was 1.7 percent in 2016 and 1.8 percent 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 $46 million, primarily due to lower compensation expenses of $56 million as a result of restructuring actions takenIndia Tax Law Changes passed in the fourth quarter of 2015. Compensation and related expenses include salaries, fringe benefits and variable compensation. Overall, selling, general and administrative expenses, as a percentage of sales, increased to 11.7 percent in 2016 from 10.9 percent in 2015.
Research, Development and Engineering Expenses
Research, development and engineering expenses decreased $99 million, primarily due to reduced project spending in most of our segments, decreased compensation expenses as a result of restructuring actions taken in the fourth quarter of 2015, and lower consulting expenses. Overall, research, development and engineering expenses, as a percentage of sales, decreased to 3.6 percent in 2016 from 3.8 percent 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 InvesteesEquity, royalty and interest income from investees decreased $14 million, primarily due to the consolidation of partially-owned North American distributors of $12 million and lower earnings at Beijing Foton Cummins Engine Co., Ltd.of$10 million, partially offset by higher earnings at other joint ventures.
Loss Contingency Charges
In 2016, we recorded charges of $138 million in addition to the 2015 charge of $60 million for a loss contingency.March 2020. See Note 12, "COMMITMENTS AND CONTINGENCIES," to the Consolidated Financial Statements for additional information.
Impairment of Light-duty Diesel Assets
In 2015, we recognized an impairment charge of $211 million on our light-duty diesel assets. See Note 19, "IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETS,"NOTE 4, "INCOME TAXES" to the Consolidated Financial Statements for additional information.
Restructuring Actions and Other Charges
In 2015, we incurred a charge of $90 million, which included $86 million for the severance costs related to both voluntary and involuntary terminations and $4 million for asset impairments and other charges. See Note 20, "RESTRUCTURING ACTIONS AND OTHER CHARGES," to the Consolidated Financial Statements for additional information.
Other Operating Income (Expense), Net
Other operating income (expense), net was as follows:
|
| | | | | | | | |
| | | Years ended December 31, |
| In millions | | 2016 | | 2015 |
| Loss on write off of assets | | $ | (18 | ) | | $ | (15 | ) |
| Amortization of intangible assets | | (9 | ) | | (18 | ) |
| Royalty income, net | | 28 |
| | 20 |
|
| Other, net | | (6 | ) | | (4 | ) |
| Total other operating income (expense), net | | $ | (5 | ) | | $ | (17 | ) |
Interest Income
Interest income was relatively flat compared to 2015.
Interest Expense
Interest expense 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:
|
| | | | | | | | |
| | | Years ended December 31, |
| In millions | | 2016 | | 2015 |
| Change in cash surrender value of corporate owned life insurance | | $ | 18 |
| | $ | (3 | ) |
Gain on sale of equity investee (1) | | 17 |
| | — |
|
Gains on fair value adjustment for consolidated investees (2) | | 15 |
| | 18 |
|
| Dividend income | | 5 |
| | 3 |
|
| Bank charges | | (9 | ) | | (9 | ) |
| Foreign currency, net | | (12 | ) | | (18 | ) |
| Other, net | | 14 |
| | 18 |
|
| Total other income, net | | $ | 48 |
| | $ | 9 |
|
(1) See Note 3, "INVESTMENTS IN EQUITY INVESTEES," to the Consolidated Financial Statements for additional information.
(2) See Note 18, "ACQUISITIONS," to the Consolidated Financial Statements for additional information.
Incomeinformation on India Tax Expense
Our effective tax rate for 2016 was 24.6 percent compared to 27.4 percent for 2015. The 2.8 percent decrease in our effective tax rate from 2015 to 2016 was primarily due to favorable changes in the jurisdictional mix of pre-tax income.
Noncontrolling Interests
Noncontrolling interests in income of consolidated subsidiaries decreased $9 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.Law Changes.
Net Income Attributable to Cummins Inc. and Diluted Earnings Per Common Share Attributable to Cummins Inc.
Net income was relatively flat as significantlyand diluted earnings per share attributable to Cummins Inc. decreased $471 million and $2.47 per share, respectively, primarily due to lower net sales, decreased gross margin, anda higher loss contingency charges were mostly offset by the absence of 2015 impairment and restructuring charges, in addition to lower research, development and engineering expenses, a lower effective tax rate and unfavorable foreign currency fluctuations (primarily the Brazilian real), partially offset by prior restructuring actions, temporary salary reductions and reduced variable compensation resulting in lower selling, generaloverall compensation expenses, increased equity, royalty and administrative expensesinterest income from investees primarily in China (due to stronger demand for construction equipment and trucks) and favorable changesadjustments related to corporate owned life insurance.India Tax Law Changes in March 2020. Diluted earnings per common share for 20172020 benefited $0.26$0.24 per share from lowerfewer weighted-average shares outstanding, primarily due to purchases under the stock repurchase program.
Comprehensive Income - Foreign Currency Translation Adjustment
The foreign currency translation adjustment was a net gain (loss) of $335 million, $(448)$71 million and $(305)a net loss of $152 million for the years ended December 31, 2017, 20162020 and 2015, respectively, and was driven by2019, respectively. The details were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2020 | | 2019 | | |
| In millions | | Translation adjustment | | Primary currency driver vs. U.S. dollar | | Translation adjustment | | Primary currency driver vs. U.S. dollar | | | | |
| Wholly-owned subsidiaries | | $ | 23 | | | Chinese renminbi, offset by Brazilian real and British pound | | $ | (126) | | | British pound, Chinese renminbi, Indian rupee, Brazilian real | | | | |
| Equity method investments | | 58 | | | Chinese renminbi | | (21) | | | Chinese renminbi, British pound | | | | |
| Consolidated subsidiaries with a noncontrolling interest | | (10) | | | Indian rupee | | (5) | | | Indian rupee | | | | |
| Total | | $ | 71 | | | | | $ | (152) | | | | | | | |
| | | | | | | | | | | | |
2019 vs. 2018
|
| | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| In millions | | Translation adjustment | | Primary currency driver vs. U.S. dollar | | Translation adjustment | | Primary currency driver vs. U.S. dollar | | Translation adjustment | | Primary currency driver vs. U.S. dollar |
| Wholly-owned subsidiaries | | $ | 255 |
| | British pound, Chinese renminbi, Indian rupee | | $ | (397 | ) | | British pound, Chinese renminbi, offset by Brazilian real | | $ | (261 | ) | | British pound, Brazilian real, Chinese renminbi |
| Equity method investments | | 60 |
| | Chinese renminbi, Russian ruble, Indian rupee | | (34 | ) | | Chinese renminbi, Indian rupee, offset by Mexican peso | | (29 | ) | | Chinese renminbi, Indian rupee |
| Consolidated subsidiaries with a noncontrolling interest | | 20 |
| | Indian rupee | | (17 | ) | | Chinese renminbi, Indian rupee | | (15 | ) | | Indian rupee, Chinese renminbi |
| Total | | $ | 335 |
| | | | $ | (448 | ) | | | | $ | (305 | ) | | |
OPERATING SEGMENT RESULTS
Our reportable operating segments consist of the Engine, Distribution, Components, and Power Systems and New Power segments. This reporting structure is organized according to the products and markets each segment serves. We use segment EBITEBITDA as athe primary basis for the Chief Operating Decision Maker to evaluate the performance of each of our reportable operating segments. We believe EBITDA is a useful measure of our operating performance as it assists investors and debt holders in comparing our performance on a consistent basis without regard to financing methods, capital structure, income taxes or depreciation and amortization methods, which can vary significantly depending upon many factors. Segment amounts exclude certain expenses not specifically identifiable to segments. See Note 21,22, "OPERATING SEGMENTS," to the Consolidated Financial Statementsfor additional information.information and a reconciliation of our segment information to the corresponding amounts in our Consolidated Statements of Net Income.
Following is a discussion of results for each of our operating segments.
Engine Segment Results
Financial data for the Engine segment was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2017 vs. 2016 | | 2016 vs. 2015 |
| In millions | | 2017 | | 2016 | | 2015 | | Amount | | Percent | | Amount | | Percent |
External sales (1) | | $ | 6,661 |
| | $ | 5,774 |
| | $ | 6,733 |
| | $ | 887 |
| | 15 | % | | $ | (959 | ) | | (14 | )% |
Intersegment sales (1) | | 2,292 |
| | 2,030 |
| | 1,937 |
| | 262 |
| | 13 | % | | 93 |
| | 5 | % |
| Total sales | | 8,953 |
| | 7,804 |
| | 8,670 |
| | 1,149 |
| | 15 | % | | (866 | ) | | (10 | )% |
| Depreciation and amortization | | 184 |
| | 163 |
| | 187 |
| | (21 | ) | | (13 | )% | | 24 |
| | 13 | % |
| Research, development and engineering expenses | | 279 |
| | 226 |
| | 263 |
| | (53 | ) | | (23 | )% | | 37 |
| | 14 | % |
| Equity, royalty and interest income from investees | | 219 |
| | 148 |
| | 146 |
| | 71 |
| | 48 | % | | 2 |
| | 1 | % |
| Interest income | | 6 |
| | 10 |
| | 11 |
| | (4 | ) | | (40 | )% | | (1 | ) | | (9 | )% |
Loss contingency charges (2) | | 5 |
| | 138 |
| | 60 |
| | 133 |
| | 96 | % | | (78 | ) | | NM |
|
Impairment of light-duty diesel assets (2) | | — |
| | — |
| | 202 |
| | — |
| | — | % | | 202 |
| | 100 | % |
Restructuring actions and other charges (2) | | — |
| | — |
| | 17 |
| | — |
| | — | % | | 17 |
| | 100 | % |
| Segment EBIT | | 959 |
| | 686 |
| | 636 |
| | 273 |
| | 40 | % | | 50 |
| | 8 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | Percentage Points | | Percentage Points |
| Segment EBIT as a percentage of total sales | | 10.7 | % | | 8.8 | % | | 7.3 | % | | | | 1.9 |
| | | | 1.5 |
|
"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.
(2)See respective sections of "Results of Operations" for additional information. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2020 vs. 2019 | | 2019 vs. 2018 |
| In millions | | 2020 | | 2019 | | 2018 | | Amount | | Percent | | Amount | | Percent |
| External sales | | $ | 5,925 | | | $ | 7,570 | | | $ | 8,002 | | | $ | (1,645) | | | (22) | % | | $ | (432) | | | (5) | % |
| Intersegment sales | | 2,097 | | | 2,486 | | | 2,564 | | | (389) | | | (16) | % | | (78) | | | (3) | % |
| Total sales | | 8,022 | | | 10,056 | | | 10,566 | | | (2,034) | | | (20) | % | | (510) | | | (5) | % |
| | | | | | | | | | | | | | |
| Research, development and engineering expenses | | 290 | | | 337 | | | 311 | | | 47 | | | 14 | % | | (26) | | | (8) | % |
| Equity, royalty and interest income from investees | | 312 | | | 200 | | | 238 | | | 112 | | | 56 | % | | (38) | | | (16) | % |
| Interest income | | 9 | | | 15 | | | 11 | | | (6) | | | (40) | % | | 4 | | | 36 | % |
| | | | | | | | | | | | | | |
| Segment EBITDA (excluding restructuring actions) | | 1,235 | | | 1,472 | | | 1,446 | | | (237) | | | (16) | % | | 26 | | | 2 | % |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Restructuring actions | | — | | | 18 | | | — | | | 18 | | | 100 | % | | (18) | | | NM |
| | | | | | | | | | | | | | |
| Segment EBITDA | | 1,235 | | | 1,454 | | | 1,446 | | | (219) | | | (15) | % | | 8 | | | 1 | % |
| | | | | | | | | | | | | | |
| | | | | | | | Percentage Points | | Percentage Points |
| | | | | | | | | | | | | | |
| Segment EBITDA as a percentage of total sales | | 15.4 | % | | 14.5 | % | | 13.7 | % | | | | 0.9 | | | | | 0.8 | |
| | | | | | | | | | | | | | |
| "NM" - not meaningful information |
|
Sales for our Engine segment by market were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2017 vs. 2016 | | 2016 vs. 2015 |
| In millions | | 2017 | | 2016 | | 2015 | | Amount | | Percent | | Amount | | Percent |
| Heavy-duty truck | | $ | 2,840 |
| | $ | 2,443 |
| | $ | 3,116 |
| | $ | 397 |
| | 16 | % | | $ | (673 | ) | | (22 | )% |
| Medium-duty truck and bus | | 2,513 |
| | 2,272 |
| | 2,507 |
| | 241 |
| | 11 | % | | (235 | ) | | (9 | )% |
| Light-duty automotive | | 1,727 |
| | 1,581 |
| | 1,475 |
| | 146 |
| | 9 | % | | 106 |
| | 7 | % |
| Total on-highway | | 7,080 |
| | 6,296 |
| | 7,098 |
| | 784 |
| | 12 | % | | (802 | ) | | (11 | )% |
| Off-highway | | 1,873 |
| | 1,508 |
| | 1,572 |
| | 365 |
| | 24 | % | | (64 | ) | | (4 | )% |
| Total sales | | $ | 8,953 |
|
| $ | 7,804 |
| | $ | 8,670 |
| | $ | 1,149 |
| | 15 | % | | $ | (866 | ) | | (10 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2020 vs. 2019 | | 2019 vs. 2018 |
| In millions | | 2020 | | 2019 | | 2018 | | Amount | | Percent | | Amount | | Percent |
| Heavy-duty truck | | $ | 2,648 | | | $ | 3,555 | | | $ | 3,652 | | | $ | (907) | | | (26) | % | | $ | (97) | | | (3) | % |
| Medium-duty truck and bus | | 2,066 | | | 2,707 | | | 2,855 | | | (641) | | | (24) | % | | (148) | | | (5) | % |
| Light-duty automotive | | 1,547 | | | 1,804 | | | 1,819 | | | (257) | | | (14) | % | | (15) | | | (1) | % |
| Total on-highway | | 6,261 | | | 8,066 | | | 8,326 | | | (1,805) | | | (22) | % | | (260) | | | (3) | % |
| Off-highway | | 1,761 | | | 1,990 | | | 2,240 | | | (229) | | | (12) | % | | (250) | | | (11) | % |
| Total sales | | $ | 8,022 | | | $ | 10,056 | | | $ | 10,566 | | | $ | (2,034) | | | (20) | % | | $ | (510) | | | (5) | % |
| | | | | | | | | | | | | | |
Unit shipments by engine classification (including unit shipments to Power Systems and off-highway engine units included in their respective classification) were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2020 vs. 2019 | | 2019 vs. 2018 |
| | | 2020 | | 2019 | | 2018 | | Amount | | Percent | | Amount | | Percent |
| Heavy-duty | | 92,500 | | | 122,600 | | | 128,500 | | | (30,100) | | | (25) | % | | (5,900) | | | (5) | % |
| Medium-duty | | 220,900 | | | 283,400 | | | 311,100 | | | (62,500) | | | (22) | % | | (27,700) | | | (9) | % |
| Light-duty | | 215,800 | | | 245,900 | | | 273,400 | | | (30,100) | | | (12) | % | | (27,500) | | | (10) | % |
| Total unit shipments | | 529,200 | | | 651,900 | | | 713,000 | | | (122,700) | | | (19) | % | | (61,100) | | | (9) | % |
| | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2017 vs. 2016 | | 2016 vs. 2015 |
| | | 2017 | | 2016 | | 2015 | | Amount | | Percent | | Amount | | Percent |
| Heavy-duty | | 95,900 |
| | 79,000 |
| | 114,400 |
| | 16,900 |
| | 21 | % | | (35,400 | ) | | (31 | )% |
| Medium-duty | | 268,100 |
| | 229,100 |
| | 247,100 |
| | 39,000 |
| | 17 | % | | (18,000 | ) | | (7 | )% |
| Light-duty | | 257,500 |
| | 228,600 |
| | 209,300 |
| | 28,900 |
| | 13 | % | | 19,300 |
| | 9 | % |
| Total unit shipments | | 621,500 |
|
| 536,700 |
|
| 570,800 |
| | 84,800 |
| | 16 | % | | (34,100 | ) | | (6 | )% |
20172020 vs. 20162019
Sales
Engine segment sales increased $1.1 billion versus 2016.decreased $2,034 million across all markets. The following were the primary drivers by market:
•Heavy-duty truck engine sales increased $397decreased $907 million primarilyprincipally due to higherlower volumes in North America with lower shipments of 35 percent, partially offset by stronger demand in North American heavy-duty truck markets with increased shipments of 20 percent.China.
Off-highway sales increased $365 million primarily due to improved demand in global industrial markets, especially in international construction markets, with increased unit shipments of 54 percent primarily in China and Western Europe.
•Medium-duty truck and bus sales increased $241decreased $641 million mainly due to lower demand in North America with decreased shipments of 30 percent.
•Light-duty automotive sales decreased $257 million primarily due to higherlower pick-up sales in North America with decreased shipments of 16 percent.
•Off-highway sales decreased $229 million principally due to lower demand in construction markets in North American medium-duty truck markets with increased engine shipments of 20 percent.
Light-duty automotive sales increased $146 million primarily due to higher sales to ChryslerAmerica, Western Europe and higher sales of light commercial vehicles,Asia Pacific, partially offset by lower sales to Nissan.higher construction demand in China.
•Unfavorable foreign currency fluctuations, primarily in the Brazilian real.
Total on-highway-related sales for 20172020 were 7978 percent of total engine segment sales, compared to 8180 percent in 2016.2019.
Segment EBITEBITDA
Engine segment EBIT increased $273EBITDA decreased $219 million, versus 2016, primarily due to improvedlower gross margin, lower loss contingency charges andpartially offset by increased equity, royalty and interest income from investees, partially offset by higherlower selling, general and administrative expenses and higherdecreased research, development and engineering expenses. Major components of EBITGross margin and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
|
| | | | | | | | | | |
| | | Year ended December 31, 2017 vs. 2016 |
| | | Favorable/(Unfavorable) Change |
| In millions | | Amount | | Percent | | Percentage point change as a percent of sales |
| Gross margin | | $ | 195 |
| | 13 | % | | (0.2 | ) |
| Selling, general and administrative expenses | | (89 | ) | | (16 | )% | | — |
|
| Research, development and engineering expenses | | (53 | ) | | (23 | )% | | (0.2 | ) |
| Equity, royalty and interest income from investees | | 71 |
| | 48 | % | | 0.5 |
|
Loss contingency charge(1) | | 133 |
| | 96 | % | | 1.7 |
|
__________________________________________________________________________
(1) See Note 12 , "COMMITMENTS AND CONTINGENCIES," to the Consolidated Financial Statements for additional information.
The increase in gross margin versus 2016 was primarily due to higher volumes, partially offset by increased warranty costs for campaigns, changes in estimates and higher variable compensation expense. Gross margin as a percentage of sales declined primarilydecreased mainly due to the increased warranty costslower volumes, partially offset by prior restructuring actions, temporary salary reductions and increasedlower variable compensation expense. The increaseresulting in selling,lower compensation expenses and decreased material costs. Selling, general and administrative expenses was primarilydecreased principally due to higher compensation expense, especiallyprior restructuring actions, temporary salary reductions and lower variable compensation expense,resulting in decreased compensation expenses, reduced consulting expenses and higher consultinglower travel expenses. The increase in research,Research, development and engineering expenses was primarilydecreased principally due to higher compensation expense, especially higherprior restructuring actions, temporary salary reductions and lower variable compensation expense,resulting in decreased compensation expenses and higherreduced consulting expenses. The increase in equity,Equity, royalty and interest income from investees was primarilyincreased largely due to higher earnings at Beijing Foton Cummins Engine Co., Ltd. and Dongfengincreased earnings at Tata Cummins Engine Company, Ltd., despite unfavorable impacts from Tax Legislation related to withholding taxes on foreign earnings and remeasurement of deferred taxes of $23 million.
2016 vs. 2015
Sales
Engine segment sales decreased $866 million versus 2015. The following were the primary drivers by market:
Heavy-duty truck sales decreased $673 million primarily due to lower demand in the North American heavy-duty truck market with decreased engine shipments of 38 percent.
Medium-duty truck and bus sales decreased $235 million primarily due to lower demand in most global medium-duty truck markets with decreased engine shipments of 17 percent, primarily in North America, Brazil and Mexico.
Off-highway sales decreased $64 million primarily due to decreased engine shipments in several North American industrial markets, partially offset by increased unit shipments of 25 percent in international construction markets.
The decreases above were partially offset by an increase in light-duty automotive sales of $106 million primarily due to new sales for the Nissan pickup truck platform launched in the second half of 2015.
Total on-highway-related sales for 2016 were 81 percent of total engine segment sales, compared to 82 percent in 2015.
Segment EBIT
In 2016, we recorded additional charges of $138 million for an existing loss contingency in addition to the $60 million recorded in 2015. In 2015, we also incurred an impairment charge of $202 million for our light-duty diesel assets and incurred a restructuring charge of $17 million for actions primarily in the form of professional voluntary and involuntary employee separation programs in response to the continued deterioration in our global markets.
Engine segment EBIT increased $50 million versus 2015, primarilymainly due to an impairment$18 million favorable adjustment related to India Tax Law Changes passed in March 2020 and $18 million of light-duty diesel assetstechnology fee revenue recorded in 2015, lower selling, general and administrative expenses, lower research, development and engineering expenses and restructuring actions and other charges in 2015, partially offset by lower gross margin and higher loss contingency charges in 2016. Major componentsthe first quarter of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
|
| | | | | | | | | | |
| | | Year ended December 31, 2016 vs. 2015 |
| | | Favorable/(Unfavorable) Change |
| In millions | | Amount | | Percent | | Percentage point change as a percent of sales |
| Gross margin | | $ | (210 | ) | | (13 | )% | | (0.6 | ) |
| Selling, general and administrative expenses | | 72 |
| | 11 | % | | 0.1 |
|
| Research, development and engineering expenses | | 37 |
| | 14 | % | | 0.1 |
|
| Equity, royalty and interest income from investees | | 2 |
| | 1 | % | | 0.2 |
|
Impairment of light-duty diesel assets (1) | | 202 |
| | 100 | % | | 2.3 |
|
Restructuring actions and other charges (1) | | 17 |
| | 100 | % | | 0.2 |
|
Loss contingency charge (2) | | (78 | ) | | NM |
| | 1.1 |
|
__________________________________________________________________________
"NM" - not meaningful information
(1) 2020. See respective sections of "Results of Operations" for additional information.
(2) See Note 12 , "COMMITMENTS AND CONTINGENCIES,"NOTE 4, "INCOME TAXES" to the Consolidated Financial Statements for additional information.information on India Tax Law Changes.
The decrease in gross margin versus 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 a result of restructuring actions taken in the fourth quarter of 2015 and higher expense recovery from customers and external parties.
Distribution Segment Results
Financial data for the Distribution segment was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2020 vs. 2019 | | 2019 vs. 2018 |
| In millions | | 2020 | | 2019 | | 2018 | | Amount | | Percent | | Amount | | Percent |
| External sales | | $ | 7,110 | | | $ | 8,040 | | | $ | 7,807 | | | $ | (930) | | | (12) | % | | $ | 233 | | | 3 | % |
| Intersegment sales | | 26 | | | 31 | | | 21 | | | (5) | | | (16) | % | | 10 | | | 48 | % |
| Total sales | | 7,136 | | | 8,071 | | | 7,828 | | | (935) | | | (12) | % | | 243 | | | 3 | % |
| | | | | | | | | | | | | | |
| Research, development and engineering expenses | | 31 | | | 28 | | | 20 | | | (3) | | | (11) | % | | (8) | | | (40) | % |
| Equity, royalty and interest income from investees | | 62 | | | 52 | | | 46 | | | 10 | | | 19 | % | | 6 | | | 13 | % |
| Interest income | | 4 | | | 15 | | | 13 | | | (11) | | | (73) | % | | 2 | | | 15 | % |
| | | | | | | | | | | | | | |
| Segment EBITDA (excluding restructuring actions) | | 665 | | | 693 | | | 563 | | | (28) | | | (4) | % | | 130 | | | 23 | % |
| Restructuring actions | | — | | | 37 | | | — | | | 37 | | | 100 | % | | (37) | | | NM |
| Segment EBITDA | | 665 | | | 656 | | | 563 | | | 9 | | | 1 | % | | 93 | | | 17 | % |
| | | | | | | | | | | | | | |
| | | | | | | | Percentage Points | | Percentage Points |
| | | | | | | | | | | | | | |
| Segment EBITDA as a percentage of total sales | | 9.3 | % | | 8.1 | % | | 7.2 | % | | | | 1.2 | | | | | 0.9 | |
| | | | | | | | | | | | | | |
| "NM" - not meaningful information |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2017 vs. 2016 | | 2016 vs. 2015 |
| In millions | | 2017 | | 2016 | | 2015 | | Amount | | Percent | | Amount | | Percent |
| External sales | | $ | 7,029 |
| | $ | 6,157 |
| | $ | 6,198 |
| | $ | 872 |
| | 14 | % | | $ | (41 | ) | | (1 | )% |
| Intersegment sales | | 29 |
| | 24 |
| | 31 |
| | 5 |
| | 21 | % | | (7 | ) | | (23 | )% |
| Total sales | | 7,058 |
|
| 6,181 |
|
| 6,229 |
| | 877 |
| | 14 | % | | (48 | ) | | (1 | )% |
| Depreciation and amortization | | 116 |
| | 116 |
| | 105 |
| | — |
| | — | % | | (11 | ) | | (10 | )% |
| Research, development and engineering expenses | | 19 |
| | 13 |
| | 10 |
| | (6 | ) | | (46 | )% | | (3 | ) | | (30 | )% |
| Equity, royalty and interest income from investees | | 44 |
| | 70 |
| | 78 |
| | (26 | ) | | (37 | )% | | (8 | ) | | (10 | )% |
| Interest income | | 6 |
| | 4 |
| | 4 |
| | 2 |
| | 50 | % | | — |
| | — | % |
Restructuring actions and other charges (1) | | — |
| | — |
| | 23 |
| | — |
| | — | % | | 23 |
| | 100 | % |
Segment EBIT (2) | | 384 |
| | 392 |
| | 412 |
| | (8 | ) | | (2 | )% | | (20 | ) | | (5 | )% |
| | | | | | | | | | | | | | | |
| | | | | | | | | Percentage Points | | Percentage Points |
Segment EBIT as a percentage of total sales (3) | | 5.4 | % | | 6.3 | % | | 6.6 | % | | | | (0.9 | ) | | | | (0.3 | ) |
| |
(1)
| See Restructuring Actions and Other Charges section of "Results of Operations" for additional information.
|
| |
(2)
| Segment EBIT for 2016 and 2015 included gains of $15 million and $18 million, respectively, resulting from acquisitions of controlling interests in North American distributors. See Note 18, "ACQUISITIONS," to the Consolidated Financial Statements for additional information.
|
| |
(3)
| North American distributor acquisitions are dilutive to segment EBIT as a percentage of sales. |
In the first quarter of 2017, our Distribution segment reorganized its regions to align with how the segment is managed. All prior year amounts have been reclassified to conform to our new regional structure. Sales for our Distribution segment by region were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2017 vs. 2016 | | 2016 vs. 2015 |
| In millions | | 2017 | | 2016 | | 2015 | | Amount | | Percent | | Amount | | Percent |
| North America | | $ | 4,733 |
| | $ | 3,973 |
| | $ | 3,957 |
| | $ | 760 |
| | 19 | % | | $ | 16 |
| | — | % |
| Asia Pacific | | 767 |
| | 720 |
| | 763 |
| | 47 |
| | 7 | % | | (43 | ) | | (6 | )% |
| Europe | | 440 |
| | 440 |
| | 426 |
| | — |
| | — | % | | 14 |
| | 3 | % |
| Africa and Middle East | | 327 |
| | 366 |
| | 431 |
| | (39 | ) | | (11 | )% | | (65 | ) | | (15 | )% |
| China | | 267 |
| | 235 |
| | 224 |
| | 32 |
| | 14 | % | | 11 |
| | 5 | % |
| India | | 190 |
| | 175 |
| | 165 |
| | 15 |
| | 9 | % | | 10 |
| | 6 | % |
| Russia | | 167 |
| | 123 |
| | 108 |
| | 44 |
| | 36 | % | | 15 |
| | 14 | % |
| Latin America | | 167 |
| | 149 |
| | 155 |
| | 18 |
| | 12 | % | | (6 | ) | | (4 | )% |
| Total sales | | $ | 7,058 |
| | $ | 6,181 |
| | $ | 6,229 |
| | $ | 877 |
| | 14 | % | | $ | (48 | ) | | (1 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2020 vs. 2019 | | 2019 vs. 2018 |
| In millions | | 2020 | | 2019 | | 2018 | | Amount | | Percent | | Amount | | Percent |
| North America | | $ | 4,696 | | | $ | 5,533 | | | $ | 5,341 | | | $ | (837) | | | (15) | % | | $ | 192 | | | 4 | % |
| Asia Pacific | | 805 | | | 878 | | | 856 | | | (73) | | | (8) | % | | 22 | | | 3 | % |
| Europe | | 598 | | | 531 | | | 538 | | | 67 | | | 13 | % | | (7) | | | (1) | % |
| China | | 346 | | | 358 | | | 320 | | | (12) | | | (3) | % | | 38 | | | 12 | % |
| Africa and Middle East | | 200 | | | 235 | | | 241 | | | (35) | | | (15) | % | | (6) | | | (2) | % |
| Russia | | 194 | | | 159 | | | 169 | | | 35 | | | 22 | % | | (10) | | | (6) | % |
| India | | 150 | | | 201 | | | 194 | | | (51) | | | (25) | % | | 7 | | | 4 | % |
| Latin America | | 147 | | | 176 | | | 169 | | | (29) | | | (16) | % | | 7 | | | 4 | % |
| Total sales | | $ | 7,136 | | | $ | 8,071 | | | $ | 7,828 | | | $ | (935) | | | (12) | % | | $ | 243 | | | 3 | % |
| | | | | | | | | | | | | | |
Sales for our Distribution segment by product line were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2020 vs. 2019 | | 2019 vs. 2018 |
| In millions | | 2020 | | 2019 | | 2018 | | Amount | | Percent | | Amount | | Percent |
| Parts | | $ | 2,931 | | | $ | 3,290 | | | $ | 3,234 | | | $ | (359) | | | (11) | % | | $ | 56 | | | 2 | % |
| Power generation | | 1,692 | | | 1,784 | | | 1,486 | | | (92) | | | (5) | % | | 298 | | | 20 | % |
| Service | | 1,263 | | | 1,479 | | | 1,474 | | | (216) | | | (15) | % | | 5 | | | — | % |
| Engines | | 1,250 | | | 1,518 | | | 1,634 | | | (268) | | | (18) | % | | (116) | | | (7) | % |
| Total sales | | $ | 7,136 | | | $ | 8,071 | | | $ | 7,828 | | | $ | (935) | | | (12) | % | | $ | 243 | | | 3 | % |
| | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2017 vs. 2016 | | 2016 vs. 2015 |
| In millions | | 2017 | | 2016 | | 2015 | | Amount | | Percent | | Amount | | Percent |
| Parts | | $ | 3,040 |
| | $ | 2,627 |
| | $ | 2,423 |
| | $ | 413 |
| | 16 | % | | $ | 204 |
| | 8 | % |
| Engines | | 1,369 |
| | 1,100 |
| | 1,294 |
| | 269 |
| | 24 | % | | (194 | ) | | (15 | )% |
| Power generation | | 1,337 |
| | 1,239 |
| | 1,290 |
| | 98 |
| | 8 | % | | (51 | ) | | (4 | )% |
| Service | | 1,312 |
| | 1,215 |
| | 1,222 |
| | 97 |
| | 8 | % | | (7 | ) | | (1 | )% |
| Total sales | | $ | 7,058 |
|
| $ | 6,181 |
|
| $ | 6,229 |
| | $ | 877 |
| | 14 | % | | $ | (48 | ) | | (1 | )% |
20172020 vs. 20162019
Sales
Distribution segment sales decreased $935 million across all product lines. The following were the primary drivers by region:
•North American sales decreased $837 million, representing 90 percent of the total change in Distribution segment sales, due to decreased demand in all product lines, especially parts and engines sales in oil and gas markets.
•Unfavorable foreign currency fluctuations, principally in the Brazilian real, Indian rupee, Australian dollar and South African rand.
Segment EBITDA
Distribution segment EBITDA increased $877$9 million, versus 2016, primarily due to an increase in organic sales of $684 million (primarily in North America) and $267 million of sales related to the acquisition of a North American distributor in the fourth quarter of 2016.
Segment EBIT
Distribution segment EBIT decreased $8 million versus 2016, primarily due to higher selling, general and administrative expenses, higher research developmentlower restructuring charges and engineering expenses, lowerhigher equity, royalty and interest income from investees, and the absence of a gain from the acquisition of controlling interests in a North American distributor in 2016, partially offset by higherlower gross margin. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
|
| | | | | | | | | | |
| | | Year ended December 31, 2017 vs. 2016 |
| | | Favorable/(Unfavorable) Change |
| In millions | | Amount | | Percent | | Percentage point change as a percent of sales |
| Gross margin | | $ | 112 |
| | 10 | % | | (0.5 | ) |
| Selling, general and administrative expenses | | (111 | ) | | (15 | )% | | — |
|
| Research, development and engineering expenses | | (6 | ) | | (46 | )% | | (0.1 | ) |
| Equity, royalty and interest income from investees | | (26 | ) | | (37 | )% | | (0.5 | ) |
| Gain on sale of assets | | (15 | ) | | (100 | )% | | NM |
|
__________________________________________________________________________
"NM" - not meaningful information
The increase in grossGross margin versus 2016 was primarilydecreased mainly due to higher organiclower volumes, and the acquisition of a North American distributor in the fourth quarter of 2016, partially offset by increasedprior restructuring actions, temporary salary reductions and lower variable compensation expense.resulting in decreased compensation expenses and favorable pricing. Gross margin as a percentage of sales declinedincreased primarily due to the increase inprior restructuring actions, temporary salary reductions and lower variable compensation expense. The increaseresulting in selling,decreased compensation expenses and favorable pricing. Selling, general and administrative expenses was primarilydecreased due to higherprior restructuring actions, temporary salary reductions and lower variable compensation expense, increasedresulting in decreased compensation expense related to the acquisition of a North American distributorexpenses and reduced travel expenses, partially offset by higher consulting expenses. The decrease in equity,Equity, royalty and interest income from investees was the result of the acquisition of a North American distributor in 2016 and unfavorable impacts from Tax Legislation related to withholding taxes on foreign earnings of $4 million.
2016 vs. 2015
Sales
Distribution segment sales decreased $48 million versus 2015, primarilyincreased principally due to a decline in organic sales of $295$5 million principally in North America, Asia Pacific and the Middle East and unfavorable foreign currency fluctuations (primarily in the South African rand, Canadian dollar, Chinese renminbi, Indian rupee, Australian dollar and British pound), partially offset by $344 million of segment salesfavorable adjustment related to the acquisition of North American distributors since December 31, 2014.
Segment EBIT
In 2015, we incurred a restructuring charge of $23 million for actions primarilyIndia Tax Law Changes passed in the form of professional voluntary and involuntary employee separation programs in responseMarch 2020. See NOTE 4, "INCOME TAXES" to the continued deterioration in our global markets.
Distribution segment EBIT decreased $20 million versus 2015, primarily due to higher selling, general and administrative expenses (mainly related to the acquisition of North American distributors since December 31, 2014), partially offset by higher gross margin and the absence of restructuring actions and other charges in 2015. The acquisitions resulted in $11 million and $24 million of additional amortization of intangible assets, partially offset by gains of $15 million and $18 million related to the remeasurement of our pre-existing ownership interests for North American distributor acquisitions in 2016 and 2015, respectively. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
|
| | | | | | | | | | |
| | | Year ended December 31, 2016 vs. 2015 |
| | | Favorable/(Unfavorable) Change |
| In millions | | Amount | | Percent | | Percentage point change as a percent of sales |
| Gross margin | | $ | 37 |
| | 4 | % | | 0.7 |
|
| Selling, general and administrative expenses | | (68 | ) | | (10 | )% | | (1.2 | ) |
| Equity, royalty and interest income from investees | | (8 | ) | | (10 | )% | | (0.2 | ) |
Restructuring actions and other charges (1) | | 23 |
| | NM |
| | 0.4 |
|
__________________________________________________________________________
"NM" - not meaningful information
(1) See Consolidated Financial StatementsRestructuring Actions and Other Charges section of "Results of Operations" for additional information.information on India Tax Law Changes.
The increase in gross margin versus 2015 was primarily due to the acquisitions of North American distributors since December 31, 2014 and improved pricing, partially offset by unfavorable foreign currency fluctuations (primarily in the South African rand, Canadian dollar and Australian dollar) and lower volumes. The increase in selling, general and administrative expenses was primarily due to higher compensation expenses related to the acquisitions of North American distributors and higher consulting expenses. The decrease in equity, royalty and interest income from investees was the result of the acquisitions of North American distributors.
Components Segment Results
Financial data for the Components segment was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2017 vs. 2016 | | 2016 vs. 2015 |
| In millions | | 2017 | | 2016 | | 2015 | | Amount | | Percent | | Amount | | Percent |
External sales (1) | | $ | 4,363 |
| | $ | 3,514 |
| | $ | 3,745 |
| | $ | 849 |
| | 24 | % | | $ | (231 | ) | | (6 | )% |
Intersegment sales (1) | | 1,526 |
| | 1,322 |
| | 1,427 |
| | 204 |
| | 15 | % | | (105 | ) | | (7 | )% |
| Total sales | | 5,889 |
| | 4,836 |
| | 5,172 |
| | 1,053 |
| | 22 | % | | (336 | ) | | (6 | )% |
| Depreciation and amortization | | 163 |
| | 133 |
| | 109 |
| | (30 | ) | | (23 | )% | | (24 | ) | | (22 | )% |
| Research, development and engineering expenses | | 240 |
| | 208 |
| | 236 |
| | (32 | ) | | (15 | )% | | 28 |
| | 12 | % |
| Equity, royalty and interest income from investees | | 40 |
| | 41 |
| | 35 |
| | (1 | ) | | (2 | )% | | 6 |
| | 17 | % |
| Interest income | | 3 |
| | 4 |
| | 4 |
| | (1 | ) | | (25 | )% | | — |
| | — | % |
Impairment of light-duty diesel assets (2) | | — |
| | — |
| | 9 |
| | — |
| | — | % | | 9 |
| | 100 | % |
Restructuring actions and other charges (2) | | — |
| | — |
| | 13 |
| | — |
| | — | % | | 13 |
| | 100 | % |
| Segment EBIT | | 754 |
| | 641 |
| | 727 |
| | 113 |
| | 18 | % | | (86 | ) | | (12 | )% |
| | | | | | | | | | | | | | | |
| | | | | | | | | Percentage Points | | Percentage Points |
| Segment EBIT as a percentage of total sales | | 12.8 | % | | 13.3 | % | | 14.1 | % | | |
| | (0.5 | ) | | | | (0.8 | ) |
(1)Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.
(2)See respective sections of "Results of Operations" for additional information.
In the first quarter of 2017, our Components segment reorganized its reporting structure to move the electronics business out of the emission solutions business and into the fuel systems business to enhance operational, administrative and product development efficiencies. Prior year sales were reclassified to conform with this change. We changed the name of our fuel systems business to electronics and fuel systems.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2020 vs. 2019 | | 2019 vs. 2018 |
| In millions | | 2020 | | 2019 | | 2018 | | Amount | | Percent | | Amount | | Percent |
| External sales | | $ | 4,650 | | | $ | 5,253 | | | $ | 5,331 | | | $ | (603) | | | (11) | % | | $ | (78) | | | (1) | % |
| Intersegment sales | | 1,374 | | | 1,661 | | | 1,835 | | | (287) | | | (17) | % | | (174) | | | (9) | % |
| Total sales | | 6,024 | | | 6,914 | | | 7,166 | | | (890) | | | (13) | % | | (252) | | | (4) | % |
| | | | | | | | | | | | | | |
| Research, development and engineering expenses | | 264 | | | 300 | | | 272 | | | 36 | | | 12 | % | | (28) | | | (10) | % |
| Equity, royalty and interest income from investees | | 61 | | | 40 | | | 54 | | | 21 | | | 53 | % | | (14) | | | (26) | % |
| Interest income | | 4 | | | 8 | | | 5 | | | (4) | | | (50) | % | | 3 | | | 60 | % |
| | | | | | | | | | | | | | |
| Segment EBITDA (excluding restructuring actions) | | 961 | | | 1,117 | | | 1,030 | | | (156) | | | (14) | % | | 87 | | | 8 | % |
| | | | | | | | | | | | | | |
| Restructuring actions | | — | | | 20 | | | — | | | 20 | | | 100 | % | | (20) | | | NM |
| Segment EBITDA | | 961 | | | 1,097 | | | 1,030 | | | (136) | | | (12) | % | | 67 | | | 7 | % |
| | | | | | | | | | | | | | |
| | | | | | | | Percentage Points | | Percentage Points |
| | | | | | | | | | | | | | |
| Segment EBITDA as a percentage of total sales | | 16.0 | % | | 15.9 | % | | 14.4 | % | | | | 0.1 | | | | | 1.5 | |
| | | | | | | | | | | | | | |
| "NM" - not meaningful information |
| | | | | | | | | | | | | | |
In the third quarter of 2017, we formed the Eaton Cummins Automated Transmission Technologies joint venture (ECJV), which was consolidated and included in our Components segment as the automated transmissions business. See Note 18, "ACQUISITIONS", in the Consolidated Financial Statements for additional information.
Sales for our Components segment by business were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2017 vs. 2016 | | 2016 vs. 2015 |
| In millions | | 2017 | | 2016 | | 2015 | | Amount | | Percent | | Amount | | Percent |
| Emission solutions | | $ | 2,675 |
| | $ | 2,238 |
| | $ | 2,449 |
| | $ | 437 |
| | 20 | % | | $ | (211 | ) | | (9 | )% |
| Turbo technologies | | 1,179 |
| | 1,036 |
| | 1,141 |
| | 143 |
| | 14 | % | | (105 | ) | | (9 | )% |
| Filtration | | 1,153 |
| | 1,010 |
| | 1,010 |
| | 143 |
| | 14 | % | | — |
| | — | % |
| Electronics and fuel systems | | 718 |
| | 552 |
| | 572 |
| | 166 |
| | 30 | % | | (20 | ) | | (3 | )% |
| Automated transmissions | | 164 |
| | — |
| | — |
| | 164 |
| | NM |
| | — |
| | — | % |
| Total sales | | $ | 5,889 |
|
| $ | 4,836 |
|
| $ | 5,172 |
| | $ | 1,053 |
| | 22 | % | | $ | (336 | ) | | (6 | )% |
____________________________________ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2020 vs. 2019 | | 2019 vs. 2018 |
| In millions | | 2020 | | 2019 | | 2018 | | Amount | | Percent | | Amount | | Percent |
| Emission solutions | | $ | 2,632 | | | $ | 3,122 | | | $ | 3,177 | | | $ | (490) | | | (16) | % | | $ | (55) | | | (2) | % |
| Filtration | | 1,232 | | | 1,281 | | | 1,265 | | | (49) | | | (4) | % | | 16 | | | 1 | % |
| Turbo technologies | | 1,098 | | | 1,218 | | | 1,343 | | | (120) | | | (10) | % | | (125) | | | (9) | % |
| Electronics and fuel systems | | 754 | | | 759 | | | 838 | | | (5) | | | (1) | % | | (79) | | | (9) | % |
| Automated transmissions | | 308 | | | 534 | | | 543 | | | (226) | | | (42) | % | | (9) | | | (2) | % |
| Total sales | | $ | 6,024 | | | $ | 6,914 | | | $ | 7,166 | | | $ | (890) | | | (13) | % | | $ | (252) | | | (4) | % |
| | | | | | | | | | | | | | |
"NM" - not meaningful information
20172020 vs. 20162019
Sales
Components segment sales increased $1.1 billiondecreased $890 million across all lines of business versus 2016.businesses. The following were the primary drivers by business:
•Emission solutions sales increased $437decreased $490 million primarily due to increased sales of products to meet new emission standards in India and stronger marketweaker demand for trucks in North America and China.Western Europe, partially offset by stronger demand in China and India.
Electronics and fuel systems•Automated transmissions sales increased $166decreased $226 million primarily due to higherlower heavy-duty truck demand in China, Mexico and India.North America.
Automated transmissions contributed North American sales of $164 million following the consolidation of the ECJV during the third quarter of 2017.
•Turbo technologies sales increased $143decreased $120 million, primarilyprincipally due to higher demand in China and North America.
Filtration sales increased $143 million primarily due to higherlower demand in North America Australia and China.
Segment EBIT
Components segment EBIT increased $113 million versus 2016, primarily due to higher gross margin,Western Europe, partially offset by increasedhigher demand in China.
•Unfavorable currency fluctuations, primarily in the Brazilian real.
Segment EBITDA
Components segment EBITDA decreased $136 million, mainly due to lower gross margin and unfavorable foreign currency fluctuations (primarily in the Brazilian real), partially offset by lower selling, general and administrative expenses, decreased research, development and engineering expenses and higher equity, royalty and interest income from investees. Gross margin and gross margin as a percentage of sales decreased mainly due to lower volumes, partially offset by prior restructuring actions, temporary salary reductions and lower variable compensation resulting in decreased compensation expenses and lower material costs. Selling, general and administrative expenses and 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:
|
| | | | | | | | | | |
| | | Year ended December 31, 2017 vs. 2016 |
| | | Favorable/(Unfavorable) Change |
| In millions | | Amount | | Percent | | Percentage point change as a percent of sales |
| Gross margin | | $ | 218 |
| | 19 | % | | (0.5 | ) |
| Selling, general and administrative expenses | | (99 | ) | | (28 | )% | | (0.4 | ) |
| Research, development and engineering expenses | | (32 | ) | | (15 | )% | | 0.2 |
|
| Equity, royalty and interest income from investees | | (1 | ) | | (2 | )% | | (0.1 | ) |
The increase in gross margin was primarilyexpenses decreased due to higher volumes,prior restructuring actions, temporary salary reductions and lower material costs and improved leverage, partially offset by higher warranty costs driven by campaigns and changes in estimates, unfavorable pricing and increased variable compensation expense. The increaseresulting in selling, general and administrative expenses was primarily due to higherdecreased compensation expense, especially variable compensation expense, and expenses related to the new ECJV. The increase in research, development and engineering expenses was primarily due to higher compensation expense, especially variable compensation expense, higher consulting expenses and expenses related to the new ECJV. The decrease in equity,reduced consulting expenses. Equity, royalty and interest income from investees was primarilyincreased principally due to unfavorable impacts from Tax Legislationhigher earnings at Fleetguard Filtration Systems India Pvt. driven by a $14 million favorable adjustment related to withholding taxes on foreign earnings
of $12 million, partially offset byIndia Tax Law Changes passed in March 2020 and increased earnings at Dongfeng Cummins Emission Solutions Co., Ltd. and Shanghai Fleetguard Filter Co.
2016 vs. 2015
Sales
Components segment sales decreased $336 million across most lines of business versus 2015. The following were the primary drivers by business:
Emission solutions sales decreased $211 million primarily due to lower demand in North American on-highway markets, partially offset by higher demand in China.
Turbo technologies sales decreased $105 million primarily due to lower demand in North American on-highway markets, partially offset by higher demand in China.
Foreign currency fluctuations unfavorably impacted sales results primarily in the Chinese renminbi, British pound and Brazilian real.
Electronics and fuel systems sales decreased $20 million primarily due to lower demand in North American on-highway markets, partially offset by higher demand in China.
Segment EBIT
In 2015, we incurred a restructuring charge of $13 million for actions primarily in the form of professional voluntary and involuntary employee separation programs in responseSee NOTE 4, "INCOME TAXES" to the continued deterioration in our global markets. We also incurred an impairment charge of $9 million for our light-duty diesel assets.
Components segment EBIT decreased $86 million versus 2015, primarily due to lower gross margin and higher selling, general and administrative expenses, partially offset by lower research, development and engineering expenses and the absence of restructuring actions and other charges and impairment charges in 2016. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
|
| | | | | | | | | | |
| | | Year ended December 31, 2016 vs. 2015 |
| | | Favorable/(Unfavorable) Change |
| In millions | | Amount | | Percent | | Percentage point change as a percent of sales |
| Gross margin | | $ | (111 | ) | | (9 | )% | | (0.6 | ) |
| Selling, general and administrative expenses | | (33 | ) | | (10 | )% | | (1.1 | ) |
| Research, development and engineering expenses | | 28 |
| | 12 | % | | 0.3 |
|
| Equity, royalty and interest income from investees | | 6 |
| | 17 | % | | 0.1 |
|
Impairment of light-duty diesel assets (1) | | 9 |
| | NM |
| | 0.2 |
|
Restructuring actions and other charges (1) | | 13 |
| | NM |
| | 0.3 |
|
__________________________________________________________________________
"NM" - not meaningful information
(1) See respective sections of "Results of Operations"Consolidated Financial Statements for additional information.information on India Tax Law Changes.
The decrease in gross margin was primarily due to lower volumes, unfavorable pricing, unfavorable mix and unfavorable foreign currency fluctuations (primarily in the Chinese renminbi and Brazilian real), 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 the new allocation methodology adopted during 2016, 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 reduced project spending, lower consulting expenses 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2020 vs. 2019 | | 2019 vs. 2018 |
| In millions | | 2020 | | 2019 | | 2018 | | Amount | | Percent | | Amount | | Percent |
| External sales | | $ | 2,055 | | | $ | 2,670 | | | $ | 2,625 | | | $ | (615) | | | (23) | % | | $ | 45 | | | 2 | % |
| Intersegment sales | | 1,576 | | | 1,790 | | | 2,001 | | | (214) | | | (12) | % | | (211) | | | (11) | % |
| Total sales | | 3,631 | | | 4,460 | | | 4,626 | | | (829) | | | (19) | % | | (166) | | | (4) | % |
| | | | | | | | | | | | | | |
| Research, development and engineering expenses | | 212 | | | 230 | | | 230 | | | 18 | | | 8 | % | | — | | | — | % |
| Equity, royalty and interest income from investees | | 21 | | | 38 | | | 56 | | | (17) | | | (45) | % | | (18) | | | (32) | % |
| Interest income | | 4 | | | 8 | | | 6 | | | (4) | | | (50) | % | | 2 | | | 33 | % |
| | | | | | | | | | | | | | |
| Segment EBITDA (excluding restructuring actions) | | 343 | | | 524 | | | 614 | | | (181) | | | (35) | % | | (90) | | | (15) | % |
| Restructuring actions | | — | | | 12 | | | — | | | 12 | | | 100 | % | | (12) | | | NM |
| Segment EBITDA | | 343 | | | 512 | | | 614 | | | (169) | | | (33) | % | | (102) | | | (17) | % |
| | | | | | | | | | | | | | |
| | | | | | | | Percentage Points | | Percentage Points |
| | | | | | | | | | | | | | |
| Segment EBITDA as a percentage of total sales | | 9.4 | % | | 11.5 | % | | 13.3 | % | | | | (2.1) | | | | | (1.8) | |
| | | | | | | | | | | | | | |
| "NM" - not meaningful information |
| | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2017 vs. 2016 | | 2016 vs. 2015 |
| In millions | | 2017 | | 2016 | | 2015 | | Amount | | Percent | | Amount | | Percent |
External sales (1) | | $ | 2,375 |
| | $ | 2,064 |
| | $ | 2,434 |
| | $ | 311 |
| | 15 | % | | $ | (370 | ) | | (15 | )% |
Intersegment sales (1) | | 1,683 |
| | 1,453 |
| | 1,633 |
| | 230 |
| | 16 | % | | (180 | ) | | (11 | )% |
| Total sales | | 4,058 |
|
| 3,517 |
|
| 4,067 |
| | 541 |
| | 15 | % | | (550 | ) | | (14 | )% |
| Depreciation and amortization | | 117 |
| | 115 |
| | 110 |
| | (2 | ) | | (2 | )% | | (5 | ) | | (5 | )% |
| Research, development and engineering expenses | | 214 |
| | 189 |
| | 226 |
| | (25 | ) | | (13 | )% | | 37 |
| | 16 | % |
| Equity, royalty and interest income from investees | | 54 |
| | 42 |
| | 56 |
| | 12 |
| | 29 | % | | (14 | ) | | (25 | )% |
| Interest income | | 3 |
| | 5 |
| | 5 |
| | (2 | ) | | (40 | )% | | — |
| | — | % |
Restructuring actions and other charges (2) | | — |
| | — |
| | 26 |
| | — |
| | — | % | | 26 |
| | 100 | % |
| Segment EBIT | | 294 |
| | 263 |
| | 335 |
| | 31 |
| | 12 | % | | (72 | ) | | (21 | )% |
| | | | | | | | | | | | | | | |
| | | | | | | | | Percentage Points | | Percentage Points |
| Segment EBIT as a percentage of total sales | | 7.2 | % | | 7.5 | % | | 8.2 | % | | | | (0.3 | ) | | | | (0.7 | ) |
(1)Due to the acquisitions of North American distributors, sales previously recognized as external sales are now included in intersegment sales.
(2) See Restructuring Actions and Other Charges section of "Results of Operations" for additional information.
