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Cummins Reports Strong Results for the Third Quarter of 2014
Third Quarter Revenues of $4.9 Billion, EBIT of 14.0 Percent of Sales; Full Year Revenue Expected to Grow Between 10 and 12 Percent and EBIT to Be in the Range of 13.0 to 13.5 Percent of Sales

COLUMBUS, IN -- (Marketwired) -- 10/28/14 -- Cummins Inc. (NYSE: CMI) today reported results for the third quarter of 2014.

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

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

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

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

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

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

Other recent highlights:

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

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

Engine Segment

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

Components Segment

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

Power Generation Segment

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

Distribution Segment

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

About Cummins

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

Forward-looking disclosure statement

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

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

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

The following files are available for download:

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

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

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

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

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

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

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

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

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

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

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

(1) Includes intersegment sales and profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the nine months ended September 28, 2014 and September 29, 2013. 
(2) Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Income as "Interest expense." The amortization of debt discount and deferred costs were $2 million and $8 million for the nine months ended September 28, 2014 and September 29, 2013, respectively. 
(3) Distribution segment EBIT for the nine months ended September 28, 2014 and September 29, 2013 included gains of $38 million and $12 million on the fair value adjustments resulting from the acquisitions of controlling interests in North American distributors in each period, respectively.

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

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

NOTE 1. EQUITY, ROYALTY AND INTEREST INCOME FROM INVESTEES

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

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

NOTE 2. INCOME TAXES

Our effective tax rate for the year is expected to approximate 29.5 percent, excluding any one-time items that may arise. The expected tax rate does not include the benefits of the research tax credit which expired December 31, 2013 and has not yet been renewed by Congress. Our tax rate is generally less than the 35 percent U.S. statutory income tax rate primarily due to lower tax rates on foreign income. 

The effective tax rates for the three and nine month periods ended September 28, 2014, were 34.4 percent and 30.4 percent, respectively. The tax rate for the three months ended September 28, 2014, included a $19 million discrete tax expense to reflect the reduction in value of state tax credits as a result of a favorable state tax rate change that will lower future taxes. Additionally, the tax rate for the nine month period included a second quarter $2 million discrete tax benefit for the release of reserves for uncertain tax positions related to multiple state audit settlements, a first quarter $12 million discrete tax expense attributable primarily to state deferred tax adjustments, as well as a first quarter $6 million discrete net tax benefit resulting from a $70 million dividend paid from China earnings generated prior to 2012.

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

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

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

NOTE 3. ACQUISITION  

Cummins Eastern Canada LP

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

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

Earnings before interest, taxes and noncontrolling interests

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

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

Supplemental Information

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

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

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

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

Engine segment net sales by market:

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

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

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

Component segment sales by business:

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

Power Generation segment sales by business:

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

Distribution segment sales by business:

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

Carole Casto
Executive Director
Corporate Communications
(317) 610-2480
carole.casto@cummins.com

Source: Cummins Inc.

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