In the first quarter of 2017, our Power Systems segment reorganized its product lines to better reflect how the segment is managed. Prior year sales were reclassified to reflect these changes. Sales for our Power Systems segment by product line were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2020 vs. 2019 | | 2019 vs. 2018 |
| In millions | | 2020 | | 2019 | | 2018 | | Amount | | Percent | | Amount | | Percent |
| Power generation | | $ | 2,167 | | | $ | 2,518 | | | $ | 2,586 | | | $ | (351) | | | (14) | % | | $ | (68) | | | (3) | % |
| Industrial | | 1,188 | | | 1,576 | | | 1,663 | | | (388) | | | (25) | % | | (87) | | | (5) | % |
| Generator technologies | | 276 | | | 366 | | | 377 | | | (90) | | | (25) | % | | (11) | | | (3) | % |
| Total sales | | $ | 3,631 | | | $ | 4,460 | | | $ | 4,626 | | | $ | (829) | | | (19) | % | | $ | (166) | | | (4) | % |
| | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2017 vs. 2016 | | 2016 vs. 2015 |
| In millions | | 2017 | | 2016 | | 2015 | | Amount | | Percent | | Amount | | Percent |
| Power generation | | $ | 2,305 |
| | $ | 2,256 |
| | $ | 2,588 |
| | $ | 49 |
| | 2 | % | | $ | (332 | ) | | (13 | )% |
| Industrial | | 1,399 |
| | 941 |
| | 1,121 |
| | 458 |
| | 49 | % | | (180 | ) | | (16 | )% |
| Generator technologies | | 354 |
| | 320 |
| | 358 |
| | 34 |
| | 11 | % | | (38 | ) | | (11 | )% |
| Total sales | | $ | 4,058 |
| | $ | 3,517 |
| | $ | 4,067 |
| | $ | 541 |
| | 15 | % | | $ | (550 | ) | | (14 | )% |
High-horsepower unit shipments by engine classification were as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2017 vs. 2016 | | 2016 vs. 2015 |
| | | 2017 | | 2016 | | 2015 | | Amount | | Percent | | Amount | | Percent |
| Power generation | | 8,200 |
| | 7,900 |
| | 8,600 |
| | 300 |
| | 4 | % | | (700 | ) | | (8 | )% |
| Industrial | | 6,400 |
| | 4,400 |
| | 5,200 |
| | 2,000 |
| | 45 | % | | (800 | ) | | (15 | )% |
| Total units | | 14,600 |
| | 12,300 |
| | 13,800 |
| | 2,300 |
| | 19 | % | | (1,500 | ) | | (11 | )% |
20172020 vs. 20162019
Sales
Power Systems segment sales increased $541decreased $829 million across all product lines versus 2016.lines. The following were the primary drivers:
•Industrial sales increased $458decreased $388 million primarily due to higherlower demand in globalinternational mining markets especiallyand decreased demand in Europe, North America and China, and oil and gas markets in China and North America.
| |
• | Power generation sales increased $49 million primarily due to higher demand in Western Europe, North America and China, partially offset by lower demand in the Middle East, Africa and Eastern Europe.
|
Generator technologies sales increased $34Power Systems segment EBITDA decreased $169 million, primarily due to higher demand in Europe.
Segment EBIT
Power Systems segment EBIT increased $31 million versus 2016, primarily due to higherlower gross margin favorable foreign currency fluctuations and higherlower equity, royalty and interest income from investees, partially offset by increasedlower selling, general and administrative expenses higherand decreased research, development and engineering expensesexpenses. Gross margin and the absence of a $17 million gain on the sale of an equity investee recorded in 2016. Major components of EBIT and related changes to segment EBIT and EBITgross margin as a percentage of sales were as follows:
|
| | | | | | | | | | |
| | | Year ended December 31, 2017 vs. 2016 |
| | | Favorable/(Unfavorable) Change |
| In millions | | Amount | | Percent | | Percentage point change as a percent of sales |
| Gross margin | | $ | 107 |
| | 14 | % | | (0.3 | ) |
| Selling, general and administrative expenses | | (45 | ) | | (11 | )% | | 0.4 |
|
| Research, development and engineering expenses | | (25 | ) | | (13 | )% | | 0.1 |
|
| Equity, royalty and interest income from investees | | 12 |
| | 29 | % | | 0.1 |
|
| Gain on sale of an equity investee | | (17 | ) | | (100 | )% | | 0.5 |
|
The increase in gross margin versus 2016 was primarilydecreased mainly due to increasedlower volumes, partially offset by higher warranty cost related to a campaign accrualprior restructuring actions, temporary salary reductions and higherlower variable compensation expense. The increaseresulting in selling,decreased compensation expenses, lower warranty expenses and favorable pricing. Selling, general and administrative expenses wasdecreased primarily due to higherprior restructuring actions, temporary salary reductions and lower variable compensation expenseresulting in decreased compensation expenses, reduced travel expenses and higherlower consulting expenses. The increase in research,Research, development and engineering expenses was primarilydecreased principally due to higherprior restructuring actions, temporary salary reductions and lower variable compensation expense, increased project spendingresulting in decreased compensation expenses, reduced consulting expenses and higher consultinglower travel expenses. The increase in equity,Equity, royalty and interest income from investees was primarilydecreased largely due to an $8 million loss on the absencesale of a joint venture asset impairment recorded in 2016. and lower earnings at Chongqing Cummins Engine Co., Ltd.
New Power Segment Results
The decreaseNew Power segment designs, manufactures, sells and supports hydrogen production solutions as well as electrified power systems ranging from fully electric to hybrid along with innovative components and subsystems, including battery and fuel cell technologies. The New Power segment is currently in the gaindevelopment phase with a primary focus on saleresearch and development activities for our power systems, components and subsystems. Financial data for the New Power segment was as follows:
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| | | | | | | | | | | | | | |
| | | | | | | Favorable/(Unfavorable) | | Favorable/(Unfavorable) |
| | | Years ended December 31, | | 2020 vs. 2019 | | 2019 vs. 2018 |
| In millions | | 2020 | | 2019 | | 2018 | | Amount | | Percent | | Amount | | Percent |
| External sales | | $ | 71 | | | $ | 38 | | | $ | 6 | | | $ | 33 | | | 87 | % | | $ | 32 | | | NM |
| Intersegment sales | | 1 | | | — | | | 1 | | | 1 | | | NM | | (1) | | | (100) | % |
| Total sales | | 72 | | | 38 | | | 7 | | | 34 | | | 89 | % | | 31 | | | NM |
| | | | | | | | | | | | | | |
| Research, development and engineering expenses | | 109 | | | 106 | | | 69 | | | (3) | | | (3) | % | | (37) | | | (54) | % |
| Equity, royalty and interest loss from investees | | (4) | | | — | | | — | | | (4) | | | NM | | — | | | — | % |
| | | | | | | | | | | | | | |
| Segment EBITDA (excluding restructuring actions) | | (172) | | | (148) | | | (90) | | | (24) | | | (16) | % | | (58) | | | (64) | % |
| Restructuring actions | | — | | | 1 | | | — | | | 1 | | | 100 | % | | (1) | | | NM |
| Segment EBITDA | | (172) | | | (149) | | | (90) | | | (23) | | | (15) | % | | (59) | | | (66) | % |
| | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| "NM" - not meaningful information |
| | | | | | | | | | | | | | |
2021 OUTLOOK
COVID-19 Impacts
The COVID-19 pandemic negatively impacted our financial performance in 2020 and may continue to do so in the future. Because the magnitude and duration of the pandemic and its economic consequences are unclear, the pandemic’s impact on our performance is difficult to predict.
COVID-19 Positive Trends
COVID-19 vaccines are currently being administered around the world with the hope that the majority of the population will have access to the absencevaccine by the middle of 2021. If the distribution and the effectiveness of the vaccine are consistent with current government and health organization estimates we anticipate the vaccine will mitigate the spread of the virus by the end of 2021 and allow a $17 million gain recordedreturn to more normal operations in the second half of the year.
COVID-19 Challenges
The ongoing spread of the virus and increase in infections prior to widespread vaccination presents several risks to our business, especially in the first half of 2021. The three principle areas where COVID-19 may negatively impact our financial performance are through its impact on customer demand, the impact on our ability to procure parts from suppliers and our ability to operate our manufacturing and distribution facilities.
Customer Demand – The majority of our major customers, including PACCAR, Navistar, Daimler and Chrysler experienced extended production shutdowns in response to the pandemic in the first half of 2020. Although many of these customers reopened their facilities and ramped up their production in the second half of 2020, levels of future production remain uncertain and will be determined by supply chain constraints, market demand and government decisions to keep economies open.
Supply Chain Impact – Supplier shutdowns may result in parts shortages and negatively impact our ability to manufacture products and meet aftermarket demand. In addition, industry parts shortages may impact the timing of when customer facilities reopen and the speed at which customers ramp up production, negatively impacting demand for our products. Lower demand increases the risk that certain suppliers will face financial issues, potentially impacting their ability to supply parts.
Operations Impact - Our manufacturing and distribution locations are generally considered critical services and the majority of our facilities remain open to meet customer demand. In an effort to contain the spread of COVID-19, maintain the well-being of our employees, ensure compliance with governmental requirements or respond to declines in demand from customers, we closed or partially shut down certain office, manufacturing and distribution facilities around the world at the end of the first quarter and into the third quarter of 2020. We have taken, and will continue to take, a variety of steps to reduce the risk of employees contracting COVID-19 at work. These steps include social distancing, expanded cleaning and sanitization, adjusting work hours and temperature checks. All manufacturing and distribution facilities are now open, but remain subject to future closure if deemed necessary for the safety of our employees or to comply with future government mandates.
Business Outlook Considering Potential COVID-19 Impacts
Our outlook reflects the following positive trends and challenges to our business that could impact our revenue and earnings potential in 2021.Specific impacts of the COVID-19 pandemic are highlighted in the above section but are reflected in our market outlook.
Positive Trends
•We expect demand for pick-up trucks in North America to remain strong and in line with the second half of 2020.
•North American medium-duty and heavy-duty truck demand improved in the fourth quarter and could continue to strengthen above second half of 2016 for Cummins Olayan Energy.2020 levels.
2016 vs. 2015•Market demand for trucks in India is expected to improve from 2020 levels.
Sales•We anticipate our aftermarket business will strengthen from second half of 2020 levels, driven primarily by increased truck utilization in North America.
Power Systems segment sales decreased $550 million across all product lines versus 2015. The following were the primary drivers:•Our liquidity of $7.0 billion in cash, marketable securities and available credit facilities puts us in a strong position to deal with any uncertainties that may arise in 2021.
Power generation sales decreased $332 million, in most regions, with the largest declines in demand primarily in Asia, the Middle East, North America, Latin America, China, Western Europe, Africa and Mexico.Challenges
Industrial sales decreased $180 million primarily due to lower•Market demand in North America (mainly oiltruck and gasconstruction markets in China is expected to decline from record levels in 2020.
•We may close or restructure additional manufacturing and mining markets, partially offset by rail markets), Asia (mainly marinedistribution facilities as we evaluate the appropriate size and mining markets), China (mainly marinestructure of our manufacturing and mining markets) and Africa.distribution capacity, which could result in additional charges.
Foreign currency fluctuations unfavorably impacted sales results primarily•Uncertainty in the British pound, Indian rupee and Chinese renminbi.
Generator technologies sales decreased $38 million primarily dueU.K. surrounding its ability to lower demand in China and North America.
Segment EBIT
In 2015, we incurrednegotiate trade agreements as a restructuring charge of $26 million for actions primarilysovereign country could have material negative impacts on our European operations in the form of professional voluntary and involuntary employee separation programs in response to the continued deterioration in our global markets.
Power Systems segment EBIT decreased $72 million versus 2015, primarily due to lower gross margin, partially offset by lower selling, general and administrative expenses, favorable foreign currency fluctuations (primarily the British pound), lower research, development and engineering expenses, the absence of restructuring actions and other charges and a gain from the divestiture of an equity investee. Major components of EBIT and related changes to segment EBIT and EBIT as a percentage of sales were as follows:
|
| | | | | | | | | | |
| | | Year ended December 31, 2016 vs. 2015 |
| | | Favorable/(Unfavorable) Change |
| In millions | | Amount | | Percent | | Percentage point change as a percent of sales |
| Gross margin | | $ | (215 | ) | | (21 | )% | | (2.3 | ) |
| Selling, general and administrative expenses | | 75 |
| | 16 | % | | 0.3 |
|
| Research, development and engineering expenses | | 37 |
| | 16 | % | | 0.2 |
|
| Equity, royalty and interest income from investees | | (14 | ) | | (25 | )% | | (0.2 | ) |
Restructuring actions and other charges (1) | | 26 |
| | 100 | % | | 0.6 |
|
| Gain on sale of an equity investee | | 17 |
| | 100 | % | | 0.5 |
|
__________________________________________________________________________long-term.
(1) See Restructuring Actions and Other Charges section of "Results of Operations" for additional information.
The decrease in gross margin versus 2015 was primarily due to lower volumes and increased project 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 reduced project spending, 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. In 2016, we sold our remaining 49 percent interest in Cummins Olayan Energy for $61 million and recognized a gain of $17 million.
Reconciliation of Segment EBIT to Net Income Attributable to Cummins Inc.
The table below reconciles the segment information to the corresponding amounts in the Consolidated Statements of Income.
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| In millions | | 2017 | | 2016 | | 2015 |
| TOTAL SEGMENT EBIT | | $ | 2,391 |
| | $ | 1,982 |
| | $ | 2,110 |
|
Non-segment EBIT (1) | | 55 |
| | 17 |
| | (20 | ) |
| TOTAL EBIT | | 2,446 |
|
| 1,999 |
|
| 2,090 |
|
| Less: Interest expense | | 81 |
| | 69 |
| | 65 |
|
| INCOME BEFORE INCOME TAXES | | 2,365 |
| | 1,930 |
| | 2,025 |
|
| Less: Income tax expense | | 1,371 |
| | 474 |
| | 555 |
|
| CONSOLIDATED NET INCOME | | 994 |
| | 1,456 |
| | 1,470 |
|
| Less: Net (loss) income attributable to noncontrolling interest | | (5 | ) | | 62 |
| | 71 |
|
| NET INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 999 |
| | $ | 1,394 |
| | $ | 1,399 |
|
(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. The year ended December 31, 2015, included an $11 million corporate restructuring charge. There were no significant unallocated corporate expenses for the years ended December 31, 2017 and 2016.
LIQUIDITY AND CAPITAL RESOURCES
Key Working Capital and Balance Sheet Data
We fund our working capital with cash from operations and short-term borrowings, including commercial paper, when necessary. Various assets and liabilities, including short-term debt, can fluctuate significantly from month to month depending on short-term liquidity needs. As a result, working capital is a prime focus of managementmanagement's attention. Working capital and balance sheet measures are provided in the following table:
|
| | | | | | | | |
| Dollars in millions | | December 31,
2017 | | December 31,
2016 |
Working capital (1) | | $ | 3,251 |
| | $ | 3,382 |
|
| Current ratio | | 1.57 |
| | 1.78 |
|
| Accounts and notes receivable, net | | $ | 3,618 |
| | $ | 3,025 |
|
| Days’ sales in receivables | | 59 |
| | 61 |
|
| Inventories | | $ | 3,166 |
| | $ | 2,675 |
|
| Inventory turnover | | 5.0 |
| | 4.7 |
|
| Accounts payable (principally trade) | | $ | 2,579 |
| | $ | 1,854 |
|
| Days' payable outstanding | | 53 |
| | 51 |
|
| Total debt | | $ | 2,006 |
| | $ | 1,856 |
|
| Total debt as a percent of total capital | | 19.7 | % | | 20.6 | % |
(1)Working capital includes cash and cash equivalents. | | | | | | | | | | | | | | |
| Dollars in millions | | December 31,
2020 | | December 31,
2019 |
Working capital (1) | | $ | 5,562 | | | $ | 3,127 | |
| Current ratio | | 1.88 | | | 1.50 | |
| Accounts and notes receivable, net | | $ | 3,820 | | | $ | 3,670 | |
| Days' sales in receivables | | 69 | | | 58 | |
| Inventories | | $ | 3,425 | | | $ | 3,486 | |
| Inventory turnover | | 4.2 | | | 4.7 | |
| Accounts payable (principally trade) | | $ | 2,820 | | | $ | 2,534 | |
| Days' payable outstanding | | 68 | | | 58 | |
| Total debt | | $ | 4,164 | | | $ | 2,367 | |
| Total debt as a percent of total capital | | 31.7 | % | | 21.9 | % |
| | | | |
(1) Working capital includes cash and cash equivalents. | | | | |
| | | | |
Cash Flows
Cash and cash equivalents were impacted as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | Change |
| In millions | | 2020 | | 2019 | | 2018 | | 2020 vs. 2019 | | 2019 vs. 2018 |
| Net cash provided by operating activities | | $ | 2,722 | | | $ | 3,181 | | | $ | 2,378 | | | $ | (459) | | | $ | 803 | |
| Net cash used in investing activities | | (719) | | | (1,150) | | | (974) | | | 431 | | | (176) | |
| Net cash provided by (used in) financing activities | | 280 | | | (2,095) | | | (1,400) | | | 2,375 | | | (695) | |
| Effect of exchange rate changes on cash and cash equivalents | | (11) | | | (110) | | | (70) | | | 99 | | | (40) | |
| Net increase (decrease) in cash and cash equivalents | | $ | 2,272 | | | $ | (174) | | | $ | (66) | | | $ | 2,446 | | | $ | (108) | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | Change |
| In millions | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
| Net cash provided by operating activities | | $ | 2,277 |
| | $ | 1,939 |
| | $ | 2,065 |
| | $ | 338 |
| | $ | (126 | ) |
| Net cash used in investing activities | | (1,052 | ) | | (917 | ) | | (918 | ) | | (135 | ) | | 1 |
|
| Net cash used in financing activities | | (1,074 | ) | | (1,413 | ) | | (1,650 | ) | | 339 |
| | 237 |
|
| Effect of exchange rate changes on cash and cash equivalents | | 98 |
| | (200 | ) | | (87 | ) | | 298 |
| | (113 | ) |
| Net increase (decrease) in cash and cash equivalents | | $ | 249 |
| | $ | (591 | ) | | $ | (590 | ) | | $ | 840 |
| | $ | (1 | ) |
20172020 vs. 20162019
Net cash provided by operating activities increased $338decreased $459 million, versus 2016, primarily due to improved earningslower consolidated net income of $358$457 million, excluding the non-cash impacthigher restructuring payments of Tax Legislation$106 million, increased equity in income of $820investees, net of dividends of $91 million and lower working capital levelsother liabilities of $352$51 million, partially offset by higher pension contributions of $109 million, a decrease in deferred tax expense of $104 million, lower loss contingency charges of $117 million and higher equity earnings of $77 million. The lower working capital requirements in 2017of $396 million. During 2020, lower working capital requirements resulted in a cash inflow of $90$365 million compared to a cash outflow of $262$31 million in 2016.2019, mainly due to higher accounts payable and accrued expenses, partially offset by a decrease in inventory and higher accounts and notes receivable.
Net cash used in investing activities increased $135decreased $431 million, versus 2016, primarily due to higher acquisitionsthe prior year acquisition of businesses, netHydrogenics for $235 million, lower capital expenditures of cash acquired of $568$172 million and the absence of $60 million in proceeds from the sale of of equity investees in 2016, partially offset by lower net investments in marketable securities of $244 million, higher cash flows from derivatives not designated as hedges of $178$48 million, partially offset by higher investments in and higher proceeds from the disposaladvances to equity investees of property, plant and equipment of $96$31 million.
Net cash used inprovided by financing activities decreased $339increased $2,375 million, versus 2016, primarilyprincipally due to the issuance of $2 billion of long-term debt and lower repurchases of common stock of $327 million.
The effect of exchange rate changes on cash and cash equivalents increased $298 million versus 2016, primarily due to the British pound, which increased cash and cash equivalents $249 million.
2016 vs. 2015
Net cash provided by operating activities decreased $126 million versus 2015, primarily due to the absence of the 2015 impairment of light-duty diesel assets of $211 million and a $123 million year over year impact related to restructuring, partially offset by an increase in deferred income taxes of $158 million and higher loss contingency charges of $62 million resulting in lower cash net income in 2016.
Net cash used in investing activities decreased $1 million versus 2015, primarily due to lower capital expenditures of $213 million and proceeds from the sale of equity investees of $60$630 million, partially offset by higher net investments in marketable securities of $160 million and changes in cash flows from derivatives not designated as hedges of $110 million.
Net cash used in financing activities decreased $237 million versus 2015, primarily due to higher net borrowingspayments of commercial paper of $212 million, lower common stock repurchases of $122 million and higher proceeds from borrowings of $67 million, partially offset by higher acquisitions of noncontrolling interests of $88 million and higher payments on borrowings and capital lease obligations of $87$217 million.
The effect of exchange rate changes on cash and cash equivalents decreased $113$99 million, versus 2015, primarily due to favorable fluctuations in the British pound which decreased cashof $73 million.
2019 vs. 2018
Sources of Liquidity
We generate significant ongoing cash flow. Cash provided by operations is our principal source of liquidity with $2.3$2.7 billion provided in 2017.
2020. At December 31, 2017,2020, our sources of liquidity included:
|
| | | | | | | | | | | | | | |
| | | December 31, 2017 |
| In millions | | Total | | U.S. | | International | | Primary location of international balances |
| Cash and cash equivalents | | $ | 1,369 |
| | $ | 360 |
| | $ | 1,009 |
| | U.K., Singapore, China, Belgium, Australia, Canada |
Marketable securities (1) | | 198 |
| | 49 |
| | 149 |
| | India |
| Total | | $ | 1,567 |
| | $ | 409 |
| | $ | 1,158 |
| | |
| Available credit capacity | | | | | | | | |
Revolving credit facility (2) | | $ | 2,452 |
| | | | | | |
| International and other uncommitted domestic credit facilities | | $ | 240 |
| | | | | | |
(1) The majority of marketable securities could be liquidated into cash within a few days.
(2) The five-year credit facility for $1.75 billion and the 364-day credit facility for $1.0 billion, maturing November 2020 and September 2018, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At December 31, 2017, we had $298 million of commercial paper outstanding, which effectively reduced the $1.75 billion available capacity under our five-year revolving credit facility to $1.45 billion. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| In millions | | Total | | U.S. | | International | | Primary location of international balances |
| Cash and cash equivalents | | $ | 3,401 | | | $ | 1,914 | | | $ | 1,487 | | | China, Singapore, Mexico, Belgium, Australia, Canada |
| | | | | | | | |
Marketable securities (1) | | 461 | | | 86 | | | 375 | | | India |
| Total | | $ | 3,862 | | | $ | 2,000 | | | $ | 1,862 | | | |
| Available credit capacity | | | | | | | | |
Revolving credit facilities (2) | | $ | 3,177 | | | | | | | |
| International and other uncommitted domestic credit facilities | | $ | 256 | | | | | | | |
| | | | | | | | |
(1) The majority of marketable securities could be liquidated into cash within a few days. |
(2) The five-year credit facility for $2.0 billion and the 364-day credit facility for $1.5 billion, maturing August 2023 and August 2021, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At December 31, 2020, we had $323 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facilities to $3.2 billion. |
| | | | | | | | |
| | | | | | | | |
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| | | | | | | | |
Cash, Cash Equivalents and Marketable Securities
A significant portion of our cash flows isare generated outside the U.S. We manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. As a result, we do not anticipate any local liquidity restrictions to preclude us from funding our operating needs with local resources.
The Tax Legislation made significant changesIf we distribute our foreign cash balances to the U.S. tax law, including a one-time transition tax on accumulatedor to other foreign subsidiaries, we could be required to accrue and pay withholding 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 $298 million withour China, India and Netherlands domiciled subsidiaries. At present, we do not foresee a cash impact of $338 million. The payments associated with this deemed repatriation will be paid over eight years. The unrepatriated foreignneed to repatriate any earnings at December 31, 2017, will be repatriated as neededfrom these subsidiaries for which we have asserted permanent reinvestment. However, to help fund cash needs. The estimated accrued withholding taxesneeds of $331 million onthe U.S. or other international subsidiaries as they arise, we repatriate available cash from certain foreign subsidiaries whose earnings that we planare not permanently reinvested when it is cost effective to repatriate in the foreseeable future will be paid as cash is repatriated. See Note 2, "INCOME TAXES," to our Consolidated Financial Statements for additional information.do so.
Debt Facilities and Other Sources of Liquidity
On November 13, 2015,April 14, 2020, we were approved for the Federal Reserve Bank of New York’s Commercial Paper Funding Facility (CPFF) program to assure access to the commercial paper funding markets during volatile credit market conditions. The CPFF was intended to provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV). The facility allows us, based on our current short-term credit rating, to issue three-month unsecured commercial paper at a rate equal to a + 110 basis point spread over the three-month overnight index swap rate on the date of issuance. The maximum amount of commercial paper that we may issue at any time through this program is $1.5 billion less the total principal amount of all other outstanding commercial paper that we have issued. We retain full access to our Board authorized $3.5 billion commercial paper program, as reduced by any amounts issued under this facility. The SPV is currently scheduled to cease purchasing commercial paper on March 17, 2021. At December 31, 2020, there were no outstanding borrowings under the CPFF program.
In June and July of 2020, we settled our February 2014 interest rate swaps, which previously converted our $500 million debt issue, due in 2023, from fixed rate to floating rate based on a LIBOR spread. We will amortize the $24 million gain realized upon settlement over the remaining three-year term of the related debt.
On August 19, 2020, we entered into an amended and restated five-year revolving364-day credit agreement with a syndicate of lenders, which provides us with a $1.75 billion senior unsecured revolving credit facility and expires on November 13, 2020. On September 5, 2017, we entered into a 364-day credit facility that allows us to borrow up to $1$1.5 billion of additional unsecured funds at any time through September 2018. prior to August 18, 2021. This credit agreement amended and restated the prior $1.5 billion 364-day credit facility that matured on August 19, 2020.
On August 24, 2020, we issued $2 billion aggregate principal amount of senior unsecured notes consisting of $500 million aggregate principal amount of 0.75% senior unsecured notes due in 2025, $850 million aggregate principal amount of 1.50% senior unsecured notes due in 2030 and $650 million aggregate principal amount of 2.60% senior unsecured notes due in 2050. We received net proceeds of $1.98 billion.
We have access to bothcommitted credit facilities whichthat total $2.75$3.5 billion, of borrowing capacity.including the new $1.5 billion 364-day facility that expires August 18, 2021 and our $2.0 billion five-year facility that expires on August 22, 2023. We intend to maintain credit facilities of a similarat the current or higher aggregate amountamounts by renewing or replacing these facilities at or before expiration. RevolvingThese revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings letters of credit and for general corporate purposes. Both credit agreements include a financial covenant requiring that the leverage ratio of net debt of the company and its subsidiaries to the consolidated total capital of the company and its subsidiaries may not exceed 0.65 to 1.0. AtDecember 31, 2020, our leverage ratio was 0.07 to 1.0.
We can issue up to $1.75$3.5 billion of unsecured, short-term promissory notes ("commercial paper")(commercial paper) pursuant to our boardthe Board authorized commercial paper programs. The programs facilitate the private placement of unsecured short-term debt through third partythird-party brokers. We intend to use the net proceeds from the commercial paper borrowings for general corporate purposes.
At December 31, 2020, we had $323 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facilities to $3.2 billion. The total combined borrowing capacity under the revolving credit facilityfacilities and commercial paper programprograms should not exceed $2.75$3.5 billion. See Note 9,11, "DEBT," to our Consolidated Financial Statements for additional information.
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 (SEC)SEC on February 16, 2016.13, 2019. 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.
In July 2017, the U.K.'s Financial Conduct Authority, which regulates the London Interbank Offered Rate (LIBOR), announced it intends to phase out LIBOR by the end of 2021. The cessation date for submission and publication of rates for certain tenors of LIBOR has since been extended until mid-2023. Various central bank committees and working groups continue to discuss replacement of benchmark rates, the process for amending existing LIBOR-based contracts and the potential economic impacts of different alternatives. The Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative rate for USD LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. We are evaluating the potential impact of the replacement of the LIBOR benchmark interest rate including risk management, internal operational readiness and monitoring the Financial Accounting Standards Board standard-setting process to address financial reporting issues that might arise in connection with transition from LIBOR to a new benchmark rate. While we do not believe the change will impact us significantly, we continue to evaluate contracts throughout the company. In anticipation of LIBOR's phase out, our revolving credit agreements include a transition mechanism for selecting a benchmark replacement rate for LIBOR, with such benchmark replacement rate to be subject to our agreement.
Supply Chain Financing
We currently have supply chain financing programs with financial intermediaries, which provide certain vendors the option to be paid by financial intermediaries earlier than the due date on the applicable invoice. When a vendor utilizes the program and receives an early payment from a financial intermediary, they take a discount on the invoice. We then pay the financial intermediary the face amount of the invoice on the regularly scheduled due date. We do not reimburse vendors for any costs they incur for participation in the program and their participation is completely voluntary. As a result, all amounts owed to the financial intermediaries are presented as "Accounts payable" in our Consolidated Balance Sheets.
Uses of Cash
Stock Repurchases
In December 2016, our2019, the Board of Directors authorized the acquisition of up to $1$2.0 billion of additional common stock upon completion of the 20152018 repurchase plan. In 2017,October 2018, the Board authorized the acquisition of up to $2.0 billion of additional common stock. For the year ended December 31, 2020, we made the following purchases under the 2015our stock repurchase program:programs:
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| | | | | | | | | | | | | | | |
In millions (except per share amounts) For each quarter ended | | Shares Purchased | | Average Cost Per Share | | Total Cost of Repurchases | | Remaining Authorized Capacity (1) |
| April 2 | | 0.3 |
| | $ | 151.32 |
| | $ | 51 |
| | $ | 445 |
|
| July 2 | | 0.5 |
| | 153.95 |
| | 69 |
| | 376 |
|
| October 1 | | 1.7 |
| | 155.05 |
| | 271 |
| | 105 |
|
| December 31 | | 0.4 |
| | 166.00 |
| | 60 |
| | 46 |
|
| Total | | 2.9 |
| | $ | 155.81 |
| | $ | 451 |
| |
|
|
(1)The remaining authorized capacity under the 2015 plan was calculated based on the cost to purchase the shares but excludes commission expenses in accordance with the authorized plan. | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In millions, except per share amounts | | Shares
Purchased | | Average Cost
Per Share | | Total Cost of
Repurchases | | | | Remaining Authorized Capacity (1) |
| | | | | | | | | | |
| October 2018, $2 billion repurchase program | | | | | | | | | | |
| March 29 | | 3.5 | | | $ | 156.92 | | | $ | 550 | | | | | $ | 85 | |
| June 28 | | — | | | — | | | — | | | | | 85 | |
| September 27 | | — | | | — | | | — | | | | | 85 | |
| December 31 | | 0.4 | | | 219.15 | | | 85 | | | | | — | |
| Subtotal | | 3.9 | | | 163.11 | | | 635 | | | | | — | |
| | | | | | | | | | |
| December 2019, $2 billion repurchase program | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| December 31 | | 0.0 | | (2) | 218.97 | | | 6 | | | | | 1,994 | |
| | | | | | | | | | |
| Total | | 3.9 | | | 163.50 | | | $ | 641 | | | | | |
| | | | | | | | | | |
(1) The remaining authorized capacity under these plans was calculated based on the cost to purchase the shares but excludes commission expenses in accordance with the authorized plan. |
(2) The shares purchased under the 2019 repurchase program rounded to zero. |
| | | | | | | | | | |
We intendtemporarily suspended share repurchases after the purchases made in the first quarter of 2020 to conserve cash, but resumed repurchasing shares in the fourth quarter of 2020. We may repurchase outstanding shares from time to time during 20182021 to enhance shareholder value and to offset the dilutive impact of employee stock basedstock-based compensation plans.
Dividends
Total dividends paid to common shareholders in 2017, 20162020, 2019 and 20152018 were $701$782 million, $676$761 million and $622$718 million, respectively. Declaration and payment of dividends in the future depends upon our income and liquidity position, among other factors, and is subject to declaration by ourthe Board, of Directors, who meetmeets quarterly to consider our dividend payment. We expect to fund dividend payments with cash from operations.
In July 2017, ourOctober 2020, the Board of Directors authorized an increase to our quarterly dividend of 5.43 percent from $1.025$1.311 per share to $1.08 per share. 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. In July 2015, our Board of Directors authorized an increase to our quarterly dividend of 25 percent from $0.78 per share to $0.975$1.35 per share. Cash dividends per share paid to common shareholders and the Board authorized increases for the last three years were as follows:
|
| | | | | | | | | | | | |
| | | Quarterly Dividends |
| | | 2017 | | 2016 | | 2015 |
| First quarter | | $ | 1.025 |
| | $ | 0.975 |
| | $ | 0.78 |
|
| Second quarter | | 1.025 |
| | 0.975 |
| | 0.78 |
|
| Third quarter | | 1.08 |
| | 1.025 |
| | 0.975 |
|
| Fourth quarter | | 1.08 |
| | 1.025 |
| | 0.975 |
|
| Total | | $ | 4.21 |
| | $ | 4.00 |
| | $ | 3.51 |
|
Acquisitions
On July 31, 2017, we formed a joint venture with Eaton Corporation PLC by purchasing a 50 percent interest in the new venture named Eaton Cummins Automated Transmission Technologies (ECJV) for $600 million in cash. In addition, each partner contributed $20 million for working capital. See Note 18 "ACQUISITIONS," to the Consolidated Financial Statements for additional information.
On November 1, 2017, we acquired Brammo Inc., an engineerer and manufacturer of lithium ion batteries primarily related to the utility vehicle markets, for $68 million. See Note 18 "ACQUISITIONS," to the Consolidated Financial Statements for additional information. | | | | | | | | | | | | | | | | | | | | |
| | | Quarterly Dividends |
| | | 2020 | | 2019 | | 2018 |
| First quarter | | $ | 1.311 | | | $ | 1.14 | | | $ | 1.08 | |
| Second quarter | | 1.311 | | | 1.14 | | | 1.08 | |
| Third quarter | | 1.311 | | | 1.311 | | | 1.14 | |
| Fourth quarter | | 1.35 | | | 1.311 | | | 1.14 | |
| Total | | $ | 5.28 | | | $ | 4.90 | | | $ | 4.44 | |
| | | | | | |
Capital Expenditures
Capital expenditures, including spending on internal use software, were $587$575 million, $775 million and $784 million in 2017, compared to $594 million in 2016.2020, 2019 and 2018, respectively. We continue to invest in new product lines and targeted capacity expansions. We plan to spend between $730an estimated $725 million and $760to $775 million in 20182021 on capital expenditures, as we continueexcluding internal use software, with product launches and facility improvements. Approximatelyover 50 percent of our capitalthese expenditures are expected to be invested outsidein North America. In addition, we plan to spend an estimated $60 million to $70 million on internal use software in 2021.
Pensions
Our global pension plans, including our unfunded and non-qualified plans, were 112 percent funded at December 31, 2020. Our U.S. defined benefit plan, which represents approximately 52 percent of the U.S. in 2018.
Pensions
worldwide pension obligation, was 128 percent funded, and our U.K. defined benefit plan was 114 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 2017,2020, the investment returngain on our U.S. pension trust was 12.98.9 percent while our U.K. pension trust returngain was 4.413.7 percent. Approximately 7772 percent of our pension plan assets are held in highly liquid investments such as fixed income and equity securities. The remaining 2328 percent of our plan assets are held in less liquid, but market valued investments, including real estate, private equity, venture capital, opportunistic credit and insurance contracts.
We sponsor funded and unfunded domestic and foreign defined benefit pension plans. Contributions to thesethe U.S. and U.K. plans were as follows:
| | | | | | | Years ended December 31, |
| In millions | | In millions | | | 2020 | | 2019 | | 2018 |
| | | | | Years ended December 31, | |
| In millions | | 2017 | | 2016 | | 2015 | |
| Defined benefit pension plans | | |
| | |
| | | |
| Voluntary contribution | | $ | 233 |
| | $ | 133 |
| | $ | 82 |
| |
| Mandatory contribution | | 10 |
| | 1 |
| | 108 |
| |
| Defined benefit pension contributions | | 243 |
| | 134 |
| | 190 |
| Defined benefit pension contributions | | | $ | 92 | | | $ | 121 | | | $ | 37 | |
| | | | | | | | |
| | Defined contribution pension plans | | $ | 84 |
| | $ | 68 |
| | $ | 74 |
| Defined contribution pension plans | | | 85 | | | 102 | | | 104 | |
|
We anticipate making total contributions of approximately $38$75 million to our global defined benefit pension plans in 2018.2021. Expected contributions to our defined benefit pension plans in 20182021 will meet or exceed the current funding requirements.
Current Maturities of Short and Long-Term Debt
We had $298$323 million of commercial paper outstanding at December 31, 2017,2020, 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.until 2023 when our 3.65% senior notes are due. Required annual long-term debt principal payments range from $6$23 million to $63$526 million over the next five years. See Note 9 "DEBT"11, "DEBT," to the Consolidated Financial Statementsfor additional information.
Credit Ratings
Our ratingsrating and outlook from each of the credit rating agencies as of the date of filing are shown in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| | Long-Term | | | | Short-Term | | | | |
Credit Rating Agency (1) | | Senior Debt Rating | | | | Debt Rating | | | | Outlook |
| Standard & Poor’s Rating Services | | A+ | | | | A1 | | | | Stable |
| | | | | | |
| | Long-Term | | Short-Term | | |
Credit Rating Agency (1)
| | Senior Debt Rating | | Debt Rating | | Outlook |
Standard & Poor’s Rating Services | | A+ | | A1 | | Stable |
| Moody’s Investors Service, Inc. | | A2 | | P1 | | P1 | | | | Stable |
| | | | | | | | | | |
(1) Credit ratings are not recommendations to buy, are subject to change, and each rating should be evaluated independently of any other rating. In addition, we undertake no obligation to update disclosures concerning our credit ratings, whether as a result of new information, future events or otherwise. |
| | | | | | | | | | |
(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
OurDespite the global recession and volatility in the capital markets due to the pandemic, our financial condition and liquidity remain strong. Our solid balance sheet and credit ratings enable us to have ready access to credit and the capital markets. We assess our liquidity in terms of our ability to generate adequate cash to fund our operating, investing and financing activities. We believe our existing cash and marketable securities, operating cash flow and liquidity providesrevolving credit facilities provide us with the financial flexibility needed to fund working capital, common stock repurchases, acquisitions, targeted capital expenditures, dividend payments, projected pension obligations and debt service obligations. While we expect more efficient access to overseas earnings as a result of Tax Legislation, weobligations through 2021 and beyond. We continue to generate significant cash from operations in the U.S. and maintain access to our expanded revolving credit facilityfacilities and commercial paper programs as noted above.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
A summary of our contractual obligations and other commercial commitments at December 31, 2017,2020, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Contractual Cash Obligations | | Payments Due by Period | | |
| In millions | | 2021 | | 2022-2023 | | 2024-2025 | | After 2025 | | Total |
| | | | | | | | | | |
Long-term debt and finance lease obligations (1) | | $ | 175 | | | $ | 798 | | | $ | 716 | | | $ | 4,079 | | | $ | 5,768 | |
| Operating leases | | 143 | | | 183 | | | 99 | | | 67 | | | 492 | |
| | | | | | | | | | |
| Capital expenditures | | 238 | | | — | | | — | | | — | | | 238 | |
| Purchase commitments for inventory | | 799 | | | 1 | | | — | | | — | | | 800 | |
| Other purchase commitments | | 298 | | | 14 | | | 6 | | | 10 | | | 328 | |
| Transitional tax liability | | 4 | | | 98 | | | 191 | | | — | | | 293 | |
| | | | | | | | | | |
| Other postretirement benefits | | 21 | | | 39 | | | 35 | | | 71 | | | 166 | |
| International and other domestic letters of credit | | 116 | | | 16 | | | 4 | | | 3 | | | 139 | |
| Performance and excise bonds | | 36 | | | 10 | | | 54 | | | — | | | 100 | |
| Guarantees, indemnifications and other commitments | | 26 | | | 3 | | | 5 | | | 10 | | | 44 | |
| Total | | $ | 1,856 | | | $ | 1,162 | | | $ | 1,110 | | | $ | 4,240 | | | $ | 8,368 | |
| | | | | | | | | | |
(1) Includes principal payments and expected interest payments based on the terms of the obligations. |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| Contractual Cash Obligations | | Payments Due by Period | | |
| In millions | | 2018 | | 2019-2020 | | 2021-2022 | | After 2022 | | Total |
| Loans payable | | $ | 57 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 57 |
|
Long-term debt and capital lease obligations (1) | | 169 |
| | 254 |
| | 180 |
| | 2,817 |
| | 3,420 |
|
| Operating leases | | 140 |
| | 188 |
| | 104 |
| | 70 |
| | 502 |
|
| Capital expenditures | | 280 |
| | 30 |
| | — |
| | — |
| | 310 |
|
| Purchase commitments for inventory | | 789 |
| | — |
| | — |
| | — |
| | 789 |
|
| Other purchase commitments | | 262 |
| | 17 |
| | 7 |
| | 16 |
| | 302 |
|
| Transitional tax liability | | 57 |
| | 54 |
| | 77 |
| | 150 |
| | 338 |
|
| Other postretirement benefits | | 29 |
| | 55 |
| | 51 |
| | 108 |
| | 243 |
|
| International and other domestic letters of credit | | 90 |
| | 57 |
| | — |
| | 2 |
| | 149 |
|
| Performance and excise bonds | | 26 |
| | 14 |
| | 61 |
| | 1 |
| | 102 |
|
| Guarantees, indemnifications and other commitments | | 31 |
| | 3 |
| | 7 |
| | 10 |
| | 51 |
|
| Total | | $ | 1,930 |
|
| $ | 672 |
|
| $ | 487 |
|
| $ | 3,174 |
| | $ | 6,263 |
|
___________________________________________________________
| |
(1)
| Includes principal payments and expected interest payments based on the terms of the obligations.
|
The contractual obligations reported above exclude our unrecognized tax benefits of $41$122 million as of December 31, 2017.2020. We are not able to reasonably estimate the period in which cash outflows relating to uncertain tax contingencies could occur. See Note 2,4, "INCOME TAXES," to the Consolidated Financial Statements for additional information. APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
A summary of our significant accounting policies is included in Note 1, "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES," of our Consolidated Financial Statements which discusses accounting policies that we have selected from acceptable alternatives.
Our Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles in the U.S. (GAAP) which often requires 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, including the impacts of COVID-19, 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 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.the Board. We believe our critical accounting estimates include those addressing the estimation ofestimating liabilities for warranty programs, assessing goodwill impairments, accounting for income taxes and pension benefits.
Warranty Programs
We estimate and record a liability for base warranty programs at the time our products are sold. Our estimates are based on historical experience and reflect management's best estimates of expected costs at the time products are sold and subsequent adjustment to those expected costs when actual costs differ. As a result of the uncertainty surrounding the nature and frequency of product recall programs, the liability for such programs is recorded when we commit to a recall action or when a recall becomes probable and estimable, which generally occurs when it is announced.management internally approves or commits to the action. Our warranty liability is generally affected by component failure rates, repair costs and the point of failure within the product life cycle. Future events and circumstances related to these factors could materially change our estimates and require adjustments to our liability. New product launches require a greater use of judgment in developing estimates until historical experience becomes available. Product specific experience is typically available four or five quarters after product launch, with a clear experience trend evident eight quarters after launch. We generally record warranty expense for new products upon shipment using a preceding product's warranty history and a multiplicative factor based upon preceding similar product experience and new product assessment until sufficient new product data is available for warranty estimation. We then use a blend of actual new product experience and preceding product historical experience for several subsequent
quarters, and new product specific experience thereafter. Note 8,12, "PRODUCT WARRANTY LIABILITY," to our Consolidated Financial Statements contains a summary of the activity in our warranty liability account for 2017, 20162020, 2019 and 20152018 including adjustments to pre-existing warranties.
Goodwill Impairment
We are required to make certain subjective and complex judgments in assessing whether a goodwill impairment event has occurred, including assumptions and estimates used to determine the fair value of our reporting units. We test for goodwill impairment at the reporting unit level and our reporting units are the operating segments or the components of operating segments that constitute businesses for which discrete financial information is available and is regularly reviewed by management.
We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it is necessary to perform an annual quantitative goodwill impairment test. We have elected this option on certain reporting units. The following events and circumstances are considered when evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount:
•Macroeconomic conditions, such as a deterioration in general economic conditions, including COVID-19 impacts, fluctuations in foreign exchange rates and/or other developments in equity and credit markets;
•Industry and market considerations, such as a deterioration in the environment in which an entity operates, material loss in market share and significant declines in product pricing;
•Cost factors, such as an increase in raw materials, labor or other costs;
•Overall financial performance, such as negative or declining cash flows or a decline in actual or forecasted revenue;
•Other relevant entity-specific events, such as material changes in management or key personnel and
•Events affecting a reporting unit, such as a change in the composition or carrying amount of its net assets including acquisitions and dispositions.
The examples noted above are not all-inclusive, and we consider other relevant events and circumstances that affect the fair value of a reporting unit in determining whether to perform the quantitative goodwill impairment test.
Our goodwill recoverability assessment is based on our annual strategic planning process. This process includes an extensive review of expectations for the long-term growth of our businesses and forecasted future cash flows. In order to determine the valuation of our reporting units, we use either the market approach or the income approach using a discounted cash flow model. Our income approach method uses a discounted cash flow model in which cash flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate rate of return. Our estimates are based upon our historical experience, our current knowledge from our commercial relationships and available external information about future trends.
The discounted cash flow model requires us to make projections of revenue, gross margin, operating expenses, working capital investment and fixed asset additions for the reporting units over a multi-year period. Additionally, management must estimate a weighted-average cost of capital, which reflects a market rate, for each reporting unit for use as a discount rate. The discounted cash flows are compared to the carrying value of the reporting unit and, if less than the carrying value, the difference is recorded as a goodwill impairment loss. In addition, we also perform a sensitivity analysis to determine how much our forecasts can fluctuate before the fair value of a reporting unit would be lower than its carrying amount. We perform the required procedures as of the end of our fiscal third quarter.
While none of our reporting units recorded a goodwill impairment in 2020, we determined the automated transmission business is our only reporting unit with material goodwill where the estimated fair value does not substantially exceed the carrying value. The estimated fair value of the reporting unit exceeds its carrying amount of $1.1 billion by approximately 18 percent. Total goodwill in this reporting unit is $544 million. Since this reporting unit is made up of only one business, our joint venture with Eaton Corporation plc (Eaton Cummins Automated Transmission Technologies), acquired in 2017, we did not expect the estimated fair value would exceed the carrying value by a significant amount. We valued this reporting unit primarily using an income approach based on its expected future cash flows. The critical assumptions that factored into the valuation are the projected future revenues and EBITDA margins of the business as well as the discount rate used to present value these future cash flows. A 100 basis point increase in the discount rate would result in a 16 percent decline in the fair value of the reporting unit.
Accounting for Income Taxes
We determine our income tax expense using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.basis. Future tax benefits of net operating loss and credit carryforwards are also recognized as deferred tax assets. We evaluate the recoverability of our deferred tax assets each quarter by assessing the likelihood of future profitability and available tax planning strategies that could be implemented to realize our net deferred tax assets. At December 31, 2017,2020, we recorded net deferred tax liabilitiesassets of $85$154 million. The assets included $359$382 million for the value of net operating loss and credit carryforwards. A valuation allowance of $347$346 million was recorded to reduce the tax assets to the net value management believed was more likely than not to be realized. In the event our operating performance deteriorates, future assessments could conclude that a larger valuation allowance will be needed to further reduce the deferred tax assets.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (Tax Legislation). We have not completed our accounting for the tax effects of enactment of the Tax Legislation. We made provisional estimates of the effects on our existing deferred tax balances, the one-time transition tax, and the withholding tax accrued on those earnings not permanently reinvested at December 31, 2017. The final transition impacts of the Tax Legislation may differ from our estimates, possibly materially, due to, among other things, changes in interpretations for the Tax Legislation, any legislative action to address questions that arise because of the Tax Legislation, any changes in accounting standards for income taxes or related interpretations in response to the Tax Legislation, or any updates or changes to estimates the company has utilized to calculate the transition impacts. Final calculations will be completed within the one year measurement period ending December 22, 2018, as required under the rules issued by the SEC. Any change of provisional amounts will be reported in income from continuing operations in the period in which the initial estimates are revised. In addition, we operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. We accrue for the estimated additional tax and interest that may result from tax authorities disputing uncertain tax positions. We have taken and we believe we have made adequate provisions for income taxes for all years that are subject to audit based upon the latest information available. A more complete description of our income taxes and the future benefits of our net operating loss and credit carryforwards is disclosed in Note 2,4, "INCOME TAXES," to our Consolidated Financial Statements.
Pension Benefits
We sponsor a number of pension plans primarilyglobally, with the majority of assets in the U.S. and the U.K. and to a lesser degree in various other countries. In the U.S. and the U.K., we have several major defined benefit plans that are separately funded. We account for our pension programs in accordance with employers' accounting for defined benefit pension and other postretirement plans, under GAAP. GAAPwhich requires that amounts recognized in financial statements be determined using an actuarial basis. As a result, our pension benefit programs are based on a number of statistical and judgmental assumptions that attempt to anticipate future events and are used in calculating the expense and liability related to our plans each year at December 31. These assumptions include discount rates used to value liabilities, assumed rates of return on plan assets, future compensation increases, employee turnover rates, actuarial assumptions relating to retirement age, mortality rates and participant withdrawals. The actuarial assumptions we use may differ significantly from actual results due to changing economic conditions, participant life span and withdrawal rates. These differences may result in a material impact to the amount of net periodic pension cost to be recorded in our Consolidated Financial Statements in the future.
The expected long-term return on plan assets is used in calculating the net periodic pension cost. We considered several factors in developing our expected rate of return on plan assets. The long-term rate of return considers historical returns and expected returns on current and projected asset allocations. Projected returns are based primarily on broad, publicly traded passive fixed income and equity indices and forward-looking estimates of the value added by active investment management. At December 31, 2017,2020, based upon our target asset allocations, it is anticipated that our U.S. investment policy will generate an average annual return over the 10-year30-year projection period equal to or in excess of 6.56.25 percent, approximately 32 percent of the time while returns of 7.0 percent or greater are anticipated 21 percent of the time, including the additional positive returns expected from active investment management.
The one-year return for our U.S. plans was 8.9 percent for 2020. Our U.S. plan assets have averaged annualized returns of 10.59.12 percent over the prior eightten years and resulted in approximately $418$443 million of actuarial gains in accumulated other comprehensive incomeloss (AOCL) in the same period. Based on the historical returns and forward-looking return expectations as plan assets continue to be de-risked, consistent with our investment policy, we believe ancontinuing our investment return assumption of 6.56.25 percent per year in 20182021 for U.S. pension assets is reasonable.
The methodology used to determine the rate of return on pension plan assets in the U.K. was based on establishing an equity-risk premium over current long-term bond yields adjusted based on target asset allocations. At December 31, 2017,2020, based upon our target asset allocations, it is anticipated that our U.K. investment policy will generate an average annual return over the 20-year projection period equal to or in excess of 4.1 percent approximately 50 percent of the time while returns of 4.8 percent or greater are anticipated 25 percent of the time. We expect modest additional positive returns from active investment management.4 percent. The one-year return for our U.K. plans was 4.413.7 percent for 2017, and similar to our U.S. plans, the strong2020. We generated average annualized returns since 2010 have resultedof 9.20 percent over ten years, resulting in approximately $383$724 million of actuarial gains in accumulated other comprehensive income.AOCL. Our strategy with respect to our investments in pension plan assets is to be invested with a long-term outlook. Therefore, the risk and return balance of our asset portfolio should reflect a long-term horizon. Based on the historical returns and forward-looking return expectations as the plan assets continue to be de-risked, we believe ancontinuing our investment return
assumption of 4.0 percent in 20182021 for U.K. pension assets is reasonable. Our pension plan asset allocations at December 31, 20172020 and 20162019 and target allocation for 20182021 are as follows:
| | | | | U.S. Plans | | U.K. Plans | | | U.S. Plans | | U.K. Plans |
| | | Target Allocation | | Percentage of Plan Assets at December 31, | | Target Allocation | | Percentage of Plan Assets at December 31, | | | Target Allocation | | Percentage of Plan Assets at December 31, | | Target Allocation | | Percentage of Plan Assets at December 31, |
| Investment description | | 2018 | | 2017 | | 2016 | | 2018 | 2017 | | 2016 | Investment description | | 2021 | | 2020 | | 2019 | | 2021 | 2020 | | 2019 |
| Liability matching | | 68.0 | % | | 68.3 | % | | 57.8 | % | | 56.5 | % | | 56.1 | % | | 54.6 | % | Liability matching | | 68.0 | % | | 66.0 | % | | 69.2 | % | | 56.5 | % | | 57.0 | % | | 53.4 | % |
| Risk seeking | | 32.0 | % | | 31.7 | % | | 42.2 | % | | 43.5 | % | | 43.9 | % | | 45.4 | % | Risk seeking | | 32.0 | % | | 34.0 | % | | 30.8 | % | | 43.5 | % | | 43.0 | % | | 46.6 | % |
| Total | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Total | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
|
The differences between the actual return on plan assets and expected long-term return on plan assets are recognized in the asset value used to calculate net periodic cost over five years. The table below sets forth the expected return assumptions used to develop our pension cost for the period 2015-20172018-2020 and our expected rate of return for 2018.2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Long-term Expected Return Assumptions |
| | | 2021 | | 2020 | | 2019 | | 2018 |
| U.S. plans | | 6.25 | % | | 6.25 | % | | 6.25 | % | | 6.50 | % |
| U.K. plans | | 4.00 | % | | 4.00 | % | | 4.00 | % | | 4.00 | % |
| | | | | | | | |
|
| | | | | | | | | | | | |
| | | Long-term Expected Return Assumptions |
| | | 2018 | | 2017 | | 2016 | | 2015 |
| U.S. plans | | 6.50 | % | | 7.25 | % | | 7.50 | % | | 7.50 | % |
| U.K. plans | | 4.00 | % | | 4.50 | % | | 4.70 | % | | 5.80 | % |
A lower expected rate of return will increase our net periodic pension cost and reduce profitability.
GAAP for pensionsPension accounting offers various acceptable alternatives to account for the differences that eventually arise between the estimates used in the actuarial valuations and the actual results. It is acceptable to delay or immediately recognize these differences. Under the delayed recognition alternative, changes in pension obligations (including those resulting from plan amendments) and changes in the value of assets set aside to meet those obligations are not recognized in net periodic pension cost as they occur but are recognized initially in accumulated other comprehensive lossAOCL and subsequently amortized as components of net periodic pension cost systematically and gradually over future periods. In addition to this approach, GAAPwe may also allowsadopt immediate recognition of actuarial gains or losses. Immediate recognition introduces volatility in financial results. We have chosen to delay recognition and amortize actuarial differences over future periods. If we adopted the immediate recognition approach, we would record a loss of $864$989 million ($680772 million after-tax) from cumulative actuarial net losses for our U.S. and U.K. pension plans.
The difference between the expected return and the actual return on plan assets is deferred from recognition in our results of operations and under certain circumstances, such as when the difference exceeds 10 percent of the greater of the market value of plan assets or the projected benefit obligation, the difference is amortized over future years of service. This is also true of changes to actuarial assumptions. Under GAAP,the delayed recognition alternative, the actuarial gains and losses are recognized and recorded in accumulated other comprehensive loss.AOCL. At December 31, 2017,2020, we had net pension actuarial losses of $649$714 million and $207$250 million for the U.S. and U.K. pension plans, respectively. As these amounts exceed 10 percent of their respective plan assets, the excess is amortized over the average remaining service lives of participating employees. Net actuarial losses decreased our shareholders' equity by $28$63 million after-tax in 2017.2020. The loss is primarily due to lower discount rates in the U.S. and U.K. and unfavorable foreign currency,U.K, partially offset by strong asset performancereturns in the U.S. and the U.K.
The table below sets forth the net periodic pension cost for the years ended December 31 and our expected cost for 2018.2021.
| | | In millions | | 2018 | | 2017 | | 2016 | | 2015 | In millions | | 2021 | | 2020 | | 2019 | | 2018 |
| Net periodic pension cost | | $ | 79 |
| | $ | 82 |
| | $ | 42 |
| | $ | 63 |
| Net periodic pension cost | | $ | 78 | | | $ | 102 | | | $ | 65 | | | $ | 86 | |
|
We expect 20182021 net periodic pension cost to decrease compared to 2017,2020, primarily due to reduced loss amortizationfavorable actuarial experience and investment returns, partially offset by lower discount rates in the U.S. and U.K., which resulted from strong asset performance, partially offset by lower expected asset returns in the U.S. and U.K. as we de-risk plan trust assets. The increase in net periodic pension cost in 20172020 compared to 20162019 was primarily due to onboarding North American distributors to Cummins pension benefits, a lower expected rate of return in the U.S. and U.K. and lower discount rates in the U.S. and U.K. The decrease in net periodic pension cost in 20162019 compared to 20152018 was due to reduced loss amortizations in the U.S. and U.K. and higher discount rates and favorable actuarial experience in the U.S. and U.K., partially offset by a lower expected asset returnsrate of return in the U.K. as we de-risked plan trust assets. Another key assumption used in the development of the net periodic pension cost is the discount rate. U.S.
The weighted-average discount rates used to develop our net periodic pension cost are set forth in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Discount Rates |
| | | 2021 | | 2020 | | 2019 | | 2018 |
| U.S. plans | | 2.62 | % | | 3.36 | % | | 4.36 | % | | 3.66 | % |
| U.K. plans | | 1.50 | % | | 2.00 | % | | 2.80 | % | | 2.55 | % |
| | | | | | | | |
|
| | | | | | | | | | | | |
| | | Discount Rates |
| | | 2018 | | 2017 | | 2016 | | 2015 |
| U.S. plans | | 3.66 | % | | 4.12 | % | | 4.47 | % | | 4.07 | % |
| U.K. plans | | 2.55 | % | | 2.70 | % | | 3.95 | % | | 3.80 | % |
The discount rate enables us to state expected future cash payments for benefits as a present value on the measurement date. The guidelines for setting this rate are discussed in GAAP which suggestssuggest the use of a high-quality corporate bond rate. We used bond information provided by Moody's Investor Services, Inc. and Standard & Poor's Rating Services. All bonds used to develop our hypothetical portfolio in the U.S. and U.K. were deemed high-quality, non-callable bonds (Aa or better) at December 31, 2017,2020, by at least one of the bond rating agencies.
Our model called for projected payments until near extinction for the U.S. and the U.K. For both countries, our model matches the present value of the plan's projected benefit payments to the market value of the theoretical settlement bond portfolio. A single equivalent discount rate is determined to align the present value of the required cash flow with the value of the bond portfolio. The resulting discount rate is reflective of both the current interest rate environment and the plan's distinct liability characteristics.
The table below sets forth the estimated impact on our 20182021 net periodic pension cost relative to a change in the discount rate and a change in the expected rate of return on plan assets.
|
| | | |
| In millions | Impact on Pension Cost Increase/(Decrease) |
| Discount rate used to value liabilities | |
| 0.25 percent increase | $ | (16 | ) |
| 0.25 percent decrease | 17 |
|
| Expected rate of return on assets | |
| 1 percent increase | (48 | ) |
| 1 percent decrease | 48 |
|
| | | | | | | | |
| In millions | | Impact on Pension Cost Increase/(Decrease) |
| Discount rate used to value liabilities | | |
| 0.25 percent increase | | $ | (19) | |
| 0.25 percent decrease | | 19 | |
| Expected rate of return on assets | | |
| 1 percent increase | | (53) | |
| 1 percent decrease | | 53 | |
| | |
The above sensitivities reflect the impact of changing one assumption at a time. A higher discount rate decreases the plan obligations and decreases our net periodic pension cost. A lower discount rate increases the plan obligations and increases our net periodic pension cost. It should be noted that economic factors and conditions often affect multiple assumptions simultaneously and the effects of changes in key assumptions are not necessarily linear. Note 10, "PENSION13, "PENSIONS AND OTHER POSTRETIREMENT BENEFITS," to our Consolidated Financial Statements provides a summary of our pension benefit plan activity, the funded status of our plans and the amounts recognized in our Consolidated Financial Statements.
RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 1, "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES", to theour Consolidated Financial Statements for additional information.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial risk resulting from volatility in foreign exchange rates, interest rates and commodity prices. This risk is closely monitored and managed through the use of financial derivative instruments including foreign currency forward contracts, interest rate swaps, commodity swap contracts, zero-cost collars and physical forward contracts. These instruments, as further described below, are accounted for as cash flow or fair value hedges or as economic hedges not designated as hedges for accounting purposes. Financial derivatives are used expressly for hedging purposes and under no circumstances are they used for speculative purposes. When material, we adjust the estimated fair value of our derivative contracts for counterparty or our credit risk. None of our derivative instruments are subject to collateral requirements. Substantially all of our derivative contracts are subject to master netting arrangements, which provide us with the option to settle certain contracts on a net basis when they settle on the same day with the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event.
We also enter into physical forward contracts with certain suppliers to purchase minimum volumes of commodities at contractually stated prices for various periods. These arrangements, as further described below, enable us to fix the prices of portions of our normal purchases of these commodities, which otherwise are subject to market volatility.
The following describes our risk exposures and provides the results of a sensitivity analysis performed at December 31, 2017.2020. The sensitivity analysis assumes instantaneous, parallel shifts in foreign currency exchange rates and commodity prices.
Foreign Exchange Rate Risk
As a result of our international business presence, we are exposed to foreign currency exchange rate risks. We transact business in foreign currencies and, as a result, our income experiences some volatility related to movements in foreign currency exchange rates. To help manage our exposure to exchange rate volatility, we use foreign currency forward contracts on a regular basis to hedge forecasted intercompany and third-party sales and purchases denominated in non-functional currencies. Our internal policy allows for managing anticipated foreign currency cash flows for up to 18 months.flow hedges generally mature within two years. These foreign currency forward contracts are designated and qualify as foreign currency cash flow hedges under GAAP.hedges. For the years ended December 31, 20172020 and 2016,2019, there were no circumstances that would have resulted in the discontinuance of a foreign currency cash flow hedge.
To minimize the income volatility resulting from the remeasurement of net monetary assets and payables denominated in a currency other than the functional currency, we enter into foreign currency forward contracts, which are considered economic hedges. The objective is to offset the gain or loss from remeasurement with the gain or loss from the fair market valuation of the forward contract. These derivative instruments are not designated as hedges under GAAP.hedges.
At December 31, 2017,2020, the potential gain or loss in the fair value of our outstanding foreign currency contracts, assuming a hypothetical 10 percent fluctuation in the currencies of such contracts, would be approximately $101$10 million. The sensitivity analysis of the effects of changes in foreign currency exchange rates assumes the notional value to remain constant for the next 12 months. The analysis ignores the impact of foreign exchange movements on our competitive position and potential changes in sales levels. Any change in the value of the contracts, real or hypothetical, would be significantly offset by an inverse change in the value of the underlying hedged items.
Interest Rate Risk
We are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through the use of interest rate swaps. The objective of the swaps is to more effectively balance our borrowing costs and interest rate risk. See Note 11, "DEBT," "Interest Rate Risk" section for additional information.
We have a series of interest rate swaps to effectively convert our September 2013, $500 million debt issue, due in 2023, from a fixed rate of 3.65 percent to a floating rate equal to the one-month LIBOR plus a spread. The terms of the swaps mirror those of the debt, with interest paid semi-annually. The swaps were designated, and will be accounted for, as fair value hedges under GAAP. The gain or loss on these derivative instruments, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in current income as “Interest expense.” The net swap settlements that accrue each period are also reported in interest expense.
The following table summarizes these gains and losses for the years presented below:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| In millions | | 2017 | | 2016 | | 2015 |
| Income Statement Classification | | Gain/(Loss) on Swaps | | Gain/(Loss) on Borrowings | | Gain/(Loss) on Swaps | | Gain/(Loss) on Borrowings | | Gain/(Loss) on
Swaps | | Gain/(Loss) on
Borrowings |
Interest expense (1) | | $ | (7 | ) | | $ | 8 |
| | $ | (8 | ) | | $ | 12 |
| | $ | 6 |
| | $ | (2 | ) |
(1) The difference between the gain/(loss) on swaps and borrowings represents hedge ineffectiveness.
Commodity Price Risk
We are exposed to fluctuations in commodity prices due to contractual agreements with component suppliers. In order to protect ourselves against future price volatility and, consequently, fluctuations in gross margins, we periodically enter into commodity swap, forward and zero-cost collar contracts with designated banks and other counterparties to fix the cost of certain raw material purchases with the objective of minimizing changes in inventory cost due to market price fluctuations. TheseCommencing in 2019, these commodity swaps are designated and qualify as cash flow hedges. At December 31, 2020, realized and unrealized gains and losses related to these hedges were not material to our financial statements. The physical forward contracts qualify for the normal purchases scope exceptions and are treated as purchase commitments. The commodity zero-cost collar contracts that represent an economic hedge, but are not designated for hedge accounting, and are marked to market through earnings. Our internal policy allows for managing our cash flow hedges for up to three years.
At December 31, 2017,2020, the potential gain or loss related to the outstanding commodity zero-cost collar contracts, assuming a hypothetical 10 percent fluctuation in the price of such commodities, would be approximately $3$1 million. The sensitivity analysis of the effects of changes in commodity prices assumes the notional value to remain constant for the next 12 months. The analysis ignores the impact of commodity price movements on our competitive position and potential changes in sales levels. Any change in the value of the zero-cost collar contracts, real or hypothetical, would be significantly offset by an inverse change in the value of the underlying hedged items.
We also limit our exposure to commodity price risk by entering into purchasing arrangements to fix the price of certain volumes of platinum and palladium expected to be used in our products. We enter into physical forward contracts with suppliers of platinum and palladium to purchase some volumes of the commodities at contractually stated prices for various periods, generally not exceeding one year.less than two years. These arrangements enable us to fix the prices of a portion of our purchases of these commodities, which otherwise are subject to market volatility.
ITEM 8. Financial Statements and Supplementary Data
Index to Financial Statements
•Management's Report to Shareholders
•Report of Independent Registered Public Accounting Firm
•Consolidated Statements of Net Incomefor the years ended December 31, 2020, 2019 and 2018
•Consolidated Statements of Comprehensive Incomefor the years ended December 31, 2020, 2019 and 2018
•Consolidated Balance Sheetsat December 31, 2020 and 2019
•Consolidated Statements of Cash Flowsfor the years ended December 31, 2020, 2019 and 2018
•Consolidated Statements of Changes in Equityfor the years ended December 31, 2020, 2019 and 2018
•Notes to the Consolidated Financial Statements
| | | | | | | | | | | | | | |
•NOTE | Consolidated Statements of Income
| for the years ended December 31, 2017, 2016 and 20151 |
| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
•NOTE | Consolidated Statements of Comprehensive Income
| for the years ended December 31, 2017, 2016 and 20152 |
| REVENUE FROM CONTRACTS WITH CUSTOMERS |
•NOTE | Consolidated Balance Sheets
| at December 31, 2017 and 20163 |
| |
• | Consolidated Statements of Cash FlowsINVESTMENTS IN EQUITY INVESTEESfor the years ended December 31, 2017, 2016 and 2015
|
| |
• | Consolidated Statements of Changes in Equityfor the years ended December 31, 2017, 2016 and 2015
|
Notes to Consolidated Financial Statements
|
| | |
NOTE 1 | | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
NOTE 2 | | 4 | | INCOME TAXES |
NOTE 3 | | INVESTMENTS IN EQUITY INVESTEES5 | | MARKETABLE SECURITIES |
NOTE 4 | | MARKETABLE SECURITIES6 | | INVENTORIES |
NOTE 5 | | INVENTORIES |
NOTE 67 | | PROPERTY, PLANT AND EQUIPMENT |
NOTE 7 | | 8 | | LEASES |
| NOTE | | 9 | | GOODWILL AND OTHER INTANGIBLE ASSETS |
NOTE 8 | | 10 | | SUPPLEMENTAL BALANCE SHEET DATA |
| NOTE | | 11 | | DEBT |
| NOTE | | 12 | | PRODUCT WARRANTY LIABILITY |
NOTE 9 | | DEBT |
NOTE 1013 | | PENSIONPENSIONS AND OTHER POSTRETIREMENT BENEFITS |
NOTE 11 | | OTHER LIABILITIES AND DEFERRED REVENUE |
NOTE 1214 | | COMMITMENTS AND CONTINGENCIES |
NOTE 13 | | 15 | | CUMMINS INC. SHAREHOLDERS' EQUITY |
NOTE 14 | | 16 | | ACCUMULATED OTHER COMPREHENSIVE LOSS |
NOTE 15 | | 17 | | NONCONTROLLING INTERESTS |
| NOTE | | 18 | | STOCK INCENTIVE AND STOCK OPTION PLANS |
NOTE 16 | | NONCONTROLLING INTERESTS19 | | EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. |
NOTE 17 | | EARNINGS PER SHARE20 | | ACQUISITIONS |
NOTE 18 | | ACQUISITIONS | | |
NOTE 19 | | IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETS21 | | RESTRUCTURING ACTIONS |
NOTE 20 | | RESTRUCTURING ACTIONS AND OTHER CHARGES22 | | OPERATING SEGMENTS |
NOTE 21 | | OPERATING SEGMENTS | | |
| | | | |
•Selected Quarterly Financial Data (Unaudited)
MANAGEMENT'S REPORT TO SHAREHOLDERS
Management's Report on Financial Statements and Practices
The accompanying Consolidated Financial Statements of Cummins Inc. were prepared by management, which is responsible for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles and include amounts that are based on management's best judgments and estimates. The other financial information included in the annual report is consistent with that in the financial statements.
Management also recognizes its responsibility for conducting our affairs according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in key policy statements issued from time to time regarding, among other things, conduct of its business activities within the laws of the host countries in which we operate, within Thethe Foreign Corrupt Practices Act and potentially conflicting interests of its employees. We maintain a systematic program to assess compliance with these policies.
To comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we designed and implemented a structured and comprehensive compliance process to evaluate our internal control over financial reporting across the enterprise.
Management's Report on Internal Control Over Financial Reporting
The management of Cummins Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of our Consolidated Financial Statementsfor external purposes in accordance with accounting principles generally accepted in the United States of America.
Management assessed the effectiveness of our internal control over financial reporting and concluded it was effective as of December 31, 2017.2020. In making its assessment, management utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013).
The effectiveness of our internal control over financial reporting as of December 31, 2017,2020, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Officer Certifications
Please refer to Exhibits 31(a) and 31(b) attached to this report for certifications required under Section 302 of the Sarbanes-Oxley Act of 2002.
|
| | | | | | | |
| /s/ N. THOMAS LINEBARGER | | /s/ PATRICK J. WARDMARK A. SMITH |
| Chairman and Chief Executive Officer | | Vice President and Chief Financial Officer |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Cummins Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Cummins Inc. and its subsidiaries (the “Company”) as of December 31, 20172020 and 2016,2019, and the related consolidated statements of net income, comprehensive income, cash flows, and changes in equity, and cash flows for each of the three years in the period ended December 31, 2017,2020, including the related notes (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)(COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 2020and 2016,2019, and the results of their itsoperations and their itscash flows for each of the three years in the period ended December 31, 2017 2020in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control - Integrated Framework (2013)issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management'sManagement’s Report on Internal Control overOver Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment - Automated Transmission Reporting Unit
As described in Notes 1 and 9 to the consolidated financial statements, the Company’s consolidated goodwill balance was $1,293 million, and the goodwill associated with the Automated Transmission reporting unit was $544 million as of December 31, 2020. Management performs an impairment test as of the end of the fiscal third quarter each year, or more frequently if events or circumstances indicate the fair value of a reporting unit is less than its carrying amount. Management performs the annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying value. Management’s valuation method is an income approach using a discounted cash flow model. The discounted cash flow model requires projections of revenue, gross margin, operating expenses, working capital investment and fixed asset additions for the Automated Transmission reporting unit over a multi-year period, and a discount rate based upon a weighted-average cost of capital.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment for the Automated Transmission reporting unit is a critical audit matter are (i) the significant judgment by management when developing the fair value measurement of the reporting unit; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating audit evidence relating to management’s cash flow projections and significant assumptions related to projected revenue, projected gross margin, and the discount rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Automated Transmission reporting unit. These procedures also included, among others, testing management’s process for developing the fair value estimate. This included evaluating the appropriateness of the discounted cash flow model, testing the completeness, accuracy, and relevance of underlying data used in the model, and evaluating the reasonableness of significant assumptions used by management related to projected revenue, projected gross margin, and the discount rate. Evaluating management assumptions related to projected revenue and projected gross margin involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the Automated Transmission reporting unit, and (ii) the consistency with external market and industry data. Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the Company’s discounted cash flow model and reasonableness of the discount rate assumption.
Base Product Warranty
As described in Notes 1 and 12 to the consolidated financial statements, management estimates and records a liability for base product warranty programs at the time products are sold. As of December 31, 2020, the accrued liability for base product warranty programs was $1,346 million. As disclosed by management, the estimate for one of the base product warranty programs is based on historical experience and reflects management's best estimates of expected costs at the time products are sold and subsequent adjustment to those expected costs when actual costs differ. Management’s estimate of base product warranty liability is generally affected by component failure rates, repair costs, and the point of failure within the product life cycle.
The principal considerations for our determination that performing procedures relating to the base product warranty liabilityis a critical audit matter are (i) the significant judgment by management when determining the estimate for the base product warranty liability; and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s
estimate and significant assumptions related to component failure rates, repair costs, and the point of failure within the product life cycle.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s estimate for the base product warranty liability related to the determination of component failure rates, repair costs, and the point of failure within the product life cycle. These procedures alsoincluded, among others, testing management’s process for determining the base product warranty liability. Procedures related to management’s estimate included evaluating the appropriateness of the method used by management, the completeness, accuracy, and relevance of underlying data used in the warranty estimate, and the reasonableness of significant assumptions used by management in estimating the base product warranty liability related to the component failure rates, repair costs, and the point of failure within the product life cycle. Evaluating management’s assumptions relating to the component failure rates, repair costs, and the point of failure within the product life cycle involved evaluating whether the assumptions were reasonable considering historical product experience of the Company.
/s/PricewaterhouseCoopers LLP
Indianapolis, INIndiana
February 14, 201810, 2021
We have served as the Company’s auditor since 2002.
CUMMINS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| In millions, except per share amounts | | 2020 | | 2019 | | 2018 |
NET SALES (a) (Note 2) | | $ | 19,811 | | | $ | 23,571 | | | $ | 23,771 | |
| Cost of sales | | 14,917 | | | 17,591 | | | 18,034 | |
| GROSS MARGIN | | 4,894 | | | 5,980 | | | 5,737 | |
| | | | | | |
| OPERATING EXPENSES AND INCOME | | | | | | |
| Selling, general and administrative expenses | | 2,125 | | | 2,454 | | | 2,437 | |
| Research, development and engineering expenses | | 906 | | | 1,001 | | | 902 | |
| Equity, royalty and interest income from investees (Note 3) | | 452 | | | 330 | | | 394 | |
| | | | | | |
| | | | | | |
| Restructuring actions (Note 21) | | 0 | | | 119 | | | 0 | |
| Other operating expense, net | | (46) | | | (36) | | | (6) | |
| OPERATING INCOME | | 2,269 | | | 2,700 | | | 2,786 | |
| | | | | | |
| | | | | | |
| Interest expense (Note 11) | | 100 | | | 109 | | | 114 | |
| Other income, net | | 169 | | | 243 | | | 81 | |
| INCOME BEFORE INCOME TAXES | | 2,338 | | | 2,834 | | | 2,753 | |
| | | | | | |
| Income tax expense (Note 4) | | 527 | | | 566 | | | 566 | |
| CONSOLIDATED NET INCOME | | 1,811 | | | 2,268 | | | 2,187 | |
| | | | | | |
| Less: Net income attributable to noncontrolling interests | | 22 | | | 8 | | | 46 | |
| NET INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 1,789 | | | $ | 2,260 | | | $ | 2,141 | |
| | | | | | |
| EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. (Note 19) | | | | | | |
| Basic | | $ | 12.07 | | | $ | 14.54 | | | $ | 13.20 | |
| Diluted | | $ | 12.01 | | | $ | 14.48 | | | $ | 13.15 | |
| | | | | | |
(a)Includes sales to nonconsolidated equity investees of $1,283 million, $1,191 million and $1,267 million for the years ended December 31, 2020, 2019 and 2018, respectively. |
| | | | | | |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| In millions, except per share amounts | | 2017 | | 2016 | | 2015 |
NET SALES (a) | | $ | 20,428 |
| | $ | 17,509 |
| | $ | 19,110 |
|
| Cost of sales | | 15,338 |
| | 13,057 |
| | 14,163 |
|
| GROSS MARGIN | | 5,090 |
| | 4,452 |
| | 4,947 |
|
| OPERATING EXPENSES AND INCOME | | | | | | |
| Selling, general and administrative expenses | | 2,390 |
| | 2,046 |
| | 2,092 |
|
| Research, development and engineering expenses | | 752 |
| | 636 |
| | 735 |
|
| Equity, royalty and interest income from investees (Note 3) | | 357 |
| | 301 |
| | 315 |
|
| Loss contingency (Note 12) | | 5 |
| | 138 |
| | 60 |
|
| Impairment of light-duty diesel assets (Note 19) | | — |
| | — |
| | 211 |
|
| Restructuring actions and other charges (Note 20) | | — |
| | — |
| | 90 |
|
| Other operating income (expense), net | | 65 |
| | (5 | ) | | (17 | ) |
| OPERATING INCOME | | 2,365 |
| | 1,928 |
| | 2,057 |
|
| Interest income | | 18 |
| | 23 |
| | 24 |
|
| Interest expense (Note 9) | | 81 |
| | 69 |
| | 65 |
|
| Other income, net | | 63 |
| | 48 |
| | 9 |
|
| INCOME BEFORE INCOME TAXES | | 2,365 |
| | 1,930 |
| | 2,025 |
|
| Income tax expense (Note 2) | | 1,371 |
| | 474 |
| | 555 |
|
| CONSOLIDATED NET INCOME | | 994 |
| | 1,456 |
| | 1,470 |
|
| Less: Net (loss) income attributable to noncontrolling interests (Note 16) | | (5 | ) | | 62 |
| | 71 |
|
| NET INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 999 |
| | $ | 1,394 |
| | $ | 1,399 |
|
| | | | | | | |
| EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC. (Note 17) | | | | | | |
| Basic | | $ | 5.99 |
| | $ | 8.25 |
| | $ | 7.86 |
|
| Diluted | | $ | 5.97 |
| | $ | 8.23 |
| | $ | 7.84 |
|
| |
(a)
| Includes sales to nonconsolidated equity investees of $1,174 million, $1,028 million and $1,209 million for the years ended December 31, 2017, 2016 and 2015, respectively. |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | Years ended December 31, | | | Years ended December 31, |
| In millions | | 2017 | | 2016 | | 2015 | In millions | | 2020 | | 2019 | | 2018 |
| CONSOLIDATED NET INCOME | | $ | 994 |
| | $ | 1,456 |
| | $ | 1,470 |
| CONSOLIDATED NET INCOME | | $ | 1,811 | | | $ | 2,268 | | | $ | 2,187 | |
| Other comprehensive income (loss), net of tax (Note 14) | | | | | | | |
| Other comprehensive income (loss), net of tax (Note 16) | | Other comprehensive income (loss), net of tax (Note 16) | | | |
| Change in pension and other postretirement defined benefit plans | | (4 | ) | | (31 | ) | | 15 |
| Change in pension and other postretirement defined benefit plans | | (1) | | | (63) | | | 18 | |
| Foreign currency translation adjustments | | 335 |
| | (448 | ) | | (305 | ) | Foreign currency translation adjustments | | 71 | | | (152) | | | (356) | |
| Unrealized gain (loss) on marketable securities | | 2 |
| | 1 |
| | (1 | ) | |
| Unrealized gain (loss) on derivatives | | 5 |
| | (12 | ) | | 6 |
| |
| | Unrealized (loss) gain on derivatives | | Unrealized (loss) gain on derivatives | | (34) | | | (11) | | | 5 | |
| Total other comprehensive income (loss), net of tax | | 338 |
| | (490 | ) | | (285 | ) | Total other comprehensive income (loss), net of tax | | 36 | | | (226) | | | (333) | |
| COMPREHENSIVE INCOME | | 1,332 |
| | 966 |
| | 1,185 |
| COMPREHENSIVE INCOME | | 1,847 | | | 2,042 | | | 1,854 | |
| Less: Comprehensive income attributable to noncontrolling interests | | 15 |
| | 45 |
| | 56 |
| Less: Comprehensive income attributable to noncontrolling interests | | 12 | | | 3 | | | 17 | |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 1,317 |
| | $ | 921 |
| | $ | 1,129 |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 1,835 | | | $ | 2,039 | | | $ | 1,837 | |
The accompanying notes are an integral part of our Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | December 31, | | December 31, |
| In millions, except par value | | 2017 | | 2016 | In millions, except par value | | 2020 | | 2019 |
| ASSETS | | | | | ASSETS | | | | |
| Current assets | | | | | Current assets | | | | |
| Cash and cash equivalents | | $ | 1,369 |
| | $ | 1,120 |
| Cash and cash equivalents | | $ | 3,401 | | | $ | 1,129 | |
| Marketable securities (Note 4) | | 198 |
| | 260 |
| |
| Marketable securities (Note 5) | | Marketable securities (Note 5) | | 461 | | | 341 | |
| Total cash, cash equivalents and marketable securities | | 1,567 |
| | 1,380 |
| Total cash, cash equivalents and marketable securities | | 3,862 | | | 1,470 | |
| Accounts and notes receivable, net | | | | | Accounts and notes receivable, net | |
| Trade and other | | 3,311 |
| | 2,803 |
| Trade and other | | 3,440 | | | 3,387 | |
| Nonconsolidated equity investees | | 307 |
| | 222 |
| Nonconsolidated equity investees | | 380 | | | 283 | |
| Inventories (Note 5) | | 3,166 |
| | 2,675 |
| |
| Inventories (Note 6) | | Inventories (Note 6) | | 3,425 | | | 3,486 | |
| Prepaid expenses and other current assets | | 577 |
| | 627 |
| Prepaid expenses and other current assets | | 790 | | | 761 | |
| Total current assets | | 8,928 |
| | 7,707 |
| Total current assets | | 11,897 | | | 9,387 | |
| Long-term assets | | | | | Long-term assets | | | | |
| Property, plant and equipment, net (Note 6) | | 3,927 |
| | 3,800 |
| |
| Property, plant and equipment, net (Note 7) | | Property, plant and equipment, net (Note 7) | | 4,255 | | | 4,245 | |
| Investments and advances related to equity method investees (Note 3) | | 1,156 |
| | 946 |
| Investments and advances related to equity method investees (Note 3) | | 1,441 | | | 1,237 | |
| Goodwill (Note 7) | | 1,082 |
| | 480 |
| |
| Other intangible assets, net (Note 7) | | 973 |
| | 332 |
| |
| Pension assets (Note 10) | | 1,043 |
| | 731 |
| |
| Other assets | | 966 |
| | 1,015 |
| |
| Goodwill (Note 9) | | Goodwill (Note 9) | | 1,293 | | | 1,286 | |
| Other intangible assets, net (Note 9) | | Other intangible assets, net (Note 9) | | 963 | | | 1,003 | |
| | Pension assets (Note 13) | | Pension assets (Note 13) | | 1,042 | | | 1,001 | |
| Other assets (Note 10) | | Other assets (Note 10) | | 1,733 | | | 1,578 | |
| Total assets | | $ | 18,075 |
|
| $ | 15,011 |
| Total assets | | $ | 22,624 | | | $ | 19,737 | |
| | | | | | | | | |
| LIABILITIES | | | | | LIABILITIES | | | | |
| Current liabilities | | | | | Current liabilities | | | | |
| Accounts payable (principally trade) | | $ | 2,579 |
| | $ | 1,854 |
| Accounts payable (principally trade) | | $ | 2,820 | | | $ | 2,534 | |
| Loans payable (Note 9) | | 57 |
| | 41 |
| |
| Commercial paper (Note 9) | | 298 |
| | 212 |
| |
| Loans payable (Note 11) | | Loans payable (Note 11) | | 169 | | | 100 | |
| Commercial paper (Note 11) | | Commercial paper (Note 11) | | 323 | | | 660 | |
| Accrued compensation, benefits and retirement costs | | 811 |
| | 412 |
| Accrued compensation, benefits and retirement costs | | 484 | | | 560 | |
| Current portion of accrued product warranty (Note 8) | | 454 |
| | 333 |
| |
| Current portion of deferred revenue | | 500 |
| | 468 |
| |
| Other accrued expenses | | 915 |
| | 970 |
| |
| Current maturities of long-term debt (Note 9) | | 63 |
| | 35 |
| |
| Current portion of accrued product warranty (Note 12) | | Current portion of accrued product warranty (Note 12) | | 674 | | | 803 | |
| Current portion of deferred revenue (Note 2) | | Current portion of deferred revenue (Note 2) | | 691 | | | 533 | |
| | Other accrued expenses (Note 10) | | Other accrued expenses (Note 10) | | 1,112 | | | 1,039 | |
| Current maturities of long-term debt (Note 11) | | Current maturities of long-term debt (Note 11) | | 62 | | | 31 | |
| Total current liabilities | | 5,677 |
| | 4,325 |
| Total current liabilities | | 6,335 | | | 6,260 | |
| Long-term liabilities | | | | | Long-term liabilities | | | | |
| Long-term debt (Note 9) | | 1,588 |
| | 1,568 |
| |
| Postretirement benefits other than pensions (Note 10) | | 289 |
| | 329 |
| |
| Pensions (Note 10) | | 330 |
| | 326 |
| |
| Other liabilities and deferred revenue (Note 11) | | 2,027 |
| | 1,289 |
| |
| Long-term debt (Note 11) | | Long-term debt (Note 11) | | 3,610 | | | 1,576 | |
| Pensions and other postretirement benefits (Note 13) | | Pensions and other postretirement benefits (Note 13) | | 630 | | | 591 | |
| Accrued product warranty (Note 12) | | Accrued product warranty (Note 12) | | 672 | | | 645 | |
| Deferred revenue (Note 2) | | Deferred revenue (Note 2) | | 840 | | | 821 | |
| Other liabilities (Note 10) | | Other liabilities (Note 10) | | 1,548 | | | 1,379 | |
| Total liabilities | | $ | 9,911 |
| | $ | 7,837 |
| Total liabilities | | $ | 13,635 | | | $ | 11,272 | |
| | | | | | | | | |
| Commitments and contingencies (Note 12) | |
|
| |
|
| |
| Commitments and contingencies (Note 14) | | Commitments and contingencies (Note 14) | | 0 | | 0 |
| | | | | | |
| EQUITY | | | | | EQUITY | |
| Cummins Inc. shareholders’ equity (Note 13) | | | | | |
| Cummins Inc. shareholders’ equity (Note 15) | | Cummins Inc. shareholders’ equity (Note 15) | | | | |
| Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued | | $ | 2,210 |
| | $ | 2,153 |
| Common stock, $2.50 par value, 500 shares authorized, 222.4 and 222.4 shares issued | | $ | 2,404 | | | $ | 2,346 | |
| Retained earnings | | 11,464 |
| | 11,040 |
| Retained earnings | | 15,419 | | | 14,416 | |
| Treasury stock, at cost, 56.7 and 54.2 shares | | (4,905 | ) | | (4,489 | ) | |
| Common stock held by employee benefits trust, at cost, 0.5 and 0.7 shares | | (7 | ) | | (8 | ) | |
| Accumulated other comprehensive loss (Note 14) | | (1,503 | ) | | (1,821 | ) | |
| Treasury stock, at cost, 74.8 and 71.7 shares | | Treasury stock, at cost, 74.8 and 71.7 shares | | (7,779) | | | (7,225) | |
| Common stock held by employee benefits trust, at cost, 0 and 0.2 shares | | Common stock held by employee benefits trust, at cost, 0 and 0.2 shares | | 0 | | | (2) | |
| Accumulated other comprehensive loss (Note 16) | | Accumulated other comprehensive loss (Note 16) | | (1,982) | | | (2,028) | |
| | Total Cummins Inc. shareholders’ equity | | 7,259 |
| | 6,875 |
| Total Cummins Inc. shareholders’ equity | | 8,062 | | | 7,507 | |
| Noncontrolling interests (Note 16) | | 905 |
| | 299 |
| |
| Noncontrolling interests (Note 17) | | Noncontrolling interests (Note 17) | | 927 | | | 958 | |
| Total equity | | $ | 8,164 |
| | $ | 7,174 |
| Total equity | | $ | 8,989 | | | $ | 8,465 | |
| Total liabilities and equity | | $ | 18,075 |
| | $ | 15,011 |
| Total liabilities and equity | | $ | 22,624 | | | $ | 19,737 | |
The accompanying notes are an integral part of our Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | Years ended December 31, | | | Years ended December 31, |
| In millions | | 2017 | | 2016 | | 2015 | In millions | | 2020 | | 2019 | | 2018 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Consolidated net income | | $ | 994 |
| | $ | 1,456 |
| | $ | 1,470 |
| Consolidated net income | | $ | 1,811 | | | $ | 2,268 | | | $ | 2,187 | |
| Adjustments to reconcile consolidated net income to net cash provided by operating activities | | | | | | | Adjustments to reconcile consolidated net income to net cash provided by operating activities | | | | | | |
| Impact of tax legislation, net (Note 2) | | 820 |
| | — |
| | — |
| |
| | Depreciation and amortization | | 583 |
| | 530 |
| | 514 |
| Depreciation and amortization | | 673 | | | 672 | | | 611 | |
| Gains on fair value adjustment for consolidated investees (Note 18) | | — |
| | (15 | ) | | (18 | ) | |
| Deferred income taxes (Note 2) | | (54 | ) | | 50 |
| | (108 | ) | |
| Equity in income of investees, net of dividends (Note 3) | | (123 | ) | | (46 | ) | | (36 | ) | |
| Pension contributions in excess of expense (Note 10) | | (161 | ) | | (92 | ) | | (127 | ) | |
| Other post retirement benefits payments in excess of expense (Note 10) | | (5 | ) | | (25 | ) | | (23 | ) | |
| Stock-based compensation expense (Note 15) | | 41 |
| | 32 |
| | 24 |
| |
| Loss contingency charges, net of payments (Note 12) | | 5 |
| | 122 |
| | 60 |
| |
| Impairment of light-duty diesel assets (Note 19) | | — |
| | — |
| | 211 |
| |
| Restructuring charges and other actions, net of cash payments (Note 20) | | — |
| | (59 | ) | | 64 |
| |
| Proceeds from corporate owned life insurance | | (52 | ) | | (22 | ) | | 6 |
| |
| Translation and hedging activities | | 71 |
| | (55 | ) | | 26 |
| |
| | Deferred income taxes (Note 4) | | Deferred income taxes (Note 4) | | 7 | | | (4) | | | (238) | |
| Equity in income of investees, net of dividends | | Equity in income of investees, net of dividends | | (105) | | | (14) | | | (90) | |
| Pension and OPEB expense (Note 13) | | Pension and OPEB expense (Note 13) | | 108 | | | 75 | | | 97 | |
| | Pension contributions and OPEB payments (Note 13) | | Pension contributions and OPEB payments (Note 13) | | (121) | | | (150) | | | (67) | |
| Share-based compensation expense (Note 18) | | Share-based compensation expense (Note 18) | | 31 | | | 49 | | | 53 | |
| | Restructuring actions, net of cash payments (Note 21) | | Restructuring actions, net of cash payments (Note 21) | | (110) | | | 115 | | | 0 | |
| | (Gain) loss on corporate owned life insurance | | (Gain) loss on corporate owned life insurance | | (57) | | | (61) | | | 26 | |
| Foreign currency remeasurement and transaction exposure | | Foreign currency remeasurement and transaction exposure | | 2 | | | (105) | | | (46) | |
| Changes in current assets and liabilities, net of acquisitions | | | | | | | Changes in current assets and liabilities, net of acquisitions | |
| Accounts and notes receivable | | (508 | ) | | (265 | ) | | 103 |
| Accounts and notes receivable | | (51) | | | 195 | | | (363) | |
| Inventories | | (407 | ) | | (4 | ) | | 150 |
| Inventories | | 46 | | | 291 | | | (695) | |
| Other current assets | | (12 | ) | | 14 |
| | (151 | ) | Other current assets | | (39) | | | (95) | | | (49) | |
| Accounts payable | | 639 |
| | 188 |
| | (130 | ) | Accounts payable | | 288 | | | (310) | | | 302 | |
| Accrued expenses | | 378 |
| | (195 | ) | | (226 | ) | Accrued expenses | | 121 | | | (112) | | | 378 | |
| Changes in other liabilities and deferred revenue | | 241 |
| | 200 |
| | 292 |
| |
| Changes in other liabilities | | Changes in other liabilities | | 189 | | | 240 | | | 108 | |
| Other, net | | (173 | ) | | 125 |
| | (36 | ) | Other, net | | (71) | | | 127 | | | 164 | |
| Net cash provided by operating activities | | 2,277 |
| | 1,939 |
| | 2,065 |
| Net cash provided by operating activities | | 2,722 | | | 3,181 | | | 2,378 | |
| | CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES | | | | | |
| Capital expenditures | | (506 | ) | | (531 | ) | | (744 | ) | Capital expenditures | | (528) | | | (700) | | | (709) | |
| Investments in internal use software | | (81 | ) | | (63 | ) | | (55 | ) | Investments in internal use software | | (47) | | | (75) | | | (75) | |
| Proceeds from disposals of property, plant and equipment | | 110 |
| | 14 |
| | 25 |
| |
| | Investments in and advances to equity investees | | (66 | ) | | (41 | ) | | (7 | ) | Investments in and advances to equity investees | | (51) | | | (20) | | | (37) | |
| Acquisitions of businesses, net of cash acquired (Note 18) | | (662 | ) | | (94 | ) | | (117 | ) | |
| Investments in marketable securities—acquisitions (Note 4) | | (194 | ) | | (478 | ) | | (282 | ) | |
| Investments in marketable securities—liquidations (Note 4) | | 266 |
| | 306 |
| | 270 |
| |
| Proceeds from sale of equity investees (Note 3) | | — |
| | 60 |
| | — |
| |
| Acquisitions of businesses, net of cash acquired (Note 20) | | Acquisitions of businesses, net of cash acquired (Note 20) | | 0 | | | (237) | | | (70) | |
| | Investments in marketable securities—acquisitions | | Investments in marketable securities—acquisitions | | (593) | | | (495) | | | (368) | |
| Investments in marketable securities—liquidations (Note 5) | | Investments in marketable securities—liquidations (Note 5) | | 469 | | | 389 | | | 331 | |
| | Cash flows from derivatives not designated as hedges | | 76 |
| | (102 | ) | | 8 |
| Cash flows from derivatives not designated as hedges | | 4 | | | (44) | | | (102) | |
| Other, net | | 5 |
| | 12 |
| | (16 | ) | Other, net | | 27 | | | 32 | | | 56 | |
| Net cash used in investing activities | | (1,052 | ) | | (917 | ) | | (918 | ) | Net cash used in investing activities | | (719) | | | (1,150) | | | (974) | |
| | CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES | | | | | |
| Proceeds from borrowings | | 6 |
| | 111 |
| | 44 |
| |
| Net borrowings of commercial paper | | 86 |
| | 212 |
| | — |
| |
| Payments on borrowings and capital lease obligations | | (60 | ) | | (163 | ) | | (76 | ) | |
| Net borrowings (payments) under short-term credit agreements | | 12 |
| | 19 |
| | (41 | ) | |
| Proceeds from borrowings (Note 11) | | Proceeds from borrowings (Note 11) | | 2,014 | | | 11 | | | 36 | |
| Net (payments) borrowings of commercial paper (Note 11) | | Net (payments) borrowings of commercial paper (Note 11) | | (337) | | | (120) | | | 482 | |
| Payments on borrowings and finance lease obligations | | Payments on borrowings and finance lease obligations | | (73) | | | (96) | | | (62) | |
| Net borrowings under short-term credit agreements | | Net borrowings under short-term credit agreements | | 10 | | | 53 | | | 1 | |
| Distributions to noncontrolling interests | | (29 | ) | | (65 | ) | | (49 | ) | Distributions to noncontrolling interests | | (26) | | | (33) | | | (30) | |
| Dividend payments on common stock (Note 13) | | (701 | ) | | (676 | ) | | (622 | ) | |
| Repurchases of common stock (Note 13) | | (451 | ) | | (778 | ) | | (900 | ) | |
| Acquisitions of noncontrolling interests (Note 18) | | — |
| | (98 | ) | | (10 | ) | |
| Dividend payments on common stock (Note 15) | | Dividend payments on common stock (Note 15) | | (782) | | | (761) | | | (718) | |
| Repurchases of common stock (Note 15) | | Repurchases of common stock (Note 15) | | (641) | | | (1,271) | | | (1,140) | |
| Proceeds from issuing common stock | | Proceeds from issuing common stock | | 88 | | | 76 | | | 13 | |
| | Other, net | | 63 |
| | 25 |
| | 4 |
| Other, net | | 27 | | | 46 | | | 18 | |
| Net cash used in financing activities | | (1,074 | ) | | (1,413 | ) | | (1,650 | ) | |
| Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | | 280 | | | (2,095) | | | (1,400) | |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | | 98 |
| | (200 | ) | | (87 | ) | EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | | (11) | | | (110) | | | (70) | |
| Net increase (decrease) in cash and cash equivalents | | 249 |
| | (591 | ) |
| (590 | ) | Net increase (decrease) in cash and cash equivalents | | 2,272 | | | (174) | | | (66) | |
| Cash and cash equivalents at beginning of year | | 1,120 |
| | 1,711 |
| | 2,301 |
| Cash and cash equivalents at beginning of year | | 1,129 | | | 1,303 | | | 1,369 | |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 1,369 |
| | $ | 1,120 |
| | $ | 1,711 |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 3,401 | | | $ | 1,129 | | | $ | 1,303 | |
The accompanying notes are an integral part of our Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In millions | Common
Stock | | Additional
Paid-in
Capital | | Retained
Earnings | | Treasury
Stock | | Common
Stock
Held in
Trust | | Accumulated
Other
Comprehensive
Loss | | Total
Cummins Inc.
Shareholders’
Equity | | Noncontrolling
Interests | | Total
Equity |
| BALANCE AT DECEMBER 31, 2014 | $ | 556 |
| | $ | 1,583 |
| | $ | 9,545 |
| | $ | (2,844 | ) | | $ | (13 | ) | | $ | (1,078 | ) | | $ | 7,749 |
| | $ | 344 |
| | $ | 8,093 |
|
| Net income | |
| | |
| | 1,399 |
| | |
| | |
| | |
| | 1,399 |
| | 71 |
| | 1,470 |
|
| Other comprehensive income (loss), net of tax (Note 14) | |
| | |
| | |
| | |
| | |
| | (270 | ) | | (270 | ) | | (15 | ) | | (285 | ) |
| Issuance of common stock |
|
| | 9 |
| | |
| | |
| | |
| | |
| | 9 |
| | — |
| | 9 |
|
| Employee benefits trust activity (Note 13) | |
| | 25 |
| | |
| | |
| | 2 |
| | |
| | 27 |
| | — |
| | 27 |
|
| Repurchases of common stock (Note 13) | |
| | |
| | |
| | (900 | ) | | |
| | |
| | (900 | ) | | — |
| | (900 | ) |
| Cash dividends on common stock (Note 13) | |
| | |
| | (622 | ) | | |
| | |
| | |
| | (622 | ) | | — |
| | (622 | ) |
| Distributions to noncontrolling interests | |
| | |
| | |
| | |
| | |
| | |
| | — |
| | (49 | ) | | (49 | ) |
| Stock based awards | |
| | (4 | ) | | |
| | 9 |
| | |
| | |
| | 5 |
| | — |
| | 5 |
|
| Acquisition of noncontrolling interests (Note 18) | | | (3 | ) | | | | | | | | | | (3 | ) | | (7 | ) | | (10 | ) |
| Other shareholder transactions |
|
| | 12 |
| |
|
| | |
| | |
| | |
| | 12 |
| | — |
| | 12 |
|
| BALANCE AT DECEMBER 31, 2015 | $ | 556 |
| | $ | 1,622 |
| | $ | 10,322 |
| | $ | (3,735 | ) | | $ | (11 | ) | | $ | (1,348 | ) | | $ | 7,406 |
| | $ | 344 |
| | $ | 7,750 |
|
| Net income | |
| | |
| | 1,394 |
| | |
| | |
| | | | 1,394 |
| | 62 |
| | 1,456 |
|
| Other comprehensive income (loss), net of tax (Note 14) | |
| | |
| | |
| | |
| | |
| | (473 | ) | | (473 | ) | | (17 | ) | | (490 | ) |
| Issuance of common stock |
|
| | 6 |
| | |
| | |
| | |
| | |
| | 6 |
| | — |
| | 6 |
|
| Employee benefits trust activity (Note 13) | |
| | 23 |
| | |
| | |
| | 3 |
| | |
| | 26 |
| | — |
| | 26 |
|
| Repurchases of common stock (Note 13) | |
| | |
| | |
| | (778 | ) | | |
| | |
| | (778 | ) | | — |
| | (778 | ) |
| Cash dividends on common stock (Note 13) | |
| | |
| | (676 | ) | | |
| | |
| | |
| | (676 | ) | | — |
| | (676 | ) |
| Distributions to noncontrolling interests | |
| | |
| | |
| | |
| | |
| | |
| | — |
| | (65 | ) | | (65 | ) |
| Stock based awards | |
| | (5 | ) | | |
| | 24 |
| | |
| | |
| | 19 |
| | — |
| | 19 |
|
| Acquisition of noncontrolling interests (Note 18) | | | (73 | ) | | | | | | | | | | (73 | ) | | (25 | ) | | (98 | ) |
| Other shareholder transactions | |
| | 24 |
| | |
| | |
| | |
| | |
| | 24 |
| | — |
| | 24 |
|
| BALANCE AT DECEMBER 31, 2016 | $ | 556 |
| | $ | 1,597 |
| | $ | 11,040 |
| | $ | (4,489 | ) | | $ | (8 | ) | | $ | (1,821 | ) | | $ | 6,875 |
| | $ | 299 |
| | $ | 7,174 |
|
| Impact of tax legislation (Note 2) | | | | | 126 |
| | | | | | | | 126 |
| | — |
| | 126 |
|
| Net income | |
| | |
| | 999 |
| | |
| | |
| | |
| | 999 |
| | (5 | ) | | 994 |
|
| Other comprehensive income (loss), net of tax (Note 14) | |
| | |
| |
|
| | |
| | |
| | 318 |
| | 318 |
| | 20 |
| | 338 |
|
| Issuance of common stock |
|
| | 6 |
| | |
| | |
| | |
| | |
| | 6 |
| | — |
| | 6 |
|
| Employee benefits trust activity (Note 13) | |
| | 17 |
| | |
| | |
| | 1 |
| | |
| | 18 |
| | — |
| | 18 |
|
| Repurchases of common stock (Note 13) | |
| | |
| | |
| | (451 | ) | | |
| | |
| | (451 | ) | | — |
| | (451 | ) |
| Cash dividends on common stock (Note 13) | |
| | |
| | (701 | ) | | |
| | |
| | |
| | (701 | ) | | — |
| | (701 | ) |
| Distributions to noncontrolling interests | |
| | |
| | |
| | |
| | |
| | |
| | — |
| | (29 | ) | | (29 | ) |
| Stock based awards | |
| | 3 |
| | |
| | 35 |
| | |
| | |
| | 38 |
| | — |
| | 38 |
|
| Acquisition of business (Note 18) | | |
|
| | | | | | | | | | — |
| | 600 |
| | 600 |
|
| Other shareholder transactions | |
| | 31 |
| | |
| | |
| | |
| | |
| | 31 |
| | 20 |
| | 51 |
|
| BALANCE AT DECEMBER 31, 2017 | $ | 556 |
| | $ | 1,654 |
| | $ | 11,464 |
| | $ | (4,905 | ) | | $ | (7 | ) | | $ | (1,503 | ) | | $ | 7,259 |
| | $ | 905 |
| | $ | 8,164 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In millions | | Common
Stock | | Additional
Paid-in
Capital | | Retained
Earnings | | Treasury
Stock | | Common
Stock
Held in
Trust | | Accumulated
Other
Comprehensive
Loss | | Total
Cummins Inc.
Shareholders’
Equity | | Noncontrolling
Interests | | Total
Equity |
| BALANCE AT DECEMBER 31, 2017 | | $ | 556 | | | $ | 1,654 | | | $ | 11,464 | | | $ | (4,905) | | | $ | (7) | | | $ | (1,503) | | | $ | 7,259 | | | $ | 905 | | | $ | 8,164 | |
| Adoption of new accounting standards | | | | | | 30 | | | | | | | | | 30 | | | — | | | 30 | |
| Net income | | | | | | 2,141 | | | | | | | | | 2,141 | | | 46 | | | 2,187 | |
| Other comprehensive loss, net of tax (Note 16) | | | | | | | | | | | | (304) | | | (304) | | | (29) | | | (333) | |
| Issuance of common stock | | 0 | | 12 | | | | | | | | | | | 12 | | | — | | | 12 | |
| Employee benefits trust activity | | | | 15 | | | | | | | 2 | | | | | 17 | | | — | | | 17 | |
| Repurchases of common stock (Note 15) | | | | | | | | (1,140) | | | | | | | (1,140) | | | — | | | (1,140) | |
| Cash dividends on common stock (Note 15) | | | | | | (718) | | | | | | | | | (718) | | | — | | | (718) | |
| Distributions to noncontrolling interests | | | | | | | | | | | | | | — | | | (30) | | | (30) | |
| Share-based awards | | | | (4) | | | | | 17 | | | | | | | 13 | | | — | | | 13 | |
| | | | | | | | | | | | | | | | | | |
| Other shareholder transactions | | | | 38 | | | | | | | | | | | 38 | | | 19 | | | 57 | |
| BALANCE AT DECEMBER 31, 2018 | | $ | 556 | | | $ | 1,715 | | | $ | 12,917 | | | $ | (6,028) | | | $ | (5) | | | $ | (1,807) | | | $ | 7,348 | | | $ | 911 | | | $ | 8,259 | |
| | | | | | | | | | | | | | | | | | |
| Net income | | | | | | 2,260 | | | | | | | | | 2,260 | | | 8 | | | 2,268 | |
| Other comprehensive loss, net of tax (Note 16) | | | | | | | | | | | | (221) | | | (221) | | | (5) | | | (226) | |
| Issuance of common stock | | | | 3 | | | | | | | | | | | 3 | | | — | | | 3 | |
| Employee benefits trust activity | | | | 34 | | | | | | | 3 | | | | | 37 | | | — | | | 37 | |
| Repurchases of common stock (Note 15) | | | | | | | | (1,271) | | | | | | | (1,271) | | | — | | | (1,271) | |
| Cash dividends on common stock (Note 15) | | | | | | (761) | | | | | | | | | (761) | | | — | | | (761) | |
| Distributions to noncontrolling interests | | | | | | | | | | | | | | — | | | (33) | | | (33) | |
| Share-based awards | | | | 2 | | | | | 74 | | | | | | | 76 | | | — | | | 76 | |
| | | | | | | | | | | | | | | | | | |
| Other shareholder transactions | | | | 36 | | | | | | | | | | | 36 | | | 77 | | | 113 | |
| BALANCE AT DECEMBER 31, 2019 | | $ | 556 | | | $ | 1,790 | | | $ | 14,416 | | | $ | (7,225) | | | $ | (2) | | | $ | (2,028) | | | $ | 7,507 | | | $ | 958 | | | $ | 8,465 | |
| Adoption of new accounting standards (Note 1) | | | | | | (4) | | | | | | | | | (4) | | | — | | | (4) | |
| Net income | | | | | | 1,789 | | | | | | | | | 1,789 | | | 22 | | | 1,811 | |
| Other comprehensive income (loss), net of tax (Note 16) | | | | | | | | | | | | 46 | | | 46 | | | (10) | | | 36 | |
| Issuance of common stock | | | | 10 | | | | | | | | | | | 10 | | | — | | | 10 | |
| Employee benefits trust activity | | | | 32 | | | | | | | 2 | | | | | 34 | | | — | | | 34 | |
| Repurchases of common stock (Note 15) | | | | | | | | (641) | | | | | | | (641) | | | — | | | (641) | |
| Cash dividends on common stock (Note 15) | | | | | | (782) | | | | | | | | | (782) | | | — | | | (782) | |
| Distributions to noncontrolling interests | | | | | | | | | | | | | | — | | | (26) | | | (26) | |
| Share-based awards | | | | 1 | | | | | 87 | | | | | | | 88 | | | — | | | 88 | |
| | | | | | | | | | | | | | | | | | |
| Other shareholder transactions | | | | 15 | | | | | | | | | | | 15 | | | (17) | | | (2) | |
| BALANCE AT DECEMBER 31, 2020 | | $ | 556 | | | $ | 1,848 | | | $ | 15,419 | | | $ | (7,779) | | | $ | 0 | | | $ | (1,982) | | | $ | 8,062 | | | $ | 927 | | | $ | 8,989 | |
The accompanying notes are an integral part of our Consolidated Financial Statements.
CUMMINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
We were founded in 1919 as Cummins Engine Company, a corporation in Columbus, Indiana and one of the first diesel engine manufacturers. In 2001, we changed our name to Cummins Inc. We are a global power leader that designs, manufactures, distributes and services diesel, and natural gas, engineselectric and engine-related component products,hybrid powertrains and powertrain-related components including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated transmissions, and electric power generation systems.systems, batteries, electrified power systems, hydrogen production and fuel cell products. We sell our products to original equipment manufacturers (OEMs), distributors, dealers and other customers worldwide. We serve our customers through a network of approximatelyover 500 wholly-owned, joint venture and independent distributor locations and over 7,5009,000 Cummins certified dealer locations in more thanwith service to approximately 190 countries and territories.
COVID-19
The outbreak of COVID-19 spread throughout the world and became a global pandemic with the resultant economic impacts evolving into a worldwide recession. The pandemic triggered a significant downturn in our markets globally, which continued to unfavorably impact market conditions throughout 2020 and these challenging market conditions could continue for an extended period of time. In an effort to contain the spread of COVID-19, maintain the well-being of our employees and stakeholders, match the reduced demand from our customers and in accordance with governmental requirements, we closed or partially shut down certain office, manufacturing, distribution and technical center facilities around the world in March 2020. Although most of our manufacturing, distribution and technical center facilities re-opened early in the second quarter of 2020, some operated at reduced capacities, most of our global office buildings remained closed through the remainder of 2020.
Principles of Consolidation
Our Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles in the United States of America (GAAP).All intercompany balances and transactions are eliminated in consolidation.
We include the accounts of all wholly-owned and majority-owned domestic and foreign subsidiaries where our ownership is more than 50 percent of outstanding equity interests except for majority-owned subsidiaries that are considered variable interest entities (VIEs) where we are not deemed to have a controlling financial interest. In addition, we also consolidate, regardless of our ownership percentage, VIEs or joint ventures for which we are deemed to have a controlling financial interest. Intercompany balances and transactionsWe have variable interests in several businesses accounted for under the equity method of accounting, however most of these VIEs are eliminated in consolidation. Whereunconsolidated.
For consolidated entities where our ownership interest is less than 100 percent, the noncontrolling ownership interests are reported in our Consolidated Balance Sheets. The noncontrolling ownership interest in our income, net of tax, is classified as "Net (loss) income attributable to noncontrolling interests" in our Consolidated Statements of Net Income.
We have variable interests in several businesses accounted for under the equity method of accounting that are deemed to be VIEs and are subject to generally accepted accounting principles in the United States of America (GAAP) for variable interest entities. Most of these VIEs are unconsolidated.
Reclassifications
Certain amounts for 20162019 and 20152018 have been reclassified to conform to the current year presentation.
Investments in Equity Investees
We use the equity method to account for our investments in joint ventures, affiliated companies and alliances in which we have the ability to exercise significant influence, generally represented by equity ownership or partnership equity of at least 20 percent but not more than 50 percent. Generally, under the equity method, original investments in these entities are recorded at cost and subsequently adjusted by our share of equity in income or losses after the date of acquisition. Investment amounts in excess of our share of an investee's net assets are amortized over the life of the related asset creating the excess. If the excess, isexcept goodwill then itwhich is not amortized. Equity in income or losses of each investee is recorded according to our level of ownership; if losses accumulate, we record our share of losses until our investment has been fully depleted. If our investment has been fully depleted, we recognize additional losses only when we are the primary funding source. We eliminate (to the extent of our ownership percentage) in our Consolidated Financial Statementsthe profit in inventory held by our equity method investees that has not yet been sold to a third-party. Dividends received from equity method investees reduce the amount of our investment when received and do not impact our earnings. Our investments are classified as "Investments and advances related to equity method investees" in our Consolidated Balance Sheets. Our share of the results from joint ventures, affiliated companies and alliances is reported in our Consolidated Statements of Net Income as "Equity, royalty and interest income from investees," and is reported net of all applicable income taxes.
Our foreign equity investees are presented net of applicable foreign income taxes in our Consolidated Statements of Net Income. Our remaining United States (U.S.)U.S. equity investees are partnerships (non-taxable), thus there is no difference between gross or net of tax presentation as the investees are not taxed. See NOTENote 3, "INVESTMENTS IN EQUITY INVESTEES," for additional information.
Use of Estimates in the Preparation of the Financial Statements
Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts presented and disclosed in our Consolidated Financial Statements. Significant estimates and assumptions in these Consolidated Financial Statementsrequire the exercise of judgmentjudgement and are used for, but not limited to, allowance for doubtful accounts, estimates of future cash flows and other assumptions associated with goodwill and long-lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, determination of discount rate and
other assumptions for pensionpensions and other postretirement benefit costs, restructuring costs, income taxes, and deferred tax valuation allowances lease classification and contingencies.contingencies and allowances for doubtful accounts. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.
The global market downturn, closures and limitations on movement related to COVID-19 are expected to be temporary, however, the duration of the production and supply chain disruptions, and related financial impacts, cannot be estimated at this time. This uncertainty could have an impact on certain estimates used in the preparation of our 2020 financial results.
Revenue From Contracts with Customers
Revenue Recognition Sales of Products
We sell to customers either through long-term arrangements or standalone purchase orders. Our long-term arrangements generally do not include committed volumes until underlying purchase orders are issued. Our performance obligations vary by contract, but may include diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated transmissions, electric power generation systems and construction related projects, batteries, electrified power systems, hydrogen production and fuel cell products, parts, maintenance services and extended warranty coverage.
Typically, we recognize revenue neton the products we sell at a point in time, generally in accordance with shipping terms, which reflects the transfer of estimatedcontrol to the customer. Since control of construction projects transfer to the customer as the work is performed, revenue on these projects is recognized based on the percentage of inputs incurred to date compared to the total expected cost of inputs, which is reflective of the value transferred to the customer. Revenue is recognized under long-term maintenance and other service agreements over the term of the agreement as underlying services are performed based on the percentage of the cost of services provided to date compared to the total expected cost of services to be provided under the contract. Sales of extended coverage are recognized based on the pattern of expected costs over the extended coverage period or, if such a pattern is unknown, on a straight-line basis over the coverage period as the customer is considered to benefit from our stand ready obligation over the coverage period. In all cases, we believe cost incurred is the most representative depiction of returns, allowances and sales incentives, when it is realized or realizable, which generally occurs when:the extent of service performed to date on a particular contract.
Persuasive evidenceOur arrangements may include the act of an arrangement exists;
Theshipping products to our customers after the performance obligation related to that product has been shippedsatisfied. We have elected to account for shipping and legal titlehandling as activities to fulfill the promise to transfer goods and all riskshave not allocated revenue to the shipping activity. All related shipping and handling costs are accrued at the time the related performance obligation has been satisfied.
Our sales arrangements may include the collection of ownershipsales and other similar taxes that are then remitted to the related taxing authority. We have been transferred;elected to present the amounts collected for these taxes net of the related tax expense rather than presenting them as additional revenue.
The sales price is fixed or determinable;We grant credit limits and
Payment is reasonably assured.
Products terms to customers based upon traditional practices and competitive conditions. Typical terms vary by market, but payments are generally sold on open account under credit terms customary to the geographic region of distribution. We perform ongoing credit evaluationsdue in 90 days or less from invoicing for most of our customersproduct and generally do not require collateral to secure our accounts receivable. For engines, service parts, service toolssales, while payments on construction and other items soldsimilar arrangements may be due on an installment basis.
For contracts where the time between cash collection and performance is less than one year, we have elected to independent distributors anduse the practical expedient that allows us to partially-owned distributors accountedignore the possible existence of a significant financing component within the contract. For contracts where this time period exceeds one year, generally the timing difference is the result of business concerns other than financing. We do have a limited amount of customer financing for under the equity method, revenueswhich we charge or impute interest, but such amounts are recorded when title and riskimmaterial to our Consolidated Statements of ownership transfers. This transfer is based on the agreement in effect with the respective distributor, which generally occurs when the products are shipped. To the extent of our ownership percentage, margins on sales to distributors accounted for under the equity method are deferred until the distributor sells the product to unrelated parties.Net Income.
Sales Incentives
We provide various sales incentives to both our distribution network and our OEM customers. These programs are designed to promote the sale of our productproducts in the channel or encourage the usage of our products by OEM customers. When there is uncertainty
surrounding these sales incentives, we may limit the amount of revenue we recognize under a contract until the uncertainty has been resolved. Sales incentives primarily fall into three categories:
•Volume rebates;
•Market share rebates; and
•Aftermarket rebates.
For volume rebates, we provide certain customers with rebate opportunities for attaining specified volumes during a particular quarter or year. We accrue forconsider the expected amount of these rebates at the time of the original sale andas we determine the overall transaction price. We update our accrualsassessment of the amount of rebates that will be earned quarterly based on our best estimate of the volume levels the customer will reach during the measurement period. For market share rebates, we provide certain customers with rebate opportunities based on the percentage of their production that utilizes our product. These rebates are typically measured either quarterly or annually and we assess them at least quarterly to determine our current estimates of amounts expected to be earned. These estimates are accruedconsidered in the determination of transaction price at the time of the original sale based on the current market shares, with adjustments made as the level changes. For aftermarket rebates, we provide incentives to promote sales to certain dealers and end-markets. These rebates are typically paid on a quarterly, or more frequent basis and estimatesbasis. At the time of the sales, we consider the expected amount of these rebates when determining the overall transaction price. Estimates are madeadjusted at the end of each quarter as tobased on the amountamounts yet to be paid. These estimates are based on historical experience with the particular program. The incentives are classified as a reduction in sales in our
Sales ReturnsConsolidated Statements of Income.
We classify shipping and handling billed to customers as sales in our Consolidated StatementsThe initial determination of Income. Substantially all shipping and handling costs are included in "Cost of sales."
the transaction price may also be impacted by expected product returns. Rights of return do not exist for the majority of our sales other than for quality issues. We do offer certain return rights in our aftermarket business, where some aftermarket customers are permitted to return small amounts of parts and filters each year, and in our power systemsgeneration business, which sells portable generators to retail customers. An estimate of future returns is accruedaccounted for at the time of sale as a reduction in the overall contract transaction price based on historical return rates.
Multiple Performance Obligations
Our sales arrangements may include multiple performance obligations. We identify each of the material performance obligations in these arrangements and allocate the total transaction price to each performance obligation based on its relative selling price. In most cases, the individual performance obligations are also sold separately and we use that price as the basis for allocating revenue to the included performance obligations. When an arrangement includes multiple performance obligations and invoicing to the customer does not match the allocated portion of the transaction price, unbilled revenue or deferred revenue is recorded reflecting that difference. Unbilled and deferred revenue are discussed in more detail below.
Long-term Contracts
Our long-term maintenance agreements often include a variable component of the transaction price. We are generally compensated under such arrangements on a cost per hour of usage basis. We typically can estimate the expected usage over the life of the contract, but reassess the transaction price each quarter and adjust our recognized revenue accordingly. Certain maintenance agreements apply to generators used to provide standby power, which have limited expectations of usage. These agreements may include monthly minimum payments, providing some certainty to the total transaction price. For these particular contracts that relate to standby power, we limit revenue recognized to date to an amount representing the total minimums earned to date under the contract plus any cumulative billings earned in excess of the minimums. We reassess the estimates of progress and transaction price on a quarterly basis. For prime power arrangements, revenue is not subject to such a constraint and is generally equal to the current estimate on a percentage of completion basis times the total expected revenue under the contract.
Deferred Revenue
The timing of our billing does not always match the timing of our revenue recognition. We record deferred revenue when we are entitled to bill a customer in advance of when we are permitted to recognize revenue. Deferred revenue may arise in construction contracts, where billings may occur in advance of performance or in accordance with specific milestones. Deferred revenue may also occur in long-term maintenance contracts, where billings are often based on usage of the underlying equipment, which generally follows a predictable pattern that often will result in the accumulation of collections in advance of our performance of the related maintenance services. Finally, deferred revenue exists in our extended coverage contracts, where the cash is collected prior to the commencement of the coverage period. Deferred revenue is included in our Consolidated Balance Sheets as a component of current liabilities for the amount expected to be recognized in revenue in a period of less than one year and long-term liabilities for the amount expected to be recognized as revenue in a period beyond one year. Deferred revenue is recognized as revenue when control of the underlying product, project or service passes to the customer under the related contract.
Unbilled Revenue
We recognize unbilled revenue when the revenue has been earned, but not yet billed. Unbilled revenue is included in our Consolidated Balance Sheets as a component of current assets for those expected to be collected in a period of less than one year and long-term assets for those expected to be collected in a period beyond one year. Unbilled revenue relates to our right to consideration for our completed performance under a contract. Unbilled revenue generally arises from contractual provisions that delay a portion of the billings on genset deliveries until commissioning occurs. Unbilled revenue may also occur when billings trail the provision of service in construction and long-term maintenance contracts. Our unbilled revenue is assessed for collection risks at the time the amounts are initially recorded. This estimate of expected losses reflects those losses expected to occur over the contractual life of the unbilled amount through the time of collection. We did not record any impairment losses on our unbilled revenues during the years ended December 31, 2020, 2019 and 2018.
Contract Costs
We are required to record an asset for the incremental costs of obtaining a contract with a customer and other costs to fulfill a contract not otherwise required to be immediately expensed when we expect to recover those costs. The only material incremental cost we incur is commission expense, which is generally incurred in the same period as the underlying revenue. Costs to fulfill a contract are generally limited to customer-specific engineering expenses that do not meet the definition of research and development expenses. As a practical expedient, we have elected to recognize these costs of obtaining a contract as an expense when the related contract period is less than one year. When the period exceeds one year, this asset is amortized over the life of the contract. We did not have any material capitalized balances at December 31, 2020 or 2019.
Extended Warranty
We sell extended warranty coverage on most of our engines and on certain components. We consider a warranty to be extended coverage in any of the following situations:
•When a warranty is sold separately or is optional (extended coverage contracts, for example) or
•When a warranty provides additional services.
The consideration collected is initially deferred and is recognized as revenue in proportion to the costs expected to be incurred in performing services over the contract period. We compare the remaining deferred revenue balance quarterly to the estimated amount of future claims under extended warranty programs and provide an additional accrual when the deferred revenue balance is less than expected future costs.
Foreign Currency Transactions and Translation
We translate assets and liabilities of foreign entities to U.S. dollars, where the local currency is the functional currency, at year-endmonth-end exchange rates. We translate income and expenses to U.S. dollars using weighted-average exchange rates for the year.rates. We record adjustments resulting from translation in a separate component of accumulated other comprehensive loss (AOCL) and include the adjustments in net income only upon sale, loss of controlling financial interest or liquidation of the underlying foreign investment.
Foreign currency transaction gains and losses are included in current net income. For foreign entities where the U.S. dollar is the functional currency, including those operating in highly inflationary economies when applicable, we remeasure non-monetary balances and the related income statement amounts using historical exchange rates. We include in income the resulting gains and losses in income, including the effect of derivatives in ourConsolidated Statements of Net Income, which combined with transaction gains and losses amounted to a net gain of $4 million and $28 million and a net loss of $6 million, $12 million and $18$34 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively.
Fair Value Measurements
A three-level valuation hierarchy, based upon the observable and unobservable inputs, is used for fair value measurements. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions based on the best evidence available. These two types of inputs create the following fair value hierarchy:
| |
• | •Level 1 - Quoted prices for identical instruments in active markets; •Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose significant inputs are observable; and •Level 3 - Instruments whose significant inputs are unobservable.
|
| |
• | Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose significant inputs are observable; and
|
| |
• | Level 3 - Instruments whose significant inputs are unobservable.
|
Derivative Instruments
We make use of derivative instruments in foreign exchange, commodity price and interest rate hedging programs. Derivatives currently in use are foreign currency forward contracts, commodity swap and physical forward contracts, optionscommodity zero-cost collars and interest rate swaps. These contracts are used strictly for hedging and not for speculative purposes.
We are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through the use of interest rate swaps. The objective of the swaps is to more effectively balance our borrowing costs and interest rate risk. The gain or loss on these derivative instruments as well as the offsetting gain or loss on the hedged item are recognized in current income as "Interest expense." For more detail on our interest rate swaps, see NOTE 9,Note 11, "DEBT."
Due to our international business presence, we are exposed to foreign currency exchange risk. We transact in foreign currencies and have assets and liabilities denominated in foreign currencies. Consequently, our income experiences some volatility related to movements in foreign currency exchange rates. In order to benefit from global diversification and after considering naturally offsetting currency positions, we enter into foreign currency forward contracts to minimize our existing exposures (recognized assets and liabilities) and hedge forecasted transactions. Foreign currency forward contracts are designated and qualify as foreign currency cash flow hedges under GAAP.hedges. The effective portion of the unrealized gain or loss on the forward contract is deferred and reported as a component of AOCL. When the hedged forecasted transaction (sale or purchase) occurs, the unrealized gain or loss is reclassified into income in the same line item associated with the hedged transaction in the same period or periods during which the hedged transaction affects income. At December 31, 2020 and 2019, realized and unrealized gains and losses related to these hedges were not material to our financial statements.
To minimize the income volatility resulting from the remeasurement of net monetary assets and payables denominated in a currency other than the functional currency, we enter into foreign currency forward contracts, which are considered economic hedges. The objective is to offset the gain or loss from remeasurement with the gain or loss from the fair market valuation of the forward contract. These derivative instruments are not designated as hedges under GAAP.hedges.
We are exposed to fluctuations in commodity prices due to contractual agreements with component suppliers. In order to protect ourselves against future price volatility and, consequently, fluctuations in gross margins, we periodically enter into commodity physicalswap, forward contracts and zero-cost collar contracts with designated banks and other counterparties to fix the cost of certain raw material purchases with the objective of minimizing changes in inventory cost due to market price fluctuations. Commencing in 2019, these commodity swaps are designated and qualify as cash flow hedges. At December 31, 2020, realized and unrealized gains and losses related to these hedges were not material to our financial statements. The physical forward contracts qualify for the normal purchases scope exceptions and are treated as purchase commitments. Additional information on the physical forwards is included in Note 14, "COMMITMENTS AND CONTINGENCIES." The commodity zero-cost collar contracts that represent an economic hedge, but are not designated for hedge accounting, are marked to market through earnings.
We record all derivatives at fair value in our financial statements. Cash flows related to derivatives that are designated as hedges are included in the Cash Flows From Operating Activities, while cash flows related to derivatives, that are not designated as hedges, are included in Cash Flows From Investing Activities in our Consolidated Statements of Cash Flows.
Substantially all of our derivative contracts are subject to master netting arrangements, which provide us with the option to settle certain contracts on a net basis when they settle on the same day with the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event. When material, we adjust the value of our derivative contracts for counter-party or our credit risk. None of our derivative instruments are subject to collateral requirements.
Income Tax Accounting
We determine our income tax expense using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.basis. Future tax benefits of net operating loss and credit carryforwards are also recognized as deferred tax assets. We evaluate the recoverability of our deferred tax assets each quarter by assessing the likelihood of future profitability and available tax planning strategies that could be implemented to realize our net deferred tax assets. A valuation allowance is recorded to reduce the tax assets to the net value management believes is more likely than not to be realized. In the event our operating performance deteriorates, future assessments could conclude that a larger valuation
allowance will be needed to further reduce the deferred tax assets. In addition, we operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. We accrue for the estimated additional tax and interest that may result from tax authorities disputing uncertain tax positions. We have taken and we believe we have made adequate provisions for income taxes for all years that are subject to audit based upon the latest information available. A more complete description of our income taxes and the future benefits of our net operating loss and credit carryforwards is disclosed in NOTE 2,Note 4, "INCOME TAXES."
Cash and Cash Equivalents
Cash equivalents are defined as short-term, highly liquid investments with an original maturity of 90 days or less at the time of purchase. The carrying amounts reflected in our Consolidated Balance Sheetsfor cash and cash equivalents approximate fair value due to the short-term maturity of these investments.
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| In millions | | 2017 | | 2016 | | 2015 |
| Cash payments for income taxes, net of refunds | | $ | 622 |
| | $ | 430 |
| | $ | 732 |
|
| Cash payments for interest, net of capitalized interest | | 82 |
| | 68 |
| | 65 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| In millions | | 2020 | | 2019 | | 2018 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Cash payments for income taxes, net of refunds | | $ | 432 | | | $ | 691 | | | $ | 699 | |
| Cash payments for interest, net of capitalized interest | | 88 | | | 109 | | | 114 | |
| | | | | | |
Marketable Securities
We account for marketableDebt securities in accordance with GAAP for investments in debt and equity securities.are classified as "held-to-maturity," "available-for-sale" or "trading." We determine the appropriate classification of all marketabledebt securities as "held-to-maturity," "available-for-sale" or "trading" at the time of purchase and re-evaluate such classifications at each balance sheet date. At December 31, 20172020 and 2016,2019, all of our investmentsdebt securities were classified as available-for-sale.
Available-for-sale (AFS) Debt and equity securities are carried at fair value with the unrealized gain or loss, net of tax, reported in other comprehensive income. Unrealizedincome and other income, respectively. For debt securities, unrealized losses considered to be "other-than-temporary" are recognized currently in other income. The cost of securities sold is based on the specific identification method. The fair value of most investment securities is determined by currently available market prices. Where quoted market prices are not available, we use the market price of similar types of securities that are traded in the market to estimate fair value. See NOTE 4,Note 5, "MARKETABLE SECURITIES," for a detailed description of our investments in marketable securities.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable represent amounts billed to customers and not yet collected or amounts that have been earned, but may not be billed until the passage of time, and are recorded when the right to consideration becomes unconditional. Trade accounts receivable are recorded at the invoiced amount, which approximates net realizable value, and generally do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probableexpected credit losses in our existing accounts receivable. We determine the allowance based on our historical collection experience and by performing an analysis of our accounts receivable in light of the current economic environment. This estimate of expected losses reflects those losses expected to occur over the contractual life of the receivable. We review our allowance for doubtful accounts on a regular basis. In addition, when necessary, we provide an allowance for the full amount of specific accounts deemed to be uncollectible. Account balances are charged off against the allowance in the period in which we determine that it is probable the receivable will not be recovered. The allowance for doubtful accounts balances for the years endedwere $39 million and $19 million at December 31, 20172020, and 20162019, respectively, and bad debt write-offs were $16 million and $16 million, respectively.not material.
Inventories
Our inventories are stated at the lower of cost or market.net realizable value. For the years ended December 31, 20172020 and 2016,2019, approximately 1214 percent and 1314 percent, respectively, of our consolidated inventories (primarily heavy-duty and high-horsepower engines and parts) were valued using the last-in, first-out (LIFO) cost method. The cost of other inventories is generally valued using the first-in, first-out (FIFO) cost method. Our inventories at interim and year-end reporting dates include estimates for adjustments related to annual physical inventory results and for inventory cost changes under the LIFO cost method. Due to significant movements of partially-manufactured components and parts between manufacturing plants, we do not internally measure, nor do our accounting systems provide, a meaningful segregation between raw materials and work-in-process. See NOTE 5,Note 6, "INVENTORIES," for additional information.
Property, Plant and Equipment
We record property, plant and equipment at cost, inclusive of assets under capital leases at cost.in 2018 and finance lease assets starting in 2019, with the adoption of the new lease standard. We depreciate the cost of the majority of our property, plant and equipment using the straight-line method with depreciable lives ranging from 20 to 40 years for buildings and 3 to 15 years for machinery, equipment and fixtures. CapitalFinance lease (capital lease in 2018) asset amortization is recorded in depreciation expense. We expense normal maintenance and repair costs as incurred. Depreciation expense totaled $467$504 million, $434$494 million and $419$455 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively. See NOTE 6,Note 7, "PROPERTY, PLANT AND EQUIPMENT,EQUIPMENT" and Note 8, "LEASES," for additional information.
Impairment of Long-Lived Assets
We review our long-lived assets for possible impairment whenever events or circumstances indicate that the carrying value of an asset or asset group may not be recoverable. We assess the recoverability of the carrying value of the long-lived assets at the lowest level for
which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. An impairment of a long-lived asset or asset group exists when the expected future pre-tax cash flows (undiscounted and without interest charges) estimated to be generated by the asset or asset group is less than its carrying value. If these cash flows are less than the carrying value of such asset or asset group, an impairment loss is measured based on the difference between the estimated fair value and carrying value of the asset or asset group. Assumptions and estimates used to estimate cash flows in the evaluation of impairment and the fair values used to determine the impairment are subject to a degree of judgment and complexity. Any changes to the assumptions and estimates resulting from changes in actual results or market conditions from those anticipated may affect the carrying value of long-lived assets and could result in a future impairment charge.
Lease Policies
We adopted the new standard on January 1, 2019, using a modified retrospective approach and as a result did not adjust prior periods. Adoption of the standard resulted in the recording of $450 million of operating lease ROU assets and operating lease liabilities, but did not have a material impact on our net income or cash flows.
We determine if an arrangement contains a lease in whole or in part at the inception of the contract. Right-of-use (ROU) assets represent our right to use an underlying asset for the lease term while lease liabilities represent our obligation to make lease payments arising from the lease. All leases greater than 12 months result in the recognition of a ROU asset and a liability at the lease commencement date based on the present value of the lease payments over the lease term. As most of our leases do not provide the information required to determine the implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. This rate is determined considering factors such as the lease term, our credit standing and the economic environment of the location of the lease. We use the implicit rate when readily determinable.
Our lease terms include all non-cancelable periods and may include options to extend (or to not terminate) the lease when it is reasonably certain that we will exercise that option. Leases that have a term of 12 months or less at the commencement date are expensed on a straight-line basis over the lease term and do not result in the recognition of an asset or a liability.
Lease expense for operating leases is recognized on a straight-line basis over the lease term. Lease expense for finance leases are generally front-loaded as the finance lease ROU asset is depreciated on a straight-line basis, but interest expense on the liability is recognized utilizing the interest method that results in more expense during the early years of the lease. We have lease agreements with lease and non-lease components, primarily related to real estate, vehicle and information technology (IT) assets. For vehicle and real estate leases, we account for the lease and non-lease components as a single lease component. For IT leases, we allocate the payment between the lease and non-lease components based on the relative value of each component. See NOTE 19, "IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETS,Note 8, "LEASES," for additional information.
Goodwill
Under GAAP for goodwill, weWe have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it is necessary to perform an annual two-stepquantitative goodwill impairment test. We have elected this option on certain reporting units. The two-stepquantitative impairment test is now only required if an entity determines through this qualitative analysis that it is more likely than not that the fair value of the reporting unit is less than its carrying value. In addition, the carrying value of goodwill must be tested for impairment on an interim basis in certain circumstances where impairment may be indicated. We perform our annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.
When we are required or opt to perform the two-stepquantitative impairment test, the fair value of each reporting unit is estimated by discountingwith either the after tax futuremarket approach or the income approach using a discounted cash flow model. Our income approach method uses a discounted cash flow model in which cash flows less requirements for working capital and fixed asset additions.anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate rate of return. Our reporting units are generally defined as one level below an operating segment. However, there are twothree situations where we have aggregated two or more reporting units which share similar economic characteristics and thus are aggregated into a single reporting unit for testing purposes. These twothree situations are described further below:
•
Within our Components segment, our emission solutions and filtration businesses have been aggregated into a single reporting unit.unit,
| |
•Within our New Power segment, our electrified power, fuel cell and hydrogen technologies businesses have been aggregated into a single reporting unit and
• | Our Distribution segment is considered a single reporting unit as it is managed geographically and all regions share similar economic characteristics and provide similar products and services.
|
Our valuation methodDistribution segment is considered a single reporting unit as it is managed geographically and all regions share similar economic characteristics and provide similar products and services.
The discounted cash flow model requires us to make projections of revenue, gross margin, operating expenses, working capital investment and fixed asset additions for the reporting units over a multi-year period. Additionally, management must estimate a weighted-average cost of capital, which reflects a market rate, for each reporting unit for use as a discount rate. The discounted cash flows are compared to the carrying value of the reporting unit and, if less than the carrying value, the difference is recorded as a separate valuation of the goodwill is required to determine if an impairment loss has occurred.loss. In addition, we also perform a sensitivity analysis to determine how much our forecasts can fluctuate before the fair value of a reporting unit would be lower than its carrying amount. We performedperform the required procedures as of the end of our fiscal third quarter andquarter.
While none of our reporting units recorded a goodwill impairment in 2020, we determined thatthe automated transmission business is our only reporting unit with material goodwill waswhere the estimated fair value does not impaired. substantially exceed the carrying value. The estimated fair value of the reporting unit exceeds its carrying amount of $1.1 billion by approximately 18 percent. Total goodwill in this reporting unit is $544 million. Since this reporting unit is made up of only one business, our joint venture with Eaton Corporation plc (Eaton Cummins Automated Transmission Technologies), acquired in 2017, we did not expect the estimated fair value would exceed the carrying value by a significant amount.
At December 31, 2017,2020, our recorded goodwill was $1,082$1,293 million, approximately 3642 percent of which resided in the automated transmissions reporting unit, 30 percent in the aggregated emission solutions and filtration reporting unit. For this reporting unit, 20 percent in the fair value exceeded its carrying value by a substantial margin. Approximately 50 percent and 4 percent of goodwill resides in our new automated transmissionspower reporting unit and our Brammo Inc. acquisition (not yet allocated to a segment), respectively. Since these businesses were just acquired6 percent in the second half of 2017, we did not perform an additional quantitative test as of the end of our third fiscal quarter. See NOTE 18, "ACQUISITIONS," for additional information on the acquisition related goodwill recorded at the respective acquisition dates.distribution reporting unit. Changes in our projections or estimates, a deterioration of our operating results and the related cash flow effect or a significant increase in the discount rate could decrease the estimated fair value of our reporting units and result in a future impairment of goodwill. See NOTE 7,Note 9, "GOODWILL AND OTHER INTANGIBLE ASSETS," for additional information.
Other Intangible Assets
We capitalize other intangible assets, such as trademarks, patents and customer relationships, that have been acquired either individually or with a group of other assets. These intangible assets are amortized on a straight-line basis over their estimated useful lives generally ranging from 3 to 25 years. Intangible assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. See NOTE 7,Note 9, "GOODWILL AND OTHER INTANGIBLE ASSETS," for additional information.
Software
We capitalize software that is developed or obtained for internal use. Software costs are amortized on a straight-line basis over their estimated useful lives generally ranging from 32 to 12 years. Software assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. Upgrades and enhancements are capitalized if they result in significant modifications that enable the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion and business process reengineering costs are expensed in the period in which they are incurred. See NOTE 7,Note 9, "GOODWILL AND OTHER INTANGIBLE ASSETS," for additional information.
Warranty
We charge the estimated costs ofestimate and record a liability for base warranty programs other than product recalls, to costat the time our products are sold. Our estimates are based on historical experience and reflect management's best estimates of salesexpected costs at the time products are sold and revenue is recognized. We use historical experiencesubsequent adjustment to developthose expected costs when actual costs differ. Factors considered in developing these estimates included component failure rates, repair costs and the estimated liability for our various warranty programs.point of failure within the product life cycle. As a result of the uncertainty surrounding the nature and frequency of product recall programs,campaigns, the liability for such programscampaigns is recorded when we commit to a recall action or when a recall becomes probable and estimable, which generally occurs when it is announced. The liability for these programscampaigns is reflected in the provision for warranties issued. We review and assess the liability for these programs on a quarterly basis. We also assess our ability to recover certain costs from our suppliers and record a receivable when we believe a recovery is probable. In addition to costs incurred on warranty and recall programs,product campaigns, from time to time we also incur costs related to customer satisfaction programs for items not covered by warranty. We accrue for these costs when agreement is reached with a specific customer. These costs are not included in the provision for warranties, but are included in cost of sales.
In addition, we sell extended warranty coverage on most of our engines. The revenue collected is initially deferredSee Extended Warranty policy discussion above and is recognized as revenue in proportion to the costs expected to be incurred in performing services over the contract period. We compare the remaining deferred revenue balance quarterly to the estimated amount of future claims under extended warranty programs and provide an additional accrual when the deferred revenue balance is less than expected future costs. See NOTE 8,Note 12, "PRODUCT WARRANTY LIABILITY," for additional information.
Research and Development
Our research and development program isprograms are focused on product improvements, product extensions, innovations and cost reductions for our customers. Research and development expenditures include salaries, contractor fees, building costs, utilities, testing, technical IT, administrative expenses and allocation of corporate costs and are expensed, net of contract reimbursements, when incurred. From
time to time, we enter into agreements with customers and government agencies to fund a portion of the research and development costs of a particular project. WeWhen not associated with a sales contract, we generally account for these reimbursements as an offset to the related research and development expenditure. Research and development expenses, net of contract reimbursements, were $734$903 million, in 2017, $616$998 million in 2016 and $718$894 million in 2015.for the years ended December 31, 2020, 2019 and 2018, respectively. Contract reimbursements were $137$86 million, in 2017, $131$90 million in 2016 and $98$120 million in 2015.for the years ended December 31, 2020, 2019 and 2018, respectively.
Related Party Transactions
In accordance with the provisions of various joint venture agreements, we may purchase products and components from our joint ventures, sell products and components to our joint ventures and our joint ventures may sell products and components to unrelated parties. Joint venture transfer prices may differ from normal selling prices. Certain joint venture agreements transfer product at cost, some transfer product on a cost-plus basis, and others transfer product at market value. Our related party sales are presented on the face of our Consolidated Statements of Net Income. Our related party purchases were not material to our financial position or results of operations.
RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Accounting Pronouncements Recently Adopted
In FebruaryAugust 2018, the Financial Accounting Standards Board (FASB) amended itsissued a new standard that aligns the accounting for implementation costs incurred in a cloud computing arrangement accounted for as a service contract with the model currently used for internal use software costs. Under the new standard, costs that meet certain criteria will be required to be capitalized on comprehensive income to provide an option for an entity to reclassify the stranded tax effectsbalance sheet and subsequently amortized over the term of the Tax Cuts and Jobs Act (Tax Legislation) that was passed in December of 2017 from accumulated other comprehensive income (AOCI) directly to retained earnings. The stranded tax effects result fromhosting arrangement. We adopted the remeasurement of deferred tax assets and liabilities which were originally recorded in comprehensive income but whose remeasurement is reflected in the income statement. This is a one-time amendment applicable only to the changes resulting from the Tax Legislation. The standard is effective for us on January 1, 2019, and may be reflected retroactively to any period in which2020, on a prospective basis as allowed by the impacts of the Tax Legislation are recognized. The standard permits early adoption for any financial statements that have not been released as of the date of the revised standard. We elected to early adopt this standard in our 2017 financial statements using specific identification and as a result reclassified $126 million from
AOCI to retained earnings which is reflected in the rollforward of AOCI. This reclassification relates only to the change in the statutory tax rate. See NOTE 14, "ACCUMULATED OTHER COMPREHENSIVE LOSS," for additional information.
In March 2016, the FASB amended its standards related to accounting for stock compensation, which became effective for us beginning January 1, 2017. The amendment replaced the requirement to record excess tax benefits and certain tax deficiencies in additional paid-in capital by recording all excess tax benefits and tax deficiencies as income tax expense / benefit in the Consolidated Statements of Income and was adopted prospectively. In addition, the standard impacted our Consolidated Statements of Cash Flow retrospectively, as excess tax benefits are now required to be presented as an operating activity and the cash paid to tax authorities is required to be presented as a financing activity. This resulted in a net reclassification of $4 million and $6 million from operating to financing activities for the year ended December 31, 2016 and 2015, respectively. Finally, in accordance with the standard, we elected to continue our historical approach of estimating forfeitures during the award's vesting period and adjusting our estimate when it is no longer probable that the employee will fulfill the service condition. The adoption of the standard wasdid not material to our Consolidated Financial Statements.
Accounting Pronouncements Issued But Not Yet Effective
In August 2017, the FASB amended its standards related to accounting for derivatives and hedging. These amendments allow the initial hedge effectiveness assessment to be performed by the end of the first quarter in which the hedge is designated rather than concurrently with entering into the hedge transaction. The changes also expand the use of a periodic qualitative hedge effectiveness assessment in lieu of an ongoing quantitative assessment performed throughout the life of the hedge. The revision removes the requirement to record ineffectiveness on cash flow hedges through the income statement when a hedge is considered highly effective, instead deferring all related hedge gains and losses in "Other comprehensive income" until the hedged item impacts earnings. The modifications permit hedging the contractually-specified price of a component of a commodity purchase and revises certain disclosure requirements. The amendments are effective January 1, 2019 and early adoption is permitted in any interim period or fiscal year prior to the effective date. The revised standard is required to be adopted on a modified retrospective basis for any cash flow or net investment hedge relationships that exist on the date of adoption and prospectively for disclosures. We do not expect the amendments to have a material effectimpact on our Consolidated Financial Statements and are still evaluating early adoption..
In March 2017, the FASB amended its standards related to the presentation of pension and other postretirement benefit costs in the financial statements beginningOn January 1, 2018. Under2020, we adopted the new standard, we will be required to separate service costs from all other elements of pension costs and reflect the other elements of pension costs outside of operating income in our Consolidated Statements of Income. In addition, the standard will limit the amount eligible for capitalization (into inventory or self-constructed assets) to the amount of service cost. This portion of the standard will be applied on a prospective basis. The remainder of the new standard is effective for us on a retrospective basis. The retroactive adoption of this standard will result in a reduction in operating income and a corresponding increase in other income (primarily related to the return on pension assets) of $31 million and $48 million for the years ended December 31, 2017 and 2016, respectively.
In August 2016, the FASB amended its standards related to the classification of certain cash receipts and cash payments. The new standard will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. We do not expect adoption of this standard to have a material impact on our Consolidated Statements of Cash Flows.
In June 2016, the FASB amended its standards related to accounting for credit losses on financial instruments. This amendment introducesstandard introduced new guidance for accounting for credit losses on instruments including trade receivables and held-to-maturity debt securities. The standard required entities to record a cumulative effect adjustment to the statement of financial position. We recorded a net decrease to opening retained earnings of $4 million, net of tax, as of January 1, 2020, due to the cumulative impact of adopting the new rules are effectivestandard. The impact to any individual financial statement line item as a result of applying the new standard, as compared to the old standard, was not material for annual and interim periods beginning afterthe year ended December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We do not expect adoption of this standard to have a material impact on our Consolidated Financial Statements.31, 2020.
In February 2016,March 2020, the FASB amended its standards relatedstandard to provide optional guidance for a limited period of time to ease the potential burden in accounting for leases. Under(or recognizing the new standard, lessees will now be requiredeffects of) reference rate reform on financial reporting. The amendment allows entities to recognize substantially all leases onelect not to apply certain modification accounting requirements to contracts affected by reference rate reform if certain criteria are met. An entity that makes this election would not have to remeasure the balance sheet as bothcontracts at the modification date or reassess a right-of-use-asset and a liability. The standard willprevious accounting determination. Entities can elect various optional expedients that would allow them to continue to have two types of leases for income statement recognition purposes: operating leases and finance leases. Operating leases will result in the recognition of a single lease expense on a straight-line basis over the lease term similar to the treatment for operating leases under today's standards. Finance leases will result in an accelerated expense similar to theapplying hedge accounting for capital leases under today's standards.hedging relationships affected by reference rate reform, if certain criteria are met. These expedients also apply to interest rate locks. The determination of a lease classification as operating or finance will occur in a manner similar to today's standard.guidance was effective upon issuance and expires after December 31, 2022. The new standard also contains amended guidance regarding the identification of embedded leases in service contracts and the identification of lease and non-lease components ofamendment did not have an arrangement. The new standard is effectiveeffect on January 1, 2019, with early adoption permitted.our Consolidated Financial Statements at December 31, 2020. We are still evaluating which contracts will be impacted by reference rate reform, but the impactexpedients will allow us to make permitted changes prior to the standard could have on our Consolidated Financial Statements, including our internal controls over financial
reporting. While we have not yet quantified the amount, we do expect the standard will haveamendments without resulting in a material impact onto our Consolidated Balance Sheets due to the recognition of additional assets and liabilities for operating leases.
In January 2016, the FASB amended its standards related to the accounting for certain financial instruments. This amendment addresses certain aspects of recognition, measurement, presentation and disclosure. The new rules will become effective for annual and interim periods beginning after December 15, 2017. Early adoption is not permitted. We do not expect the standard to have a material impact on ourConsolidated Financial Statements.
In May 2014, the FASB amended its standards related to revenue recognition which replaces all existing revenue recognition guidance
NOTE 2. REVENUE FROM CONTRACTS WITH CUSTOMERS
Long-term Contracts
Most of our contracts are for a period of less than one year. We have certain long-term maintenance agreements, construction contracts and providesextended warranty coverage arrangements that span a single, comprehensive model for all contracts with customers.period in excess of one year. The revised standard contains principles to determine the measurementaggregate amount of revenue and timing of when it is recognized. The underlying principle is that we will recognize revenue to depict the transfer of goods or services to customers at an amount that we expect to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price for long-term maintenance agreements and allowing estimation of variable considerationconstruction contracts allocated to be recognized before contingencies are resolved in certain circumstances. The amendment also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in those judgments as well as assets recognized from costs incurred to fulfill these contracts.
The standard allows either full or modified retrospective adoption effective for annual and interim periods beginning January 1, 2018. We will adopt the standard using the modified retrospective approach.
We identified a change in the manner in which we will account for certain license income. We license certain technology to our unconsolidated joint ventures that meet the definition of functional under the standard, which requires that revenue be recognized at a point in time rather than the current requirement of recognizing it over the license term. Using the modified retrospective adoption method, we will record an adjustment to our opening equity balance at January 1, 2018, to account for the differences between existing revenue recorded and what would have been recorded under the new standard for contracts for which we started recognizing revenue prior to the adoption date. We expect to record a credit to equity of approximately $30 million before taxes. We do not expect a material impact on any individual year from this change.
We also identified transactions where revenue recognition is currently limited to the amount of billings not contingent on our future performance. With the allocation provisions of the new model, we expect to accelerate the timing of revenue recognition for amounts related to satisfiedwould be delayed under the current guidance. We dohad not expect the impact of this change to be material.
On an ongoing basis, we do not expect this amendment to have a material impact on our Consolidated Financial Statements, including our internal controls over financial reporting. The revenue recognition disclosures will significantly expand under the new standard, specifically around the quantitative and qualitative information about performance obligations, changes in contract assets and liabilities and disaggregation of revenue.
NOTE 2. INCOME TAXES
The following table summarizes income before income taxes:
|
| | | | | | | | | | | | |
| |
| Years ended December 31, |
| In millions |
| 2017 |
| 2016 |
| 2015 |
| U.S. income |
| $ | 1,237 |
|
| $ | 995 |
|
| $ | 1,275 |
|
| Foreign income |
| 1,128 |
|
| 935 |
|
| 750 |
|
| Income before income taxes |
| $ | 2,365 |
|
| $ | 1,930 |
|
| $ | 2,025 |
|
Income tax expense (benefit) consists of the following:
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| In millions | | 2017 | | 2016 | | 2015 |
| Current | | | | | | |
| U.S. federal and state | | $ | 355 |
| | $ | 211 |
| | $ | 516 |
|
| Foreign | | 289 |
| | 213 |
| | 147 |
|
Impact of tax legislation
| | 349 |
| | — |
| | — |
|
| Total current | | 993 |
| | 424 |
| | 663 |
|
| Deferred | | | | | | |
| U.S. federal and state | | (42 | ) | | 57 |
| | (151 | ) |
| Foreign | | (12 | ) | | (7 | ) | | 43 |
|
Impact of tax legislation
| | 432 |
| | — |
| | — |
|
| Total deferred | | 378 |
| | 50 |
| | (108 | ) |
| Income tax expense | | $ | 1,371 |
| | $ | 474 |
| | $ | 555 |
|
A reconciliation of the statutory U.S. federal income tax rate to the effective tax rate was as follows:
|
| | | | | | | | | |
| | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Statutory U.S. federal income tax rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
| State income tax, net of federal effect | | 0.6 |
| | 0.8 |
| | 1.2 |
|
| Differences in rates and taxability of foreign subsidiaries and joint ventures | | (6.4 | ) | | (7.2 | ) | | (6.6 | ) |
| Research tax credits | | (1.4 | ) | | (1.7 | ) | | (1.4 | ) |
| Impact of tax legislation | | 33.1 |
| | — |
| | — |
|
| Other, net | | (2.9 | ) | | (2.3 | ) | | (0.8 | ) |
| Effective tax rate | | 58.0 | % | | 24.6 | % | | 27.4 | % |
Our income tax rates are generally less than the 35 percent U.S. statutory income tax rate primarily because of lower taxes on foreign earnings and research tax credits. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (Tax Legislation), which changed the U.S. statutory rate to 21 percent effective January 1, 2018 and requires companies to pay a one-time transition tax on certain previously undistributed earnings of certain foreign subsidiaries and foreign joint ventures that were tax deferred. Our effective tax rate for 2017 was 58.0 percent compared to 24.6 percent for 2016. The impacts of the Tax Legislation resulted in additional tax expense of $781 million.
The Securities and Exchange Commission (SEC) issued guidance which addressed the uncertainty in the application of GAAP to the Tax Legislation where certain income tax effects cannot be finalized at December 31, 2017. This guidance allows entities to record provisional amounts based on current estimates that are updated on a quarterly basis. As a result, our accounting for the effects of the Tax Legislation are not considered complete at this time. The final transition impacts of the Tax Legislation may differ from our estimates, possibly materially, due to, among other things, changes in interpretations of the Tax Legislation, any legislative action to address questions that arise because of the Tax Legislation, any changes in accounting standards for income taxes or related interpretations in response to the Tax Legislation, or any updates or changes to estimates the company has utilized to calculate the transition impacts. The SEC requires final calculations to be completed within the one year measurement period ending December 22, 2018, and reflect any additional guidance issued throughout the year. Any adjustments of provisional amounts will be reported in continuing operations in the period in which the estimates change. We have made provisional estimates of the effects of the Tax Legislation in three primary areas: (1) our existing deferred tax balances; (2) the one-time transition tax and (3) the withholding tax accrued on those earnings no longer considered permanently reinvested at December 31, 2017. Each of these items is described in more detail below.
Deferred tax assets and liabilities
We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent. We are still analyzing certain aspects of the Tax Legislation and refining our calculations, which could potentially affect the measurement of these balances. The provisional amount related to the remeasurement of our deferred tax balance is an incremental tax expense of $152 million. See NOTE 3, "INVESTMENTS IN EQUITY INVESTEES," for the impact to our equity investees.
One-time transition tax
The one-time transition tax is based on our total post-1986 unrepatriated earnings and profits not previously subject to U.S. income tax. The recorded provisional amount for our one-time transition tax is a tax expense of $298 million with a cash impact of $338 million .
Withholding tax
Withholding tax is an additional cost associated with the distribution of earnings from some jurisdictions. As a result of the Tax Legislation, we reconsidered previous assertions regarding earnings that were considered permanently reinvested, which requires us to record withholding taxes on earnings likely to be distributed in the foreseeable future. The assertion as to which earnings are permanently reinvested for purposes of calculating withholding tax is provisional as we refine the underlying calculations of the amount of earnings subject to the tax and the rate at which it will be taxed. The recorded provisional amount for the withholding tax resulted in an incremental tax expense of $331 million. See NOTE 3, "INVESTMENTS IN EQUITY INVESTEES," and NOTE 16, "NONCONTROLLING INTERESTS," for the impact of withholding taxes to our equity investees and noncontrolling interests.
Carryforward tax benefits and the tax effect of temporary differences between financial and tax reporting that give rise to net deferred tax (liabilities) assets were as follows:
|
| | | | | | | | |
| | | December 31, |
| In millions | | 2017 | | 2016 |
| Deferred tax assets | | | | |
| U.S. state carryforward benefits | | $ | 200 |
| | $ | 159 |
|
| Foreign carryforward benefits | | 159 |
| | 154 |
|
| Employee benefit plans | | 274 |
| | 401 |
|
| Warranty expenses | | 300 |
| | 405 |
|
| Accrued expenses | | 95 |
| | 107 |
|
| Other | | 70 |
| | 64 |
|
| Gross deferred tax assets | | 1,098 |
| | 1,290 |
|
| Valuation allowance | | (347 | ) | | (307 | ) |
| Total deferred tax assets | | 751 |
| | 983 |
|
| Deferred tax liabilities | | | | |
| Property, plant and equipment | | (250 | ) | | (319 | ) |
| Unremitted income of foreign subsidiaries and joint ventures | | (331 | ) | | (59 | ) |
| Employee benefit plans | | (224 | ) | | (213 | ) |
| Other | | (31 | ) | | (48 | ) |
| Total deferred tax liabilities | | (836 | ) | | (639 | ) |
| Net deferred tax (liabilities) assets | | $ | (85 | ) | | $ | 344 |
|
Our 2017 U.S. carryforward benefits include $200 million of state credit and net operating loss carryforward benefits that begin to expire in 2018. Our foreign carryforward benefits include $159 million of net operating loss carryforwards that begin to expire in 2018. A valuation allowance is recorded to reduce the gross deferred tax assets to an amount we believe is more likely than not to be realized. The valuation allowance was $347 million and increased in 2017 by a net $40 million. The valuation allowance is primarily attributable to the uncertainty regarding the realization of a portion of the U.S. state and foreign net operating loss and tax credit carryforward benefits.
Our Consolidated Balance Sheets contain the following tax related items:
|
| | | | | | | | |
| | | December 31, |
| In millions | | 2017 | | 2016 |
| Prepaid and other current assets | | | | |
| Refundable income taxes | | $ | 152 |
| | $ | 192 |
|
| Other assets | | | | |
| Deferred income tax assets | | 306 |
| | 420 |
|
| Long-term refundable income taxes | | 6 |
| | 22 |
|
| Accrued expenses | | | | |
| Income tax payable | | 77 |
| | 48 |
|
| Other liabilities and deferred revenue | | | | |
| Income tax payable | | 281 |
| | — |
|
| Deferred income tax liabilities | | 391 |
| | 76 |
|
A reconciliation of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 was as follows:
|
| | | | | | | | | | | | |
| | | December 31, |
| In millions | | 2017 | | 2016 | | 2015 |
| Balance at beginning of year | | $ | 59 |
| | $ | 135 |
| | $ | 174 |
|
| Additions to current year tax positions | | 11 |
| | 10 |
| | 8 |
|
| Additions to prior years' tax positions | | 9 |
| | 18 |
| | 24 |
|
| Reductions to prior years' tax positions | | (3 | ) | | — |
| | — |
|
| Reductions for tax positions due to settlements with taxing authorities | | (35 | ) | | (104 | ) | | (71 | ) |
| Balance at end of year | | $ | 41 |
| | $ | 59 |
| | $ | 135 |
|
Included in the December 31, 2017, 2016 and 2015, balances are $32 million, $31 million and $78 million, respectively, related to tax positions that, if recognized, would favorably impact the effective tax rate in future periods. Also, we had accrued interest expense related to the unrecognized tax benefits of $4 million, $3 million and $8 millionbeen satisfied as of December 31, 2017, 20162020, was $879 million. We expect to recognize the related revenue of $160 million over the next 12 months and 2015, respectively. We recognize potential accrued interest and penalties related$719 million over periods up to unrecognized tax benefits in income tax expense. For the years ended December 31, 2017, 2016 and 2015, we recognized $3 million, $2 million and $5 million in net interest expense, respectively.
Audit outcomes and10 years. See Note 12,"PRODUCT WARRANTY LIABILITY," for additional disclosures on extended warranty coverage arrangements. Our other contracts generally are for a duration of less than one year, include payment terms that correspond to the timing of audit settlements are subjectcosts incurred when providing goods and services to significant uncertainty. Although we believeour customers or represent sales-based royalties.
Deferred and Unbilled Revenue
The following is a summary of our unbilled and deferred revenue and related activity:
| | | | | | | | | | | | | | | | |
| | Years ended December 31, | | |
| In millions | | 2020 | | 2019 | | |
| Unbilled revenue | | $ | 114 | | | $ | 68 | | | |
| Deferred revenue, primarily extended warranty | | 1,531 | | | 1,354 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
We recognized revenue of $372 million and $365 million in 2020 and 2019, respectively, that adequate provision has been made for such issues, there iswas included in the possibility thatdeferred revenue balance at the ultimate resolutionbeginning of such issues could have an adverse effecteach year. We did not record any impairment losses on our earnings. Conversely, if these issues are resolved favorably inunbilled revenues during 2020 or 2019.
Disaggregation of Revenue
Consolidated Revenue
The table below presents our consolidated sales by geographic area. Net sales attributed to geographic areas were based on the future,location of the related provision would be reduced, thus having a positive impact on earnings.customer.
As a result of our global operations, we file income tax returns in various jurisdictions including U.S. federal, state and foreign jurisdictions. We are routinely subject to examination | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, | | | | |
| In millions | | 2020 | | 2019 | | 2018 | | |
| | | | | | | | | | |
| United States | | $ | 10,605 | | | $ | 13,519 | | | $ | 13,218 | | | | | |
| | | | | | | | | | |
| China | | 2,832 | | | 2,331 | | | 2,324 | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| India | | 680 | | | 848 | | | 965 | | | | | |
| | | | | | | | | | |
| Other international | | 5,694 | | | 6,873 | | | 7,264 | | | | | |
| Total net sales | | $ | 19,811 | | | $ | 23,571 | | | $ | 23,771 | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Segment Revenue
Engine segment external sales by taxing authorities throughout the world, including Australia, Belgium, Brazil, Canada, China, France, India, Mexico, the U.K. and the U.S. With few exceptions, our U.S. federal, major state and foreign jurisdictions are no longer subject to income tax assessments for years before 2013. The U.S. examinations related to tax years 2013-2015 concluded during 2017.market were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | Years ended December 31, |
| In millions | | 2020 | | 2019 | | 2018 |
| Heavy-duty truck | | $ | 1,800 | | | $ | 2,626 | | | $ | 2,885 | |
| Medium-duty truck and bus | | 1,629 | | | 2,244 | | | 2,536 | |
| Light-duty automotive | | 1,441 | | | 1,656 | | | 1,501 | |
| Total on-highway | | 4,870 | | | 6,526 | | | 6,922 | |
| Off-highway | | 1,055 | | | 1,044 | | | 1,080 | |
| Total sales | | $ | 5,925 | | | $ | 7,570 | | | $ | 8,002 | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | Years ended December 31, |
| In millions | | 2020 | | 2019 | | 2018 |
| North America | | $ | 4,688 | | | $ | 5,513 | | | $ | 5,331 | |
| Asia Pacific | | 799 | | | 875 | | | 851 | |
| Europe | | 597 | | | 528 | | | 536 | |
| China | | 340 | | | 356 | | | 317 | |
| Africa and Middle East | | 198 | | | 235 | | | 242 | |
| Russia | | 191 | | | 157 | | | 169 | |
| India | | 150 | | | 200 | | | 192 | |
| Latin America | | 147 | | | 176 | | | 169 | |
| Total sales | | $ | 7,110 | | | $ | 8,040 | | | $ | 7,807 | |
| | | | | | |
Distribution segment external sales by product line were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | Years ended December 31, |
| In millions | | 2020 | | 2019 | | 2018 |
| Parts | | $ | 2,921 | | | $ | 3,278 | | | $ | 3,222 | |
| Power generation | | 1,686 | | | 1,777 | | | 1,482 | |
| Service | | 1,258 | | | 1,474 | | | 1,471 | |
| Engines | | 1,245 | | | 1,511 | | | 1,632 | |
| Total sales | | $ | 7,110 | | | $ | 8,040 | | | $ | 7,807 | |
| | | | | | |
Components segment external sales by business were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | Years ended December 31, |
| In millions | | 2020 | | 2019 | | 2018 |
| Emission solutions | | $ | 2,352 | | | $ | 2,763 | | | $ | 2,780 | |
| Filtration | | 1,005 | | | 1,024 | | | 1,010 | |
| Turbo technologies | | 673 | | | 696 | | | 761 | |
| Electronics and fuel systems | | 317 | | | 236 | | | 237 | |
| Automated transmissions | | 303 | | | 534 | | | 543 | |
| Total sales | | $ | 4,650 | | | $ | 5,253 | | | $ | 5,331 | |
| | | | | | |
Power Systems segment external sales by product line were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | Years ended December 31, |
| In millions | | 2020 | | 2019 | | 2018 |
| Power generation | | $ | 1,155 | | | $ | 1,414 | | | $ | 1,467 | |
| Industrial | | 638 | | | 908 | | | 801 | |
| Generator technologies | | 262 | | | 348 | | | 357 | |
| Total sales | | $ | 2,055 | | | $ | 2,670 | | | $ | 2,625 | |
| | | | | | |
NOTE 3. INVESTMENTS IN EQUITY INVESTEES
Investments and advances related to equity method investees and our ownership percentage waspercentages were as follows:
|
| | | | | | | | | | |
| | | | | December 31, |
| In millions | | Ownership % | | 2017 | | 2016 |
| Beijing Foton Cummins Engine Co., Ltd. | | 50% | | $ | 223 |
| | $ | 163 |
|
| Komatsu alliances | | 20-50% | | 219 |
| | 197 |
|
| Dongfeng Cummins Engine Company, Ltd. | | 50% | | 146 |
| | 111 |
|
| Cummins-Scania XPI Manufacturing, LLC | | 50% | | 87 |
| | 82 |
|
| Chongqing Cummins Engine Company, Ltd. | | 50% | | 84 |
| | 73 |
|
| Tata Cummins, Ltd. | | 50% | | 59 |
| | 63 |
|
| Other | | Various | | 338 |
| | 257 |
|
| Investments and advances related to equity method investees | | | | $ | 1,156 |
| | $ | 946 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, |
| Dollars in millions | | Ownership % | | 2020 | | 2019 |
| Komatsu alliances | | 20-50% | | $ | 309 | | | $ | 267 | |
| Beijing Foton Cummins Engine Co., Ltd. | | 50% | | 255 | | | 193 | |
| Dongfeng Cummins Engine Company, Ltd. | | 50% | | 134 | | | 149 | |
| Chongqing Cummins Engine Company, Ltd. | | 50% | | 125 | | | 110 | |
| Cummins-Scania XPI Manufacturing, LLC | | 50% | | 99 | | | 96 | |
| Tata Cummins, Ltd. | | 50% | | 78 | | | 60 | |
| Other | | Various | | 441 | | | 362 | |
| Investments and advances related to equity method investees | | | | $ | 1,441 | | | $ | 1,237 | |
| | | | | | |
We have approximately $614$882 million in our investment account at December 31, 2017,2020, that represents cumulative undistributed income in our equity investees. Dividends received from our unconsolidated equity investees were $219$271 million, $212$260 million and $248$242 million in 2017, 20162020, 2019 and 2015,2018, respectively.
Equity, royalty and interest income from investees, net of applicable taxes, was as follows:
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| In millions | | 2017 | | 2016 | | 2015 |
| Distribution entities | | | | | | |
| Komatsu Cummins Chile, Ltda. | | $ | 30 |
| | $ | 34 |
| | $ | 31 |
|
| North American distributors | | — |
| | 21 |
| | 33 |
|
| All other distributors | | (1 | ) | | — |
| | 3 |
|
| Manufacturing entities | | | | | | |
| Beijing Foton Cummins Engine Co., Ltd. | | 94 |
| | 52 |
| | 62 |
|
| Dongfeng Cummins Engine Company, Ltd. | | 73 |
| | 46 |
| | 51 |
|
| Chongqing Cummins Engine Company, Ltd. | | 41 |
| | 38 |
| | 41 |
|
| Dongfeng Cummins Emission Solutions Co., Ltd. | | 13 |
| | 9 |
| | 6 |
|
| Shanghai Fleetguard Filter Co., Ltd. | | 12 |
| | 10 |
| | 10 |
|
| Cummins Westport, Inc. | | 9 |
| (1) | 11 |
| | 18 |
|
| All other manufacturers | | 37 |
| (1) | 39 |
| | 18 |
|
| Cummins share of net income | | 308 |
| | 260 |
| | 273 |
|
| Royalty and interest income | | 49 |
| | 41 |
| | 42 |
|
| Equity, royalty and interest income from investees | | $ | 357 |
| | $ | 301 |
| | $ | 315 |
|
(1) U.S. tax legislation passed in December 2017 decreased our equity earnings at certain equity investees, including a $7 million unfavorable impact to Cummins Westport, Inc. due to the remeasurement of deferred taxes and a $32 million unfavorable impact to "All other manufacturers" due to withholding tax adjustments on foreign earnings. See Note 2, "INCOME TAXES," to our Consolidated Financial Statements for additional information.
Distribution Entities
We have an extensive worldwide distributor and dealer network through which we sell and distribute our products and services. Generally, our distributors are divided by geographic region with some of our distributors being wholly-owned by Cummins, some partially-owned and some independently owned. We consolidate all wholly-owned distributors and partially-owned distributors where we are the primary beneficiary and account for other partially-owned distributors using the equity method of accounting.
| |
• | Komatsu Cummins Chile, Ltda. - Komatsu Cummins Chile, Ltda. is a joint venture with Komatsu America Corporation. The joint venture is a distributor that offers the full range of our products and services to customers and end-users in Chile and Peru.
|
| |
• | North American Distributors - During 2016, we acquired the remaining interest in the final unconsolidated North American distributor joint venture.
|
In certain cases where we own a partial interest in a distributor, we may be obligated to purchase the other equity holders' interests if certain events occur (such as the death or resignation of the distributor principal or a change in control of Cummins Inc.). The purchase consideration of the equity interests may be determined based on the fair vale of the distributor's assets. Repurchase obligations and practices vary by geographic region.
All distributors that are partially-owned are considered to be related parties in our Consolidated Financial Statements. | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | |
| In millions | | 2020 | | 2019 | | 2018 | |
| Manufacturing entities | | | | | | | |
| Beijing Foton Cummins Engine Co., Ltd. | | $ | 113 | | | $ | 60 | | | $ | 72 | | |
| Dongfeng Cummins Engine Company, Ltd. | | 63 | | | 52 | | | 58 | | |
| Chongqing Cummins Engine Company, Ltd. | | 35 | | | 41 | | | 51 | | |
| All other manufacturers | | 134 | | (1)(2) | 88 | | | 129 | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Distribution entities | | | | | | | |
| Komatsu Cummins Chile, Ltda. | | 31 | | | 28 | | | 26 | | |
| All other distributors | | 2 | | | 2 | | | 0 | | |
| | | | | | | |
| | | | | | | |
| Cummins share of net income | | 378 | | | 271 | | | 336 | | |
| Royalty and interest income | | 74 | | | 59 | | | 58 | | |
| Equity, royalty and interest income from investees | | $ | 452 | | | $ | 330 | | | $ | 394 | | |
| | | | | | | |
(1) Includes $37 million in favorable adjustments related to tax changes within India's 2020-2021 Union Budget of India (India Tax Law Change) passed in March 2020. See NOTE 4, "INCOME TAXES" for additional information on India Tax Law Change. |
(2) Includes impairment charges of $13 million and loss on sale of business of $8 million for a joint venture in the Power Systems segment. |
|
Manufacturing Entities
Our manufacturing joint ventures have generally been formed with customers and generally are primarily intended to allow us to increase our market penetration in geographic regions, reduce capital spending, streamline our supply chain management and develop technologies. Our largest manufacturing joint ventures are based in China and are included in the list below. Our engine manufacturing joint ventures are supplied by our Components segment in the same manner as it supplies our wholly-owned Engine segment and Power Systems segment manufacturing facilities. Our Components segment joint ventures and wholly ownedwholly-owned entities provide electronics, fuel systems, filtration, aftertreatment systems, turbocharger products and automated transmissions that are used with our engines as well as some competitors' products. The results and investments in our joint ventures in which we have 50 percent or less ownership interest (except for Eaton Cummins Automated Transmission Technologies joint venture which is consolidated due to our majority voting interest) are included in “Equity, royalty and interest income from investees” and “Investments and advances related to equity method investees” in our Consolidated Statements of Net Incomeand Consolidated Balance Sheets, respectively.
•Beijing Foton Cummins Engine Co., Ltd. - Beijing Foton Cummins Engine Co., Ltd. is a joint venture in China with Beiqi Foton Motor Co., Ltd., a commercial vehicle manufacturer, which has two distinct lines of business - a light-duty business and a heavy-duty business. The light-duty business produces our families of ISF 2.8 liter to 4.5 liter high performance light-duty diesel engines in Beijing. These engines are used in light-duty and medium-duty commercial trucks, pick-up trucks, buses, multipurpose and sport utility vehicles with main markets in China, Brazil and Russia. Certain types of small construction equipment and industrial applications are also served by these engine families. The heavy-duty business produces the X11, X12 and X13, ranging from 10.5 liter to 12.9 liter, high performance heavy-duty diesel engines in Beijing. Certain types of construction equipment and industrial applications are also served by these engine families.
| |
• | Beijing Foton Cummins Engine Co., Ltd. - Beijing Foton Cummins Engine Co., Ltd. is a joint venture in China with Beiqi Foton Motor Co., Ltd., a commercial vehicle manufacturer, which consists of two distinct lines of business, a light-duty business and a heavy-duty business. The light-duty business produces our families of ISF 2.8 liter to 4.5 liter high performance light-duty diesel engines in Beijing. These engines are used in light-duty commercial trucks, pickup trucks, buses, multipurpose and sport utility vehicles with main markets in China, Brazil and Russia. Certain types of marine, small construction equipment and industrial applications are also served by these engine families. The heavy-duty business produces ISG 10.5 liter and ISG 11.8 liter families of our high performance heavy-duty diesel engines in Beijing. These engines are used in heavy-duty commercial trucks in China and will be used by Cummins either directly sourced from China and/or locally assembled in other markets. Certain types of construction equipment and industrial applications are also served by these engine families.
|
| |
• | Dongfeng Cummins Engine Company, Ltd. - Dongfeng Cummins Engine Company, Ltd. (DCEC) is a joint venture in China with Dongfeng Automotive Co. Ltd., a subsidiary of Dongfeng Motor Corporation, one of the largest medium-duty and heavy-duty truck manufacturers in China. DCEC produces Cummins 3.9 to 13-liter mechanical engines, full-electric diesel engines, with a power range from 80 to 680 horsepower, and natural gas engines.
|
| |
• | Chongqing Cummins Engine Company, Ltd. - Chongqing Cummins Engine Company, Ltd. is a joint venture in China with Chongqing Machinery and Electric Co. Ltd. This joint venture manufactures several models of our heavy-duty and high-horsepower diesel engines, primarily serving the industrial and stationary power markets in China.
|
| |
• | Dongfeng Cummins Emission Solutions Co., Ltd. -Dongfeng Cummins Emission Solutions Co. Ltd. is a joint venture in China with Dongfeng Industrial Company, a subsidiary of Dongfeng Motor Group Company Limited, a manufacturer of numerous on-highway vehicles. This joint venture produces, purchases and sells advanced diesel engine aftertreatment solutions to support the full line of Dongfeng's commercial vehicles.
|
| |
• | Shanghai Fleetguard Filter Co., Ltd. -Shanghai Fleetguard Filter Co. Ltd. is a joint venture in China with Dongfeng Motor Co., Ltd., a manufacturer of numerous on-highway vehicles. This joint venture produces and sells filters and filter parts to support the full line of Dongfeng's commercial vehicles.
|
| |
• | Cummins Westport, Inc. -Cummins Westport Inc. is a joint venture in Canada with Westport Innovations Inc. to market and sell automotive spark-ignited natural gas engines worldwide and to participate in joint technology projects on low-emission technologies.
|
•Chongqing Cummins Engine Company, Ltd. - Chongqing Cummins Engine Company, Ltd. is a joint venture in China with Chongqing Machinery and Electric Co. Ltd. This joint venture manufactures several models of our heavy-duty and high-horsepower diesel engines primarily serving the industrial and stationary power markets in China.
Distribution Entities
We have an extensive worldwide distributor and dealer network through which we sell and distribute our products and services. Generally, our distributors are divided by geographic region with some of our distributors being wholly-owned by Cummins, some partially-owned and some independently owned. We consolidate all wholly-owned distributors and partially-owned distributors where we are the primary beneficiary and account for other partially-owned distributors using the equity method of accounting.
In certain cases where we own a partial interest in a distributor, we may be obligated to purchase the other equity holders' interests if certain events occur (such as the death or resignation of the distributor principal or a change in control of Cummins Inc.). The purchase consideration of the equity interests may be determined based on the fair value of the distributor's assets. Repurchase obligations and practices vary by geographic region.
All distributors that are partially-owned are considered to be related parties in our Consolidated Financial Statements.
Equity Investee Financial Summary
Summary financial information for our equity investees was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | For the years ended and at December 31, |
| In millions | | 2020 | | 2019 | | 2018 |
| Net sales | | $ | 7,794 | | | $ | 7,068 | | | $ | 7,352 | |
| Gross margin | | 1,418 | | | 1,274 | | | 1,373 | |
| Net income | | 696 | | | 566 | | | 647 | |
| | | | | | |
| Cummins share of net income | | $ | 378 | | | $ | 271 | | | $ | 336 | |
| Royalty and interest income | | 74 | | | 59 | | | 58 | |
| Total equity, royalty and interest from investees | | $ | 452 | | | $ | 330 | | | $ | 394 | |
| | | | | | |
| Current assets | | $ | 4,264 | | | $ | 3,282 | | | |
| Non-current assets | | 1,673 | | | 1,622 | | | |
| Current liabilities | | (3,347) | | | (2,654) | | | |
| Non-current liabilities | | (251) | | | (326) | | | |
| Net assets | | $ | 2,339 | | | $ | 1,924 | | | |
| | | | | | |
| Cummins share of net assets | | $ | 1,361 | | | $ | 1,159 | | | |
|
| | | | | | | | | | | | |
| | | For the years ended and at December 31, |
| In millions | | 2017 | | 2016 | | 2015 |
| Net sales | | $ | 7,050 |
| | $ | 5,654 |
| | $ | 5,946 |
|
| Gross margin | | 1,422 |
| | 1,182 |
| | 1,265 |
|
| Net income | | 680 |
| | 499 |
| | 521 |
|
| | | | | | | |
| Cummins share of net income | | $ | 308 |
| | $ | 260 |
| | $ | 273 |
|
| Royalty and interest income | | 49 |
| | 41 |
| | 42 |
|
| Total equity, royalty and interest from investees | | $ | 357 |
| | $ | 301 |
| | $ | 315 |
|
| | | | | | | |
| Current assets | | $ | 3,416 |
| | $ | 2,602 |
| | |
|
| Non-current assets | | 1,379 |
| | 1,377 |
| | |
|
| Current liabilities | | (2,567 | ) | | (1,938 | ) | | |
|
| Non-current liabilities | | (237 | ) | | (232 | ) | | |
|
| Net assets | | $ | 1,991 |
| | $ | 1,809 |
| | |
|
| | | | | | | |
| Cummins share of net assets | | $ | 1,116 |
| | $ | 927 |
| | |
|
Sale
NOTE 4. INCOME TAXES
The following table summarizes income before income taxes:
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| In millions | | 2020 | | 2019 | | 2018 |
| | | | | | |
| U.S. income | | $ | 1,134 | | | $ | 1,677 | | | $ | 1,239 | |
| Foreign income | | 1,204 | | | 1,157 | | | 1,514 | |
| Income before income taxes | | $ | 2,338 | | | $ | 2,834 | | | $ | 2,753 | |
| | | | | | |
Income tax expense (benefit) consists of the fourth quarterfollowing:
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| In millions | | 2020 | | 2019 | | 2018 |
| Current | | | | | | |
| U.S. federal and state | | $ | 162 | | | $ | 288 | | | $ | 303 | |
| Foreign | | 358 | | | 282 | | | 348 | |
| Impact of tax law changes | | 0 | | | 0 | | | 153 | |
| Total current income tax expense | | 520 | | | 570 | | | 804 | |
| Deferred | | | | | | |
| U.S. federal and state | | 2 | | | (32) | | | (71) | |
| Foreign | | 22 | | | 28 | | | (26) | |
| Impact of tax law changes | | (17) | | | 0 | | | (141) | |
| Total deferred income tax expense (benefit) | | 7 | | | (4) | | | (238) | |
| Income tax expense | | $ | 527 | | | $ | 566 | | | $ | 566 | |
| | | | | | |
A reconciliation of 2016,the statutory U.S. federal income tax rate to the effective tax rate was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| Statutory U.S. federal income tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State income tax, net of federal effect | | 1.0 | | | 1.1 | | | 0.9 | |
| Differences in rates and taxability of foreign subsidiaries and joint ventures | | 3.6 | | | 1.5 | | | (0.2) | |
| Research tax credits | | (1.3) | | | (1.5) | | | (1.2) | |
| Foreign derived intangible income | | (1.2) | | | (1.3) | | | (1.3) | |
| Impact of tax law changes | | (0.7) | | | 0 | | | 0.5 | |
| Other, net | | 0.1 | | | (0.8) | | | 0.9 | |
| Effective tax rate | | 22.5 | % | | 20.0 | % | | 20.6 | % |
| | | | | | |
Our effective tax rate for 2020 was 22.5 percent compared to 20.0 percent for 2019 and 20.6 percent for 2018. The year ended December 31, 2020, contained $26 million, or $0.17 per share, of unfavorable net discrete tax items, primarily due to $33 million of unfavorable changes in tax reserves and $10 million of withholding tax adjustments, partially offset by $15 million of favorable changes due to the India Tax Law Change. The India Tax Law Change eliminated the dividend distribution tax and replaced it with a lower rate withholding tax as the burden shifted from the dividend payor to the dividend recipient for a net favorable income statement impact of $35 million.
The year ended December 31, 2019, contained $34 million of favorable net discrete tax items, primarily due to withholding taxes and provision to return adjustments.
The year ended December 31, 2018, contained $14 million of favorable net discrete tax items, primarily due to $26 million of other favorable discrete tax items, partially offset by $12 million of unfavorable discrete tax items related to final adjustments for 2017 tax legislation.
The India Tax Law Change resulted in the following adjustments to the Consolidated Statements of Net Income for the year ended December 31, 2020:
| | | | | | | | | | | | | | |
| | | | |
| | | | | | | | |
| In millions | | | | | | Favorable (Unfavorable) | | |
| Equity, royalty and interest income from investees | | | | | | $ | 37 | | | |
Income tax expense (1) | | | | | | 17 | | | |
| Less: Net income attributable to noncontrolling interests | | | | | | (19) | | | |
| | | | | | | | |
| Net income statement impact | | | | | | $ | 35 | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(1) The adjustment to "Income tax expense"includes $15 million of favorable discrete items. | | |
| | | | | | | | |
At December 31, 2020, $3.7 billion of non-U.S. earnings are considered indefinitely reinvested in operations outside the U.S. for which deferred taxes have not been provided. Determination of the related deferred tax liability, if any, is not practicable because of the complexities associated with the hypothetical calculation.
Carryforward tax benefits and the tax effect of temporary differences between financial and tax reporting that give rise to net deferred tax (liabilities) assets were as follows:
| | | | | | | | | | | | | | |
| | | December 31, |
| In millions | | 2020 | | 2019 |
| Deferred tax assets | | | | |
| U.S. and state carryforward benefits | | $ | 223 | | | $ | 207 | |
| Foreign carryforward benefits | | 159 | | | 157 | |
| Employee benefit plans | | 273 | | | 279 | |
| Warranty expenses | | 445 | | | 427 | |
| | | | |
| Lease liabilities | | 107 | | | 122 | |
| Accrued expenses | | 93 | | | 76 | |
| Other | | 52 | | | 44 | |
| Gross deferred tax assets | | 1,352 | | | 1,312 | |
| Valuation allowance | | (346) | | | (317) | |
| Total deferred tax assets | | 1,006 | | | 995 | |
| Deferred tax liabilities | | | | |
| Property, plant and equipment | | (258) | | | (260) | |
| Unremitted income of foreign subsidiaries and joint ventures | | (185) | | | (181) | |
| Employee benefit plans | | (229) | | | (222) | |
| Lease assets | | (103) | | | (120) | |
| Other | | (77) | | | (77) | |
| Total deferred tax liabilities | | (852) | | | (860) | |
| Net deferred tax assets | | $ | 154 | | | $ | 135 | |
| | | | |
Our 2020 U.S. carryforward benefits include $223 million of state credit and net operating loss carryforward benefits that begin to expire in 2021. Our foreign carryforward benefits include $159 million of net operating loss carryforwards that begin to expire in 2021. A valuation allowance is recorded to reduce the gross deferred tax assets to an amount we sold our remaining 49 percent interest in Cummins Olayan Energy for $61believe is more likely than not to be realized. The valuation allowance is $346 million and increased in 2020 by a net $29 million. The valuation allowance is primarily attributable to the uncertainty regarding the realization of a portion of the U.S. state and foreign net operating loss and tax credit carryforward benefits.
Our Consolidated Balance Sheets contain the following tax related items:
| | | | | | | | | | | | | | |
| | December 31, |
| In millions | | 2020 | | 2019 |
| Prepaid expenses and other current assets | | | | |
| | | | |
| Refundable income taxes | | $ | 172 | | | $ | 191 | |
| Other assets | | | | |
| Deferred income tax assets | | 479 | | | 441 | |
| Long-term refundable income taxes | | 23 | | | 23 | |
| Other accrued expenses | | | | |
| Income tax payable | | 82 | | | 52 | |
| Other liabilities | | | | |
| One-time transition tax | | 289 | | | 293 | |
| Deferred income tax liabilities | | 325 | | | 306 | |
| | | | |
A reconciliation of unrecognized tax benefits for the years ended December 31, 2020, 2019 and 2018 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| In millions | | 2020 | | 2019 | | 2018 |
| Balance at beginning of year | | $ | 77 | | | $ | 71 | | | $ | 41 | |
| Additions to current year tax positions | | 9 | | | 23 | | | 10 | |
| Additions to prior years' tax positions | | 49 | | | 5 | | | 27 | |
| Reductions to prior years' tax positions | | (13) | | | (11) | | | (2) | |
| Reductions for tax positions due to settlements with taxing authorities | | 0 | | | (11) | | | (5) | |
| | | | | | |
| Balance at end of year | | $ | 122 | | | $ | 77 | | | $ | 71 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Included in the December 31, 2020, 2019 and 2018, balances are $114 million, $69 million and $62 million, respectively, related to tax positions that, if recognized, a gainwould favorably impact the effective tax rate in future periods. We have also accrued interest expense related to the unrecognized tax benefits of $17 million.million, $5 million and $4 million as of December 31, 2020, 2019 and 2018, respectively. We received cashrecognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.
Audit outcomes and the timing of $58 million withaudit settlements are subject to significant uncertainty. Although we believe that adequate provision has been made for such issues, there is the remaining balance receivablepossibility that the ultimate resolution of such issues could have an adverse effect on our earnings. Conversely, if these issues are resolved favorably in the future, periods.the related provision would be reduced, thus having a positive impact on earnings.
As a result of our global operations, we file income tax returns in various jurisdictions including U.S. federal, state and foreign jurisdictions. We are routinely subject to examination by taxing authorities throughout the world, including Australia, Belgium, Brazil, Canada, China, France, India, Mexico, the U.K. and the U.S. With few exceptions, our U.S. federal, major state and foreign jurisdictions are no longer subject to income tax assessments for years before 2016. NOTE 4.5. MARKETABLE SECURITIES
A summary of marketable securities, all of which are classified as current, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | | 2020 | | 2019 |
| In millions | | Cost | | Gross unrealized gains/(losses) (1) | | Estimated
fair value | | Cost | | Gross unrealized gains/(losses) (1) | | Estimated
fair value |
| Equity securities | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Debt mutual funds | | $ | 267 | | | $ | 5 | | | $ | 272 | | | $ | 180 | | | $ | 3 | | | $ | 183 | |
| Certificates of deposit | | 164 | | | — | | | 164 | | | 133 | | | — | | | 133 | |
| Equity mutual funds | | 19 | | | 5 | | | 24 | | | 19 | | | 4 | | | 23 | |
| Bank debentures | | 0 | | | — | | | 0 | | | 1 | | | — | | | 1 | |
| | | | | | | | | | | | |
| Debt securities | | 1 | | | 0 | | | 1 | | | 1 | | | 0 | | | 1 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Total marketable securities | | $ | 451 | | | $ | 10 | | | $ | 461 | | | $ | 334 | | | $ | 7 | | | $ | 341 | |
| | | | | | | | | | | | |
(1) Unrealized gains and losses for debt securities are recorded in other comprehensive income while unrealized gains and losses for equity securities are recorded in "Other income, net" in our Consolidated Statements of Net Income. |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| In millions | | Cost | | Gross unrealized
gains/(losses) | | Estimated
fair value | | Cost | | Gross unrealized
gains/(losses) | | Estimated
fair value |
Available-for-sale (1) | | |
| | |
| | |
| | |
| | |
| | |
|
| Debt mutual funds | | $ | 170 |
| | $ | — |
| | $ | 170 |
| | $ | 132 |
| | $ | — |
| | $ | 132 |
|
| Bank debentures | | — |
| | — |
| | — |
| | 114 |
| | — |
| | 114 |
|
| Equity mutual funds | | 12 |
| | 3 |
| | 15 |
| | 12 |
| | — |
| | 12 |
|
| Certificates of deposit | | 12 |
| | — |
| | 12 |
| | — |
| | — |
| | — |
|
| Government debt securities | | 1 |
| | — |
| | 1 |
| | 2 |
| | — |
| | 2 |
|
| Total marketable securities | | $ | 195 |
| | $ | 3 |
| | $ | 198 |
| | $ | 260 |
| | $ | — |
| | $ | 260 |
|
(1)All marketabledebt securities are classified as available-for-sale. All marketable securities presented use a Level 2 securities.fair value measure. The fair value of Level 2 securities is estimated using actively quoted prices for similar instruments from brokers and observable inputs where available, including market transactions and third-party pricing services, or net asset values provided to investors. We do not currently have any Level 3 securities, and there were no transfers between Level 2 or 3 during 20172020 or 2016.2019.
A description of the valuation techniques and inputs used for our Level 2 fair value measures wasis as follows:
•Debt mutual funds
| |
• | Debt mutual funds— The fair value measure for the vast majority of these investments is the daily net asset value measures for the vast majority of these investments are the daily net asset values published on a regulated governmental website. Daily quoted prices are available from the issuing brokerage and are used on a test basis to corroborate this Level 2 input.
|
| |
• | Bank debentures and Certificates of deposit— These investments provide us with a contractual rate of return and generally range in maturity from three months to five years. The counterparties to these investments are reputable financial institutions with investment grade credit ratings. Since these instruments are not tradable and must be settled directly by us with the respective financial institution, our fair value measure is the financial institutions’ month-end statement.
|
| |
• | Equity mutual funds— The fair value measure for these investments is the net asset value published by the issuing brokerage. Daily quoted prices are available from reputable third party•Equity mutual funds— The fair value measures for these investments are the net asset values published by the issuing brokerage. Daily quoted prices are available from reputable third-party pricing services and are used on a test basis to corroborate this Level 2 input measure. •Debt securities— The fair value measures for these securities are broker quotes received from reputable firms. These securities are infrequently traded on a national exchange and these values are used on a test basis to corroborate our Level 2 input measure. |
| |
• | Government debt securities— The fair value measure for these securities is broker quotes received from reputable firms. These securities are infrequently traded on a national stock exchange and these values are used on a test basis to corroborate our Level 2 input measure.
|
The proceeds from sales and maturities of marketable securities and gross realized gains from the sale of available-for-sale (AFS) securities were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| In millions | | 2020 | | 2019 | | 2018 |
| Proceeds from sales of marketable securities | | $ | 343 | | | $ | 258 | | | $ | 253 | |
| Proceeds from maturities of marketable securities | | 126 | | | 131 | | | 78 | |
| Investments in marketable securities - liquidations | | $ | 469 | | | $ | 389 | | | $ | 331 | |
| | | | | | |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| In millions | | 2017 | | 2016 | | 2015 |
| Proceeds from sales and maturities of marketable securities | | $ | 266 |
| | $ | 306 |
| | $ | 270 |
|
Gross realized gains from the sale of available-for-sale securities(1) | | — |
| | — |
| | 1 |
|
(1) Gross realized losses from the sale of available-for-sale securities were immaterial.
At December 31, 2017, the fair value of AFS investments in debt securities that utilize a Level 2 fair value measure is shown by contractual maturity below:
|
| | | | |
| Maturity date | | (in millions) |
| 1 year or less | | $ | 182 |
|
| 1 - 5 years | | 1 |
|
| Total | | $ | 183 |
|
NOTE 5.6. INVENTORIES
Inventories are stated at the lower of cost or market.net realizable value. Inventories included the following:
| | | | | | | | | | | | | | |
| | | December 31, |
| In millions | | 2020 | | 2019 |
| Finished products | | $ | 2,216 | | | $ | 2,214 | |
| Work-in-process and raw materials | | 1,346 | | | 1,395 | |
| Inventories at FIFO cost | | 3,562 | | | 3,609 | |
| Excess of FIFO over LIFO | | (137) | | | (123) | |
| Total inventories | | $ | 3,425 | | | $ | 3,486 | |
|
| | | | | | | |
| | December 31, |
| In millions | 2017 | | 2016 |
| Finished products | $ | 2,078 |
| | $ | 1,779 |
|
| Work-in-process and raw materials | 1,216 |
| | 1,005 |
|
| Inventories at FIFO cost | 3,294 |
| | 2,784 |
|
| Excess of FIFO over LIFO | (128 | ) | | (109 | ) |
| Total inventories | $ | 3,166 |
| | $ | 2,675 |
|
NOTE 6.7. PROPERTY, PLANT AND EQUIPMENT
Details of our property, plant and equipment balance were as follows:
| | | | | | | | | | | | | | |
| | | December 31, |
| In millions | | 2020 | | 2019 |
| Land and buildings | | $ | 2,613 | | | $ | 2,487 | |
| Machinery, equipment and fixtures | | 5,851 | | | 5,618 | |
| Construction in process | | 547 | | | 594 | |
| | | | |
| Property, plant and equipment, gross | | 9,011 | | | 8,699 | |
| Less: Accumulated depreciation | | (4,756) | | | (4,454) | |
| Property, plant and equipment, net | | $ | 4,255 | | | $ | 4,245 | |
|
| | | | | | | |
| | December 31, |
| In millions | 2017 | | 2016 |
| Land and buildings | $ | 2,332 |
| | $ | 2,075 |
|
| Machinery, equipment and fixtures | 5,285 |
| | 4,898 |
|
| Construction in process | 441 |
| | 662 |
|
| Property, plant and equipment, gross | 8,058 |
| | 7,635 |
|
| Less: Accumulated depreciation | (4,131 | ) | | (3,835 | ) |
| Property, plant and equipment, net | $ | 3,927 |
| | $ | 3,800 |
|
NOTE 8. LEASES
Our lease portfolio consists primarily of real estate and equipment leases. Our real estate leases primarily consist of land, office, distribution, warehousing and manufacturing facilities. These leases typically range in term from 2 to 50 years and may contain renewal options for periods up to 10 years at our discretion. Our equipment lease portfolio consists primarily of vehicles (including service vehicles), forktrucks and IT equipment. These leases typically range in term from two years to three years and may contain renewal options. Our leases generally do not contain variable lease payments other than (1) certain foreign real estate leases which have payments indexed to inflation and (2) certain real estate executory costs (such as taxes, insurance and maintenance), which are
paid based on actual expenses incurred by the lessor during the year. Our leases generally do not include residual value guarantees other than our service vehicle fleet, which has a residual guarantee based on a percentage of the original cost declining over the lease term.
The components of our lease cost were as follows:
| | | | | | | | | | | | | | |
| | | | |
| | Years ended December 31, |
| In millions | | 2020 | | 2019 |
| Operating lease cost | | $ | 172 | | | $ | 180 | |
| Finance lease cost | | | | |
| Amortization of right-of-use asset | | 18 | | | 18 | |
| Interest expense | | 4 | | | 9 | |
| Short-term lease cost | | 19 | | | 33 | |
| Variable lease cost | | 12 | | | 7 | |
| Total lease cost | | $ | 225 | | | $ | 247 | |
| | | | |
The total rental expense for the year ended December 31, 2018, prior to adoption of the new lease standard, was $217 million.
Supplemental balance sheet information related to leases:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, | | |
| In millions | | 2020 | | 2019 | | Balance Sheet Location |
| Assets | | | | | | |
| Operating lease assets | | $ | 438 | | | $ | 496 | | | Other assets |
Finance lease assets(1) | | 99 | | | 90 | | | Property, plant and equipment, net |
| Total lease assets | | $ | 537 | | | $ | 586 | | | |
| | | | | | |
| Liabilities | | | | | | |
| Current | | | | | | |
| Operating | | $ | 128 | | | $ | 131 | | | Other accrued expenses |
| Finance | | 12 | | | 12 | | | Current maturities of long-term debt |
| Long-term | | | | | | |
| Operating | | 325 | | | 370 | | | Other liabilities |
| Finance | | 79 | | | 78 | | | Long-term debt |
| Total lease liabilities | | $ | 544 | | | $ | 591 | | | |
| | | | | | |
(1) Finance lease assets were recorded net of accumulated amortization of $58 million and $62 million at December 31, 2020 and 2019. |
| | | | | | |
Supplemental cash flow and other information related to leases:
| | | | | | | | | | | | | | | | |
| | Years ended December 31, | | |
| In millions | | 2020 | | 2019 | | |
| Cash paid for amounts included in the measurement of lease liabilities | | | | | | |
| Operating cash flows from operating leases | | $ | 149 | | | $ | 163 | | | |
| Operating cash flows from finance leases | | 14 | | | 47 | | | |
| Financing cash flows from finance leases | | 4 | | | 9 | | | |
| | | | | | |
| Right-of-use assets obtained in exchange for lease obligations | | | | | | |
| Operating leases | | $ | 97 | | | $ | 214 | | | |
| Finance leases | | 19 | | | 5 | | | |
| | | | | | |
Additional information related to leases:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
| Weighted-average remaining lease term (in years) | | | | |
| Operating leases | | 4.9 | | 5.3 |
| Finance leases | | 10.8 | | 12.1 |
| | | | |
| Weighted-average discount rate | | | | |
| Operating leases | | 3.4 | % | | 3.3 | % |
| Finance leases | | 4.0 | % | | 4.4 | % |
| | | | |
Following is a summary of the future minimum lease payments due to finance and operating leases with terms of more than one year at December 31, 2020, together with the net present value of the minimum payments:
| | | | | | | | | | | | | | |
| In millions | | Finance Leases | | Operating Leases |
| 2021 | | $ | 15 | | | $ | 143 | |
| 2022 | | 14 | | | 109 | |
| 2023 | | 13 | | | 74 | |
| 2024 | | 9 | | | 56 | |
| 2025 | | 8 | | | 43 | |
| After 2025 | | 55 | | | 67 | |
| Total minimum lease payments | | 114 | | | 492 | |
| Interest | | (23) | | | (39) | |
| Present value of net minimum lease payments | | $ | 91 | | | $ | 453 | |
| | | | |
NOTE 7.9. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the changes in the carrying amount of goodwill for the years ended December 31, 20172020 and 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In millions | | Components | | New Power | | Distribution | | Power Systems | | Engine | | | | | | Total |
| Balance at December 31, 2018 | | $ | 935 | | | $ | 96 | | | $ | 79 | | | $ | 10 | | | $ | 6 | | | | | | | $ | 1,126 | |
| Acquisitions | | 0 | | | 161 | | (1) | 0 | | | 0 | | | 0 | | | | | | | 161 | |
| Translation and other | | (1) | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | (1) | |
| | | | | | | | | | | | | | | | |
| Balance at December 31, 2019 | | 934 | | | 257 | | | 79 | | | 10 | | | 6 | | | | | | | 1,286 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Translation and other | | 7 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 7 | |
| | | | | | | | | | | | | | | | |
| Balance at December 31, 2020 | | $ | 941 | | | $ | 257 | | | $ | 79 | | | $ | 10 | | | $ | 6 | | | | | | | $ | 1,293 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
(1)See Note 20, "ACQUISITIONS," for additional information on acquisition goodwill. |
|
|
| | | | | | | | | | | | | | | | | | | | |
| In millions | Components | | Distribution | | Power Systems | | Engine | | Total | |
| Balance at December 31, 2015 | $ | 391 |
| | $ | 75 |
| | $ | 10 |
| | $ | 6 |
| | $ | 482 |
| |
| Acquisitions | — |
| | 4 |
| | — |
| | — |
| | 4 |
| |
| Translation and other | (5 | ) | | — |
| | (1 | ) | | — |
| | (6 | ) | |
| Balance at December 31, 2016 | 386 |
| | 79 |
| | 9 |
| | 6 |
| | 480 |
| |
| Acquisitions | 544 |
| (1) | — |
| | — |
| | — |
| | 544 |
| |
| Translation and other | 10 |
| | — |
| | 1 |
| | — |
| | 11 |
| |
| Balance at December 31, 2017 | $ | 940 |
| | $ | 79 |
| | $ | 10 |
| | $ | 6 |
| | $ | 1,035 |
| |
| Goodwill not yet allocated to segments | | | | | | | | | 47 |
| (2) |
| | | | | | | | | | $ | 1,082 |
| |
84
| |
(1)
| Acquisition goodwill relates to Eaton Cummins Automated Transmission Technologies. See Note 18, "ACQUISITIONS," for additional information. |
| |
(2)
| Goodwill associated with the Brammo Inc. acquisition was presented as a reconciling item as it had not yet been assigned to a reportable segment at December 31, 2017. Effective January 1, 2018, Brammo Inc. will be assigned to a new reportable segment called Electrified Power. See Note 18, "ACQUISITIONS," for additional information. |
Intangible assets that have finite useful lives are amortized over their estimated useful lives. The following table summarizes our other intangible assets with finite useful lives that are subject to amortization:
|
| | | | | | | |
| | December 31, |
| In millions | 2017 | | 2016 |
| Software | $ | 718 |
| | $ | 617 |
|
| Less: Accumulated amortization | (386 | ) | | (330 | ) |
| Software, net | 332 |
| | 287 |
|
| Trademarks, patents, customer relationships and other | 786 |
| | 164 |
|
| Less: Accumulated amortization | (145 | ) | | (119 | ) |
| Trademarks, patents, customer relationships and other, net | 641 |
| | 45 |
|
| Total other intangible assets, net | $ | 973 |
| | $ | 332 |
|
| | | | | | | | | | | | | | |
| | | December 31, |
| In millions | | 2020 | | 2019 |
| Software | | $ | 661 | | | $ | 708 | |
| Less: Accumulated amortization | | (372) | | | (425) | |
| Software, net | | 289 | | | 283 | |
| | | | |
| Trademarks, patents, customer relationships and other | | 959 | | | 956 | |
| Less: Accumulated amortization | | (285) | | | (236) | |
| Trademarks, patents, customer relationships and other, net | | 674 | | | 720 | |
| Total other intangible assets, net | | $ | 963 | | | $ | 1,003 | |
| | | | |
Amortization expense for software and other intangibles totaled $112$165 million, $92$175 million and $90$153 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively. The projected amortization expense of our intangible assets, assuming no further acquisitions or dispositions, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In millions | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 |
| Projected amortization expense | | $ | 141 | | | $ | 126 | | | $ | 111 | | | $ | 93 | | | $ | 65 | |
|
| | | | | | | | | | | | | | | | | | | |
| In millions | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
| Projected amortization expense | $ | 130 |
| | $ | 116 |
| | $ | 101 |
| | $ | 76 |
| | $ | 55 |
|
NOTE 10. SUPPLEMENTAL BALANCE SHEET DATA
Other assets included the following:
| | | | | | | | | | | | | | | |
| | | | | |
| | | December 31, |
| In millions | | 2020 | | 2019 |
| Corporate owned life insurance | | $ | 508 | | | $ | 464 | |
| Deferred income taxes | | 479 | | | 441 | |
| Operating lease assets | | 438 | | | 496 | |
| Other | | 308 | | | 177 | |
| Other assets | | $ | 1,733 | | | $ | 1,578 | |
| | | | | |
Other accrued expenses included the following:
| | | | | | | | | | | | | | |
| | | December 31, |
| In millions | | 2020 | | 2019 |
| Other taxes payable | | $ | 256 | | | $ | 228 | |
| Marketing accruals | | 242 | | | 176 | |
| Current portion of operating lease liabilities | | 128 | | | 131 | |
| Income taxes payable | | 82 | | | 52 | |
| Other | | 404 | | | 452 | |
| Other accrued expenses | | $ | 1,112 | | | $ | 1,039 | |
| | | | |
Other liabilities included the following:
| | | | | | | | | | | | | | |
| | | December 31, |
| In millions | | 2020 | | 2019 |
| | | | |
| Operating lease liabilities | | $ | 325 | | | $ | 370 | |
| Deferred income taxes | | 325 | | | 306 | |
| One-time transition tax | | 289 | | | 293 | |
| Accrued compensation | | 203 | | | 206 | |
| Mark-to-market valuation on interest rate locks | | 41 | | | 12 | |
| Other long-term liabilities | | 365 | | | 192 | |
| Other liabilities | | $ | 1,548 | | | $ | 1,379 | |
| | | | |
NOTE 11. DEBT
Loans Payable and Commercial Paper
Loans payable at December 31, 2020 and 2019 were $169 million and $100 million, respectively, and consisted primarily of notes payable to financial institutions. The weighted-average interest rate for notes payable, bank overdrafts and current maturities of long-term debt at December 31 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| Weighted-average interest rate | | 2.53 | % | | 3.20 | % | | 4.66 | % |
| | | | | | |
We can issue up to $3.5 billion of unsecured, short-term promissory notes (commercial paper) pursuant to the Board of Directors (the Board) authorized commercial paper programs. The programs facilitate the private placement of unsecured short-term debt through third-party brokers. We intend to use the net proceeds from the commercial paper borrowings for general corporate purposes. We had $323 million and $660 million in outstanding borrowings under our commercial paper programs at December 31, 2020 and 2019, respectively. The weighted-average interest rate for commercial paper at December 31 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| Weighted-average interest rate | | (0.01) | % | (1) | 1.82 | % | | 2.59 | % |
| | | | | | |
(1) The weighted-average interest rate, inclusive of all brokerage fees, was negative 0.01 percent at December 31, 2020. This includes $123 million of borrowings under the EUR program that were at a negative weighted-average interest rate of 0.34 percent and $200 million of borrowings under the U.S. program at a weighted-average interest rate of 0.19 percent. |
| | | | | | |
On April 14, 2020, we were approved for the Federal Reserve Bank of New York’s Commercial Paper Funding Facility (CPFF) program to assure access to the commercial paper funding markets during volatile credit market conditions. The CPFF was intended to provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV). The facility allows us, based on our current short-term credit rating, to issue three-month unsecured commercial paper at a rate equal to a +110 basis point spread over the three-month overnight index swap rate on the date of issuance. The maximum amount of commercial paper that we may issue at any time through this program is $1.5 billion less the total principal amount of all other outstanding commercial paper that we have issued. We retain full access to our Board authorized $3.5 billion commercial paper program, as reduced by any amounts issued under this facility. The SPV is currently scheduled to cease purchasing commercial paper on March 17, 2021. At December 31, 2020, there were 0 outstanding borrowings under the CPFF program.
Revolving Credit Facilities
On August 19, 2020, we entered into an amended and restated 364-day credit agreement that allows us to borrow up to $1.5 billion of unsecured funds at any time prior to August 18, 2021. This credit agreement amended and restated the prior $1.5 billion 364-day credit facility that matured on August 19, 2020.
On August 22, 2018, we entered into a new 5-year revolving credit agreement with a syndicate of lenders and we amended the agreement on August 21, 2019. The amended credit agreement provides us with a $2 billion senior unsecured revolving credit facility until August 22, 2023. Amounts payable under our revolving credit facility will rank pro rata with all of our unsecured, unsubordinated indebtedness. Advances under the facility bear interest at (i) an alternate base rate or (ii) a rate equal to the adjusted LIBOR plus an applicable margin based on the credit ratings of our outstanding senior unsecured long-term debt. Based on our current
long-term debt ratings, the applicable margin on adjusted LIBOR rate loans was 0.75 percent per annum as of December 31, 2020. Advances under the facility may be prepaid without premium or penalty, subject to customary breakage costs.
Both credit agreements include various covenants, including, among others, maintaining a net debt to total capital leverage ratio of no more than 0.65 to 1.0. At December 31, 2020, we were in compliance with the covenants. We maintain credit facilities at the current or higher aggregate amounts by renewing or replacing these facilities at or before expiration. These revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings and for general corporate purposes. There were no outstanding borrowings under these facilities at December 31, 2020.
At December 31, 2020, our $323 million of commercial paper outstanding effectively reduced the $3.5 billion available capacity under our revolving credit facilities to $3.2 billion.
At December 31, 2020, we also had $256 million available for borrowings under our international and other domestic credit facilities.
Long-term Debt
A summary of long-term debt was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, |
| In millions | | Interest Rate | | 2020 | | 2019 |
| Long-term debt | | | | | | |
Senior notes, due 2023 (1) | | 3.65% | | $ | 500 | | | $ | 500 | |
| Senior notes, due 2025 | | 0.75% | | 500 | | | — | |
| Debentures, due 2027 | | 6.75% | | 58 | | | 58 | |
| Debentures, due 2028 | | 7.125% | | 250 | | | 250 | |
| Senior notes, due 2030 | | 1.50% | | 850 | | | — | |
| Senior notes, due 2043 | | 4.875% | | 500 | | | 500 | |
| Senior notes, due 2050 | | 2.60% | | 650 | | | — | |
Debentures, due 2098 (2) | | 5.65% | | 165 | | | 165 | |
| | | | | | |
| Other debt | | | | 132 | | | 59 | |
| | | | | | |
| Unamortized discount and deferred issuance costs | | | | (72) | | | (50) | |
| Fair value adjustments due to hedge on indebtedness | | | | 48 | | | 35 | |
| Finance leases | | | | 91 | | | 90 | |
| Total long-term debt | | | | 3,672 | | | 1,607 | |
| Less: Current maturities of long-term debt | | | | 62 | | | 31 | |
| Long-term debt | | | | $ | 3,610 | | | $ | 1,576 | |
| | | | | | |
(1) In June and July 2020, we settled our February 2014 interest rate swaps. See "Interest Rate Risk" below for additional information. |
(2) The effective interest rate is 7.48%. |
| | | | | | |
Principal payments required on long-term debt during the next five years are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In millions | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 |
| Principal payments | | $ | 62 | | | $ | 49 | | | $ | 526 | | | $ | 23 | | | $ | 506 | |
| | | | | | | | | | |
On August 24, 2020, we issued $2 billion aggregate principal amount of senior unsecured notes consisting of $500 million aggregate principal amount of 0.75% senior unsecured notes due in 2025, $850 million aggregate principal amount of 1.50% senior unsecured notes due in 2030 and $650 million aggregate principal amount of 2.60% senior unsecured notes due in 2050. We received net proceeds of $1.98 billion. The senior unsecured notes pay interest semi-annually on March 1 and September 1, commencing on March 1, 2021. The indenture governing the senior unsecured notes contains covenants that, among other matters, limit (i) our ability to consolidate or merge into, or sell, assign, convey, lease, transfer or otherwise dispose of all or substantially all of our and our subsidiaries' assets to another person, (ii) our and certain of our subsidiaries' ability to create or assume liens and (iii) our and certain of our subsidiaries' ability to engage in sale and leaseback transactions.
The $250 million 7.125% debentures and $165 million 5.65% debentures are unsecured and are not subject to any sinking fund requirements. We can redeem these debentures at any time prior to maturity at the greater of par plus accrued interest or an amount designed to ensure that the debenture holders are not penalized by the early redemption.
Our debt agreements contain several restrictive covenants. The most restrictive of these covenants applies to our revolving credit facility which will upon default, among other things, limit our ability to incur additional debt or issue preferred stock, enter into sale-leaseback transactions, sell or create liens on our assets, make investments and merge or consolidate with any other entity. At December 31, 2020, we were in compliance with all of the covenants under our borrowing agreements.
Shelf Registration
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 13, 2019. 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. Our current shelf is scheduled to expire in February 2022.
Interest Expense
For the years ended December 31, 2020, 2019 and 2018, total interest incurred was $102 million, $112 million and $116 million, respectively, and interest capitalized was $2 million, $3 million and $2 million, respectively.
Interest Rate Risk
In 2019 we entered into $350 million of interest rate lock agreements, and in the first half of 2020 we entered into an additional $150 million of lock agreements to reduce the variability of the cash flows of the interest payments on a total of $500 million of fixed rate debt forecast to be issued in 2023 to replace our senior notes at maturity. The terms of the rate locks mirror the time period of the expected fixed rate debt issuance and the expected timing of interest payments on that debt. The gains and losses on these derivative instruments will be initially recorded in "Other comprehensive income" and will be released to earnings in "Interest expense" in future periods to reflect the difference in (1) the fixed rates economically locked in at the inception of the hedge and (2) the actual fixed rates established in the debt instrument at issuance.
The following table summarizes the interest rate lock activity in AOCL:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| In millions | | 2020 | | 2019 | | |
| Type of Swap | | Gain (Loss)
Recognized in AOCL | | | | Gain (Loss) Reclassified from AOCL into Interest Expense | | Gain (Loss)
Recognized in AOCL | | | | Gain (Loss) Reclassified from AOCL into Interest Expense | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Interest rate locks | | $ | (22) | | | | | $ | 0 | | | (10) | | | | | 0 | | | | | | | |
| | | | | | | | | | | | | | | | | | |
We had a series of interest rate swaps to effectively convert our September 2013, $500 million debt issue, due in 2023, from a fixed rate of 3.65 percent to a floating rate equal to the one-month LIBOR plus a spread. The debt is included in the Consolidated Balance Sheets as "Long-term debt." The terms of the swaps mirrored those of the debt, with interest paid semi-annually. The swaps were designated, and were accounted for, as fair value hedges. The gain or loss on these derivative instruments, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, were recognized in current income as “Interest expense.” The net swap settlements that accrued each period were also reported in the Consolidated Financial Statements as "Interest expense." A basis adjustment related to credit risk, excluded from the assessment of effectiveness, was being amortized over the life of the hedge using a straight-line method and was considered de minimis.
In June and July of 2020, we settled our February 2014 interest rate swaps, which previously converted our $500 million debt issue, due in 2023, from fixed rate to floating rate based on a LIBOR spread. We will amortize the $24 million gain realized upon settlement over the remaining three-year term of the related debt.
The following table summarizes the gains and losses:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| In millions | | 2020 | | 2019 | | 2018 |
| Type of Swap | | Gain (Loss) on Swaps | | Gain (Loss) on Borrowings | | Gain (Loss) on Swaps | | Gain (Loss) on Borrowings | | Gain (Loss) on
Swaps | | Gain (Loss) on
Borrowings |
Interest rate swaps(1) | | $ | 7 | | | $ | (5) | | | $ | 16 | | | $ | (14) | | | $ | (8) | | | $ | 7 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(1) The difference between the gain/(loss) on swaps and borrowings represented hedge ineffectiveness. |
|
Fair Value of Debt
Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our risk premium, the fair values and carrying values of total debt, including current maturities, were as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| In millions | | 2020 | | 2019 |
Fair values of total debt (1) | | $ | 4,665 | | | $ | 2,706 | |
| Carrying value of total debt | | 4,164 | | | 2,367 | |
| | | | |
(1) The fair value of debt is derived from Level 2 inputs. | | | | |
| | | | |
NOTE 8.12. PRODUCT WARRANTY LIABILITY
A tabular reconciliation of the product warranty liability, including the deferred revenue related to our extended warranty coverage and accrued recall programsproduct campaigns, was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| In millions | | 2020 | | 2019 | | 2018 |
| Balance, beginning of year | | $ | 2,389 | | | $ | 2,208 | | | $ | 1,687 | |
| Provision for base warranties issued | | 443 | | | 458 | | | 437 | |
| Deferred revenue on extended warranty contracts sold | | 248 | | | 356 | | | 293 | |
| Provision for product campaigns issued | | 90 | | | 210 | | | 481 | |
| Payments made during period | | (589) | | | (590) | | | (443) | |
| Amortization of deferred revenue on extended warranty contracts | | (227) | | | (230) | | | (244) | |
| Changes in estimates for pre-existing product warranties | | (52) | | | (24) | | | 3 | |
| Foreign currency translation and other | | 5 | | | 1 | | | (6) | |
| Balance, end of year | | $ | 2,307 | | | $ | 2,389 | | | $ | 2,208 | |
| | | | | | |
We recognized supplier recoveries of $20 million, $67 million and $26 million for the for the years ended December 31, 2020, 2019 and 2018, respectively.
|
| | | | | | | | | | | | |
| | | December 31, |
| In millions | | 2017 | | 2016 | | 2015 |
| Balance, beginning of year | | $ | 1,414 |
| | $ | 1,404 |
| | $ | 1,283 |
|
| Provision for warranties issued | | 557 |
| | 334 |
| | 391 |
|
| Deferred revenue on extended warranty contracts sold | | 240 |
| | 231 |
| | 290 |
|
| Payments | | (398 | ) | | (385 | ) | | (389 | ) |
| Amortization of deferred revenue on extended warranty contracts | | (219 | ) | | (201 | ) | | (179 | ) |
| Changes in estimates for pre-existing warranties | | 85 |
| | 44 |
| | 20 |
|
| Foreign currency translation | | 8 |
| | (13 | ) | | (12 | ) |
| Balance, end of year | | $ | 1,687 |
| | $ | 1,414 |
| | $ | 1,404 |
|
Warranty related deferred revenues and the long-term portion of the warranty liabilities on ourConsolidated Balance Sheets were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, | | |
| In millions | | 2020 | | 2019 | | Balance Sheet Location |
| Deferred revenue related to extended coverage programs | | | | | | |
| Current portion | | $ | 261 | | | $ | 227 | | | Current portion of deferred revenue |
| Long-term portion | | 700 | | | 714 | | | Deferred revenue |
| Total | | $ | 961 | | | $ | 941 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Product warranty | | | | | | |
| Current portion | | $ | 674 | | | $ | 803 | | | Current portion of accrued product warranty |
| Long-term portion | | 672 | | | 645 | | | Accrued product warranty |
| Total | | $ | 1,346 | | | $ | 1,448 | | | |
| | | | | | |
| Total warranty accrual | | $ | 2,307 | | | $ | 2,389 | | | |
| | | | | | |
|
| | | | | | | | | | |
| | | December 31, | | |
| In millions | | 2017 | | 2016 | | Balance Sheet Location |
| Deferred revenue related to extended coverage programs | | | | | | |
| Current portion | | $ | 231 |
| | $ | 218 |
| | Current portion of deferred revenue |
| Long-term portion | | 536 |
| | 527 |
| | Other liabilities and deferred revenue |
| Total | | $ | 767 |
| | $ | 745 |
| | |
| | | | | | | |
| Long-term portion of warranty liability | | $ | 466 |
| | $ | 336 |
| | Other liabilities and deferred revenue |
NOTE 9. DEBT
Loans PayableDuring 2017, the California Air Resources Board (CARB) and Commercial Paper
Loans payable at December 31, 2017the U.S. Environmental Protection Agency (EPA) selected certain of our pre-2013 model year engine systems for additional emissions testing. Some of these engine systems failed CARB and 2016 were $57 million and $41 million, respectively, and consisted primarilyEPA tests as a result of notes payable to financial institutions. The weighted-average interest rate for notes payable, bank overdrafts and current maturitiesdegradation of long-term debt at December 31 was as follows:
|
| | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Weighted-average interest rate | | 3.01 | % | | 4.20 | % | | 3.65 | % |
We can issue up to $1.75 billion of unsecured short-term promissory notes ("commercial paper") pursuant to our board authorized commercial paper programs. The programs facilitate the private placement of unsecured short-term debt through third party brokers. We intend to use the net proceeds from the commercial paper borrowings for general corporate purposes. We had $298 million in outstanding borrowings under our commercial paper programs at December 31, 2017, with a weighted-average interest rate of 1.56 percent.
Revolving Credit Facilities
On November 13, 2015,2018, we entered into an amended and restated five-year revolving creditreached agreement with the CARB and EPA regarding our plans to address the affected populations. From the fourth quarter of 2017 through the second quarter of 2018, we recorded charges for the expected costs of field campaigns to repair these engine systems.
The campaigns launched in the third quarter of 2018 are being completed in phases across the affected population. The total engine system campaign charge, excluding supplier recoveries, was $410 million. In the fourth quarter of 2020, we recorded an additional $20 million charge related to this campaign, as a syndicate of lenders, which provides us with a $1.75 billion senior unsecured revolving credit facility and expires on November 13, 2020. Amounts payable under our revolving credit facility will rank pro rata with all of our unsecured, unsubordinated indebtedness. Upchange in estimate, to $300 million under our credit facility is available for swingline loans. Advances underbring the facility bear interest at (i) a base rate or (ii) a rate equaltotal campaign, excluding supplier recoveries, to the LIBOR rate plus an applicable margin based on the credit ratings of our outstanding senior unsecured long-term debt. Based on our current long-term debt ratings, the applicable margin on LIBOR rate loans was 0.75 percent per annum at December 31, 2017. Advances under the facility may be prepaid without premium or penalty, subject to customary breakage costs.
On September 5, 2017, we entered into a 364-day credit facility that allows us to borrow up to $1 billion of additional unsecured funds at any time through September 2018.
These credit agreements include various covenants, including, among others, maintaining a leverage ratio of no more than 3.5 to 1.0.$430 million. At December 31, 2017, we were in compliance with2020, the covenants.remaining accrual balance was $151 million.
There were no outstanding borrowings under these facilities at December 31, 2017. We intend to maintain credit facilities of a similar aggregate amount by renewing or replacing these facilities before expiration. Revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings, letters of credit and general corporate purposes. At December 31, 2017, we had $298 million of commercial paper outstanding, which effectively reduced the $1.75 billion available capacity under our five-year revolving credit facility to $1.45 billion. At December 31, 2017, we also had $1 billion available under our 364-day facility.
At December 31, 2017, we also had $240 million available for borrowings under our international and other domestic credit facilities.
Long-term Debt
|
| | | | | | | |
| | December 31, |
| In millions | 2017 | | 2016 |
| Long-term debt | | | |
| Senior notes, 3.65%, due 2023 | $ | 500 |
| | $ | 500 |
|
| Debentures, 6.75%, due 2027 | 58 |
| | 58 |
|
| Debentures, 7.125%, due 2028 | 250 |
| | 250 |
|
| Senior notes, 4.875%, due 2043 | 500 |
| | 500 |
|
| Debentures, 5.65%, due 2098 (effective interest rate 7.48%) | 165 |
| | 165 |
|
| Other debt | 76 |
| | 51 |
|
| Unamortized discount | (54 | ) | | (56 | ) |
| Fair value adjustments due to hedge on indebtedness | 35 |
| | 47 |
|
| Capital leases | 121 |
| | 88 |
|
| Total long-term debt | 1,651 |
| | 1,603 |
|
| Less: Current maturities of long-term debt | 63 |
| | 35 |
|
| Long-term debt | $ | 1,588 |
| | $ | 1,568 |
|
Principal payments required on long-term debt during the next five years are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| In millions | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
| Principal payments | $ | 63 |
| | $ | 50 |
| | $ | 12 |
| | $ | 6 |
| | $ | 6 |
|
Interest on the $500 million aggregate principal amount of 3.65% senior unsecured notes due in 2023 and the $500 million aggregate principal amount of 4.875% senior unsecured notes due in 2043 pay interest semi-annually on April 1 and October 1 of each year.
Interest on the 6.75% debentures is payable on February 15 and August 15 of each year.
Interest on the $250 million 7.125% debentures and $165 million 5.65% debentures is payable on March 1 and September 1 of each year. The debentures are unsecured and are not subject to any sinking fund requirements. We can redeem the 7.125% debentures and the 5.65% debentures at any time prior to maturity at the greater of par plus accrued interest or an amount designed to ensure that the debenture holders are not penalized by the early redemption.
Our debt agreements contain several restrictive covenants. The most restrictive of these covenants applies to our revolving credit facility which will upon default, among other things, limit our ability to incur additional debt or issue preferred stock, enter into sale-leaseback transactions, sell or create liens on our assets, make investments and merge or consolidate with any other entity. In addition, we are subject to a maximum debt-to-EBITDA ratio financial covenant. At December 31, 2017, we were in compliance with all of the covenants under our borrowing agreements.
Shelf Registration
As a well-known seasoned issuer, we filed an automatic shelf registration for an undetermined amount of debt and equity securities with the SEC 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.
Interest
For the years ended December 31, 2017, 2016 and 2015, total interest incurred was $85 million, $75 million and $68 million, respectively, and interest capitalized was $4 million, $6 million and $3 million, respectively.
Interest Rate Risk
We are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through the use of interest rate swaps. The objective of the swaps is to more effectively balance our borrowing costs and interest rate risk.
We have a series of interest rate swaps to effectively convert our September 2013, $500 million debt issue, due in 2023, from a fixed rate of 3.65 percent to a floating rate equal to the one-month LIBOR plus a spread. The terms of the swaps mirror those of the debt, with interest paid semi-annually. The swaps were designated, and will be accounted for, as fair value hedges under GAAP. The gain or loss on these derivative instruments, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in current income as “Interest expense.” The net swap settlements that accrue each period are also reported in interest expense.
The following table summarizes these gains and losses for the years presented below:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| In millions | | 2017 | | 2016 | | 2015 |
| Income Statement Classification | | Gain/(Loss) on Swaps | | Gain/(Loss) on Borrowings | | Gain/(Loss) on Swaps | | Gain/(Loss) on Borrowings | | Gain/(Loss) on
Swaps | | Gain/(Loss) on
Borrowings |
Interest expense (1) | | $ | (7 | ) | | $ | 8 |
| | $ | (8 | ) | | $ | 12 |
| | $ | 6 |
| | $ | (2 | ) |
(1) The difference between the gain/(loss) on swaps and borrowings represents hedge ineffectiveness.
Fair Value of Debt
Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, considering our risk premium, the fair values and carrying values of total debt, including current maturities, were as follows:
|
| | | | | | | | |
| | | December 31, |
| In millions | | 2017 | | 2016 |
Fair values of total debt (1) | | $ | 2,301 |
| | $ | 2,077 |
|
| Carrying values of total debt | | 2,006 |
| | 1,856 |
|
(1) The fair value of debt is derived from Level 2 inputs.
NOTE 10. PENSION13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Pension Plans
We sponsor several contributory and noncontributory pension plans covering substantially all employees. Generally, hourly employee pension benefits for salaried employees are earneddetermined as a function of employee’s compensation. Pension benefits for most hourly employees are determined similarly and as a function of employee’s compensation, with the exception of a small group of hourly employees whose pension benefits were grandfathered in accordance with agreements with their union representation and are based on their years of service and compensation during active employment while future benefits for salaried employees are determined using a cash balance formula. However, theemployment. The level of benefits and terms of vesting may vary among plans.plans and are offered in accordance with applicable laws. Pension planplans assets are administered by trustees and are principally invested in fixed income securities and equity securities. It is our policy to make contributions to our various qualified plans in accordance with statutory and contractual funding requirements, and any additional contributions we determine are appropriate.
Obligations, Assets and Funded Status
Benefit obligation balances presented below reflect the projected benefit obligation (PBO) for our pension plans. The changes in the benefit obligations, the various plan assets, the funded status of the plans and the amounts recognized in our Consolidated Balance Sheets for our significant pension plans at December 31 were as follows:
|
| | | | | | | | | | | | | | | | |
| | | Qualified and Non-Qualified Pension Plans |
| | | U.S. Plans | | U.K. Plans |
| In millions | | 2017 | | 2016 | | 2017 | | 2016 |
| Change in benefit obligation | | | | | | | | |
| Benefit obligation at the beginning of the year | | $ | 2,661 |
| | $ | 2,533 |
| | $ | 1,451 |
| | $ | 1,390 |
|
| Service cost | | 107 |
| | 90 |
| | 26 |
| | 21 |
|
| Interest cost | | 106 |
| | 109 |
| | 40 |
| | 50 |
|
| Actuarial loss | | 61 |
| | 111 |
| | 53 |
| | 316 |
|
| Benefits paid from fund | | (155 | ) | | (175 | ) | | (54 | ) | | (55 | ) |
| Benefits paid directly by employer | | (15 | ) | | (16 | ) | | — |
| | — |
|
| Plan amendments | | — |
| | 9 |
| | — |
| | — |
|
| Exchange rate changes | | — |
| | — |
| | 146 |
| | (271 | ) |
| Benefit obligation at end of year | | $ | 2,765 |
| | $ | 2,661 |
| | $ | 1,662 |
| | $ | 1,451 |
|
| Change in plan assets | | | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 2,751 |
| | $ | 2,636 |
| | $ | 1,753 |
| | $ | 1,712 |
|
| Actual return on plan assets | | 351 |
| | 200 |
| | 78 |
| | 402 |
|
| Employer contributions | | 219 |
| | 90 |
| | 9 |
| | 28 |
|
| Benefits paid | | (155 | ) | | (175 | ) | | (54 | ) | | (55 | ) |
| Exchange rate changes | | — |
| | — |
| | 174 |
| | (334 | ) |
| Fair value of plan assets at end of year | | $ | 3,166 |
| | $ | 2,751 |
| | $ | 1,960 |
| | $ | 1,753 |
|
| Funded status (including underfunded and nonfunded plans) at end of year | | $ | 401 |
| | $ | 90 |
| | $ | 298 |
| | $ | 302 |
|
| Amounts recognized in consolidated balance sheets | | | | | | | | |
| Pension assets - long-term | | $ | 745 |
| | $ | 429 |
| | $ | 298 |
| | $ | 302 |
|
| Accrued compensation, benefits and retirement costs - current liabilities | | (14 | ) | | (13 | ) | | — |
| | — |
|
| Pensions - long-term liabilities | | (330 | ) | | (326 | ) | | — |
| | — |
|
| Net amount recognized | | $ | 401 |
| | $ | 90 |
| | $ | 298 |
| | $ | 302 |
|
| Amounts recognized in accumulated other comprehensive loss | | | | | | | | |
| Net actuarial loss | | $ | 649 |
| | $ | 770 |
| | $ | 207 |
| | $ | 172 |
|
| Prior service cost | | 8 |
| | 9 |
| | — |
| | — |
|
| Net amount recognized | | $ | 657 |
| | $ | 779 |
| | $ | 207 |
| | $ | 172 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Qualified and Non-Qualified Pension Plans | |
| | | U.S. Plans | | U.K. Plans | |
| In millions | | 2020 | | 2019 | | 2020 | | 2019 | |
| Change in benefit obligation | | | | | | | | | |
| Benefit obligation at the beginning of the year | | $ | 2,916 | | | $ | 2,562 | | | $ | 1,851 | | | $ | 1,550 | | |
| Service cost | | 133 | | | 116 | | | 29 | | | 26 | | |
| Interest cost | | 95 | | | 108 | | | 36 | | | 43 | | |
| Actuarial loss | | 224 | | | 296 | | | 136 | | | 232 | | |
| Benefits paid from fund | | (224) | | | (150) | | | (72) | | | (62) | | |
| Benefits paid directly by employer | | (22) | | | (16) | | | — | | | — | | |
| | | | | | | | | |
| Exchange rate changes | | — | | | — | | | 70 | | | 62 | | |
| | | | | | | | | |
| | | | | | | | | |
| Benefit obligation at end of year | | $ | 3,122 | | | $ | 2,916 | | | $ | 2,050 | | | $ | 1,851 | | |
| Change in plan assets | | | | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 3,357 | | | $ | 2,937 | | | $ | 2,010 | | | $ | 1,782 | | |
| Actual return on plan assets | | 274 | | | 493 | | | 268 | | | 193 | | |
| Employer contributions | | 22 | | | 77 | | | 48 | | | 28 | | |
| Benefits paid from fund | | (224) | | | (150) | | | (72) | | | (62) | | |
| Exchange rate changes | | 0 | | | 0 | | | 83 | | | 69 | | |
| Fair value of plan assets at end of year | | $ | 3,429 | | | $ | 3,357 | | | $ | 2,337 | | | $ | 2,010 | | |
| Funded status (including unfunded plans) at end of year | | $ | 307 | | | $ | 441 | | | $ | 287 | | | $ | 159 | | |
| Amounts recognized in consolidated balance sheets | | | | | | | | | |
| Pension assets | | $ | 755 | | | $ | 842 | | | $ | 287 | | | $ | 159 | | |
| Accrued compensation, benefits and retirement costs | | (17) | | | (16) | | | — | | | — | | |
| Pension and OPEB benefits | | (431) | | | (385) | | | — | | | — | | |
| Net amount recognized | | $ | 307 | | | $ | 441 | | | $ | 287 | | | $ | 159 | | |
| Amounts recognized in accumulated other comprehensive loss | | | | | | | | | |
| Net actuarial loss | | $ | 714 | | | $ | 611 | | | $ | 250 | | | $ | 323 | | |
| Prior service cost | | 6 | | | 7 | | | 19 | | | 22 | | |
| Net amount recognized | | $ | 720 | | | $ | 618 | | | $ | 269 | | | $ | 345 | | |
| | | | | | | | | |
|
| | | | | | | | | |
In addition to the pension plans in the above table, we also maintain less significant defined benefit pension plans primarily in 14 other countries outside of the U.S. and the U.K. that comprise approximately 3 percent and 45 percent of our pension plan assets and obligations, respectively, at December 31, 2017.2020. These plans are reflected in "Other liabilities and deferred revenue"liabilities" on our Consolidated Balance Sheets. In 2017,2020 and 2019, we made $11$16 million and $15 million of contributions to these plans.plans, respectively.
The following table presents information regardingsummarizes the total accumulated benefit obligation PBO's and underfunded(ABO), the ABO for defined benefit pension plans that are includedwith ABO in excess of plan assets and the preceding table:PBO for defined benefit pension plans with PBO in excess of plan assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Qualified and Non-Qualified Pension Plans |
| | | U.S. Plans | | U.K. Plans |
| In millions | | 2020 | | 2019 | | 2020 | | 2019 |
| Total ABO | | $ | 3,091 | | | $ | 2,894 | | | $ | 1,954 | | | $ | 1,756 | |
| Plans with ABO in excess of plan assets | | | | | | | | |
| ABO | | 417 | | | 379 | | | — | | | — | |
| Plans with PBO in excess of plan assets | | | | | | | | |
| PBO | | 448 | | | 401 | | | — | | | — | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Qualified and Non-Qualified Pension Plans |
| | | U.S. Plans | | U.K. Plans |
| In millions | | 2017 | | 2016 | | 2017 | | 2016 |
| Total accumulated benefit obligation | | $ | 2,745 |
| | $ | 2,625 |
| | $ | 1,569 |
| | $ | 1,366 |
|
| Plans with accumulated benefit obligation in excess of plan assets | | | | | | | | |
| Accumulated benefit obligation | | 323 |
| | 304 |
| | — |
| | — |
|
| Plans with projected benefit obligation in excess of plan assets | | | | | | | | |
| Projected benefit obligation | | 344 |
| | 339 |
| | — |
| | — |
|
91
Components of Net Periodic Pension Cost
The following table presents the net periodic pension cost under our plans for the years ended December 31:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Qualified and Non-Qualified Pension Plans |
| | | U.S. Plans | | U.K. Plans |
| In millions | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Service cost | | $ | 107 |
| | $ | 90 |
| | $ | 80 |
| | $ | 26 |
| | $ | 21 |
| | $ | 27 |
|
| Interest cost | | 106 |
| | 109 |
| | 102 |
| | 40 |
| | 50 |
| | 56 |
|
| Expected return on plan assets | | (204 | ) | | (201 | ) | | (189 | ) | | (70 | ) | | (71 | ) | | (91 | ) |
| Amortization of prior service cost | | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
|
| Recognized net actuarial loss | | 37 |
| | 29 |
| | 45 |
| | 40 |
| | 15 |
| | 34 |
|
| Net periodic pension cost | | $ | 46 |
| | $ | 27 |
| | $ | 37 |
| | $ | 36 |
| | $ | 15 |
| | $ | 26 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Qualified and Non-Qualified Pension Plans |
| | | U.S. Plans | | U.K. Plans |
| In millions | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
| Service cost | | $ | 133 | | | $ | 116 | | | $ | 120 | | | $ | 29 | | | $ | 26 | | | $ | 29 | |
| Interest cost | | 95 | | | 108 | | | 98 | | | 36 | | | 43 | | | 41 | |
| Expected return on plan assets | | (195) | | | (189) | | | (196) | | | (74) | | | (70) | | | (69) | |
| Amortization of prior service cost | | 1 | | | 1 | | | 1 | | | 2 | | | 2 | | | 0 | |
| Recognized net actuarial loss | | 41 | | | 17 | | | 33 | | | 34 | | | 11 | | | 29 | |
| Net periodic pension cost | | $ | 75 | | | $ | 53 | | | $ | 56 | | | $ | 27 | | | $ | 12 | | | $ | 30 | |
| | | | | | | | | | | | |
Other changes in benefit obligations and plan assets recognized in other comprehensive incomeloss for the years ended December 31 were as follows:
|
| | | | | | | | | | | | |
| In millions | | 2017 | | 2016 | | 2015 |
| Amortization of prior service credit | | $ | — |
| | $ | — |
| | $ | 1 |
|
| Recognized net actuarial loss | | (77 | ) | | (44 | ) | | (79 | ) |
| Incurred actuarial (gain) loss | | (40 | ) | | 107 |
| | 105 |
|
| Foreign exchange translation adjustments | | 30 |
| | (28 | ) | | (7 | ) |
| Total recognized in other comprehensive income | | $ | (87 | ) | | $ | 35 |
| | $ | 20 |
|
| | | | | | | |
| Total recognized in net periodic pension cost and other comprehensive income | | $ | (5 | ) | | $ | 77 |
| | $ | 83 |
|
The amount in accumulated other comprehensive loss expected to be recognized as a component of net periodic pension cost during the next fiscal year is a net actuarial loss of $62 million. | | | | | | | | | | | | | | | | | | | | |
| In millions | | 2020 | | 2019 | | 2018 |
| Amortization of prior service cost | | $ | (3) | | | $ | (3) | | | $ | 0 | |
| Recognized net actuarial loss | | (75) | | | (28) | | | (62) | |
| | | | | | |
| Incurred actuarial loss | | 85 | | | 101 | | | 91 | |
| Foreign exchange translation adjustments | | 19 | | | 4 | | | (5) | |
| Total recognized in other comprehensive loss | | $ | 26 | | | $ | 74 | | | $ | 24 | |
| | | | | | |
| Total recognized in net periodic pension cost and other comprehensive loss | | $ | 128 | | | $ | 139 | | | $ | 110 | |
| | | | | | |
Assumptions
The table below presents various assumptions used in determining the PBO for each year and reflects weighted-average percentages for the various plans as follows:
|
| | | | | | | | | | | | |
| | | Qualified and Non-Qualified Pension Plans |
| | | U.S. Plans | | U.K. Plans |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Discount rate | | 3.66 | % | | 4.12 | % | | 2.55 | % | | 2.70 | % |
| Compensation increase rate | | 2.99 | % | | 4.87 | % | | 3.75 | % | | 3.75 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Qualified and Non-Qualified Pension Plans |
| | | U.S. Plans | | U.K. Plans |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| Discount rate | | 2.62 | % | | 3.36 | % | | 1.50 | % | | 2.00 | % |
| Cash balance crediting rate | | 3.74 | % | | 4.11 | % | | 0 | | | 0 | |
| Compensation increase rate | | 2.73 | % | | 2.73 | % | | 3.75 | % | | 3.75 | % |
| | | | | | | | |
The table below presents various assumptions used in determining the net periodic pension cost and reflects weighted-average percentages for the various plans as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | Qualified and Non-Qualified Pension Plans |
| | | U.S. Plans | | U.K. Plans |
| | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Discount rate | | 4.12 | % | | 4.47 | % | | 4.07 | % | | 2.70 | % | | 3.95 | % | | 3.80 | % |
| Expected return on plan assets | | 7.25 | % | | 7.50 | % | | 7.50 | % | | 4.50 | % | | 4.70 | % | | 5.80 | % |
| Compensation increase rate | | 4.87 | % | | 4.87 | % | | 4.88 | % | | 3.75 | % | | 3.75 | % | | 4.25 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Qualified and Non-Qualified Pension Plans |
| | | U.S. Plans | | U.K. Plans |
| | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
| Discount rate | | 3.36 | % | | 4.36 | % | | 3.66 | % | | 2.00 | % | | 2.80 | % | | 2.55 | % |
| Expected return on plan assets | | 6.25 | % | | 6.25 | % | | 6.50 | % | | 4.00 | % | | 4.00 | % | | 4.00 | % |
| Compensation increase rate | | 2.73 | % | | 2.73 | % | | 3.00 | % | | 3.75 | % | | 3.75 | % | | 3.75 | % |
| | | | | | | | | | | | |
Plan Assets
Our investment policies in the U.S. and U.K. provide for the rebalancing of assets to maintain our long-term strategic asset allocation. We are committed to this long-term strategy and do not attempt to time the market givenmarket. Given empirical evidence that asset allocation is more critical, than individual asset or investment manager selection. Rebalancingrebalancing of the assets has and continues to occur. The rebalancing is critical to havingoccur, maintaining the proper weighting of assets to achieve the expected total portfolio returns. We believe that our portfolio is highly diversified and does not have any significant exposure to concentration risk. The plan assets for our defined benefit pension plans do not include any of our common stock.
U.S. Plan Assets
For the U.S. qualified pension plans, our assumption for the expected return on assets was 7.256.25 percent in 2017.2020. Projected returns are based primarily on broad, publicly traded equity and fixed income indices and forward-looking estimates of active portfolio and investment management. We expect additional positive returns from this active investment management. Based on the historical returns and forward-looking return expectations, in a rising interest rate environment, we have elected to reducemaintain our assumption to 6.50of 6.25 percent in 2018.2021.
The primary investment objective is to exceed, on a net-of-fee basis, the rate of return of a policy portfolio comprised of the following:
|
| | | | | | | | | | | | | |
| Asset Class | | Target | | Range |
| U.S. equities | | 10.07.0 | % | | +2.0/-8.0%5.0/ -5.0% |
| Non-U.S. equities | | 2.0 | % | | +3.0/-2.0% |
| Global equities | | 8.06.0 | % | | +1.0/-5.0%3.0/ -3.0% |
| Total equities | | 20.015.0 | % | | |
Real estateassets | | 6.06.5 | % | | +4.0/-6.0%3.5/ -6.5% |
| Private equity/venture capital | | 4.06.5 | % | | +6.0/-4.0%3.5/ -6.5% |
| Opportunistic credit | | 2.04.0 | % | | +8.0/-2.0%6.0/ -4.0% |
| Fixed income | | 68.0 | % | | +/5.0/ -5.0% |
| Total | | 100.0 | % | | |
| | | | |
The fixed income component is structured to represent a custom bond benchmark that will closely hedge the change in the value of our liabilities. This component is structured in such a way that its benchmark covers approximately 100 percent of the plan's exposure to changes in its discount rate (AA corporate bond yields). In order to achieve a hedge on more than the targeted 68 percent of plan assets invested in fixed income securities, our Benefits Policy Committee (BPC) permits the fixed income managers, other managers or the custodian/trustee to utilize derivative securities, as part of a liability driven investment strategy to further reduce the plan's risk of declining interest rates. However, all managers hired to manage assets for the trust are prohibited from using leverage unless specifically discussed withapproved by the BPC and approved in their guidelines.BPC.
U.K. Plan Assets
For the U.K. qualified pension plans, our assumption for the expected return on assets was 4.54.0 percent in 2017.2020. The methodology used to determine the rate of return on pension plan assets in the U.K. was based on establishing an equity-risk premium over current long-term bond yields adjusted based on target asset allocations. Our strategy with respect to our investments in these assets is to be invested in a suitable mixture of return-seeking assets such as equities, real estate and liability matching assets such as group annuity insurance contracts and duration matched bonds. Therefore, the risk and return balance of our U.K. asset portfolio should reflect a long-term horizon. To achieve these objectives we have established the following targets:
| | | | | | | | | | |
| Asset Class | | Target | | |
| Equities | | 10.0 | % | | |
| Private markets/secure income assets | | 18.0 | % | | |
| Credit | | 7.5 | % | | |
| Diversifying strategies | | 8.0 | % | | |
| | | |
Asset Class | | Target |
Global equitiesFixed income/insurance annuity | | 23.055.5 | % | | |
Real estate/private marketsCash | | 5.01.0 | % | | |
Re-insuranceTotal | | 8.0100.0 | % | | |
Corporate credit instruments | | 7.5 | % |
Fixed income | | 56.5 | % |
Total | | 100.0 | % |
As part of our strategy in the U.K. we have not prohibited the use of any financial instrument, including derivatives. As in the U.S. plan, derivatives may be used to better match liability duration and are not used in a speculative way. The 56.555.5 percent fixed income component is structured in a way that covers approximately 7980 percent of the plan's exposure to changes in its discount rate. Based on the above discussion, we have elected an assumption of 4.004.0 percent in 2018.2021.
Fair Value of U.S. Plan Assets
The fair values of U.S. pension plan assets by asset category were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at December 31, 2020 |
| In millions | | Quoted prices in active
markets for identical assets
(Level 1) | | Significant other
observable inputs
(Level 2) | | Significant
unobservable inputs
(Level 3) | | Total |
| Equities | | | | | | | | |
| U.S. | | $ | 194 | | | $ | — | | | $ | — | | | $ | 194 | |
| Non-U.S. | | 58 | | | — | | | — | | | 58 | |
| Fixed income | | | | | | | | |
| Government debt | | 78 | | | 5 | | | — | | | 83 | |
| Corporate debt | | | | | | | | |
| U.S. | | — | | | 512 | | | — | | | 512 | |
| Non-U.S. | | — | | | 26 | | | — | | | 26 | |
| Asset/mortgaged backed securities | | — | | | 3 | | | — | | | 3 | |
Net cash equivalents (1) | | 319 | | | 37 | | | — | | | 356 | |
| | | | | | | | |
Private markets and real assets (2) | | — | | | — | | | 431 | | | 431 | |
| Net plan assets subject to leveling | | $ | 649 | | | $ | 583 | | | $ | 431 | | | $ | 1,663 | |
| | | | | | | | |
Accruals (3) | | | | | | | | 5 | |
| Investments measured at net asset value | | | | | | | | 1,761 | |
| Net plan assets | | | | | | | | $ | 3,429 | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at December 31, 2017 |
| In millions | | Quoted prices in active
markets for identical assets
(Level 1) | | Significant other
observable inputs
(Level 2) | | Significant
unobservable inputs
(Level 3) | | Total |
| Equities | | | | | | | | |
| U.S. | | $ | 102 |
| | $ | — |
| | $ | — |
| | $ | 102 |
|
| Non-U.S. | | 56 |
| | — |
| | — |
| | 56 |
|
| Fixed income | | | | | | | |
|
| Government debt | | — |
| | 691 |
| | — |
| | 691 |
|
| Corporate debt | | | | | | | |
|
| U.S. | | — |
| | 590 |
| | — |
| | 590 |
|
| Non-U.S. | | — |
| | 73 |
| | — |
| | 73 |
|
| Asset/mortgaged backed securities | | — |
| | 78 |
| | — |
| | 78 |
|
Net cash equivalents(1) | | 50 |
| | 25 |
| | — |
| | 75 |
|
Derivative instruments(2) | | — |
| | 3 |
| | — |
| | 3 |
|
Private equity and real estate(3) | | — |
| | — |
| | 246 |
| | 246 |
|
| Net plan assets subject to leveling | | $ | 208 |
| | $ | 1,460 |
| | $ | 246 |
| | $ | 1,914 |
|
| Pending trade/purchases/sales | | |
| | |
| | |
| | (96 | ) |
Accruals(4) | | |
| | |
| | |
| | 12 |
|
| Investments measured at net asset value | | | | | | | | 1,336 |
|
| Net plan assets | | |
| | |
| | |
| | $ | 3,166 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at December 31, 2019 |
| In millions | | Quoted prices in active
markets for identical assets
(Level 1) | | Significant other
observable inputs
(Level 2) | | Significant unobservable inputs (Level 3) | | Total |
| Equities | | | | | | | | |
| U.S. | | $ | 96 | | | $ | — | | | $ | — | | | $ | 96 | |
| Non-U.S. | | 47 | | | — | | | — | | | 47 | |
| Fixed income | | | | | | | | |
| Government debt | | — | | | 72 | | | — | | | 72 | |
| Corporate debt | | | | | | | | |
| U.S. | | — | | | 357 | | | — | | | 357 | |
| Non-U.S. | | — | | | 11 | | | — | | | 11 | |
| Asset/mortgaged backed securities | | — | | | 1 | | | — | | | 1 | |
Net cash equivalents (1) | | 338 | | | 33 | | | — | | | 371 | |
| | | | | | | | |
Private markets and real assets (2) | | — | | | — | | | 371 | | | 371 | |
| Net plan assets subject to leveling | | $ | 481 | | | $ | 474 | | | $ | 371 | | | $ | 1,326 | |
| | | | | | | | |
Accruals (3) | | | | | | | | 5 | |
| Investments measured at net asset value | | | | | | | | 2,026 | |
| Net plan assets | | | | | | | | $ | 3,357 | |
| | | | | | | | |
(1) Cash equivalents include commercial paper, short-term government/agency, mortgage and credit instruments. |
(2) The instruments in private markets and real assets, for which quoted market prices are not available, are valued at their estimated fair value as determined by applicable investment managers or by audited financial statements of the funds. Private markets include equity, venture capital and private credit instruments and funds. Real assets include real estate and infrastructure. |
(3) Accruals include interest or dividends that were not settled at December 31. |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at December 31, 2016 |
| In millions | | Quoted prices in active
markets for identical assets
(Level 1) | | Significant other
observable inputs
(Level 2) | | Significant
unobservable inputs
(Level 3) | | Total |
| Equities | | |
| | |
| | | | |
|
| U.S. | | $ | 145 |
| | $ | — |
| | $ | — |
| | $ | 145 |
|
| Non-U.S. | | 125 |
| | — |
| | — |
| | 125 |
|
| Fixed income | | | | | | | |
|
|
| Government debt | | — |
| | 570 |
| | — |
| | 570 |
|
| Corporate debt | | | | | | | |
|
|
| U.S. | | — |
| | 497 |
| | — |
| | 497 |
|
| Non-U.S. | | — |
| | 84 |
| | — |
| | 84 |
|
| Asset/mortgaged backed securities | | — |
| | 58 |
| | — |
| | 58 |
|
Net cash equivalents (1) | | 18 |
| | 20 |
| | — |
| | 38 |
|
Derivative instruments (2) | | — |
| | 9 |
| | — |
| | 9 |
|
Private equity and real estate (3) | | — |
| | — |
| | 212 |
| | 212 |
|
| Net plan assets subject to leveling | | $ | 288 |
| | $ | 1,238 |
| | $ | 212 |
| | $ | 1,738 |
|
| Pending trade/purchases/sales | | |
| | |
| | |
| | (83 | ) |
Accruals (4) | | |
| | |
| | |
| | 12 |
|
| Investments measured at net asset value | | | | | | | | 1,084 |
|
| Net plan assets | | |
| | |
| | |
| | $ | 2,751 |
|
| |
(1)
| Cash equivalents include commercial paper, short-term government/agency, mortgage and credit instruments.
|
| |
(2)
| Derivative instruments include interest rate swaps and credit default swaps.
|
| |
(3)
| The instruments in private equity, real estate and insurance funds, for which quoted market prices are not available, are valued at their estimated fair value as determined by applicable investment managers or by audited financial statements of the funds.
|
| |
(4)
| Accruals include interest or dividends that were not settled at December 31. |
Certain of our assets are valued based on their respective net asset value (NAV) (or its equivalent), as an alternative to estimated fair value due to the absence of readily available market prices. The fair value of each such investment category was as follows:
| |
• | U.S. and Non-U.S. Equities ($428 million and $511 million at December 31, 2017 and 2016, respectively)- These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.
|
| |
• | Government Debt ($347 million and $178 million at December 31, 2017 and 2016, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.
|
| |
• | U.S. and Non-U.S. Corporate Debt ($321 million and $265 million at December 31, 2017 and 2016, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.
|
| |
• | Real Estate ($137 million and $129 million at December 31, 2017 and 2016, respectively) - This asset type represents different types of real estate including development property, industrial property, individual mortgages, office property, property investment companies, and retail property. These funds are valued using NAVs and allow quarterly or more frequent redemptions.
|
| |
• | Asset/Mortgage Backed Securities ($103 million and $1 million at December 31, 2017 and 2016,•U.S. and Non-U.S. Corporate Debt ($1,068 million and $939 million at December 31, 2020 and 2019, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days. •U.S. and Non-U.S. Equities ($245 million and $367 million at December 31, 2020 and 2019, respectively)- These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days. •Government Debt ($199 million and $503 million at December 31, 2020 and 2019, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days. •Real Estate ($153 million and $140 million at December 31, 2020 and 2019, respectively) - This asset type represents different types of real estate including development property, industrial property, individual mortgages, office property, property investment companies and retail property. These funds are valued using NAVs and allow quarterly or more frequent redemptions. •Asset/Mortgage Backed Securities ($96 million and $77 million at December 31, 2020 and 2019, respectively) - This asset type represents investments in fixed- and floating-rate loans. These funds are valued using NAVs and allow quarterly or more frequent redemptions. |
The reconciliation of Level 3 assets was as follows:
|
| | | | | | | | | | | | |
| | | Fair Value Measurements
Using Significant Unobservable Inputs (Level 3) |
| In millions | | Private Equity | | Real Estate | | Total |
| Balance at December 31, 2015 | | $ | 143 |
| | $ | 60 |
| | $ | 203 |
|
| Actual return on plan assets | | | | | | |
| Unrealized gains on assets still held at the reporting date | | 6 |
| | 6 |
| | 12 |
|
| Purchases, sales and settlements, net | | (1 | ) | | (2 | ) | | (3 | ) |
| Balance at December 31, 2016 | | 148 |
| | 64 |
| | 212 |
|
| Actual return on plan assets | | | | | | |
| Unrealized gains on assets still held at the reporting date | | 24 |
| | 5 |
| | 29 |
|
| Purchases, sales and settlements, net | | 8 |
| | (3 | ) | | 5 |
|
| Balance at December 31, 2017 | | $ | 180 |
| | $ | 66 |
| | $ | 246 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements
Using Significant Unobservable Inputs (Level 3) |
| In millions | | Private Markets | | Real Assets | | Total |
| Balance at December 31, 2018 | | $ | 247 | | | $ | 69 | | | $ | 316 | |
| Actual return on plan assets | | | | | | |
| Unrealized gains on assets still held at the reporting date | | 24 | | | 5 | | | 29 | |
| Purchases, sales and settlements, net | | 28 | | | (2) | | | 26 | |
| Balance at December 31, 2019 | | 299 | | | 72 | | | 371 | |
| Actual return on plan assets | | | | | | |
| Unrealized gains on assets still held at the reporting date | | 21 | | | 2 | | | 23 | |
| Purchases, sales and settlements, net | | 39 | | | (2) | | | 37 | |
| Balance at December 31, 2020 | | $ | 359 | | | $ | 72 | | | $ | 431 | |
| | | | | | |
Fair Value of U.K. Plan Assets
In July 2012, the U.K. pension plan purchased an insurance contract that will guarantee payment of specified pension liabilities. The contract defers payment for 10 years and is included in the table below in Level 3 for years ended December 31, 2017 and 2016 at a value of $477 million and $439 million, respectively.
The fair values of U.K. pension plan assets by asset category were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at December 31, 2020 |
| In millions | | Quoted prices in active
markets for identical assets
(Level 1) | | Significant other
observable inputs
(Level 2) | | Significant
unobservable inputs
(Level 3) | | Total |
| Equities | | | | | | | | |
| U.S. | | $ | — | | | $ | 56 | | | $ | — | | | $ | 56 | |
| Non-U.S. | | — | | | 69 | | | — | | | 69 | |
| Fixed income | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net cash equivalents (1) | | 26 | | | — | | | — | | | 26 | |
| | | | | | | | |
| | | | | | | | |
Insurance annuity (2) | | — | | | — | | | 556 | | | 556 | |
Private markets and real assets (3) | | — | | | — | | | 282 | | | 282 | |
| Net plan assets subject to leveling | | $ | 26 | | | $ | 125 | | | $ | 838 | | | $ | 989 | |
| | | | | | | | |
| | | | | | | | |
| Investments measured at net asset value | | | | | | | | 1,348 | |
| Net plan assets | | | | | | | | $ | 2,337 | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at December 31, 2017 |
| In millions | | Quoted prices in active
markets for identical assets
(Level 1) | | Significant other
observable inputs
(Level 2) | | Significant
unobservable inputs
(Level 3) | | Total |
| Equities | | | | | | | | |
| U.S. | | $ | — |
| | $ | 63 |
| | $ | — |
| | $ | 63 |
|
| Non-U.S. | | — |
| | 91 |
| | — |
| | 91 |
|
| Fixed income | | | | | | | | |
Net cash equivalents (1) | | 29 |
| | — |
| | — |
| | 29 |
|
Private equity, real estate and insurance (2) | | — |
| | — |
| | 671 |
| | 671 |
|
| Net plan assets subject to leveling | | $ | 29 |
| | $ | 154 |
| | $ | 671 |
| | $ | 854 |
|
| Investments measured at net asset value | | | | | | | | 1,106 |
|
| Net plan assets | | |
| | |
| | |
| | $ | 1,960 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at December 31, 2019 |
| In millions | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Total |
| Equities | | | | | | | | |
| U.S. | | $ | — | | | $ | 45 | | | $ | — | | | $ | 45 | |
| Non-U.S. | | — | | | 58 | | | — | | | 58 | |
| Fixed income | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net cash equivalents (1) | | 35 | | | — | | | — | | | 35 | |
| | | | | | | | |
| | | | | | | | |
Insurance annuity (2) | | — | | | — | | | 476 | | | 476 | |
Private markets and real assets (3) | | — | | | — | | | 259 | | | 259 | |
| Net plan assets subject to leveling | | $ | 35 | | | $ | 103 | | | $ | 735 | | | $ | 873 | |
| | | | | | | | |
| | | | | | | | |
| Investments measured at net asset value | | | | | | | | 1,137 | |
| Net plan assets | | | | | | | | $ | 2,010 | |
| | | | | | | | |
(1) Cash equivalents include commercial paper, short-term government/agency, mortgage and credit instruments. |
(2) In July 2012, the U.K. pension plan purchased an insurance contract that will guarantee payment of specified pension liabilities. The contract defers payment for 10 years. |
(3) The instruments in private markets and real assets, for which quoted market prices are not available, are valued at their estimated fair value as determined by applicable investment managers or by audited financial statements of the funds. Private markets include equity, venture capital and private credit instruments and funds. Real assets include real estate and infrastructure. |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at December 31, 2016 |
| In millions | | Quoted prices in active
markets for identical assets
(Level 1) | | Significant other
observable inputs
(Level 2) | | Significant
unobservable inputs
(Level 3) | | Total |
| Equities | | | | | | | | |
| U.S. | | $ | — |
| | $ | 174 |
| | $ | — |
| | $ | 174 |
|
| Non-U.S. | | — |
| | 193 |
| | — |
| | 193 |
|
| Fixed income | | | | | | | |
|
Net cash equivalents (1) | | 24 |
| | — |
| | — |
| | 24 |
|
Private equity, real estate and insurance (2) | | — |
| | — |
| | 613 |
| | 613 |
|
| Net plan assets subject to leveling | | $ | 24 |
| | $ | 367 |
| | $ | 613 |
| | $ | 1,004 |
|
| Investments measured at net asset value | | | | | | | | 749 |
|
| Net plan assets | | |
| | |
| | |
| | $ | 1,753 |
|
| |
(1)
| Cash equivalents include commercial paper, short-term government/agency, mortgage and credit instruments.
|
| |
(2)
| The instruments in private equity, real estate and insurance funds, for which quoted market prices are not available, are valued at their estimated fair value as determined by applicable investment managers or by audited financial statement of the funds. |
Certainrtain of our assets are valued based on their respective NAV (or its equivalent), as an alternative to estimated fair value due to the absence of readily available market prices. The fair value of each such investment category was as follows:
| |
• | U.S. and Non-U.S. Corporate Debt ($822 million and $655 million at December 31, 2017 and 2016,•U.S. and Non-U.S. Corporate Debt ($970 million and $791 million at December 31, 2020 and 2019, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days. •U.S. and Non-U.S. Equities ($168 million and $160 million at December 31, 2020 and 2019, respectively)- These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days. •Asset/Mortgage Backed Securities ($100 million and $96 million at December 31, 2020 and 2019, respectively) - This asset type represents investments in fixed- and floating-rate loans. These funds are valued using NAVs and allow quarterly or more frequent redemptions. •Re-insurance ($60 million and $30 million at December 31, 2020 and 2019, respectively) - This commingled fund has a NAV that is determined on a monthly basis and the investment may be sold at that value. •Diversified Strategies ($50 million and $60 million at December 31, 2020 and 2019, respectively) - These commingled funds invest in commodities, fixed income and equity securities. They have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.
|
| |
• | U.S. and Non-U.S. Equities ($144 million and zero dollars at December 31, 2017 and 2016, respectively)- These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.
|
| |
• | Re-insurance ($86 million and $56 million at December 31, 2017 and 2016, respectively) - This commingled fund has a NAV that is determined on a monthly basis and the investment may be sold at that value.
|
| |
• | Managed Futures Funds ($54 million and $38 million at December 31, 2017 and 2016, respectively) - These commingled funds invest in commodities, fixed income and equity securities. They have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.
|
The reconciliation of Level 3 assets was as follows:
|
| | | | | | | | | | | | | | | | |
| | | Fair Value Measurements
Using Significant Unobservable Inputs (Level 3) |
| In millions | | Insurance | | Real Estate | | Private Equity | | Total |
| Balance at December 31, 2015 | | $ | 445 |
| | $ | 57 |
| | $ | 99 |
| | $ | 601 |
|
| Actual return on plan assets | | | | | | | | |
| Unrealized (losses) gains on assets still held at the reporting date | | (6 | ) | | (7 | ) | | 15 |
| | 2 |
|
| Purchases, sales and settlements, net | | — |
| | 7 |
| | 3 |
| | 10 |
|
| Balance at December 31, 2016 | | 439 |
| | 57 |
| | 117 |
| | 613 |
|
| Actual return on plan assets | | | | | | | | |
| Unrealized gains on assets still held at the reporting date | | 38 |
| | 10 |
| | 28 |
| | 76 |
|
| Purchases, sales and settlements, net | | — |
| | (8 | ) | | (10 | ) | | (18 | ) |
| Balance at December 31, 2017 | | $ | 477 |
| | $ | 59 |
| | $ | 135 |
| | $ | 671 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements
Using Significant Unobservable Inputs (Level 3) |
| In millions | | Insurance Annuity | | Real Assets | | Private Markets | | Total |
| Balance at December 31, 2018 | | $ | 442 | | | $ | 57 | | | $ | 187 | | | $ | 686 | |
| Actual return on plan assets | | | | | | | | |
| Unrealized gains on assets still held at the reporting date | | 34 | | | 5 | | | 14 | | | 53 | |
| Purchases, sales and settlements, net | | 0 | | | (27) | | | 23 | | | (4) | |
| Balance at December 31, 2019 | | 476 | | | 35 | | | 224 | | | 735 | |
| Actual return on plan assets | | | | | | | | |
| Unrealized gains (losses) on assets still held at the reporting date | | 80 | | | (2) | | | 22 | | | 100 | |
| Purchases, sales and settlements, net | | 0 | | | (2) | | | 5 | | | 3 | |
| Balance at December 31, 2020 | | $ | 556 | | | $ | 31 | | | $ | 251 | | | $ | 838 | |
| | | | | | | | |
Level 3 Assets
The investments in an insurance annuity contract, venture capital, private equity opportunistic credit and real estate, funds, for which quoted market prices are not available, are valued at their estimated fair value as determined by applicable investment managers or by quarterly financial statements of the funds. These financial statements are audited at least annually. In conjunction with our investment consultant, we monitor the fair value of the insurance contract as periodically reported by our insurer and their counterparty risk. The fair value of all real estate properties, held in the partnerships, are valued at least once per year by an independent professional real estate valuation firm. Fair value generally represents the fund's proportionate share of the net assets of the investment partnerships as reported by the general partners of the underlying partnerships. Some securities with no readily available market are initially valued at cost, utilizing independent professional valuation firms as well as market comparisons with subsequent adjustments to values which reflect either the basis of meaningful third-party transactions in the private market or the fair value deemed appropriate by the general partners of the underlying investment partnerships. In such instances, consideration is also given to the financial condition and operating results of the issuer, the amount that the investment partnerships can reasonably expect to realize upon the sale of the securities and any other factors deemed relevant. The estimated fair values are subject to uncertainty and therefore may differ from the values that would have been used had a ready market for such investments existed and such differences could be material.
Estimated Future Contributions and Benefit Payments
We plan to contribute approximately $38$75 million to our defined benefit pension plans in 2018.2021. The table below presents expected future benefit payments under our pension plans:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Qualified and Non-Qualified Pension Plans |
| In millions | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 - 2027 |
| Expected benefit payments | | $ | 239 |
| | $ | 237 |
| | $ | 242 |
| | $ | 248 |
| | $ | 253 |
| | $ | 1,320 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Qualified and Non-Qualified Pension Plans |
| In millions | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 - 2030 |
| Expected benefit payments | | $ | 282 | | | $ | 268 | | | $ | 271 | | | $ | 276 | | | $ | 278 | | | $ | 1,417 | |
| | | | | | | | | | | | |
Other Pension Plans
We also sponsor defined contribution plans for certain hourly and salaried employees. Our contributions to these plans were $84$85 million, $68$102 million and $74$104 million for the years ended December 31, 2017, 20162020, 2019 and 2015.2018.
Other Postretirement Benefits
Our other postretirement benefit (OPEB) plans provide various health care and life insurance benefits to eligible employees, who retire and satisfy certain age and service requirements, and their dependents. The plans are contributory and contain cost-sharing features such as caps, deductibles, coinsurance and spousal contributions. Employer contributions are limited by formulas in each plan. Retiree contributions for health care benefits are adjusted annually, and we reserve the right to change benefits covered under these plans. There were no plan assets for the postretirement benefitOPEB plans as our policy is to fund benefits and expenses for these plans as claims and premiums are incurred.
Obligations and Funded Status
Benefit obligation balances presented below reflect the accumulated postretirement benefit obligations (APBO) for our other postretirement benefitOPEB plans. The changes in the benefit obligations, the funded status of the plans and the amounts recognized in our Consolidated Balance Sheets for our significant other postretirement benefitOPEB plans were as follows:
|
| | | | | | | | |
| In millions | | 2017 | | 2016 |
| Change in benefit obligation | | | | |
| Benefit obligation at the beginning of the year | | $ | 364 |
| | $ | 385 |
|
| Interest cost | | 14 |
| | 16 |
|
| Plan participants' contributions | | 24 |
| | 14 |
|
| Actuarial (gain) loss | | (35 | ) | | 9 |
|
| Benefits paid directly by employer | | (49 | ) | | (60 | ) |
| Benefit obligation at end of year | | $ | 318 |
| | $ | 364 |
|
| | | | | |
| Funded status at end of year | | $ | (318 | ) | | $ | (364 | ) |
| | | | | |
| Amounts recognized in consolidated balance sheets | | | | |
| Accrued compensation, benefits and retirement costs - current liabilities | | $ | (29 | ) | | $ | (35 | ) |
| Postretirement benefits other than pensions-long-term liabilities | | (289 | ) | | (329 | ) |
| Net amount recognized | | $ | (318 | ) | | $ | (364 | ) |
| | | | | |
| Amounts recognized in accumulated other comprehensive loss: | | | | |
| Net actuarial loss | | $ | 27 |
| | $ | 69 |
|
| Prior service credit | | (4 | ) | | (5 | ) |
| Net amount recognized | | $ | 23 |
| | $ | 64 |
|
| | | | | | | | | | | | | | |
| | December 31, |
| In millions | | 2020 | | 2019 |
| Change in benefit obligation | | | | |
| Benefit obligation at the beginning of the year | | $ | 227 | | | $ | 246 | |
| Interest cost | | 7 | | | 10 | |
| Plan participants' contributions | | 9 | | | 14 | |
| | | | |
| Actuarial loss | | 14 | | | — | |
| Benefits paid directly by employer | | (38) | | | (43) | |
| Benefit obligation at end of year | | $ | 219 | | | $ | 227 | |
| | | | |
| Funded status at end of year | | $ | (219) | | | $ | (227) | |
| | | | |
| Amounts recognized in consolidated balance sheets | | | | |
| Accrued compensation, benefits and retirement costs | | $ | (20) | | | $ | (21) | |
| Pension and OPEB | | (199) | | | (206) | |
| Net amount recognized | | $ | (219) | | | $ | (227) | |
| | | | |
| Amounts recognized in accumulated other comprehensive loss | | | | |
| Net actuarial gain | | $ | (10) | | | $ | (25) | |
| Prior service credit | | (4) | | | (4) | |
| Net amount recognized | | $ | (14) | | | $ | (29) | |
| | | | |
In addition to the other postretirementOPEB plans in the above table, we also maintain less significant postretirementOPEB plans in four4 other countries outside the U.S. that comprise approximately 69 percent and 511 percent of our postretirementOPEB obligations at December 31, 20172020 and 2016,2019, respectively. These plans are reflected in "Other liabilities and deferred revenue"liabilities" in our Consolidated Balance Sheets.
Components of Net Periodic Other Postretirement BenefitsOPEB Cost
The following table presents the net periodic other postretirement benefitsOPEB cost under our plans:
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| In millions | | 2017 | | 2016 | | 2015 |
| Interest cost | | $ | 14 |
| | $ | 16 |
| | $ | 15 |
|
| Recognized net actuarial loss | | 6 |
| | 5 |
| | 5 |
|
| Net periodic other postretirement benefit cost | | $ | 20 |
| | $ | 21 |
| | $ | 20 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| In millions | | 2020 | | 2019 | | 2018 |
| Interest cost | | $ | 7 | | | $ | 10 | | | $ | 11 | |
| | | | | | |
| Recognized net actuarial gain | | (1) | | | 0 | | | — | |
| | | | | | |
| Net periodic OPEB cost | | $ | 6 | | | $ | 10 | | | $ | 11 | |
| | | | | | |
Other changes in benefit obligations recognized in other comprehensive incomeloss (income) for the years ended December 31 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| In millions | | 2020 | | 2019 | | 2018 |
| | | | | | |
| Recognized net actuarial gain | | $ | 1 | | | $ | — | | | $ | — | |
| Incurred actuarial loss (gain) | | 14 | | | (1) | | | (51) | |
| | | | | | |
| | | | | | |
| Total recognized in other comprehensive loss (income) | | $ | 15 | | | $ | (1) | | | $ | (51) | |
| | | | | | |
| Total recognized in net periodic OPEB cost and other comprehensive loss (income) | | $ | 21 | | | $ | 9 | | | $ | (40) | |
| | | | | | |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| In millions | | 2017 | | 2016 | | 2015 |
| Recognized net actuarial loss | | $ | (6 | ) | | $ | (6 | ) | | $ | (5 | ) |
| Incurred actuarial (gain) loss | | (35 | ) | | 9 |
| | 6 |
|
| Total recognized in other comprehensive income | | $ | (41 | ) | | $ | 3 |
| | $ | 1 |
|
| | | | | | | |
| Total recognized in net periodic other postretirement benefit cost and other comprehensive income | | $ | (21 | ) | | $ | 24 |
| | $ | 21 |
|
The amount in accumulated other comprehensive loss expected to be recognized as a component of net periodic other postretirement benefit cost during the next fiscal year is approximately zero.
Assumptions
The table below presents assumptions used in determining the other postretirement benefitOPEB obligation for each year and reflects weighted-average percentages for our other postretirementOPEB plans as follows:
|
| | | | | | |
| | | 2017 | | 2016 |
| Discount rate | | 3.55 | % | | 4.00 | % |
| | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| Discount rate | | 2.30 | % | | 3.15 | % |
| | | | |
The table below presents assumptions used in determining the net periodic other postretirement benefitsOPEB cost and reflects weighted-average percentages for the various plans as follows:
|
| | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Discount rate | | 4.00 | % | | 4.35 | % | | 3.90 | % |
| | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| Discount rate | | 3.15 | % | | 4.25 | % | | 3.55 | % |
| | | | | | |
Our consolidated other postretirement benefitOPEB obligation is determined by application of the terms of health care and life insurance plans, together with relevant actuarial assumptions and health care cost trend rates. For measurement purposes, an 8.00a 6.88 percent annual rate of increase in the per capita cost of covered health care benefits was assumed in 2017.2020. The rate is assumed to decrease on a linear basis to 5.005.0 percent through 20262029 and remain at that level thereafter. An increase in the health care cost trends of 1 percent would increase our APBO by $16 million at December 31, 2017 and the net periodic other postretirement benefit cost for 2018 by $1 million. A decrease in the health care cost trends of 1 percent would decrease our APBO by $14 million at December 31, 2017 and the net periodic other postretirement benefit cost for 2018 by $1 million.
Estimated Benefit Payments
The table below presents expected benefit payments under our other postretirement benefitOPEB plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In millions | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 - 2030 |
| Expected benefit payments | | $ | 21 | | | $ | 20 | | | $ | 19 | | | $ | 18 | | | $ | 17 | | | $ | 71 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| In millions | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 - 2027 |
| Expected benefit payments | | $ | 29 |
| | $ | 28 |
| | $ | 27 |
| | $ | 26 |
| | $ | 25 |
| | $ | 108 |
|
NOTE 11. OTHER LIABILITIES AND DEFERRED REVENUE
Other liabilities and deferred revenue included the following:
|
| | | | | | | |
| | December 31, |
| In millions | 2017 | | 2016 |
| Deferred revenue | $ | 604 |
| | $ | 589 |
|
| Accrued warranty | 466 |
| | 336 |
|
| Deferred income taxes | 391 |
| | 76 |
|
Income tax payable(1) | 281 |
| | — |
|
| Accrued compensation | 151 |
| | 151 |
|
| Other long-term liabilities | 134 |
| | 137 |
|
| Other liabilities and deferred revenue | $ | 2,027 |
| | $ | 1,289 |
|
(1) Long-term income taxes payable are the result of Tax Legislation and relate to the non-current portion of
the one-time transition tax on accumulated foreign earnings. See Note 2, "INCOME TAXES," to our
Consolidated Financial Statements for additional information.
NOTE 12.14. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are subject to numerous lawsuits and claims arising out of the ordinary course of our business, including actions related to product liability; personal injury; the use and performance of our products; warranty matters; product recalls; patent, trademark or other intellectual property infringement; contractual liability; the conduct of our business; tax reporting in foreign jurisdictions; distributor termination; workplace safety; and environmental matters. We also have been identified as a potentially responsible party at multiple waste disposal sites under U.S. federal and related state environmental statutes and regulations and may have joint and several liability for any investigation and remediation costs incurred with respect to such sites. We have denied liability with respect to many of these lawsuits, claims and proceedings and are vigorously defending such lawsuits, claims and proceedings. We carry various forms of commercial, property and casualty, product liability and other forms of insurance; however, such insurance may not be applicable or adequate to cover the costs associated with a judgment against us with respect to these lawsuits, claims and proceedings. We do not believe that these lawsuits are material individually or in the aggregate. While we believe we have also established adequate accruals pursuant to GAAP for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based upon then presently available information, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition or cash flows.
We conduct significant business operations in Brazil that are subject to the Brazilian federal, state and local labor, social security, tax and customs laws. While we believe we comply with such laws, they are complex, subject to varying interpretations and we are often engaged in litigation regarding the application of these laws to particular circumstances.
Loss Contingencies
Third Party Aftertreatment
Engine systems sold in the U.S. must be certified to complyOn April 29, 2019, we announced that we were conducting a formal internal review of our emissions certification process and compliance with the Environmental Protection Agency (EPA) and California Air Resources Board (CARB) emission standards. EPA and CARB regulations require that in-use testing be performed on vehicles by the emission certificate holder and reported tostandards for our pick-up truck applications, following conversations with the EPA and CARB regarding certification of our engines in ordermodel year 2019 RAM 2500 and 3500 trucks. This review is being conducted with external advisors to ensure ongoingthe certification and compliance processes for all of our pick-up truck applications are consistent with our internal policies, engineering standards and applicable laws. In addition, we voluntarily disclosed our formal internal review to the regulators and to other government agencies, the Department of Justice (DOJ) and the SEC, and worked cooperatively with them to ensure a complete and thorough review. We fully cooperated with the DOJ's and the SEC's information requests and inquiries and, based on recent communications with these emission standards. We are the holder of this emission certificate for our engines, including engines installed in certain vehicles with one customer for whichagencies, we diddo not also manufacture or sell the emission aftertreatment system.expect further inquiries. During 2015, a quality issue in certain of these third party aftertreatment systems caused some of our inter-related engines to fail in-use emission testing. In the fourth quarter of 2015, the vehicle manufacturer made a request that we assist in the design and bear the financial cost of a field campaign (Campaign) to address the technical issue purportedly causing some vehicles to fail the in-use testing.
As the certificate holder, we recorded a charge of $60 million in 2015 for the expected cost of the proposed voluntary Campaign. The Campaign design was finalized with our original equipment manufacturer (OEM) customer, reviewedconversations with the EPA and submitted for final approval in 2016. We concluded based upon additional in-use emission testing performed in 2016 thatCARB about the Campaign should be expanded to include a larger population of vehicles manufactured by this one OEM. We recorded additional charges of $138 million in 2016 to reflect the estimated costeffectiveness of our overall participationpick-up truck applications, the regulators raised concerns that certain aspects of our emissions systems may reduce the effectiveness of our emissions control systems and thereby act as defeat devices. As a result, our internal review focuses, in the Campaign.part,
In late 2016, litigation arose with our OEM customer regarding cost allocation for this Campaign. In January 2018, a settlement was reached with our customer to fully resolve this matter, which resulted in an incremental charge of $5 million recorded in the fourth quarter of 2017.
These charges are reflected in a separate line item
on our Consolidated Statements of Income.
Engine System
During 2017, the CARB and U.S. EPA selected certain of our pre-2013 model year engine systems for additional emissions testing. Some of these engine systems failed CARB and EPA's tests as a result of degradation of an aftertreatment component. We have not been issued an official notice from the CARB or EPA regarding these particular engine systems.regulators’ concerns. We are working closely with the agenciesregulators to enhance our emissions systems to improve the effectiveness of all of our pick-up truck applications and will meet with them beginning in the first quarter of 2018, to develop a resolution of these matters. We are developing and testing a variety of solutions tofully address the technical issues, which could includeregulators’ requirements. Based on discussions with the regulators, we have developed a combination ofnew calibration changes, service practices and hardware changes. We recorded a charge of $29 million to "cost of sales" in our Consolidated Statements of Income in the third quarter of 2017 for the expected cost of field campaignsengines in model year 2019 RAM 2500 and 3500 trucks that has been included in all engines shipped since September 2019. During our discussions, the regulators have asked us to repair some of these engine systems.
In addition, we continue to evaluate other engine systems for model years 2010 through 2015 that could potentially be subject to similar aftertreatment component degradation issues. At the close of 2017, we had not yet determined the impact tolook at other model years or engine systems orand other engines. Due to the percentagecontinuing nature of our formal review, our ongoing cooperation with our regulators and the engine system populationspresence of many unknown facts and circumstances, we cannot predict the final outcome of this review and these regulatory processes, and we cannot provide assurance that could be affected.
Since there are many unresolved variables with respect to these degradation issues, we arethe matter will not yet able to estimate the financial impact of these matters. It is possible that they could have a materialmaterially adverse impact on our results of operations in the periods in which these degradation issues are resolved and a solution is determined.
We do not currently expect any fines or penalties from the EPA or CARB related to this matter.cash flows.
Guarantees and Commitments
Periodically, we enter into guarantee arrangements, including guarantees of non-U.S. distributor financings, residual value guarantees on equipment under operating leases and other miscellaneous guarantees of joint ventures or third-party obligations. At December 31, 2017,2020, the maximum potential loss related to these guarantees was $51$44 million.
We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At December 31, 2017,2020, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $84 million, of which $23 million relates to a contract with a components supplier that extends to 2018 and $19 million relates to a contract with a power systems supplier that extends to 2019.$32 million. Most of these arrangements enable us to secure supplies of critical components. We do not currently anticipate paying any penalties under these contracts.
We enter into physical forward contracts with suppliers of platinum palladium and copperpalladium to purchase minimumcertain volumes of the commodities at contractually stated prices for various periods, not to exceedwhich generally fall within two years. At December 31, 2017,2020, the total commitments under these contracts were $17$79 million. These arrangements enable us to fixguarantee the prices of these commodities, which otherwise are subject to market volatility.
We have guarantees with certain customers that require us to satisfactorily honor contractual or regulatory obligations, or compensate for monetary losses related to nonperformance. These performance bonds and other performance-related guarantees were $102$100 million at December 31, 2017.2020.
Indemnifications
Periodically, we enter into various contractual arrangements where we agree to indemnify a third-party against certain types of losses. Common types of indemnities include:
•product liability and license, patent or trademark indemnifications;
| |
• | product liability and license, patent or trademark indemnifications;asset sale agreements where we agree to indemnify the purchaser against future environmental exposures related to the asset sold; and
•any contractual agreement where we agree to indemnify the counterparty for losses suffered as a result of a misrepresentation in the contract. |
| |
• | asset sale agreements where we agree to indemnify the purchaser against future environmental exposures related to the asset sold; and
|
| |
• | any contractual agreement where we agree to indemnify the counterparty for losses suffered as a result of a misrepresentation in the contract.
|
We regularly evaluate the probability of having to incur costs associated with these indemnities and accrue for expected losses that are probable. Because the indemnifications are not related to specified known liabilities and due to their uncertain nature, we are unable to estimate the maximum amount of the potential loss associated with these indemnifications.
Leases
We lease certain manufacturing equipment, facilities, warehouses, office space and equipment, aircraft and automobiles for varying periods under lease agreements. Most of the leases are non-cancelable operating leases with fixed rental payments, expire over the next 10 years and contain renewal provisions. Rent expense under these leases was as follows:
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| In millions | | 2017 | | 2016 | | 2015 |
| Rent expense | | $ | 215 |
| | $ | 210 |
| | $ | 205 |
|
The following is a summary of the leased property under capital leases by major classes:
|
| | | | | | | | |
| | | December 31, |
| In millions | | 2017 | | 2016 |
| Building | | $ | 158 |
| | $ | 113 |
|
| Equipment | | 94 |
| | 109 |
|
| Land | | 16 |
| | 15 |
|
| Less: Accumulated depreciation | | (137 | ) | | (133 | ) |
| Total | | $ | 131 |
| | $ | 104 |
|
Following is a summary of the future minimum lease payments due under capital and operating leases with terms of more than one year at December 31, 2017, together with the net present value of the minimum payments due under capital leases:
|
| | | | | | | | |
| In millions | | Capital Leases | | Operating Leases |
| 2018 | | $ | 30 |
| | $ | 140 |
|
| 2019 | | 26 |
| | 108 |
|
| 2020 | | 14 |
| | 80 |
|
| 2021 | | 9 |
| | 60 |
|
| 2022 | | 9 |
| | 44 |
|
| After 2022 | | 75 |
| | 70 |
|
| Total minimum lease payments | | $ | 163 |
| | $ | 502 |
|
| Interest | | (42 | ) | | |
|
| Present value of net minimum lease payments | | $ | 121 |
| | |
|
NOTE 13.15. CUMMINS INC. SHAREHOLDERS' EQUITY
Preferred and Preference Stock
We are authorized to issue one million1000000 shares each of zero par value preferred and 1000000 shares of preference stock with preferred shares being senior to preference shares. We can determine the number of shares of each series, and the rights, preferences and limitations of each series. At December 31, 2017,2020, there was no preferred or preference stock outstanding.
Common Stock
Changes in shares of common stock, treasury stock and common stock held in trust for employee benefit plans were as follows:
|
| | | | | | | | | |
| In millions | | Common
Stock | | Treasury
Stock | | Common Stock
Held in Trust |
| Balance at December 31, 2014 | | 222.3 |
| | 40.1 |
| | 1.1 |
|
| Shares acquired | | — |
| | 7.2 |
| | — |
|
| Shares issued | | 0.1 |
| | (0.1 | ) | | (0.2 | ) |
| Balance at December 31, 2015 | | 222.4 |
| | 47.2 |
| | 0.9 |
|
| Shares acquired | | — |
| | 7.3 |
| | — |
|
| Shares issued | | — |
| | (0.3 | ) | | (0.2 | ) |
| Balance at December 31, 2016 | | 222.4 |
| | 54.2 |
| | 0.7 |
|
| Shares acquired | | — |
| | 2.9 |
| | — |
|
| Shares issued | | — |
| | (0.4 | ) | | (0.2 | ) |
| Balance at December 31, 2017 | | 222.4 |
| | 56.7 |
| | 0.5 |
|
| | | | | | | | | | | | | | | | | | | | |
| In millions | | Common
Stock | | Treasury
Stock | | Common Stock
Held in Trust |
| Balance at December 31, 2017 | | 222.4 | | | 56.7 | | | 0.5 | |
| Shares acquired | | — | | | 7.9 | | | — | |
| Shares issued | | 0 | | | (0.2) | | | (0.1) | |
| | | | | | |
| | | | | | |
| Balance at December 31, 2018 | | 222.4 | | | 64.4 | | | 0.4 | |
| Shares acquired | | — | | | 8.1 | | | — | |
| Shares issued | | 0 | | | (0.8) | | | (0.2) | |
| | | | | | |
| | | | | | |
| Balance at December 31, 2019 | | 222.4 | | | 71.7 | | | 0.2 | |
| Shares acquired | | — | | | 3.9 | | | — | |
| Shares issued | | 0 | | | (0.8) | | | (0.2) | |
| | | | | | |
| | | | | | |
| Balance at December 31, 2020 | | 222.4 | | | 74.8 | | | 0 | |
| | | | | | |
Treasury Stock
Shares of common stock repurchased by us are recorded at cost as treasury stock and result in a reduction of shareholders' equity in our Consolidated Balance Sheets. Treasury shares may be reissued as part of our stock-based compensation programs. When shares are reissued, we use the weighted-average cost method for determining cost. The gains between the cost of the shares and the issuance price are added to additional paid-in-capital. The losses are deducted from additional paid-in capital to the extent of the gains. Thereafter, the losses are deducted from retained earnings. Treasury stock activity for the three-year period ended December 31, 2017,2020, consisting of shares issued and repurchased is presented in our Consolidated Statements of Changes in Equity.
In December 2016, our2019, the Board of Directors authorized the acquisition of up to $1$2.0 billion of additional common stock upon completion of the 20152018 repurchase plan. In 2017,October 2018, the Board authorized the acquisition of up to $2.0 billion of additional common stock upon completion of the 2016 repurchase plan. For the year ended December 31, 2020, we made the following purchases under the 2015 purchasestock repurchase programs:
| In millions (except per share amounts)
For each quarter ended | | In millions (except per share amounts)
For each quarter ended | | 2020 Shares Purchased | | Average Cost
Per Share | | Total Cost of
Repurchases | | | Remaining Authorized Capacity (1) |
| | In millions (except per share amounts) For each quarter ended | | 2017 Shares Purchased | | Average Cost Per Share | | Total Cost of Repurchases | | Remaining Authorized Capacity (1) | |
| April 2 | | 0.3 |
| | $ | 151.32 |
| | $ | 51 |
| | $ | 445 |
| |
| July 2 | | 0.5 |
| | 153.95 |
| | 69 |
| | 376 |
| |
| October 1 | | 1.7 |
| | 155.05 |
| | 271 |
| | 105 |
| |
| | October 2018, $2 billion repurchase program | | October 2018, $2 billion repurchase program | | | | | | | | | |
| March 29 | | March 29 | | 3.5 | | | $ | 156.92 | | | $ | 550 | | | | $ | 85 | |
| June 28 | | June 28 | | 0 | | | 0 | | | 0 | | | | 85 | |
| September 27 | | September 27 | | 0 | | | 0 | | | 0 | | | | 85 | |
| December 31 | | 0.4 |
| | 166.00 |
| | 60 |
| | 46 |
| December 31 | | 0.4 | | | 219.15 | | | 85 | | | | 0 | |
| Subtotal | | Subtotal | | 3.9 | | | 163.11 | | | 635 | | | | 0 | |
| | December 2019, $2 billion repurchase program | | December 2019, $2 billion repurchase program | | | |
| | December 31 | | December 31 | | 0.0 | | (2) | 218.97 | | | 6 | | | | 1,994 | |
| | Total | | 2.9 |
| | $ | 155.81 |
| | $ | 451 |
| |
|
| Total | | 3.9 | | | 163.50 | | | $ | 641 | | | | |
| (1) The remaining authorized capacity under these plans was calculated based on the cost to purchase the shares but excludes commission expenses in accordance with the authorized plan. | | (1) The remaining authorized capacity under these plans was calculated based on the cost to purchase the shares but excludes commission expenses in accordance with the authorized plan. |
(2) The shares purchased under the 2019 repurchase program rounded to zero. | | (2) The shares purchased under the 2019 repurchase program rounded to zero. |
|
(1)The remaining authorized capacity under the 2015 plan was calculated based on the cost to purchase the shares but excludes commission expenses in accordance with the authorized plan.
In 2016,2018, we entered into an accelerated share repurchase agreement with a third party financial institutionGoldman, Sachs & Co. LLC to repurchase $500 million of our common stock under our previously announced share repurchase plans and received 4.73.5 million shares at an average purchase price of $105.50$144.02 per share.
We repurchased $451$641 million, $778$1,271 million and $900$1,140 million of our common stock in the years ended December 31, 2017, 20162020, 2019 and 20152018, respectively.
Dividends
Total dividends paid to common shareholders in 2017, 20162020, 2019 and 20152018 were $701$782 million, $676$761 million and $622$718 million, respectively. Declaration and payment of dividends in the future depends upon our income and liquidity position, among other factors, and is subject to declaration by ourthe Board, of Directors, who meet quarterly to consider our dividend payment. We expect to fund dividend payments with cash from operations.
In July 2017,October 2020, the Board of Directors authorized an increase to our quarterly dividend of 5.43.0 percent from $1.025$1.311 per share to $1.08.$1.35 per share. In July 2016,2019, the Board of Directors authorized a 5.115.0 percent increase to our quarterly cash dividend on our common stock from $0.975$1.14 per share to $1.025$1.311 per share. In July 2015,2018, the Board of Directors approved a 255.6 percent increase to our quarterly dividend on our common stock from $0.780$1.08 per share to $0.975$1.14 per share. Cash dividends per share paid to common shareholders for the last three years were as follows:
|
| | | | | | | | | | | | |
| | | Quarterly Dividends |
| | | 2017 | | 2016 | | 2015 |
| First quarter | | $ | 1.025 |
| | $ | 0.975 |
| | $ | 0.78 |
|
| Second quarter | | 1.025 |
| | 0.975 |
| | 0.78 |
|
| Third quarter | | 1.08 |
| | 1.025 |
| | 0.975 |
|
| Fourth quarter | | 1.08 |
| | 1.025 |
| | 0.975 |
|
| Total | | $ | 4.21 |
| | $ | 4.00 |
| | $ | 3.51 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Quarterly Dividends |
| | | 2020 | | 2019 | | 2018 |
| First quarter | | $ | 1.311 | | | $ | 1.14 | | | $ | 1.08 | |
| Second quarter | | 1.311 | | | 1.14 | | | 1.08 | |
| Third quarter | | 1.311 | | | 1.311 | | | 1.14 | |
| Fourth quarter | | 1.35 | | | 1.311 | | | 1.14 | |
| Total | | $ | 5.28 | | | $ | 4.90 | | | $ | 4.44 | |
| | | | | | |
Employee Benefits Trust
In 1997, we established the Employee Benefits Trust (EBT) funded with common stock for use in meeting our future obligations under employee benefit and compensation plans. The primary sources of cash for the EBT arewere dividends received on unallocated shares of our common stock held by the EBT. TheShares of Cummins stock and cash in the EBT may bewere used to fund matching contributions to employeethe accounts of participants in the 401(k)Cummins Retirement and Savings Plan (RSP) madewho elected to receive company matching funds in proportion to employee contributions under the terms of the RSP.Cummins stock. In addition, at times we may directdirected the trustee to sell shares ofin the EBT on the open market and swept cash from the EBT to fund other non-qualified employee benefit plans. Matching contributions charged to income for the years ended December 31, 2017, 20162020, 2019 and 20152018 were $17$2 million, $23$10 million and $25$12 million, respectively.
NOTE 14.16. ACCUMULATED OTHER COMPREHENSIVE LOSS
Following are the changes in accumulated other comprehensive income (loss) by component:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In millions | | Change in pensions and other postretirement defined benefit plans | | Foreign currency translation adjustment | | Unrealized gain (loss) on marketable securities | | Unrealized gain (loss) on derivatives | | Total attributable to Cummins Inc. | | Noncontrolling interests | | Total |
| Balance at December 31, 2014 | | $ | (669 | ) | | $ | (406 | ) | | $ | (1 | ) | | $ | (2 | ) | | $ | (1,078 | ) | | |
| | |
|
| Other comprehensive income before reclassifications | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Before tax amount | | (81 | ) | | (366 | ) | | — |
| | 17 |
| | (430 | ) | | $ | (15 | ) | | $ | (445 | ) |
| Tax (expense) benefit | | 35 |
| | 76 |
| | — |
| | (1 | ) | | 110 |
| | — |
| | 110 |
|
| After tax amount | | (46 | ) | | (290 | ) | | — |
| | 16 |
| | (320 | ) | | (15 | ) | | (335 | ) |
Amounts reclassified from accumulated other comprehensive income(1)(2) | | 61 |
| | — |
| | (1 | ) | | (10 | ) | | 50 |
| | — |
| | 50 |
|
| Net current period other comprehensive income (loss) | | 15 |
| | (290 | ) | | (1 | ) | | 6 |
| | (270 | ) | | $ | (15 | ) | | $ | (285 | ) |
| Balance at December 31, 2015 | | $ | (654 | ) | | $ | (696 | ) | | $ | (2 | ) | | $ | 4 |
| | $ | (1,348 | ) | | |
| | |
|
| Other comprehensive income before reclassifications | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Before tax amount | | (111 | ) | | (469 | ) | | 1 |
| | (38 | ) | | (617 | ) | | $ | (17 | ) | | $ | (634 | ) |
| Tax benefit (expense) | | 44 |
| | 38 |
| | — |
| | 6 |
| | 88 |
| | — |
| | 88 |
|
| After tax amount | | (67 | ) | | (431 | ) | | 1 |
| | (32 | ) | | (529 | ) | | (17 | ) | | (546 | ) |
Amounts reclassified from accumulated other comprehensive income(1)(2) | | 36 |
| | — |
| | — |
| | 20 |
| | 56 |
| | — |
| | 56 |
|
| Net current period other comprehensive income (loss) | | (31 | ) | | (431 | ) | | 1 |
| | (12 | ) | | (473 | ) | | $ | (17 | ) | | $ | (490 | ) |
| Balance at December 31, 2016 | | $ | (685 | ) | | $ | (1,127 | ) | | $ | (1 | ) | | $ | (8 | ) | | $ | (1,821 | ) | | |
| | |
|
| Other comprehensive income before reclassifications | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Before tax amount | | 73 |
| | 335 |
| | 2 |
| | (12 | ) | | 398 |
| | $ | 20 |
| | $ | 418 |
|
| Tax benefit (expense) | | (36 | ) | | (20 | ) | | — |
| | 5 |
| | (51 | ) | | — |
| | (51 | ) |
| After tax amount | | 37 |
| | 315 |
| | 2 |
| | (7 | ) | | 347 |
| | 20 |
| | 367 |
|
Amounts reclassified from accumulated other comprehensive income(1)(2) | | 62 |
| | — |
| | — |
| | 12 |
| | 74 |
| | — |
| | 74 |
|
| Impact of tax legislation (Note 2) | | (103 | ) | (3) | — |
| | — |
| | — |
| | (103 | ) | | — |
| | (103 | ) |
| Net current period other comprehensive income (loss) | | (4 | ) | | 315 |
| | 2 |
| | 5 |
| | 318 |
| | $ | 20 |
| | $ | 338 |
|
| Balance at December 31, 2017 | | $ | (689 | ) | | $ | (812 | ) | | $ | 1 |
| | $ | (3 | ) | | $ | (1,503 | ) | | |
| | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| In millions | | Change in
pensions and
other
postretirement
defined benefit
plans | | Foreign
currency
translation
adjustment | | Unrealized gain
(loss) on debt
securities | | Unrealized gain
(loss) on
derivatives | | | Total
attributable to
Cummins Inc. | | Noncontrolling
interests | | Total |
| Balance at December 31, 2017 | | $ | (689) | | | $ | (812) | | | $ | 1 | | | $ | (3) | | | | $ | (1,503) | | | | | |
| Other comprehensive income before reclassifications | | | | | | | | | | | | | | | |
| Before-tax amount | | (42) | | | (333) | | | 2 | | | 21 | | | | (352) | | | $ | (30) | | | $ | (382) | |
| Tax benefit (expense) | | 7 | | | 7 | | | 0 | | | (7) | | | | 7 | | | 0 | | | 7 | |
| After-tax amount | | (35) | | | (326) | | | 2 | | | 14 | | | | (345) | | | (30) | | | (375) | |
Amounts reclassified from accumulated other comprehensive income(1) | | 53 | | | — | | | (3) | | | (9) | | | | 41 | | | 1 | | | 42 | |
| | | | | | | | | | | | | | | |
| Net current period other comprehensive income (loss) | | 18 | | | (326) | | | (1) | | | 5 | | | | (304) | | | $ | (29) | | | $ | (333) | |
| Balance at December 31, 2018 | | $ | (671) | | | $ | (1,138) | | | $ | 0 | | | $ | 2 | | | | $ | (1,807) | | | | | |
| Other comprehensive income before reclassifications | | | | | | | | | | | | | | | |
| Before-tax amount | | (106) | | | (153) | | | 0 | | | (12) | | | | (271) | | | $ | (5) | | | $ | (276) | |
| Tax benefit (expense) | | 16 | | | 6 | | | 0 | | | 5 | | | | 27 | | | 0 | | | 27 | |
| After-tax amount | | (90) | | | (147) | | | 0 | | | (7) | | | | (244) | | | (5) | | | (249) | |
Amounts reclassified from accumulated other comprehensive income(1) | | 27 | | | 0 | | | 0 | | | (4) | | | | 23 | | | 0 | | | 23 | |
| | | | | | | | | | | | | | | |
| Net current period other comprehensive loss | | (63) | | | (147) | | | 0 | | | (11) | | | | (221) | | | $ | (5) | | | $ | (226) | |
| Balance at December 31, 2019 | | $ | (734) | | | $ | (1,285) | | | $ | 0 | | | $ | (9) | | | | $ | (2,028) | | | | | |
| Other comprehensive income before reclassifications | | | | | | | | | | | | | | | |
| Before-tax amount | | (92) | | | 73 | | | 0 | | | (41) | | | | (60) | | | $ | (10) | | | $ | (70) | |
| Tax benefit (expense) | | 26 | | | 8 | | | 0 | | | 9 | | | | 43 | | | 0 | | | 43 | |
| After-tax amount | | (66) | | | 81 | | | 0 | | | (32) | | | | (17) | | | (10) | | | (27) | |
Amounts reclassified from accumulated other comprehensive income(1) | | 65 | | | 0 | | | 0 | | | (2) | | | | 63 | | | 0 | | | 63 | |
| Net current period other comprehensive (loss) income | | (1) | | | 81 | | | 0 | | | (34) | | | | 46 | | | $ | (10) | | | $ | 36 | |
| Balance at December 31, 2020 | | $ | (735) | | | $ | (1,204) | | | $ | 0 | | | $ | (43) | | | | $ | (1,982) | | | | | |
| | | | | | | | | | | | | | | |
(1) Amounts are net of tax. Reclassifications out of accumulated other comprehensive income (loss) and the related tax effects are immaterial for separate disclosure. |
|
| | | | | | | | | | | | | | | |
(1)Amounts are net of tax.(2) Reclassifications out of accumulated other comprehensive income (loss) and the related tax effects are immaterial for separate disclosure.
(3) Impact of tax legislation includes $(126) million related to one-time cumulative adjustments and $23 million related to 2017. See Note 2, "INCOME TAXES," to our Consolidated Financial Statements for additional information.
NOTE 15. STOCK INCENTIVE AND STOCK OPTION PLANS17. NONCONTROLLING INTERESTS
In May of 2017 the Board of Directors approved an amendment to the shareholder approved stock incentive plan (the Plan) to increase the number of available shares. The revised Plan allows for the granting of up to 8.5 million total shares of equity awards to executives, employees and non-employee directors. Awards available for grant under the Plan include, but are not limited to, stock options, stock appreciation rights, performance shares and other stock awards. Shares issued under the Plan may be newly issued shares or reissued treasury shares.
Stock options are generally granted with a strike price equal to the fair market value of the stock on the date of grant and a life of 10 years. Stock options granted have a three-year vesting period. The strike price may be higher than the fair value of the stock on the date of the grant, but cannot be lower. Compensation expense is recorded on a straight-line basis over the vesting period beginning on the grant date. The compensation expense is based on the fair value of each option grant using the Black-Scholes option pricing model. Options granted to employees eligible for retirement under our retirement plan are fully expensed at the grant date.
Stock options are also awarded through the Key Employee Stock Investment Plan (KESIP) which allows certain employees, other than officers, to purchase shares of common stock on an installment basis up to an established credit limit. For every even block of 100 KESIP shares purchased by the employee 50 stock options are granted. The options granted through the KESIP program are considered awards under the Plan and are vested immediately. Compensation expense for stock options granted through the KESIP program is recorded based on the fair value of each option grant using the Black-Scholes option pricing model.
Performance shares are granted as target awards and are earned based on our return on equity (ROE) performance. A payout factor has been established ranging from 0 to 200 percent of the target award based on our actual ROE performance. Shares have a three-year performance period. The fair value of the award is equal to the average market price, adjusted for the present value of dividends over the vesting period, of our stock on the grant date. Compensation expense is recorded ratably over the period beginning on the grant date until the shares become unrestricted and is based on the amount of the award that is expected to be earned under the plan formula, adjusted each reporting period based on current information.
Restricted common stock is awarded from time to time at no cost to certain employees. Participants are entitled to cash dividends and voting rights. Restrictions limit the sale or transfer of the shares during a defined period. Generally, one-third of the shares become vested and free from restrictions after two years and one-third of the shares issued become vested and free from restrictions each year thereafter on the anniversary of the grant date, provided the participant remains an employee. The fair value of the award is equal to the average market price of our stock on the grant date. Compensation expense is determined at the grant date and is recognized over the restriction period on a straight-line basis.
Employee compensation expense (net of estimated forfeitures) related to our share-based plans for the years ended December 31, 2017, 2016 and 2015, was approximately $39 million, $31 million and $22 million, respectively. In addition, non-employee director share-based compensation expense for the years ended December 31, 2017, 2016 and 2015, was approximately $2 million, $1 million and $2 million, respectively. Shares granted to non-employee directors vest immediately and have no restrictions or performance conditions. The excess tax benefit associated with our employee share-based plans for the years ended December 31, 2017, 2016 and 2015, was $2 million, $1 million and $1 million, respectively. The total unrecognized compensation expense (net of estimated forfeitures) related to nonvested awards for our employee share-based plans was approximately $41 million at December 31, 2017, and is expected to be recognized over a weighted-average period of less than two years.
The tables below summarize the employee share-based activityNoncontrolling interests in the Plan:equity of consolidated subsidiaries were as follows:
| | | | | | | | | | | | | | | |
| | | December 31, | |
| In millions | | 2020 | | 2019 | |
| Eaton Cummins Automated Transmission Technologies | | $ | 538 | | | $ | 581 | | |
| Cummins India Ltd. | | 319 | | | 302 | | |
Hydrogenics Corporation (1) | | 50 | | | 58 | | |
| Other | | 20 | | | 17 | | |
| Total | | $ | 927 | | | $ | 958 | | |
| | | | | |
(1) See Note 20, "ACQUISITIONS," for additional information. | |
| | | | | |
|
| | | | | | | | | | | | | |
| | | Options | | Weighted-average Exercise Price | | Weighted-average Remaining Contractual Life (in years) | | Aggregate Intrinsic Value (in millions) |
| Balance at December 31, 2014 | | 1,626,724 |
| | $ | 108.30 |
| | | | |
|
| Granted | | 476,205 |
| | 135.21 |
| | | | |
|
| Exercised | | (53,545 | ) | | 82.89 |
| | | | |
|
| Forfeited | | (19,698 | ) | | 135.89 |
| | | | |
|
| Balance at December 31, 2015 | | 2,029,686 |
| | 115.02 |
| | | | |
|
| Granted | | 984,430 |
| | 109.24 |
| | | | |
|
| Exercised | | (215,890 | ) | | 87.27 |
| | | | |
|
| Forfeited | | (63,462 | ) | | 119.56 |
| | | | |
|
| Balance at December 31, 2016 | | 2,734,764 |
| | 115.02 |
| | | | |
|
| Granted | | 648,900 |
| | 149.98 |
| | | | |
|
| Exercised | | (355,479 | ) | | 105.91 |
| | | | |
|
| Forfeited | | (126,816 | ) | | 125.65 |
| | | | |
|
| Balance at December 31, 2017 | | 2,901,369 |
| | $ | 123.49 |
| | 7.1 | | $ | 156 |
|
| | | | | | | | | |
| Exercisable, December 31, 2015 | | 1,318,101 |
| | $ | 100.55 |
| | 5.7 | | $ | 13 |
|
| Exercisable, December 31, 2016 | | 1,149,549 |
| | $ | 104.19 |
| | 4.8 | | $ | 38 |
|
| Exercisable, December 31, 2017 | | 1,063,889 |
| | $ | 115.26 |
| | 4.7 | | $ | 66 |
|
The weighted-average grant date fair value of options granted during the years ended December 31, 2017, 2016 and 2015, was $36.86, $25.28 and $35.25, respectively. The total intrinsic value of options exercised during the years ended December 31, 2017, 2016 and 2015, was approximately $19 million, $9 million and $3 million, respectively.
The weighted-average grant date fair value of performance and restricted shares was as follows:
|
| | | | | | | | | | | | | | |
| | | Performance Shares | | Restricted Shares |
| Nonvested | | Shares | | Weighted-average
Fair Value | | Shares | | Weighted-average
Fair Value |
| Balance at December 31, 2014 | | 466,693 |
| | $ | 119.78 |
| | 11,275 |
| | $ | 110.94 |
|
| Granted | | 133,975 |
| | 128.48 |
| | — |
| | — |
|
| Vested | | (112,901 | ) | | 115.48 |
| | (7,021 | ) | | 110.66 |
|
| Forfeited | | (67,398 | ) | | 118.71 |
| | — |
| | — |
|
| Balance at December 31, 2015 | | 420,369 |
| | 123.88 |
| | 4,254 |
| | 111.40 |
|
| Granted | | 169,150 |
| | 98.26 |
| | 8,089 |
| | 117.69 |
|
| Vested | | (115,680 | ) | | 106.55 |
| | (2,502 | ) | | 114.57 |
|
| Forfeited | | (69,345 | ) | | 110.52 |
| | — |
| | — |
|
| Balance at December 31, 2016 | | 404,494 |
| | 120.41 |
| | 9,841 |
| | 115.76 |
|
| Granted | | 150,225 |
| | 138.23 |
| | — |
| | — |
|
| Vested | | (85,020 | ) | | 141.50 |
| | (1,752 | ) | | 106.89 |
|
| Forfeited | | (58,460 | ) | | 132.52 |
| | — |
| | — |
|
| Balance at December 31, 2017 | | 411,239 |
| | $ | 120.84 |
| | 8,089 |
| | $ | 117.68 |
|
The total vesting date fair value of performance shares vested during the years ended December 31, 2017, 2016 and 2015 was $13 million, $12 million and $11 million, respectively. The total fair value of restricted shares vested was less than $1 million, $1 million and $1 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The fair value of each option grant was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:
|
| | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Expected life (years) | | 6 |
| | 5 |
| | 5 |
|
| Risk-free interest rate | | 2.08 | % | | 1.34 | % | | 1.41 | % |
| Expected volatility | | 29.97 | % | | 30.96 | % | | 33.06 | % |
| Dividend yield | | 2.28 | % | | 2.10 | % | | 1.69 | % |
Expected life—The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding based upon our historical data.
Risk-free interest rate—The risk-free interest rate assumption is based upon the observed U.S. treasury security rate appropriate for the expected life of our employee stock options.
Expected volatility—The expected volatility assumption is based upon the weighted-average historical daily price changes of our common stock over the most recent period equal to the expected option life of the grant, adjusted for activity which is not expected to occur in the future.
Dividend yield—The dividend yield assumption is based on our history and expectation of dividend payouts.
NOTE 18. STOCK INCENTIVE AND STOCK OPTION PLANS
Our stock incentive plan (the Plan) allows for granting of up to 8.5 million total shares of equity awards to executives, employees and non-employee directors. Awards available for grant under the Plan include, but are not limited to, stock options, stock appreciation rights, performance shares and other stock awards. Shares issued under the Plan may be newly issued shares or reissued treasury shares.
NOTE 16. NONCONTROLLING INTERESTSStock options are generally granted with a strike price equal to the fair market value of the stock on the date of grant and a life of 10 years. Stock options granted have a three-year vesting period. The strike price may be higher than the fair value of the stock on the date of the grant, but cannot be lower. Compensation expense is recorded on a straight-line basis over the vesting period beginning on the grant date. The compensation expense is based on the fair value of each option grant using the Black-Scholes option pricing model. Options granted to employees eligible for retirement under our retirement plan are fully expensed at the grant date.
Net (loss) income attributableStock options are also awarded through the Key Employee Stock Investment Plan (KESIP) which allows certain employees, other than officers, to noncontrolling interests includedpurchase shares of common stock on an installment basis up to an established credit limit. For every block of 100 KESIP shares purchased by the employee 50 stock options are granted. The options granted through the KESIP program are considered awards under the Plan and are vested immediately. Compensation expense for stock options granted through the KESIP program is recorded based on the fair value of each option grant using the Black-Scholes option pricing model.
Performance shares are granted as target awards and are earned based on certain measures of our operating performance. A payout factor has been established ranging from 0 to 200 percent of the target award based on our actual performance during the three-year performance period. The fair value of the award is equal to the average market price, adjusted for the present value of dividends over the vesting period, of our stock on the grant date. Compensation expense is recorded ratably over the period beginning on the grant date until the shares become unrestricted and is based on the amount of the award that is expected to be earned under the plan formula, adjusted each reporting period based on current information.
Restricted common stock is awarded from time to time at no cost to certain employees. Participants are entitled to cash dividends and voting rights. Restrictions limit the sale or transfer of the shares during a $43 million increasedefined period. Generally, one-third of the shares become vested and free from restrictions after two years and one-third of the shares issued become vested and free from restrictions each year thereafter on the anniversary of the grant date, provided the participant remains an employee. The fair value of the award is equal to incomethe average market price of our stock on the grant date. Compensation expense is determined at the grant date and is recognized over the restriction period on a straight-line basis.
Employee compensation expense (net of estimated forfeitures) related to withholding taxes on foreign earnings asour share-based plans for the years ended December 31, 2020, 2019 and 2018, was approximately $30 million, $48 million and $52 million, respectively. In addition, non-employee director share-based compensation expense for the years ended December 31, 2020, 2019 and 2018, was approximately $1 million, $1 million and $1 million, respectively. Shares granted to non-employee directors vest immediately and have no restrictions or performance conditions. The excess tax benefit associated with our employee share-based plans for the years ended December 31, 2020, 2019 and 2018, was $4 million, $4 million and $2 million, respectively. The total unrecognized compensation expense (net of estimated forfeitures) related to nonvested awards for our employee share-based plans was approximately $27 million at December 31, 2020 and is expected to be recognized over a resultweighted-average period of tax legislation.less than two years.
The table below summarizes the employee share-based activity in the equityPlan:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options | | Weighted-average
Exercise Price | | Weighted-average
Remaining
Contractual Life
(in years) | | Aggregate
Intrinsic Value
(in millions) |
| Balance at December 31, 2017 | | 2,901,369 | | | $ | 123.49 | | | | | |
| Granted | | 515,320 | | | 159.06 | | | | | |
| Exercised | | (140,133) | | | 88.74 | | | | | |
| Forfeited | | (32,894) | | | 133.00 | | | | | |
| Balance at December 31, 2018 | | 3,243,662 | | | 130.55 | | | | | |
| Granted | | 710,120 | | | 163.42 | | | | | |
| Exercised | | (652,980) | | | 116.76 | | | | | |
| Forfeited | | (63,232) | | | 139.86 | | | | | |
| Balance at December 31, 2019 | | 3,237,570 | | | 140.36 | | | | | |
| Granted | | 632,080 | | | 142.81 | | | | | |
| Exercised | | (660,786) | | | 131.25 | | | | | |
| Forfeited | | (33,334) | | | 150.83 | | | | | |
| Balance at December 31, 2020 | | 3,175,530 | | | $ | 142.63 | | | 6.6 | | $ | 263 | |
| | | | | | | | |
| Exercisable, December 31, 2018 | | 1,366,722 | | | $ | 124.97 | | | 4.7 | | $ | 18 | |
| Exercisable, December 31, 2019 | | 1,665,710 | | | $ | 123.55 | | | 4.8 | | $ | 92 | |
| Exercisable, December 31, 2020 | | 1,589,015 | | | $ | 130.28 | | | 4.6 | | $ | 151 | |
| | | | | | | | |
The weighted-average grant date fair value of consolidated subsidiaries wereoptions granted during the years ended December 31, 2020, 2019 and 2018, was $25.40, $31.04 and $34.21, respectively. The total intrinsic value of options exercised during the years ended December 31, 2020, 2019 and 2018, was approximately $40 million, $35 million and $9 million, respectively.
The weighted-average grant date fair value of performance and restricted shares was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Performance Shares | | Restricted Shares |
| Nonvested | | Shares | | Weighted-average
Fair Value | | Shares | | Weighted-average
Fair Value |
| Balance at December 31, 2017 | | 411,239 | | | $ | 120.84 | | | 8,089 | | | $ | 117.68 | |
| Granted | | 124,700 | | | 146.50 | | | 0 | | | 0 | |
| Vested | | (80,996) | | | 128.47 | | | (2,696) | | | 117.68 | |
| Forfeited | | (44,593) | | | 127.90 | | | 0 | | | 0 | |
| Balance at December 31, 2018 | | 410,350 | | | 126.36 | | | 5,393 | | | 117.68 | |
| Granted | | 185,377 | | | 141.01 | | | 0 | | | 0 | |
| Vested | | (176,613) | | | 98.28 | | | (2,696) | | | 117.68 | |
| Forfeited | | (23,183) | | | 145.26 | | | 0 | | | 0 | |
| Balance at December 31, 2019 | | 395,931 | | | 144.64 | | | 2,697 | | | 117.68 | |
| Granted | | 260,480 | | | 132.57 | | | 3,704 | | | 165.04 | |
| Vested | | (268,773) | | | 138.27 | | | (2,697) | | | 117.68 | |
| Forfeited | | (10,684) | | | 144.22 | | | 0 | | | 0 | |
| Balance at December 31, 2020 | | 376,954 | | | $ | 140.85 | | | 3,704 | | | $ | 165.04 | |
| | | | | | | | |
|
| | | | | | | | |
| | | December 31, |
| In millions | | 2017 | | 2016 |
Eaton Cummins Automated Transmission Technologies(1) | | $ | 609 |
| | $ | — |
|
| Cummins India Ltd. | | 280 |
| (2) | 285 |
|
| Other | | 16 |
| | 14 |
|
| Total | | $ | 905 |
| | $ | 299 |
|
(1) See Note 18, "ACQUISITIONS,"The total vesting date fair value of performance shares vested during the years ended December 31, 2020, 2019 and 2018, was $41 million, $27 million and $13 million, respectively. The total fair value of restricted shares vested was less than $1 million, less than $1 million and $1 million for additional information.
(2) Noncontrolling interest for Cummins India Ltd. was reduced by $43 million related to withholding taxes on foreign earnings as a result of tax legislation. See Note 2, "INCOME TAXES," to our Consolidated Financial Statements for additional information.
| | | | | | | | | | | | | | | | | | | | |
| | | 2020 | | 2019 | | 2018 |
| Expected life (years) | | 6 | | 6 | | 6 |
| Risk-free interest rate | | 0.62 | % | | 2.41 | % | | 2.72 | % |
| Expected volatility | | 27.05 | % | | 23.79 | % | | 25.40 | % |
| Dividend yield | | 2.88 | % | | 2.68 | % | | 2.48 | % |
| | | | | | |
Expected life—The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding based upon our historical data.
Risk-free interest rate—The risk-free interest rate assumption is based upon the observed U.S. treasury security rate appropriate for the expected life of our employee stock options.
Expected volatility—The expected volatility assumption is based upon the weighted-average historical daily price changes of our common stock over the most recent period equal to the expected option life of the grant, adjusted for activity which is not expected to occur in the future.
Dividend yield—The dividend yield assumption is based on our history and expectation of dividend payouts.
NOTE 17.19. EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.
We calculate basic earnings per share (EPS) of common stock by dividing net income attributable to Cummins Inc. by the weighted-average number of common shares outstanding for the period. The calculation of diluted EPS assumes the issuance of common stock for all potentially dilutive share equivalents outstanding. We exclude shares of common stock held in the Employee Benefits Trust (EBT)EBT (see Note 13, "SHAREHOLDERS'15, "CUMMINS INC. SHAREHOLDERS' EQUITY") from the calculation of the weighted-average common shares outstanding until those shares are distributed from the EBT to the Retirement Savings Plan. Following are the computations for basic and diluted earnings per share:
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| Dollars in millions, except per share amounts | | 2017 | | 2016 | | 2015 |
| Net income attributable to Cummins Inc. | | $ | 999 |
| | $ | 1,394 |
| | $ | 1,399 |
|
| | | | | | | |
| Weighted-average common shares outstanding | | | | | | |
| Basic | | 166,625,320 |
| | 169,038,410 |
| | 178,037,581 |
|
| Dilutive effect of stock compensation awards | | 645,545 |
| | 298,206 |
| | 369,247 |
|
| Diluted | | 167,270,865 |
| | 169,336,616 |
| | 178,406,828 |
|
| Earnings per common share attributable to Cummins Inc. | | | | | | |
| Basic | | $ | 5.99 |
| | $ | 8.25 |
| | $ | 7.86 |
|
| Diluted | | 5.97 |
| | 8.23 |
| | 7.84 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| In millions, except per share amounts | | 2020 | | 2019 | | 2018 |
| Net income attributable to Cummins Inc. | | $ | 1,789 | | | $ | 2,260 | | | $ | 2,141 | |
| | | | | | |
| Weighted-average common shares outstanding | | | | | | |
| Basic | | 148.2 | | | 155.4 | | | 162.2 | |
| Dilutive effect of stock compensation awards | | 0.8 | | | 0.7 | | | 0.6 | |
| Diluted | | 149.0 | | | 156.1 | | | 162.8 | |
| Earnings per common share attributable to Cummins Inc. | | | | | | |
| Basic | | $ | 12.07 | | | $ | 14.54 | | | $ | 13.20 | |
| Diluted | | 12.01 | | | 14.48 | | | 13.15 | |
| | | | | | |
The weighted-average diluted common shares outstanding excludesexclude the anti-dilutive effect of certain stock options since such options had an exercise price in excess of the monthly average market value of our common stock.options. The options excluded from diluted earnings per share were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Options excluded | | 645,334 | | | 473,845 | | | 969,385 | |
| | | | | | |
|
| | | | | | | | | |
| | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Options excluded | | 31,991 |
| | 1,091,799 |
| | 866,262 |
|
NOTE 18.20. ACQUISITIONS
Acquisitions for the years ended December 31, 2017, 20162019 and 20152018, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Entity Acquired (Dollars in millions) | | Date of Acquisition | | Percent Interest Acquired | | Payments to Former Owners | | Acquisition Related Debt Retirements | | Total Purchase Consideration(1) | | | | | | Goodwill Recognized | | Intangibles Recognized(2) | | Net Sales Previous Fiscal Year Ended | |
| 2019 | | | | | | | | | | | | | | | | | | | | | |
| Hydrogenics Corporation | | 9/09/19 | | 81% | | $ | 235 | | | $ | 0 | | | $ | 235 | | | | | | | $ | 161 | | | $ | 161 | | | $ | 34 | | |
| | | | | | | | | | | | | | | | | | | | | |
| 2018 | | | | | | | | | | | | | | | | | | | | | |
| Efficient Drivetrains, Inc. | | 8/15/18 | | 100% | | $ | 62 | | | $ | 2 | | | $ | 64 | | | | | | | $ | 49 | | | $ | 15 | | | $ | 3 | | |
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(1) All results from acquired entities were included in segment results subsequent to the acquisition date. Newly consolidated entities were accounted for as business combinations and were included in the New Power segment on the date of acquisition. | |
(2) Intangible assets acquired in business combinations were mostly customer and technology related, the majority of which will be amortized over a period of up to 20 years from the date of the acquisition. | |
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| Entity Acquired (Dollars in millions) | | Date of Acquisition | | Additional Percent Interest Acquired | | Payments to Former Owners | | Acquisition Related Debt Retirements | | Total Purchase Consideration | | Type of Acquisition(1) | | Gain Recognized(1) | | Goodwill Acquired | | Intangibles Recognized(2) | | Net Sales Previous Fiscal Year Ended | |
| 2017 | | | | | | | | | | | | | | | | | | | | | |
| Brammo Inc. | | 11/01/17 | | 100% | | $ | 62 |
| | $ | — |
| | $ | 68 |
| (3) | COMB | | $ | — |
| | $ | 47 |
|
| $ | 23 |
| | $ | 4 |
| |
| Eaton Cummins Automated Transmission Technologies | | 07/31/17 | | 50% | | 600 |
| (4) | — |
| | 600 |
| | COMB | | — |
| | 544 |
| | 596 |
| | — |
| (4) |
| 2016 | | | | | | | | | | | | | | | | | | | | | |
| Wuxi Cummins Turbo Technologies Co. Ltd | | 12/05/16 | | 45% | | $ | 86 |
| | $ | — |
| | $ | 86 |
| | EQUITY | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| Cummins Pacific LLC | | 10/04/16 | | 50% | | 32 |
| | 67 |
| | 99 |
| | COMB | | 15 |
| | 4 |
| | 8 |
| | 391 |
| (5 | ) |
| Cummins Northeast LLC | | 01/01/16 | | 35% | | 12 |
| | — |
| | 12 |
| | EQUITY | | — |
| | — |
| | — |
| | — |
| |
| 2015 | | | | | | | | | | | | | | | | | | | | | |
| Cummins Crosspoint LLC | | 08/03/15 | | 50% | | $ | 29 |
| | $ | 36 |
| | $ | 65 |
| | COMB | | $ | 10 |
| | $ | 7 |
| | $ | 2 |
| | $ | 258 |
| (5 | ) |
| Cummins Atlantic LLC | | 08/03/15 | | 51% | | 21 |
| | 28 |
| | 49 |
| | COMB | | 8 |
| | 5 |
| | 6 |
| | 245 |
| (5 | ) |
| Cummins Central Power LLC | | 06/29/15 | | 20.01% | | 8 |
| | — |
| | 8 |
| | EQUITY | | — |
| | — |
| | — |
| | — |
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(1)
| All results from acquired entities (excluding Brammo Inc.) were included in segment results subsequent to the acquisition date. Previously consolidated entities were accounted for as equity transactions (EQUITY). Newly consolidated entities were accounted for as business combinations (COMB) with gains recognized based on the requirement to remeasure our pre-existing ownership to fair value in accordance with GAAP and are included in the Consolidated Statements of Income as "Other income, net. The Brammo Inc. acquisition had not yet been assigned to a reportable segment at December 31, 2017.
|
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(2)
| Intangible assets acquired in business combinations were mostly customer and technology related, the majority of which will be amortized over a period of`up to 25 years from the date of the acquisition. |
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(3)
| The "Total Purchase Consideration" represents the total amount that will or is estimated to be paid to complete the acquisition. A portion of the Brammo Inc. acquisition payment has not yet been made and will be paid in future periods in accordance with the purchase contract. The Brammo Inc. acquisition contains an earnout based on future results of the acquired business and could result in a maximum contingent consideration payment of $100 million (fair value of $5 million) to the former owners. |
(4) This transaction created a newly formed joint venture that we consolidated. See additional information below.
| |
(5)
| Sales amounts are not fully incremental to our consolidated sales as the amount would be reduced by the elimination of sales to the previously unconsolidated entity. |
Eaton Cummins Automated Transmission TechnologiesIn April 2017,On September 9, 2019, we entered intoacquired an agreement to form a joint venture with Eaton Corporation PLC (Eaton), which closed on July 31, 2017 (the acquisition date). We purchased a 5081 percent interest in Hydrogenics Corporation for total consideration of $235 million. The Hydrogen Company, a wholly-owned subsidiary of L’Air Liquide, S.A., maintains a 19 percent noncontrolling interest in Hydrogenics Corporation of $56 million, based on the new venture named Eaton Cummins Automated Transmission Technologies (ECJV) for $600 million in cash. In addition, each partner contributed $20 million for working capital. The joint venture will design, assemble, sell and support medium-duty and heavy-duty automated transmissionspublicly traded share price of Hydrogenics at the acquisition date, which was representative of its fair value. We accounted for the commercial vehicle market, including new product launches.transaction as a business combination and included it in the New Power segment in the third quarter of 2019. We assigned this business to our New Power reporting unit, which included our electrified power, fuel cell and hydrogen technologies businesses, for goodwill impairment purposes. As of December 31, 2019, our purchase accounting was complete. The new generation products (Procision and Endurant) were launched in 2016 and 2017, respectively, and are owned by the joint venture. Eaton will continue to manufacture and sell the old generation products to the joint venture whichintangible assets will be marked up and soldamortized over periods ranging from 3 to end customers. Eaton will also sell certain transmission components to the joint venture at prices approximating market rates. In addition, Eaton will provide certain manufacturing and administrative services to the joint venture, including but not limited to manufacturing labor in Mexico, information technology services, accounting services and purchasing services, at prices approximating market rates. Pro forma financial information was not provided as historical activity related to the products contributed to the joint venture was not material.
We consolidated the results of the joint venture in our Components segment as we have a majority voting interest in the venture by virtue of a tie-breaking vote on the joint venture's board of directors.20 years. The joint venture had an enterprise value at inception of $1.2 billion. Due to the structure of the joint venture and equal sharing of economic benefits, we did not apply a discount for lack of control to the noncontrolling interests. The final purchase price allocation was as follows:
|
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| In millions | |
| Inventory | $ | 3 |
|
| Fixed assets | 58 |
|
| Intangible assets | |
| Customer relationships | 424 |
|
| Technology | 172 |
|
| Goodwill | 544 |
|
| Liabilities | (1 | ) |
| Total business valuation | 1,200 |
|
| Less: Noncontrolling interest | 600 |
|
| Total purchase consideration | $ | 600 |
|
| | | | | | | | |
| In millions | | |
| Inventory | | $ | 21 | |
| Other current assets | | 25 | |
| Intangible assets | | |
| Technology assets | | 96 | |
| Customer relationships | | 29 | |
| In-process research and development | | 35 | |
| Other intangible assets | | 1 | |
| Goodwill | | 161 | |
| Other assets | | 18 | |
| Current liabilities | | (53) | |
| Other liabilities | | (42) | |
| Total business valuation | | 291 | |
| Less: Noncontrolling interest | | 56 | |
| Total purchase consideration | | $ | 235 | |
| | |
Customer relationship assets represent the value of the long-term strategic relationship the business has with its significant customers, which we are amortizing over 25 years.customers. The assets were valued using an income approach, specifically the "multi-periodmulti-period excess earnings"earnings method, which identifies an estimated stream of revenues and expenses for a particular group of assets from which deductions of portions of the projected economic benefits, attributable to assets other than the subject asset (contributory assets), are deducted in order to isolate the prospective earnings of the subject asset. This value is considered a level 3 measurement under the GAAP fair value hierarchy. Key assumptions used inare expected revenue, related expenses, the valuation of customer relationships include: (1) a rate of return of 10 percentestimated remaining useful life and (2) an attrition rate of 3 percent. Technologythe discount rate. These assets primarily represent the associated patents and know how related to the Endurant and Procision next generation automated transmissions, which we are amortizingeach being amortized over 15 to 20 years. These assets were valued using the "relief-from-royalty" method, which is a combinationAs of both the income approach and market approach that values a subject asset based on an estimate of the "relief" from the royalty expense that would be incurred if the subject asset were licensed from a third party. Key assumptions impacting this value include: (1) a market royalty rate of 5 percent, (2) a rate of return of 10 percent and (3) an economic depreciation rate of 7.5 percent. This value is considered a level 3 measurement under the GAAP fair value hierarchy. AnnualDecember 31, 2019, annual amortization of the intangible assets for the next 5five years iswas expected to approximate $28$8 million.
In-process research and development assets represent acquired research and development assets that have been initiated, achieved material progress, but have not yet resulted in a technologically feasible or commercially viable project. These assets were valued using the relief-from-royalty method, as described above. These assets will not be amortized until they have been completed, but will be tested annually for impairment until that time. Approximately $10 million of this amount began to be amortized in 2020, and the remainder will begin amortization once the related projects are completed.
Goodwill was determined based on the residual difference between the fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities. Approximately $31 million of theThe goodwill isamount will not be deductible for tax purposes. Among the factors contributing to a purchase price resulting in the recognition of goodwill isare the acquisition of engineering talent in the fuel cell space, the ability to integratebe one of the forerunners in the development of clean fuel cell energy and optimize the engine and transmission developmentcontinued opportunity to deliver the world’s bestexpand our position as a global power train, to realize synergies in service and aftermarket growth and to utilize our strength in international markets where automated transmission adoption rates are very low.
Included in our 2017 results were revenues of $164 million and a net loss of $11 million related to this joint venture.
NOTE 19. IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETS
We began development of a new North American light-duty diesel engine (LDD) platform in July of 2006 for use in a variety of on and off-highway applications. At December 31, 2015, we had capitalized investments of approximately $279 million, with a net book value prior to the impairment of $246 million ($235 million of which was in our Engine segment and $11 million of which was in our Components segment). Market uncertainty due to the global recession in 2008/2009 resulted in some customers delaying or canceling their vehicle programs, while others remained active. We announced an agreement with Nissan Motor Co. Ltd. in 2013 to supply our light-duty diesel engine and began commercial shipment in 2015. In the fourth quarter of 2015, we learned that we were not successful in our bid to supply this product for an additional customer. In addition, the deterioration in global economic conditions and excess manufacturing capacity in other markets made it unlikely that we would manufacture additional products on the LDD line to utilize its excess capacity during the asset recovery period. As a result, we concluded that the combination of these events presented a triggering event requiring an assessment of the recoverability of these assets in the fourth quarter of 2015. The assessment indicated that the projected undiscounted cash flows related to this asset group were not sufficient to recover its carrying value. Consequently, we were required to write down the LDD asset group to fair value. Our 2015 fourth quarter results included an impairment charge of $211 million ($133 million after-tax), of which $202 million was in the Engine segment and $9 million was in the Components segment, to reflect the assets at fair value. We remain committed to servicing existing contracts and are not exiting this product line.
The fair value of the asset group was estimated to be $35 million ($33 million for the Engine segment and $2 million for the Components segment) at December 31, 2015 and was calculated primarily using a cost approach with consideration of a market approach where secondary market information was available for the type and age of these assets. In the application of the market approach, we determined that the liquidation value in-place reflected the best estimate of fair value. In the application of the cost approach we considered the current cost of replacing the assets with a reduction for physical deterioration given the age of the assets and a reduction for functional and economic obsolescence in the form of a discount reflecting the current and projected under-utilization of the assets. The fair value of these assets are considered Level 3 under the fair value hierarchy as they are either derived from unobservable inputs or have significant adjustments to the observable inputs.
NOTE 20.21. RESTRUCTURING ACTIONS AND OTHER CHARGES
We executed restructuring actions primarily in the form of professional voluntary and involuntary employee separation programs in the fourth quarter of 2015. These actions wereIn November 2019, we announced our intentions to reduce our global workforce in response to the continued deterioration in our global markets in the second half of 2015,2019, as well as expected reductions in orders in most U.S. and globalinternational markets in 2016. We reduced our worldwide workforce by approximately 1,9002020. In the fourth quarter of 2019, we began executing restructuring actions, primarily in the form of voluntary and involuntary employee separation programs. To the extent these programs involved voluntary separations, a liability was recorded at the time offers to employees including approximately 370 employees accepting voluntary retirement packageswere accepted. To the extent these programs provided separation benefits in accordance with pre-existing agreements or policies, a liability was recorded once the remainder of the reductions being involuntary.amount was probable and reasonably estimable. We incurred a charge of $90$119 million ($6190 million after-tax) in the fourth quarter of 2015, of2019 for these actions which $86 million related to severance costs for bothimpacted approximately 2,300 employees. The voluntary and involuntary terminations and $4 million for asset impairments and other charges.
Atactions were completed by December 31, 2017, all terminations2019 and the involuntary actions were completed.completed by June 28, 2020.
Restructuring actions were included in our segment and non-segment operating results as follows:
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| In millions | | Year ended December 31, 2019 | | | | |
| Engine | | $ | 18 | | | | | |
| Distribution | | 37 | | | | | |
| Components | | 20 | | | | | |
| Power Systems | | 12 | | | | | |
| New Power | | 1 | | | | | |
| Non-segment | | 31 | | | | | |
| Restructuring actions | | $ | 119 | | | | | |
| | | | | | |
The table below summarizes the activity and balance of accrued restructuring, which is included in "Other accrued expenses" in our Consolidated Balance Sheets:
| | | | | | |
| | | |
| | | |
| In millions | | Restructuring Accrual |
| Workforce reductions | | $ | 119 | |
| Cash payments | | (4) | |
| Foreign currency loss | | 1 | |
| Balance at December 31, 2019 | | 116 | |
| | | |
| Cash payments | | (110) | |
| Change in estimate | | (4) | |
| Foreign currency gain | | (1) | |
| Balance at December 31, 2020 | | $ | 1 | |
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NOTE 21.22. OPERATING SEGMENTS
Operating segments under GAAP are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (CODM), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is the President and Chief Operating Officer.
Our reportable operating segments consist of Engine, Distribution, Components, Power Systems and Power Systems.New Power. 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)smaller) 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, electronics, fuel systems and automated transmissions. The Power Systems segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas, marine and rail), standby and prime power generator sets, alternators and other power components. The New Power segment designs, manufactures, sells and supports hydrogen production solutions as well as electrified power systems ranging from fully electric to hybrid along with innovative components and subsystems, including battery and fuel cell technologies. We
continue to serve all our markets as they adopt electrification and alternative power technologies, meeting the needs of our OEM partners and end customers.
We use EBIT (defined assegment earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests)interests (EBITDA) as athe primary basis for the CODM to evaluate the performance of each of our reportable operating segments. We believe EBITDA is a useful measure of our operating performance as it assists investors and debt holders in comparing our performance on a consistent basis without regard to financing methods, capital structure, income taxes or depreciation and amortization methods, which can vary significantly depending upon many factors. Segment amounts exclude certain expenses not specifically identifiable to segments.
The accounting policies of our operating segments are the same as those applied in ourConsolidated Financial Statements. We prepared the financial results of our operating segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. We allocate certain common costs and expenses, primarily corporate functions, among segments differently than we would for stand-alone financial information prepared in accordance with GAAP. These include certain costs and expenses of shared services, such as information technology, human resources, legal, finance and supply chain management. We do not allocate debt-related items, actuarial gains or losses prior service costs or credits, changes in cash surrender value of corporate owned life insurance or income taxes to individual segments. EBITEBITDA may not be consistent with measures used by other companies.
Summarized financial information regarding our reportable operating segments at December 31, is shown in the table below: | | | In millions | | Engine | | Distribution | | Components (1) | | Power Systems | | Total Segment | | Intersegment Eliminations (2) | | Total | In millions | | Engine | | Distribution | | Components | | Power Systems | | New Power | | Total Segments | | Intersegment Eliminations(1) | | Total |
| 2017 | | | | | | | | | | | | | | | |
| 2020 | | 2020 | | | | | | | | | | | | | | | | |
| External sales | | $ | 6,661 |
| | $ | 7,029 |
| | $ | 4,363 |
| | $ | 2,375 |
| | $ | 20,428 |
| | $ | — |
| | $ | 20,428 |
| External sales | | $ | 5,925 | | | $ | 7,110 | | | $ | 4,650 | | | $ | 2,055 | | | $ | 71 | | | $ | 19,811 | | | $ | — | | | $ | 19,811 | |
| Intersegment sales | | 2,292 |
| | 29 |
| | 1,526 |
| | 1,683 |
| | 5,530 |
| | (5,530 | ) | | — |
| Intersegment sales | | 2,097 | | | 26 | | | 1,374 | | | 1,576 | | | 1 | | | 5,074 | | | (5,074) | | | — | |
| Total sales | | 8,953 |
| | 7,058 |
| | 5,889 |
| | 4,058 |
| | 25,958 |
| | (5,530 | ) | | 20,428 |
| Total sales | | 8,022 | | | 7,136 | | | 6,024 | | | 3,631 | | | 72 | | | 24,885 | | | (5,074) | | | 19,811 | |
Depreciation and amortization (3) | | 184 |
| | 116 |
| | 163 |
| | 117 |
| | 580 |
| | — |
| | 580 |
| |
| Research, development and engineering expenses | | 279 |
| | 19 |
| | 240 |
| | 214 |
| | 752 |
| | — |
| | 752 |
| Research, development and engineering expenses | | 290 | | | 31 | | | 264 | | | 212 | | | 109 | | | 906 | | | — | | | 906 | |
Equity, royalty and interest income from investees (4) | | 219 |
| | 44 |
| | 40 |
| | 54 |
| | 357 |
| | — |
| | 357 |
| |
| Equity, royalty and interest income (loss) from investees | | Equity, royalty and interest income (loss) from investees | | 312 | | | 62 | | | 61 | | | 21 | | | (4) | | | 452 | | | — | | | 452 | |
| Interest income | | 6 |
| | 6 |
| | 3 |
| | 3 |
| | 18 |
| | — |
| | 18 |
| Interest income | | 9 | | | 4 | | | 4 | | | 4 | | | 0 | | | 21 | | | — | | | 21 | |
Loss contingency charge (5) | | 5 |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | 5 |
| |
| Segment EBIT | | 959 |
| | 384 |
| | 754 |
| | 294 |
| | 2,391 |
| | 55 |
| | 2,446 |
| |
| | EBITDA | | EBITDA | | 1,235 | | | 665 | | | 961 | | | 343 | | | (172) | | | 3,032 | | | 76 | | | 3,108 | |
Depreciation and amortization (2) | | Depreciation and amortization (2) | | 208 | | | 122 | | | 192 | | | 130 | | | 18 | | | 670 | | | — | | | 670 | |
| Net assets | | 1,290 |
| | 2,700 |
| | 3,028 |
| | 3,124 |
| | 10,142 |
| | — |
| | 10,142 |
| Net assets | | 1,306 | | | 2,444 | | | 2,878 | | | 2,134 | | | 504 | | | 9,266 | | | — | | | 9,266 | |
| Investments and advances to equity investees | | 531 |
| | 267 |
| | 194 |
| | 164 |
| | 1,156 |
| | — |
| | 1,156 |
| Investments and advances to equity investees | | 681 | | | 313 | | | 215 | | | 200 | | | 32 | | | 1,441 | | | — | | | 1,441 | |
| Capital expenditures | | 188 |
| | 101 |
| | 127 |
| | 90 |
| | 506 |
| | — |
| | 506 |
| Capital expenditures | | 202 | | | 89 | | | 140 | | | 79 | | | 18 | | | 528 | | | — | | | 528 | |
| 2016 | | | | | | | | | | | | | | | |
| 2019 | | 2019 | | | | | | | | | | |
| External sales | | $ | 5,774 |
| | $ | 6,157 |
| | $ | 3,514 |
| | $ | 2,064 |
| | $ | 17,509 |
| | $ | — |
| | $ | 17,509 |
| External sales | | $ | 7,570 | | | $ | 8,040 | | | $ | 5,253 | | | $ | 2,670 | | | $ | 38 | | | $ | 23,571 | | | $ | — | | | $ | 23,571 | |
| Intersegment sales | | 2,030 |
| | 24 |
| | 1,322 |
| | 1,453 |
| | 4,829 |
| | (4,829 | ) | | — |
| Intersegment sales | | 2,486 | | | 31 | | | 1,661 | | | 1,790 | | | 0 | | | 5,968 | | | (5,968) | | | — | |
| Total sales | | 7,804 |
| | 6,181 |
| | 4,836 |
| | 3,517 |
| | 22,338 |
| | (4,829 | ) | | 17,509 |
| Total sales | | 10,056 | | | 8,071 | | | 6,914 | | | 4,460 | | | 38 | | | 29,539 | | | (5,968) | | | 23,571 | |
Depreciation and amortization (3) | | 163 |
| | 116 |
| | 133 |
| | 115 |
| | 527 |
| | — |
| | 527 |
| |
| Research, development and engineering expenses | | 226 |
| | 13 |
| | 208 |
| | 189 |
| | 636 |
| | — |
| | 636 |
| Research, development and engineering expenses | | 337 | | | 28 | | | 300 | | | 230 | | | 106 | | | 1,001 | | | — | | | 1,001 | |
| Equity, royalty and interest income from investees | | 148 |
| | 70 |
| | 41 |
| | 42 |
| | 301 |
| | — |
| | 301 |
| Equity, royalty and interest income from investees | | 200 | | | 52 | | | 40 | | | 38 | | | 0 | | | 330 | | | — | | | 330 | |
| Interest income | | 10 |
| | 4 |
| | 4 |
| | 5 |
| | 23 |
| | — |
| | 23 |
| Interest income | | 15 | | | 15 | | | 8 | | | 8 | | | 0 | | | 46 | | | — | | | 46 | |
Loss contingency charge (5) | | 138 |
| | — |
| | — |
| | — |
| | 138 |
| | — |
| | 138 |
| |
| Segment EBIT | | 686 |
| | 392 |
| (6) | 641 |
| | 263 |
| (7) | 1,982 |
| | 17 |
| | 1,999 |
| |
| EBITDA (excluding restructuring actions) | | EBITDA (excluding restructuring actions) | | 1,472 | | | 693 | | | 1,117 | | | 524 | | | (148) | | | 3,658 | | | 73 | | | 3,731 | |
Restructuring actions (3) | | Restructuring actions (3) | | 18 | | | 37 | | | 20 | | | 12 | | | 1 | | | 88 | | | 31 | | | 119 | |
| | EBITDA | | EBITDA | | 1,454 | | | 656 | | | 1,097 | | | 512 | | | (149) | | | 3,570 | | | 42 | | | 3,612 | |
Depreciation and amortization (2) | | Depreciation and amortization (2) | | 202 | | | 115 | | | 222 | | | 118 | | | 12 | | | 669 | | | — | | | 669 | |
| Net assets | | 1,620 |
| | 2,604 |
| | 1,868 |
| | 2,629 |
| | 8,721 |
| | — |
| | 8,721 |
| Net assets | | 1,094 | | | 2,536 | | | 2,911 | | | 2,245 | | | 472 | | | 9,258 | | | — | | | 9,258 | |
| Investments and advances to equity investees | | 427 |
| | 204 |
| | 176 |
| | 139 |
| | 946 |
| | — |
| | 946 |
| Investments and advances to equity investees | | 575 | | | 296 | | | 193 | | | 171 | | | 2 | | | 1,237 | | | — | | | 1,237 | |
| Capital expenditures | | 200 |
| | 96 |
| | 143 |
| | 92 |
| | 531 |
| | — |
| | 531 |
| Capital expenditures | | 240 | | | 136 | | | 191 | | | 107 | | | 26 | | | 700 | | | — | | | 700 | |
| 2015 | | | | | | | | | | | | | | | |
| External sales | | $ | 6,733 |
| | $ | 6,198 |
| | $ | 3,745 |
| | $ | 2,434 |
| | $ | 19,110 |
| | $ | — |
| | $ | 19,110 |
| |
| Intersegment sales | | 1,937 |
| | 31 |
| | 1,427 |
| | 1,633 |
| | 5,028 |
| | (5,028 | ) | | — |
| |
| Total sales | | 8,670 |
| | 6,229 |
| | 5,172 |
| | 4,067 |
| | 24,138 |
| | (5,028 | ) | | 19,110 |
| |
Depreciation and amortization (3) | | 187 |
| | 105 |
| | 109 |
| | 110 |
| | 511 |
| | — |
| | 511 |
| |
| Research, development and engineering expenses | | 263 |
| | 10 |
| | 236 |
| | 226 |
| | 735 |
| | — |
| | 735 |
| |
| Equity, royalty and interest income from investees | | 146 |
| | 78 |
| | 35 |
| | 56 |
| | 315 |
| | — |
| | 315 |
| |
| Interest income | | 11 |
| | 4 |
| | 4 |
| | 5 |
| | 24 |
| | — |
| | 24 |
| |
Loss contingency charge (5) | | 60 |
| | — |
| | — |
| | — |
| | 60 |
| | — |
| | 60 |
| |
Impairment of light-duty diesel assets (8) | | 202 |
| | — |
| | 9 |
| | — |
| | 211 |
| | — |
| | 211 |
| |
Restructuring actions and other charges (9) | | 17 |
| | 23 |
| | 13 |
| | 26 |
| | 79 |
| | 11 |
| | 90 |
| |
| Segment EBIT | | 636 |
| | 412 |
| (6) | 727 |
| | 335 |
| | 2,110 |
| | (20 | ) | | 2,090 |
| |
| Net assets | | 2,107 |
| | 2,330 |
| | 1,891 |
| | 2,736 |
| | 9,064 |
| | — |
| | 9,064 |
| |
| Investments and advances to equity investees | | 445 |
| | 192 |
| | 150 |
| | 188 |
| | 975 |
| | — |
| | 975 |
| |
| Capital expenditures | | 345 |
| | 125 |
| | 137 |
| | 137 |
| | 744 |
| | — |
| | 744 |
| |
|
| |
(1)
| Includes Eaton Cummins Automated Transmission Technologies joint venture results consolidated during the third quarter of 2017. See Note |
18 , "ACQUISITIONS," for additional information.
| |
(2)
| Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the years ended December 31, 2017, 2016 and 2015, respectively.
|
| |
(3)
| Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs that are included in the Consolidated Statements of Income as "Interest expense." The amortization of debt discount and deferred costs were $3 million, $3 million and $3 million for the years ended December 31, 2017, 2016 and 2015, respectively.
|
| |
(4)
| U.S. tax legislation passed in December 2017 decreased our equity earnings at certain equity investees, negatively impacting our equity, royalty and interest income from investees by $23 million, $4 million and $12 million for the Engine, Distribution and Components segments, respectively. See Note 2, "INCOME TAXES," for additional information. |
| |
(5)
| See Note 12, "COMMITMENTS AND CONTINGENCIES," for additional information. |
| |
(6)
| Distribution segment EBIT included gains on the fair value adjustment resulting from the acquisition of controlling interests in North American distributors of $15 million and $18 million for the years ended December 31, 2016 and 2015, respectively. See Note 18, "ACQUISITIONS," for additional information. |
| |
(7)
| Power Systems segment EBIT included a $17 million gain on the sale of an equity investee for the year ended December 31, 2016. See Note 3, "INVESTMENTS IN EQUITY INVESTEES," for additional information. |
| |
(8)
| See Note 19, "IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETS," for additional information. |
| |
(9)
| See Note 20, "RESTRUCTURING ACTIONS AND OTHER CHARGES," for additional information. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| In millions | | Engine | | Distribution | | Components | | Power Systems | | New Power | | Total Segments | | Intersegment Eliminations(1) | | Total |
| 2018 | | | | | | | | | | | | | | | | |
| External sales | | $ | 8,002 | | | $ | 7,807 | | | $ | 5,331 | | | $ | 2,625 | | | $ | 6 | | | $ | 23,771 | | | $ | — | | | $ | 23,771 | |
| Intersegment sales | | 2,564 | | | 21 | | | 1,835 | | | 2,001 | | | 1 | | | 6,422 | | | (6,422) | | | — | |
| Total sales | | 10,566 | | | 7,828 | | | 7,166 | | | 4,626 | | | 7 | | | 30,193 | | | (6,422) | | | 23,771 | |
| Research, development and engineering expenses | | 311 | | | 20 | | | 272 | | | 230 | | | 69 | | | 902 | | | — | | | 902 | |
| Equity, royalty and interest income from investees | | 238 | | | 46 | | | 54 | | | 56 | | | 0 | | | 394 | | | — | | | 394 | |
| Interest income | | 11 | | | 13 | | | 5 | | | 6 | | | 0 | | | 35 | | | — | | | 35 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| EBITDA | | 1,446 | | | 563 | | | 1,030 | | | 614 | | | (90) | | | 3,563 | | | (87) | | | 3,476 | |
Depreciation and amortization (2) | | 190 | | | 109 | | | 185 | | | 119 | | | 6 | | | 609 | | | — | | | 609 | |
| Net assets | | 1,265 | | | 2,677 | | | 2,878 | | | 2,262 | | | 138 | | | 9,220 | | | — | | | 9,220 | |
| Investments and advances to equity investees | | 561 | | | 278 | | | 206 | | | 177 | | | 0 | | | 1,222 | | | — | | | 1,222 | |
| Capital expenditures | | 254 | | | 133 | | | 182 | | | 129 | | | 11 | | | 709 | | | — | | | 709 | |
| | | | | | | | | | | | | | | | |
(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. The year ended December 31, 2019, includes a $31 million restructuring charge related to corporate functions. There were no significant unallocated corporate expenses for the years ended December 31, 2020 and 2018. |
(2) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Consolidated Statements of Net Income as "Interest expense." The amortization of debt discount and deferred costs were $3 million, $3 million and $2 million for the years ended 2020, 2019 and 2018, respectively. A portion of depreciation expense is included in "Research, development and engineering expense." |
(3) See Note 21 "RESTRUCTURING ACTIONS," for additional information. |
| | | | | | | | | | | | | | | | |
A reconciliation of our segment information to the corresponding amounts in the Consolidated Statements of Net Income is shown in the table below:
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| In millions | | 2020 | | 2019 | | 2018 |
| TOTAL SEGMENT EBITDA | | $ | 3,032 | | | $ | 3,570 | | | $ | 3,563 | |
| Intersegment elimination | | 76 | | | 42 | | | (87) | |
| TOTAL EBITDA | | 3,108 | | | 3,612 | | | 3,476 | |
| Less: | | | | | | |
| Interest expense | | 100 | | | 109 | | | 114 | |
| Depreciation and amortization | | 670 | | | 669 | | | 609 | |
| INCOME BEFORE INCOME TAXES | | 2,338 | | | 2,834 | | | 2,753 | |
| Less: Income tax expense | | 527 | | | 566 | | | 566 | |
| CONSOLIDATED NET INCOME | | 1,811 | | | 2,268 | | | 2,187 | |
| Less: Net income attributable to noncontrolling interests | | 22 | | | 8 | | | 46 | |
| NET INCOME ATTRIBUTABLE TO CUMMINS INC. | | $ | 1,789 | | | $ | 2,260 | | | $ | 2,141 | |
| | | | | | |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| In millions | | 2017 | | 2016 | | 2015 |
| Total EBIT | | $ | 2,446 |
| | $ | 1,999 |
| | $ | 2,090 |
|
| Less: Interest expense | | 81 |
| | 69 |
| | 65 |
|
| Income before income taxes | | $ | 2,365 |
| | $ | 1,930 |
| | $ | 2,025 |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | |
| In millions | | 2020 | | 2019 | | 2018 | |
| Net assets for operating segments | | $ | 9,266 | | | $ | 9,258 | | | $ | 9,220 | | |
| Cash, cash equivalents and marketable securities | | 3,862 | | | 1,470 | | | 1,525 | | |
| | | | | | | |
Net liabilities deducted in arriving at net assets (1) | | 8,947 | | | 8,498 | | | 7,836 | | |
| Pension and OPEB adjustments excluded from net assets | | 67 | | | 67 | | | 68 | | |
| Deferred tax assets not allocated to segments | | 479 | | | 441 | | | 410 | | |
| Deferred debt costs not allocated to segments | | 3 | | | 3 | | | 3 | | |
| Total assets | | $ | 22,624 | | | $ | 19,737 | | | $ | 19,062 | | |
| | | | | | | |
(1) Liabilities deducted in arriving at net assets include certain accounts payable, accrued expenses, long-term liabilities and other items. | |
| | | | | | | |
|
| | | | | | | | | | | | |
| | | December 31, |
| In millions | | 2017 | | 2016 | | 2015 |
| Net assets for operating segments | | $ | 10,142 |
| | $ | 8,721 |
| | $ | 9,064 |
|
| Brammo Inc. assets | | 72 |
| (1) | — |
| | — |
|
| Liabilities deducted in arriving at net assets | | 7,397 |
| | 6,152 |
| | 5,920 |
|
| Pension and other postretirement benefit adjustments excluded from net assets | | 156 |
| | (284 | ) | | (242 | ) |
| Deferred tax assets not allocated to segments | | 306 |
| | 420 |
| | 390 |
|
| Deferred debt costs not allocated to segments | | 2 |
| | 2 |
| | 2 |
|
| Total assets | | $ | 18,075 |
| | $ | 15,011 |
| | $ | 15,134 |
|
| |
(1)
| Assets associated with the Brammo Inc. acquisition were presented as a reconciling item as Brammo Inc. had not yet been assigned to a reportable segment at December 31, 2017. See Note 18, "ACQUISITIONS,See Note 2, "REVENUE FROM CONTRACTS WITH CUSTOMERS," for additional information. |
The tables below present certain segment informationnet sales by geographic area. Net sales attributed to geographic areas were based on the location of the customer.
|
| | | | | | | | | | | | |
| In millions | | Years ended December 31, |
| Net Sales | | 2017 | | 2016 | | 2015 |
| United States | | $ | 11,010 |
| | $ | 9,476 |
| | $ | 10,757 |
|
| China | | 2,137 |
| | 1,544 |
| | 1,451 |
|
| Other International | | 7,281 |
| | 6,489 |
| | 6,902 |
|
| Total net sales | | $ | 20,428 |
| | $ | 17,509 |
| | $ | 19,110 |
|
Long-lived assets include property, plant and equipment, net of depreciation, investments and advances to equity investees and other assets, excluding deferred tax assets, refundable taxes and deferred debt expenses. Long-lived segment assets by geographic area were as follows:
|
| | | | | | | | | | | | |
| In millions | | December 31, |
| Long-lived assets | | 2017 | | 2016 | | 2015 |
| United States | | $ | 3,157 |
| | $ | 3,092 |
| | $ | 2,968 |
|
| China | | 795 |
| | 652 |
| | 668 |
|
| India | | 563 |
| | 475 |
| | 450 |
|
| United Kingdom | | 339 |
| | 254 |
| | 349 |
|
| Netherlands | | 221 |
| | 197 |
| | 172 |
|
| Brazil | | 149 |
| | 149 |
| | 124 |
|
| Mexico | | 136 |
| | 131 |
| | 108 |
|
| Canada | | 116 |
| | 132 |
| | 133 |
|
| Other international countries | | 293 |
| | 236 |
| | 261 |
|
| Total long-lived assets | | $ | 5,769 |
| | $ | 5,318 |
| | $ | 5,233 |
|
| | | | | | | | | | | | | | | | | | | | |
|
| | December 31, |
| In millions | | 2020 | | 2019 | | 2018 |
| United States | | $ | 3,776 | | | $ | 3,555 | | | $ | 3,174 | |
| China | | 1,010 | | | 893 | | | 823 | |
| India | | 595 | | | 616 | | | 577 | |
| United Kingdom | | 370 | | | 370 | | | 337 | |
| Netherlands | | 295 | | | 253 | | | 234 | |
| Mexico | | 187 | | | 175 | | | 171 | |
| Canada | | 149 | | | 139 | | | 114 | |
| Brazil | | 79 | | | 106 | | | 104 | |
| Other international countries | | 466 | | | 489 | | | 329 | |
| Total long-lived assets | | $ | 6,927 | | | $ | 6,596 | | | $ | 5,863 | |
| | | | | | |
Our largest customer is PACCAR Inc. Worldwide sales to this customer were $2,893$2,900 million, in 2017, $2,359$3,937 million in 2016 and $2,949$3,643 million in 2015,for the years ended December 31, 2020, 2019 and 2018, representing 1415 percent, 1317 percent and 15 percent, respectively, of our consolidated net sales. No other customer accounted for more than 10 percent of consolidated net sales.
SELECTED QUARTERLY FINANCIAL DATA
UNAUDITED
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | |
| In millions, except per share amounts | | 2020 | |
| Net sales | | $ | 5,011 | | | $ | 3,852 | | | $ | 5,118 | | | $ | 5,830 | | |
| Gross margin | | 1,294 | | | 890 | | | 1,349 | | | 1,361 | | |
| Net income attributable to Cummins Inc. | | 511 | | | 276 | | | 501 | | | 501 | | |
| Earnings per common share attributable to Cummins Inc.—basic | | $ | 3.42 | | | $ | 1.87 | | | $ | 3.39 | | | $ | 3.39 | | |
Earnings per common share attributable to Cummins Inc.—diluted (1) | | 3.41 | | | 1.86 | | | 3.36 | | | 3.36 | | |
| Cash dividends per share | | 1.311 | | | 1.311 | | | 1.311 | | | 1.35 | | |
| Stock price per share | | | | | | | | | |
| High | | $ | 180.88 | | | $ | 184.94 | | | $ | 215.43 | | | $ | 244.67 | | |
| Low | | 101.03 | | | 127.30 | | | 170.19 | | | 203.51 | | |
|
| | | | | | | | | | | | | | | | | |
| | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | |
| In millions, except per share amounts | | 2017 | |
| Net sales | | $ | 4,589 |
| | $ | 5,078 |
| | $ | 5,285 |
| | $ | 5,476 |
| |
| Gross margin | | 1,128 |
| | 1,249 |
| | 1,339 |
| | 1,374 |
| |
| Net income attributable to Cummins Inc. | | 396 |
| | 424 |
| | 453 |
| | (274 | ) | (1) |
Earnings per common share attributable to Cummins Inc.—basic (2) | | $ | 2.36 |
| | $ | 2.53 |
| | $ | 2.72 |
| | $ | (1.66 | ) | (1) |
Earnings per common share attributable to Cummins Inc.—diluted (2) | | 2.36 |
| | 2.53 |
| | 2.71 |
| | (1.65 | ) | (1) |
| Cash dividends per share | | 1.025 |
| | 1.025 |
| | 1.08 |
| | 1.08 |
| |
| Stock price per share | | |
| | |
| | |
| | |
| |
| High | | $ | 155.51 |
| | $ | 164.23 |
| | $ | 170.68 |
| | $ | 181.79 |
| |
| Low | | 134.06 |
| | 143.83 |
| | 150.25 |
| | 158.75 |
| |
|
| | | | | | | | | | | | | | | | | |
| | | 2016 | |
| Net sales | | $ | 4,291 |
| | $ | 4,528 |
| | $ | 4,187 |
| | $ | 4,503 |
| |
| Gross margin | | 1,056 |
| | 1,197 |
| | 1,079 |
| | 1,120 |
| |
| Net income attributable to Cummins Inc. | | 321 |
| | 406 |
| (3) | 289 |
| (3) | 378 |
| |
Earnings per common share attributable to Cummins Inc.—basic (2) | | $ | 1.87 |
| | $ | 2.41 |
| (3) | $ | 1.72 |
| (3) | $ | 2.26 |
| |
Earnings per common share attributable to Cummins Inc.—diluted (2) | | 1.87 |
| | 2.40 |
| (3) | 1.72 |
| (3) | 2.25 |
| |
| Cash dividends per share | | 0.975 |
| | 0.975 |
| | 1.025 |
| | 1.025 |
| |
| Stock price per share | | | | | | | | | |
| High | | $ | 111.29 |
| | $ | 120.00 |
| | $ | 128.60 |
| | $ | 147.10 |
| |
| Low | | 79.88 |
| | 104.30 |
| | 107.51 |
| | 121.22 |
| |
| |
(1)
| Net income attributable to Cummins Inc. and earnings per share were negatively impacted by a $777 million tax adjustment related to The Tax Cuts and Jobs Act passed in December of 2017. For the fourth quarter of 2017, results for basic and diluted earnings per share were reduced by $4.70 per share and $4.68 per share, respectively, due to tax reform. |
| |
(2)
| Earnings per share in each quarter is computed using the weighted-average number of shares outstanding during that quarter while earnings per share for the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters earnings per share may not equal the full year earnings per share.
|
| |
(3)
| The second quarter of 2016 included a $39 million loss contingency charge ($24 million after-tax). The third quarter of 2016 included an additional $99 million loss contingency charge ($50 million net of favorable compensation impact and after-tax). |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | |
| Net sales | | $ | 6,004 | | | $ | 6,221 | | | $ | 5,768 | | | $ | 5,578 | | |
| Gross margin | | 1,532 | | | 1,641 | | | 1,494 | | | 1,313 | | |
| Net income attributable to Cummins Inc. | | 663 | | | 675 | | | 622 | | | 300 | | (2) |
Earnings per common share attributable to Cummins Inc.—basic (1) | | $ | 4.22 | | | $ | 4.29 | | | $ | 3.99 | | | $ | 1.98 | | (2) |
Earnings per common share attributable to Cummins Inc.—diluted (1) | | 4.20 | | | 4.27 | | | 3.97 | | | 1.97 | | (2) |
| Cash dividends per share | | 1.14 | | | 1.14 | | | 1.311 | | | 1.311 | | |
| Stock price per share | | | | | | | | | |
| High | | $ | 162.34 | | | $ | 171.84 | | | $ | 175.91 | | | $ | 186.73 | | |
| Low | | 130.03 | | | 150.48 | | | 141.14 | | | 151.15 | | |
| | | | | | | | | |
(1)Earnings per share in each quarter is computed using the weighted-average number of shares outstanding during that quarter while earnings per share for the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters earnings per share may not equal the full year earnings per share. |
(2) Net income attributable to Cummins Inc. and earnings per share were negatively impacted by $119 million ($90 million after-tax) of restructuring actions in the fourth quarter of 2019 ($0.59 per basic share and $0.59 per diluted share). |
|
|
At December 31, 2017,2020, there were approximately 3,3622,637 holders of record of Cummins Inc.'s $2.50 par value common stock.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, 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 as of the end of the period covered by this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended December 31, 2017,2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
The information required by Item 9A relating to Management's Annual Report on Internal Control Over Financial Reporting and Attestation Report of the Registered Public Accounting Firm is incorporated herein by reference to the information set forth under the captions "Management's Report on Internal Control Over Financial Reporting" and "Report of Independent Registered Public Accounting Firm," respectively, under Item 8.
ITEM 9B. Other Information
None.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 is incorporated by reference to the relevant information under the captions "Corporate Governance," "Election of Directors" and "Other Information—Section 16(a) Beneficial Ownership Reporting Compliance" in our 20182021 Proxy Statement, which will be filed within 120 days after the end of 2017.2020. Information regarding our executive officers may be found in Part 1 of this annual report under the caption "Executive Officers of the Registrant."Information About Our Executive Officers." Except as otherwise specifically incorporated by reference, our Proxy Statement is not deemed to be filed as part of this annual report.
ITEM 11. Executive Compensation
The information required by Item 11 is incorporated by reference to the relevant information under the caption "Executive Compensation" in our 20182021 Proxy Statement, which will be filed within 120 days after the end of 2017.2020.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information concerning our equity compensation plans at December 31, 2017,2020, was as follows:
| | | | | | | | | | | | | | | | | | | | |
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights(1) | | Weighted-average exercise price of outstanding options, warrants and rights(2) | | Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in the first column) |
| Equity compensation plans approved by security holders | | 3,556,188 | | | $ | 142.63 | | | 5,733,380 | |
| | | | | | |
| | | | | | |
| | | | | | |
(1) The number is comprised of 3,175,530 stock options, 376,954 performance shares and 3,704 restricted shares. See Note 18, "STOCK INCENTIVE AND STOCK OPTION PLANS," to the Consolidated Financial Statements for a description of how options and shares are awarded. |
(2) The weighted-average exercise price relates only to the 3,175,530 stock options. Performance and restricted shares do not have an exercise price and, therefore, are not included in this calculation. |
| | | | | | |
|
| | | | | | | | | | |
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights(1) | | Weighted-average exercise price of outstanding options, warrants and rights(2) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column) |
| Equity compensation plans approved by security holders | | 3,320,697 |
| | $ | 123.49 |
| | 8,510,444 |
|
| Equity compensation plans not approved by security holders | | — |
| | — |
| | — |
|
| Total | | 3,320,697 |
| | $ | 123.49 |
| | 8,510,444 |
|
________________________________________________
| |
(1)
| The number is comprised of 2,901,369 stock options, 411,239 performance shares and 8,089 restricted shares. See NOTE 15, "STOCK INCENTIVE AND STOCK OPTION PLANS," to the Consolidated Financial Statements for a description of how options and shares are awarded.
|
| |
(2)
| The weighted-average exercise price relates only to the 2,901,369 stock options. Performance and restricted shares do not have an exercise price and, therefore, are not included in this calculation. |
The remaining information required by Item 12 is incorporated by reference to the relevant information under the caption "Stock Ownership of Directors, Management and Others" in our 20182021 Proxy Statement, which will be filed within 120 days after the end of 2017.2020.
ITEM 13. Certain Relationships, Related Transactions and Director Independence
The information required by Item 13 is incorporated by reference to the relevant information under the captions "Corporate Governance" and "Other Information-Related Party Transactions" in our 20182021 Proxy Statement, which will be filed within 120 days after the end of 2017.2020.
ITEM 14. Principal Accounting Fees and Services
The information required by Item 14 is incorporated by reference to the relevant information under the caption "Selection of Independent Public Accountants" in our 20182021 Proxy Statement, which will be filed within 120 days after the end of 2017.2020.
PART IV
ITEM 15. Exhibits, and Financial Statement Schedules
| |
(a) | (a)The following Consolidated Financial Statements and schedules filed as part of this report can be found in Item 8 "Financial Statements and Supplementary Data": |
| |
• | Management's Report to Shareholders
|
| |
• | Report of Independent Registered Public Accounting Firm
|
| |
• | Consolidated Statements of Incomefor the years ended December 31, 2017, 2016 and 2015
|
| |
• | Consolidated Statements of Comprehensive Incomefor the years ended December 31, 2017, 2016 and 2015
|
| |
• | Consolidated Balance Sheetsat December 31, 2017 and 2016
|
| |
• | Consolidated Statements of Cash Flowsfor the years ended December 31, 2017, 2016 and 2015
|
| |
• | Consolidated Statements of Changes in Equityfor the years ended December 31, 2017, 2016 and 2015
|
Notes to Consolidated Financial Statements and schedules filed as part of this report can be found in Item 8 "Financial Statements and Supplementary Data":
Selected Quarterly•Management's Report to Shareholders
•Report of Independent Registered Public Accounting Firm
•Consolidated Statements of Net Incomefor the years ended December 31, 2020, 2019 and 2018
•Consolidated Statements of Comprehensive Incomefor the years ended December 31, 2020, 2019 and 2018
��Consolidated Balance Sheetsat December 31, 2020 and 2019
•Consolidated Statements of Cash Flowsfor the years ended December 31, 2020, 2019 and 2018
•Consolidated Statements of Changes in Equityfor the years ended December 31, 2020, 2019 and 2018
•Notes to the Consolidated Financial Data (Unaudited)
| |
(b) | The exhibits listed in the following Exhibit Index are filed as part of this Annual Report on Form 10-K. |
CUMMINS INC.
EXHIBIT INDEX
|
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| Exhibit No. | | Description of Exhibit |
3
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4
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10
| (r)#
| | Second Amended and Restated 364-Day Credit Agreement, dated as of September 5, 2017,August 19, 2020, by and among Cummins Inc., the subsidiary borrowers referred to therein, the Lenders and Agentslenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 to Cummins Inc.’sthe Current Report on Form 8-K filed by Cummins Inc. with the Securities and Exchange Commission on September 6, 2017)(FileAugust 25, 2020 (File No.001-04949)). |
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| 101 | .INS.INS* | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101 | .SCH.SCH* | | Inline XBRL Taxonomy Extension Schema Document. |
| 101 | .CAL.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101 | .DEF.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| 101 | .LAB.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| 101 | .PRE.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| 104 | | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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# A management contract or compensatory plan or arrangement.
ITEM 16. Form 10-K Summary (optional)
Not Applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| CUMMINS INC. |
| By: | | /s/ PATRICK J. WARDMARK A. SMITH | | By: | | /s/ CHRISTOPHER C. CLULOW |
| | Patrick J. WardMark A. Smith
Vice President and Chief Financial Officer (Principal Financial Officer) | | | | Christopher C. Clulow Vice President—Corporate Controller (Principal Accounting Officer) |
| | | | | | |
| Date: | | February 12, 201810, 2021 | | | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| Signatures | | Title | | Date |
| /s/ N. THOMAS LINEBARGER | | Chairman of the Board of Directors and Chief Executive Officer
(Principal Executive Officer) | | February 12, 201810, 2021 |
| N. Thomas Linebarger | | |
/s/ PATRICK J. WARDMARK A. SMITH | | Vice President and Chief Financial Officer
(Principal Financial Officer)
| | February 12, 201810, 2021 |
Patrick J. WardMark A. Smith | | |
| /s/ CHRISTOPHER C. CLULOW | | Vice President—Corporate Controller
(Principal Accounting Officer)
| | February 12, 201810, 2021 |
| Christopher C. Clulow | | |
| * | | | | February 12, 201810, 2021 |
| Robert J. Bernhard | | Director | |
| * | | | | February 12, 201810, 2021 |
| Franklin R. ChangDiaz | | Director | |
| * | | | | February 12, 201810, 2021 |
| Bruno V. Di Leo Allen | | Director | |
| * | | | | February 12, 201810, 2021 |
| Stephen B. Dobbs | | Director | |
* | | | | February 12, 2018 |
Richard J. Freeland | | Director | |
* | | | | February 12, 2018 |
Robert K. Herdman | | Director | |
* | | | | February 12, 2018 |
Alexis M. Herman | | Director | |
* | | | | February 12, 2018 |
Thomas J. Lynch | | Director | |
* | | | | February 12, 2018 |
William I. Miller | | Director | |
* | | | | February 12, 2018 |
Georgia R. Nelson | | Director | |
* | | | | February 12, 2018 |
Karen H. Quintos | | Director | |
|
| |
*By: | /s/ PATRICK J. WARD |
| * | | | | February 10, 2021 |
| Robert K. Herdman | | Director | |
| * | | | | February 10, 2021 |
| Alexis M. Herman | | Director | |
| * | | | | February 10, 2021 |
| Thomas J. Lynch | | Director | |
| * | | | | February 10, 2021 |
| William I. Miller | | Director | |
| * | | | | February 10, 2021 |
| Georgia R. Nelson | | Director | |
| * | | | | February 10, 2021 |
| Kimberly A. Nelson | | Director | |
| * | | | | February 10, 2021 |
| Karen H. Quintos | | Director | |
| | | | | |
| *By: | /s/ MARK A. SMITH |
| Patrick J. WardMark A. Smith
Attorney-in-fact |
